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Making sense of the current real estate market Jan 28, 2023

In this episode, we welcome House Canary’s Director of Research, Brandon Lwowski to look at what has been happening in the real estate market over the last years and where we are headed as an industry. We discuss the health of the real estate market, the residual effects of the response to COVID-19, and the main challenges facing investors today.

Brandon Lwowski built his career after studying Computer Science Mathematics at The University of Texas at San Antonio. In his role at HouseCanary as Director of Research, Brandon distills what is happening in the real estate market through data analytics and machine learning to help investors make more informed decisions about their portfolios.

Links:

https://www.housecanary.com/

https://www.linkedin.com/in/brandon-lwowski/

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Transcript

Before we get into the episode, here's a quick disclaimer about our content. The SFR show is for informational purposes only, and is not intended as investment advice. The views, opinions, and strategies of the hosts and the guests are their own and should not be considered as guidance, from Roofstock. Make sure to run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to an episode of the SFR show, the place where you get all of your up to date SFR investing information. I'm Michael Albaum, and today my guest is Brandon Lwowski, the director of Research over HouseCanary and he's gonna be talking to us about all of the things that have been going on in the market over the last several years and months, and how we can use that information going forward. So let's get into it.

Hey, Brandon, what's going on? Thanks so much for taking the time to come jump in chat with me today. Appreciate it, man.

Brandon:

No, of course, it's good to be here to get an opportunity to discuss the real estate market for sure.

Michael:

Yeah, I'm super excited. So you're the director of Research at HouseCanary. Give us all just a quick little bit of insight background on who you are and what house canary is and what they do as a company.

Brandon:

Yeah, definitely. So HouseCanary, you know, it's basically a national brokerage and so it's really known for its real estate valuation, technology and accuracy. This company has been around since 2013. It was founded by Jeremy Sicklick, our CEO and our Chief of Research, Chris Stroud, kind of off of the 2008 housing crisis, they did decide to form this company to kind of help speed up the transactions and speed up and really gain knowledge and just competence in the real estate market through using analytics machine learning to provide 100 and 14 million valuations on properties as well as 91 million rental valuations. So if you think of how scary it's built around the analytics and valuations of the United States real estate market.

Michael:

It was at $114 million valuations that you said since it since inception.

Brandon:

No, that's monthly, we produce 114 million property valuations. Of course, the 114 million is a subset of you know, every property in the United States and that repeated monthly, but we train this very complex machine learning model AI model to produce 114 million property valuations.

Michael:

That's incredible. Well, I want to come back to HouseCanary as a company here in a minute. But I want to first start by asking you, Brandon, because it is so analytics and data driven, what is it that HouseCanary as a company and you as an as the director of research are seeing in the numbers in the data with regard to just where we are in the market, there's so much chatter about market cycles and ups and downs and bubbles, give us a little bit of insight to what are the numbers and facts supporting where we are right now, as we're recording this brand new into the new year 2023.

Brandon:

I think kind of the one of the biggest headlines to kind of drive home right now, especially in the market, we have this unique combination of these elevated interest rates and you know, the slow buying season that we typically see during the winter months, this has really impacted across the board, our new inventory coming into the market, our new listings, listings going under contract, all of these metrics that we typically look at to understand the health of the market and the health of the real estate market, have really had significant declines year on a year over year basis, that's across the board inventory listings under contract, the Feds kind of you know, their fourth straight 75 basis point interest rate increase, you know, as the thing is, the fourth month straight or the fourth, fourth one straight, has really had that negative impact on net inventory. But this is just providing more evidence that you know, supply of homes is still squeezed and it's remaining negative over time, we've kind of seen this trend since August, right where our supply of affordable housing and actually all housing in the market has really continued to drop and this is basically you know, the biggest driving factor here is that interest rates shot really driving down these new listings volumes to like a multiyear low since pre you know, I don't use the word pre pandemic because you know, we're still in the pandemic, but that pre pandemic peaks we'll call them we're seeing you know, all its multi-year lows in terms of new listings, everything going on the real estate market. The biggest picture here is even as these interest rates come up, our supply just remains extremely negative and still going in a downward trajectory.

Michael:

And when you say downward trajectory is that From 12 months prior, or is that from the prior month?

Brandon:

We're looking at a year a year basis right now. If you think about the month over month basis, we are still seeing declines. But when we're talking about these multi year lows in terms of net new listings, on the purchase side of the market, we've reached those multi year lows. I think, you know, the reason why this supply crisis is also happening right now is, in this current real estate environment, it's really difficult to convert homeowners and current renters and convert them into future homebuyers, right. In this elevated interest, interest rate market, it just doesn't make sense financially for a lot of people to enter the market, you think of this large group of, of homebuyers that purchase homes at record low interest rates, they refinanced during the peak of a call it the peak of the refinance, boom, that happened during the pandemic and for them to reenter the market, it just doesn't make financial sense for them. So in order to move out of their current home and into a new loan, they're going to be paying a higher premium for the same quality of home. So they're available availability to spend money has definitely decreased and I really don't see this inventory shortage, kind of relieving itself or beginning to increase well into, you know, the first quarter, second half or first half of 2023, the supply just remains super squeezed.

Michael:

Okay and so that, like the supply aspect is, I'm guessing one ingredient in the recipe, so to speak, what are some of the other things that you're looking at, and that you're seeing, to give you an indicator of where we're headed and where we are currently.

Brandon:

Right. So I think so the supply is, has been squeezed, I think since COVID, there's been a really tight squeeze on the flat supply side of the market. But with those low interest rates that were happening, I mean, 1- 2% interest rates, people were getting their home loans that the demand for property shot up, which is why we really saw that two, three years of just record breaking price growth and the real estate market. Now we're looking at the demand side, and we're actually in the seventh consecutive month of double digit declines in on a year over year basis, we're looking at the listings that are coming under contract in the market. So if you look at inventory as a supply of new listings coming in, if we look at listings of those listings, and the existing market, this existing supply, existing supply, listings under contract is still seven consecutive months of double digit declines since November, are all of our data right now, it's kind of up to that first week of December 2, so we kind of think of it as, as of November. This is this kind of is the driving force behind this is, you know, we've never seen this kind of seventh consecutive month of double digit. So it's kind of driving a lot of fear into homebuyers and home owners and the way we kind of know that this is not normal, it's kind of beyond the typical seasonality we'd expect during the cold winter months to have seven consecutive months, this kind of uncertainty in the market around interest rates, economic downturn, the inflation, they just continue to force homeowners and would be buyers, you know, to play the waiting game, they're, they're gonna sit in the sidelines, they're gonna stay away from the market and so they're a little more competent in in where this kind of roller coaster is going.

Michael:

As I'm thinking about such a visual thinker. I'm thinking about this as almost like a race to the bottom in a sense of like supply versus demand once because it sounds like they're almost moving in lockstep negatively, we were having a reduction in supply, but we also have a reduction in demand and once right is that is that the right way to think about it?

Brandon:

The demand has definitely began to decrease or is decreasing at a faster rate than supply because supply has been squeezed since the pandemic whenever the shutdowns happened. People just stop selling houses. They stopped listing their home so the supply side of the market has been squeezed since the shutdown the pandemic. The demand side due to the interest rate hikes the economic uncertainty, that's where we're really seeing the decrease on the supply side where the decreases are coming from. So even though you know supply is always been net always been tight. We've been tight recently in recent years. A lot of the continued decrease on supply side is actually coming from net new listings so people aren't putting listings on the market right now. For the reason that we discussed earlier. It's hard to get homeowners back into the game. They're actually down around 25% on a year over year basis, in terms of like how many new listings are coming into the market, but even a bigger piece here is on the supply side is our removals of listings are up 65% on a year over year basis. So houses that were listed last month six are being removed from the market further impacting supply, while supply has been remained squeezed like very, very tight supply of properties over the years, there still is a decrease in net new listings, and also an increase in removal. So in that supply is being affected. But when it's so squeezed already, that that impact in the market will not be as significant as the impact of a decreasing demand side of the market.

Michael:

Yeah and that makes total sense and so what are you seeing with regard to sale, as opposed to sale of percent of this price and then also days on market?

Brandon:

Yeah. So I think some other key indicators, the market, you kind of just discussed, you know, we have days on market, I think price lists ratio is important, I think, the median price, right, the time series of how is price behaving in this environment, all important and understanding kind of the overall health of the market and I kinda like to go with the big one first, in my opinion, which is the median price, right? Where is the market going? I kind of macro at a national scale. The, if you look at the year over year basis, median price of all single family listings, right, so single family dwellings, that those are actually up 10%, on list prices, and actually up 2% in terms of actual close prices. So even though we're seeing the storyline of these prices really starting to decline and kind of freefall, we're still seeing as a year over year basis, because we hit such a huge peak in the middle of 2022. We're still up year over year, by those two percentage I meant mentioned.

On a month over month basis that compared to last month, we are slightly down, but it's very, very small. We're down around one and a half percent on listings and down and less than half a percent on close prices. So we see a lot of the storylines and the headlines across the news, that these prices are falling drastically. We're in a deep decline. The roller coaster rails are off and we're down to 2008 again, but just looking at the data alone without any sort of human interjection or opinions. I'm not an economist, I'm a data scientist. But by heart, I'm just looking at the data because we had such a high peak in the middle of 2022, in terms of the median house prices were still up year over year and on a month over month basis, the declines in price are very, very miniscule, to what we're kind of hearing in the media. So that's one thing, right? The median price is definitely a driving factor. Everyone's concerned about like, what am I going to get for my property? Where's the trend of our nationwide real estate market heading and even though we're in a slight downtick month, over month, if you look at long term, we're still up 10% on listings and up, you know, 2% on closed prices.

Michael:

It seems like there has been so much resiliency, if we're seeing such a miniscule price reduction month over month and year over year, there seems to be a lot of resiliency to interest rate increases for folks, and that they're still closing transactions, even at this much higher interest rates, and they're not saving a lot or really anything at all, in terms of the price that they're paying out the door.

Brandon:

Right, I think what's causing these prices to, I don't wanna say remain elevated, but kind of not declining at the pace that we would expect is that tight supply. Now, we're still a few months probably away from seeing how this kind of mass layoff and technology could affect the real estate market. Because, in my opinion, what's really going to drive these prices down is when we see supply, increase at levels that the demand has decreased and that imbalance in the market is what will really drive those prices down and the reason why kind of refer to that technology, layoff if that same style, that same volume of layoffs, hits other sectors of employment, then we're going to see defaults and people need to give up their homes because they can't afford it anymore. So unless something in outside of the real estate market really drives the demand. I'm sorry the supply side of the market to escalate at a very fast rate, that safety net is there to kind of keep our prices from really crashing, like we saw in 2008. We don't have the same supply that we saw in 2008. So we're kind of have that safety net there. Unless like I said, something really drives that unemployment up and forces people to default and give up their homes or sell their homes because they can't afford the mortgage anymore.

Michael:

But it's interesting, because from all the news that I've been hearing, and correct me if I'm wrong, maybe you've been hearing, the unemployment rate is super low. Like there just doesn't seem to be those mass layoffs that we saw in the tech industry, yet anyhow, affecting so much of the so many other industries. So it doesn't feel as imminent.

Brandon:

100% right, I'm hoping I mean, just for the health of our economy, I'm hoping that that mass layoff doesn't reach other sectors and I hope that we're done with majority of it. But we're probably a month or two away from really understanding did that actually have an impact on our median, price per square foot or median close price of a property and then we can track those defaults, and those the supply over the next few months to see if that really impacted the real estate market or not.

Michael:

And that makes total sense. We'll talk this Brandon about those other two factors that you mentioned the price to list ratio, and then the days on market.

Brandon:

The price to list ratio has actually been on a pretty big decline. I think back in May 2022, it may have been June or May, I think we're at a multiyear high of around 102%. So most properties, were selling 100 or 2% higher than the list price, which means that it's definitely a seller's market, right. If I if I can list my house for X amount of dollars, I know I'm gonna get 102% return, I mean, I happen to present a 2% return on that is definitely a seller's market. We actually for the first time in about mid-August of last year, we're now down below 100. So that's just an indicator that the markets kind of switched right now buyers kind of have that power and that ratio now stands around 98%, which is kind of the levels before COVID emerged, and actually the lowest number since the first half of 2020. So we're not we went from a high of 102 in May to now we're down to about 98 which is definitely a key indicator that buyers now have more power than the seller's because of you know, just multiple aspects that we've been talking about the high interest rates buyers be a little more choosy. Even though the supply is down sewer buyers, there's not enough buyers in the pool to compete with me anymore. So I have a little bit more pool, which is why we're seeing that sale to list price or price to list ratio, starting to decrease. That kind of in parallel, what we see with that is to kind of tell that same story that we're now entering that buyers’ market, even though demand is low, if you look at the volume of price drops, right, think about how many times a listing comes on the market for 100k. It sits there for 30 days, they come back and they say hey, you know what, let's list it for 95 maybe we can get more buyers, those price drops in terms of volume are actually up 142% year over year since the last time. It's just more evidence that buyers now because demand is so is so squeezing this high interest rate environment, they get more power listings are staying on the market longer list to or sale to list price ratio is down and then but yet the because supply still squeezed, we're not really seeing a huge impact that we're kind of seeing in the news right now, on the actual median price of all listings.

Michael:

Brandon, just out of curiosity, I think I remember if my memory serves me correctly, which it often doesn't, but like in the height of 2022, the max or the highest median home price in the country was like 395k. But do you happen to recall what that number was and maybe what it is now today?

Brandon:

Yeah, so if you look at the peak of 2022. So kind of that halfway mark, I think it was right around the ending of H 122. The actual median price is actually higher, at least according to our data, right? The data that we have availability to our actual median price was actually above 400,000. We're sitting right around like 420,000 was kind of that median price for closed listings for active listings was actually even higher than that. So for closed listings were around that for 120,000 range, right now as of the first week of December is kind of our data cut off. Right now in terms of the data that I'm giving you, we're sitting right around $380,000 as the kind of median price per square foot, I'm sorry, median price of closed listings, it sounds dramatic, and we go from, you know, that 420 ish down to three, it's a pretty big drop. But as you look at the entire time series from, we'll call it the pandemic, the start of the closed downs, all the way to today, if you bought a house, during those pandemic years, you're still doing really well in terms of the amount of equity, it's still in your home prices haven't dropped that drastically to where you're now upside on your loan, you're still well above you know, what you bought the house in, during the bottom of the pandemic years, what's really going to cause kind of some worry, and headaches is these people who kind of bought later in the year, kind of towards the end, or middle of 2022. Now, they're beginning to worry the most because they didn't have that same amount of cushion that these homeowners bought when they don't worry about houses a year or two years ago. So that number does seem like a big decrease. But if you look at the longevity of the time series of the pandemic eight pandemic shutdowns to now, you're still up quite a bit in terms of percent and you have a large cushion before you even have to worry about being upside down in a mortgage or, you know, losing a large amount of equity in your property.

Michael:

Does the data give us any indicators as to what's coming down the pike because obviously, data is rear looking. But how can we use that to be forward looking or is there a way to be?

Brandon:

Yeah, so I think you're talking about forward looking, you know, the next 6,12,18 months. If you look back slightly, we hit this topic quite a bit. It's a big topic right now in real estate is these large interest rate hikes. If you look at the timeline, the time series of the real estate market in terms of medium price terms of you know, list to sale rate of sale to price ratio, you look at, you know, the days on market, it seems that with the large amount of growth that we experienced in two years, you know, record growth, that was actually able to absorb a lot of the impact that people would assume, continuing to month over month raise this interest rate to higher and higher levels, they assumed that it was going to impact the real estate market at much a much quicker, much faster way. So then they can stop, right, the goal of raising interest rates tend to raise them forever. They're just raising them until they kind of see the market growth kind of settled down and adjust and kind of normalize. But it's kind of shocking when you think about how much and how quickly that interest rate rose and until a few months back. I mean, most of 2022 there was very little impact from those rounds of interest rates. So it's one thing that we can we can learn as, as we saw record growth, even that dramatic increase really did not impact the real estate market as we thought it would. Secondly, what's really kind of driving any sort of kind of negative view of the real estate market right now around this interest rate, is you gotta think of like purchase power of our homebuyers, right?

We didn't see salaries raised at the same rate as the real estate market, we didn't see household income raise at the same rate as real estate. So the really big question here and the kind of the, you know, the driving force here is the purchase power of homebuyers. We actually seeing and this is from Freddie Mac, I believe a 32% decrease in purchase power, based on this 30 year, you know, FRM, that's given the same monthly payments for a loan made at the end of 2021. So we're really seeing a decrease in what homebuyers can afford and that combined with hopefully the Fed has definitely signaled smaller rate hikes in the future. We're hoping that housing fundamentals can hopefully come back to a quote unquote normal seasonality cycle and the expected returns, but into early 2023. I think we're still going to see you know, a real estate market that's just characterized by this continued tight squeeze on supply tight squeeze on demand. With the exception of what we discussed earlier, which was a major economic event causing mass layoffs or firings, then I'm thinking early 2023 is going to be characterized the same kind of, of patterns we're seeing now, which is tight supply, shrinking demand, days on market, increasing. median price is slowly decreasing month over month, until we see hopefully towards the second half of 2023, a market that's brought back to its normal seasonality and its normal housing market fundamentals.

Michael:

Brandon, I want to be super respectful of your time and get you out of here, man. But before I do if people want to learn more about you and the research team HouseCanary has a whole services that y'all provide. Where's the best place for them to do that or get a hold of someone?

Brandon:

Yeah, I would definitely just go to https://www.housecanary.com/ . From there, you can get a list of all the products services, there's probably people on our company that can explain the better business use cases and appear researcher, I'm all about the data. But if you go to https://www.housecanary.com/, there's plenty of people to contact through there and also, I'll attach my email. I'll pass it on to you, Michael after this. So you can share it with the listeners.

Michael:

Thank you so much for taking the time. This was super informative and definitely again, curious to see how things all pan out.

Brandon:

Yeah, stay up, same tune. I think next week, our new market pulse comes out as well. So if you're interested in different states and how the market is performing, and also at the national level, it's a free report and that report will be valid all the way up into the end of December. So it will have kind of our December numbers added to that report and you can see those trends going on there as well. So usually is dispersed on our website. Also LinkedIn, if you follow HouseCanary on LinkedIn, that report is shared monthly for free and you can see all those metrics that we talked about updated on a monthly cadence. So you can kind of have competence in your decision making process.

Michael:

Love it, love it. We'll definitely check that out as well. Well, thanks again, Brandon. Appreciate you and we'll chat soon.

Brandon:

Appreciate it, thanks, Michael.

Michael:

All right, everyone. That was our show a big thank you to Brandon for coming on and dropping so much knowledge, facts, data and statistics on us to help us guide our investing through these kind of tumultuous times. As always, if you enjoyed the episode, we would love to hear from you all ratings and reviews are always appreciated as are comments with additional topic ideas that you are interested in learning about. We look forward to seeing on the next one. Happy investing…

Revolutionizing real estate investing on the blockchain Jan 14, 2023

This episode features the masterminds behind Roofstock OnChain, Geoffrey Thompson, and Sanjay Raghavan. We discuss the revolutionary product of tokenized real estate, how it works, the problems it solves, the incredible scaling power of this new technology, and who it is for.

Geoff Thompson built his career at top-tier law firms practicing in the areas of capital markets, banking and credit, structured finance, private equity, and cross-border transactions. Geoff's prior role at Roofstock was as general counsel where he advised on partnerships, product innovation, fundraising, deal structuring, real estate matters, securities law, international expansion, and all other legal and compliance matters.

Sanjay Raghavan is the Head of Web3 Initiatives of Roofstock onChain where he leads the real estate investing platform's blockchain initiative. After being accepted into Cypher Accelerator, Sanjay continues to build connections between real estate investing and blockchain. Sanjay is also an advisor at Pudgy Penguins NFTs. Roofstock onChain is the Web3 subsidiary of Roofstock, the leading digital real estate investing platform for the $4 trillion single-family rental home sector.

Relevant links:

https://mobile.twitter.com/eth_sanjay

https://mobile.twitter.com/_gthomps

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

What's going on everyone, Michael Albaum here from the Remote Real Estate Investor, we're actually in the midst of a pivot and so we're changing the name of our show to be the SFR show. Reason being is we really want to double down on the single family rental industry as a whole and so we wanted to pick a title and a name that's reflective of that.

So join us here on the new show, the SFR show where we're gonna be bringing you everything you need to know about SFR investing from what the market is doing at the micro and macro level, to what the factors are influencing and changing the space. So let's kick it off with this first episode. We hope you enjoy.

Hey everyone, welcome to the SFR show. We're going to be talking today with Geoff and Sanjay on Roofstocks web three team about cryptocurrency tokenization, alternative investments, portfolio theory and risk management just to name a few. So with that, let's just jump straight into it.

Geoff and Sanjay, good to see you both. How have you been?

Sanjay:

Great. Good to see you again and, Michael, you look really different from the last time we spoke and so much younger and much more refreshed, I think after the holidays.

Michael:

Thank you. Yeah, I came back from the holidays ready, you know, cut, put some 10 pounds on and took 10 years off my face. So I'm doing the best I can, so…

Geoff:

That's it.

Michael:

That's it. So for anyone who didn't catch our prior episode together, I'd love if you could give a really quick intro who you guys are and what is it that you're doing here at Roofstock.

Geoff:

So yeah, we are co leading the web three business unit every stock. I'm Geoff Thompson, this is Sanjay Raghavan and we have been at Roofstock for several years and over the last year, we've spent all of our time focusing on how to use blockchain and web three technology to improve the real estate transaction process and to generally make single family rentals more accessible and asset class.

Michael:

And for anyone who isn't familiar with what web three is definitely go back and give that prior episode a listen. Sanjay gets into it and kind of what the technology is. So I'm curious gents where we are today, where are you seeing blockchain and tokenization playing a role in the single family space.

Sanjay:

So first of all, we had a sale of our Genesis property in mid-October. So for your audience who may have read about it on crypto Twitter or on media publications, that was a very successful launch of this product, we spent about 10 months working on legal and tax analysis of how to structure this product so that it would be compliant and when somebody was purchasing this property in a web three as a web three home, they were in fact getting, you know, ownership of the underlying assets. So that took us about 10 months to engineer and the sale. The first sale that happened in mid-October was a huge success, went viral on crypto Twitter, and was picked up by all the leading crypto and non-crypto publications and the reason for that was because for the first time, what really happened in crypto and blockchain, which, if your followers are looking at the market, in general, this has been a really particularly bad year in the industry for the stock market.

Inflation has been at a 40 year high feds have been drastically, like we went to 475 basis point interest rate hike and so, you know, we're going through this very tumultuous time in the industry and crypto has not been an exception, either, they've, you know, Krypto has been having an unprecedented winter, where either like Bitcoin and Aetherium lost 60% of their value since last year to this year and then a bunch of crypto companies went insolvent, because of various either it was just poor risk management or just, you know, for whatever other reasons, you know, they didn't have the capital to withstand the, this bear market. So during these times, you know, this was sort of like a ray of light in this industry, because we had successfully demonstrated that it was actually possible to sell a single family rental property, which normally is a three four week closing process was done instantaneously using battery technologies. But we were also able to find a leverage partner who was able to provide a loan for that property at a 65% LTV and so the combination of all of this really was a very positive thing in the industry, and we got a lot of outreach because of that.

Michael:

Hopefully it wasn't FTX, right…

Sanjay:

No, the leverage partner was not FTY, it was Dehler finance. But specifically, you know, about your question about, you know, with respect to blockchain tokenization, what does that really mean for real estate is that, you know, we've been able to now demonstrate that it is possible to have a better sale experience, right? When you typically look at the three week closing process on a real estate transaction, there's a bunch of contingencies on an offer, both the buyer and seller are extremely nervous about what happens during the diligence period in those three weeks. You know, like, for example, as you're aware, you know, the inspection results come in, and then you find out something about the property that you were not aware of before and then there's typically some kind of negotiation that goes on the offer price after the fact. There's an appraisal, contingency financing contingency, and, you know, so anything can happen during this three week period, the seller and buyer, even though an offer was accepted, may have a disagreement later on, you know, based on the results of further analysis, and sometimes the offer can be rescinded and then you're back to the drawing board trying to relist the property and sell it. So it's a particularly stressful time, both for the buyer and seller and doing it through this web three mechanism essentially allows us to take a lot of that diligence, which still has to happen, but we're just moving it, you know, upfront in the process, so the buyer and seller have access to the same information about the property, and the buyer is able to perform all of their diligence upfront. The way Geoff talks about his experiences, you may spend a week or two looking at Amazon Prime to figure out what you want to buy for Christmas. But once you've made that decision, you want it to be delivered, you know, on Amazon Prime, same day or next day, you don't want to wait four weeks for it to be then shipped from China to you know, get to Los Angeles, and then from there to be transported to, you know, San Francisco. So, you know, we really want to make this process easy for people, right. So you do all your diligence upfront, but when you decide to make that purchase decision, it happens instantaneously and on top of that, when you add that financing in a way that's asset based and not based on your personal credit underwriting, you're not trying to find a lender and you know, sending them two years of tax returns and bank statements and as you as you're aware, Michael, what happens in this process is you send all this information, you get a pre underwriting approval and then as you're getting ready to close on the property a month or two have elapsed, and all your information is outdated, and you're resending all the information back to the lender.

So you know, you want to avoid all of this as well, because that's also incredibly stressful as you're going through a purchase process and here, because it's a rental property, it's cashflow generating, you based on the value of the asset, you can actually underwrite the loan and say, you know, it's a $200,000 property, I'm comfortable giving you $100,000 loan against it and that makes the lending paradigm a lot simpler as well. So overall, it's generally a better experience, both for the seller and the buyer, when you bring in the battery technology into this process.

Michael:

This is mind blowing, you guys. So, I'm curious, like, how are you seeing really or rather, are people doing this at scale? I mean, is this we did it once we've, we've proven that it can be done once. But what is the scalability factor look like here? For both buyers and for sellers?

Geoff:

It is yeah, I can jump in here. It is scalable. It's scalable in the same way that buying and selling homes today can be done, you know in bulk, or you can assemble your own portfolio over time. It's not you know, there isn't a delayed production process in creating these and preparing them to be sold on the blockchain. We do get that question a lot. Well, how much does it cost to mint a token? You know, is it 10s of 1000s of dollars? No, that's, that's essentially free. How long does it take, it's essentially instantaneous. The work that we do to prepare this to be sold is, is what Sanjay alluded to the diligence and inspection making sure everything photos have been taken, taxes have been paid HOA square all of those things. That's what we do up front, which has to happen in any real estate transaction, we just package that up in a very short timeframe of you know, call it five or 10 days, once the home has been purchased, and rehabbed and you know, it's ready to be listed for sale. So this can be this can be scaled and then once the home has been put on chain, then this is where the seller really is going to feel the scalability and the ease of interaction because imagine that you own five or 10 or you know some number of homes, you want to rebalance your portfolio. Maybe you want to get into one market and get out of another market. Right now you know, you'd have to do that through the traditional process. It might take a few months and involved a number of different intermediaries. In our case, if you if you own those homes as tokenized properties, we can get them ready for sale in five or 10 days, and then they can be listed immediately and once they've been listed on an NFT marketplace, the sale can happen with one click. So you don't as the seller, you don't have to go through a you know, a prolonged and painful back and forth with the buyer countering after they get the inspection and you know, trying to haggle on the price or trying to get a discount here, whatever it might be. That's all taken care of up front. So in that sense, it's it does make this much more scalable and much more liquid than the traditional process.

Michael:

Should audience and listeners be thinking about crypto almost like a foreign currency and so just quick anecdote. So I've invested in Portugal, I signed my purchase agreement to purchase the property in Portugal back in 2020, just before the pandemic, then where the dollar was really strong against the euro than the Dollar tanked against the Euro and so I changed money after the fact and just got totally hosed on the exchange rate. How should people be thinking about exchange rate, if you will, between cryptocurrency and whatever currency there?

Sanjay:

Yeah, that's a that's a really good question, right and when you think about a cryptocurrency, like Bitcoin or Aetherium, these are the two sort of more commonly discussed cryptocurrencies, in a way it is, you can make the analogy that these are almost as though they are, you know, sovereign currencies of their own and there is an exchange rate between the US dollar and Bitcoin or Aetherium. The only difference here being that, you know, unlike Euro, or the British pound, where they have their own fiscal and monetary policies that, you know, determine what happens to their bank against the dollar, in the case of cryptocurrencies, they are highly volatile and we see that there's, they're very, actually strongly correlated to the stock market today. So, when, for example, the, there was an indication that the feds might slow down the rate at which they're increasing the interest rates and I think the expectation for, I believe this week the Fed is meeting and the expectation is that this week, it will be a 50 basis point taken sort of a 75 basis point high, the stock markets rallied and sorted Bitcoin with that and however, even though they're kind of strongly correlated, they're also highly volatile and so when we talk about people having cryptocurrencies that they can use to buy these properties, we actually suggest that they buy and keep their money in stable coins, which are pegged against the US dollar and there are companies such as circle which have USDC, and Paxos which has its own version of dollar pegged stable coin.

And having your money in stable coins means that you're not subject to the same volatility, as Bitcoin or Aetherium might be which can drop or go up in value by 20-30% in a single day and that's, that's how we will really think about it. If people want to, you know, have an allocation, if somebody is really long on Bitcoin or Aetherium, and they want to have an allocation in that asset class, that's fine. As long as they're aware that those are highly volatile and in the short term, they could be, you know, fluctuating quite a bit.

Michael:

Yeah and that makes sense and so when are you seeing people make the change from the stable coin to whatever coin they're going to be using to purchase the properties?

Sanjay:

So the stable, you can actually purchase properties with stable coins and because, you know, we have a way to when we received those stable coins, for example, if we are the seller of the property, and, you know, property is purchased using, let's say, serpents, USDC. Once were paid in USD C, we have a way to convert that back into US dollars. So that's, you know, it makes essentially, you can think of the stable coins as programmable money meaning this whole transaction is happening on the blockchain, and it's happening through a piece of computer code, there's no you know, you and I are not sitting across the table signing documents and you know, giving a check and receiving title and in return. So, this is all happening because a piece of computer code is transferring money from you to me and transferring the, the LLC through the NFT giving you the LLC that I own, which has this property and since this is all being executed by computer code, this stable coin is really, you know, we refer to it as programmable money because a piece of computer program is able to move money from you to me, and, and allow this transaction to happen in that one click process that Geoff was talking about earlier.

Geoff:

You know, it feels like this is the way things should work, right? If you think about the system that we have right now for closing property transactions. It's basically inherited from England 800 years ago. You know, we've made small advancements, but not really and it shouldn't you know, it all of everyone who is involved in these transactions, and every step that's taken is taken for a reason it's solving a particular problem. But if you stop and rethink how this is done, you realize that by reordering some things, and maybe, you know, using a splash of new technology here, you can actually dramatically change the experience for everyone and it's not necessarily, you know, a zero sum game, I think it's best, it's better for everyone, everyone who's in the industry is going to be better off, there will be more transactions, because it's easier to transact, there'll be more demand because people are interested in getting in, if they know they can get out easily, right?

Right now, you know that if you're looking at buying a property, you're probably going to have to hold it at least five years to recover your closing costs and wait for it to appreciate a little bit and you know, it's going to be a headache, when you do have to sell, if you don't have those constraints, you know, transaction fees are less and the time involved is less, you'll be more inclined to get in the market, because you know, you can get out when you need to.

Sanjay:

And, you know, I'll also add one more thing to that, right. So Michael, if you think about, you know, back in the day, when there were these kind of all day, buyers, a lot of them were like businessmen that, you know, one year, they might have made half a million dollars, but you know, then another year, it was only 150, or something and so it's very hard to underwrite those types of folks through a traditional underwriting process, because you're looking at two years of, you know, income and tax returns, and all of that, and a lot of them may not can qualify for more conventional financing. However, in an asset based lending type solution, you know, as long as you have the money, and, you know, you're not constrained by, you know, your income for the last two years or three years, as long as you have the money to buy the, you know, to put in as down payment on the product, and the asset itself has the value, you're able to borrow against it much more easily. So, you know, we just talked about the complexity of closing a real estate transaction, in general. But once you add in the financing layer, on top of that, it gets even harder because, you know, there's, again, in a in a, you know, when the market is going up, you just, you just don't know, if you know the max, you want to make the best offer, you can but at that offer, you don't know if you will qualify for the loan, because the also the rate might have moved since the time, you initially got underwritten and suddenly, with the new rate, you don't qualify anymore for that and you have to find that little bit more down payment to offset it or buy some points. You know, you and I have gone through this numerous times in our lives. But you know, you can avoid all of those types of issues because in an asset based lending program, you know, that when you buy this asset, which is worth $200,000, there's a lender, if they're willing to come in at 65%, LTV, you know that based on the value of the asset, you're going to get that loan.

Michael:

And if we just decouple the crypto piece of this and blockchain piece of this, I mean, asset based lending, is that available for regular folks?

Sanjay:

So in the traditional finance world, it is available, right, but it becomes it becomes harder, because when you're buying an investment property. As you know, Fannie Mae puts limitations on how many investment properties you can get financing for as an individual. Once you get past that limit, then you're looking at pretty much private money, hard money type lending solutions, until you can get up to a scale where you have enough properties where Citibank or Wells Fargo or Goldman Sachs might be interested in working with you. But there's this pocket where after you know, your first 10 properties till you get to a few 100, we are primarily working with, you know, non-bank lenders who are generally, you know, where the rate could be 10 or 12% and then, oftentimes, some of these lenders will also ask for a personal guarantee on top of it. So it's not, you know, while it is possible to get financing on investment properties in the traditional finance world, at some point, it doesn't scale very well and, you know, you're sort of in that desert for until you can somehow figure out a way to get to 200 properties when suddenly the larger lenders are willing to talk to you.

So that problem goes away when you're using Blockchain, and specifically decentralized finance or defy as we refer to it, because they're incrementally each property that you're buying is getting financed based on asset value and so you know, you're able to get a much more sort of a pleasurable experience to get through the lending process on the blockchain than on the traditional work.

Michael:

Let's pivot just a little bit and talk about risk management and portfolio theory and as folks are starting to scale their portfolio or really as institutions have already a sizable portfolio, where does tokenization fit in to their playbook? When's the appropriate time? When should people be thinking about it in general?

Sanjay:

The way I like to answer this question is if you as an individual, if you went to your financial advisor, and said, okay, you know, I have, you know, a million dollars, I want to invest, and I want to make sure there's, you know, come up with a portfolio allocation, that makes sense for me, typically, they're going to, like, in the old days, it was just a sort of a 60,40 rule, there was 60%, in stocks, 40%. In bonds, yeah, but I think people have gotten smarter over the last 10 years and nowadays, when you go to a financial advisor, they're going to say, some allocation in stock, some allocation in fixed income bond products, and then an allocation to alternative investments, because that's where, you know, you can get non correlated yields, because the stock market moving in one direction should not and like, you know, God forbid, if you have an emergency, and you need some cash, like this would be a, you know, if you bought at the height of the market last year, this would be a really bad time to sell, you know, your S&P 500 shares to, to, you know, pay for whatever you had to write, whether it's a wedding, a doctor's thing, education, whatever it is.

So, generally speaking, financial advisors these days suggest that you should have an allocation in alternative investments that are non-correlated to the stock and bond markets and, you know, you can access that pool of capital, you know, when you need to, right. So from that, from that perspective, diversification, and then when you talk about alternatives, there's, obviously, there's a wide range of assets there. But real estate is on top of mind, for almost all the, you know, anytime we talk about alternatives, real estate, sort of is one of the top things people talk about. So from that perspective, you know, almost every investor should probably be looking at some allocation, and it will depend on their individual circumstances, whether their age, their income, their marital status, and you know, their need for cash there, this cauldrons and all that, but, you know, advisors might ask you to put five to 10% or, or more into alternative asset classes and so the same financial hygiene should also be applied by corporations and institutions, because you're sort of being asked to manage the treasury of your company, let's say you are a venture funded company, and you just raised $100 million, well, you are going to keep a good portion of that money in cash and cash like instruments, money market, and so on, because you have working capital, you have other things that you need to be spending on. But some allocation of that you might put in US Treasuries, for example, right and in the crypto world, crypto institutions may keep some allocation in Bitcoin and Aetherium and other protocols that they have high conviction and but nevertheless, whether it's a web two institution or a crypto institution, it's just basic financial hygiene to have an allocation in alternative asset classes and specifically, with our product, being a web three product, you know, that money can stay, you know, essentially, the token they're purchasing is a is an NFT and it is part of the blockchain ecosystem, so they can keep their assets within the crypto world without having to continuously off ramp into US dollars and then on ramp it back into crypto when they need to switch back and forth with respect to how they receive rental income, of course, you know, if your properties are managed by a property manager, which they should be because institutions are not in the business of managing properties, you can collect your rent in cash if you have, you know, if you have to, if you have expenses that need to be paid out in US dollars, but also if you want to collect your rent and USDC or DDM, you have the option to do that as well.

So whether you're a two institution or a web three institution, depending on your cash needs and your crypto needs, now you can have a yield generating crypto asset, and the yield can be collected in Fiat or in or in cryptocurrency. So, you know, it is good financial health to do it. We encourage everybody to have some allocation, whether it's through Roofstock, or through any other channel channels that they would like to pursue, but they should have some allocation and alternatives if it just makes sense. Geoff, if you'd like to add something back?

Geoff:

No, that's it. I mean, in our case, because we've designed a solution that allows you to transact with crypto natively. This is something that we've heard from a number of crypto or web three institutions that it's potentially very interesting for them, as opposed to maintaining all of their assets in a cryptocurrency or a stable coin, this isn't a way to get access to, you know, a diversified asset that does create yield and it does have a price appreciation component. So there are a lot of, you know, we've heard from the web three community in particular that this is a perfect diversification play.

Michael:

And if I'm someone that owns a sizable portfolio, maybe I own it all in cash, because that's been my mantra and I do need that quick capital injection. I mean, could I tokenize these properties and then go get asset based lending and convert that into cash very quickly.

Geoff:

Yes, that's your thinking ahead, I like that. Yes, the properties can be tokenized. Basically any point in their lifecycle. If you own them, now, you bought them through a traditional sale and settlement, you can, you know, basically what it means is you have to drop it into an LLC and the LLC has a particular structure that we've worked out, it is very particular. So you know, we'll work with you to set that create that LLC, to help transfer the property into the LLC. In most states, I think the vast majority of states that transfer from an owner to an LLC that's owned by the owner doesn't create transfer tax obligations. So there's, you know, there's a little bit of the traditional closing costs, recreation fee, or whatever that might be part of that. But it is perfectly possible to onboard existing assets that you own into the system and similarly, for if we're talking about other points in the lifecycle for builders, we've had a few builders reach out and say they're close to completing a community and they might want to try to sell some of these as in an NFT form, those can those new assets as new properties that really have never been titled before, those can also be titled directly into an LLC. So it's a very flexible structure, it accommodates property at whatever stage of the lifecycle it's in.

Michael:

Anyone who's got conventional financing experience under their belt might be listening to this and saying, Well, you're talking about lending or talking about LLCs. Those two things often don't jive play nice get in the sandbox. So the acid base lender that we're working with, or that we are going to be working with, I would imagine has no issue lending to an LLC. Is that right?

Geoff:

Yes, that's exactly right. The lenders that we're working with are the web three lenders, we have talked to numerous traditional lenders, and some of them expressed a lot of interest in digital assets and maybe they've even created a team. But in most cases, the underwriting aspect of it isn't, isn't there yet. They're not ready to take this to credit committee and make a loan on the structure that we're proposing here but that's okay because there are there's a lot of money that's available in the web three space, and it is more flexible in terms of what it requires. They don't necessarily need to have all of the same checks and balances that a traditional lender would be in terms of underwriting against the individual. They can be comfortable underwriting against the asset, because they're comfortable that in the event of default, that asset, it is already in their vaults. So it's in the lenders wallet at the time of default and because we're building this system where you can sell them through an NFT marketplace, there is liquidity that there wouldn't otherwise be if you were holding this you know the traditional way so you to your to your question. Are Trade Fi lenders, the traditional finance space interested? Yes, we've heard some say they're interested we haven't seen anyone actually show up to engage in detail. But there is an entirely separate pool of capital into web three space that's much more flexible and willing to work with Blockchain structure.

Michael:

I think my last question, guys before I let you out of here is like I'm sold this sounds obviously like a really great product, like a really cool technology that exists. Who isn't this for who, who listening to this should think about that. It's not a good fit for me because XY and Z.

Sanjay:

Yeah, I mean, I can start with a couple of things and then Geoff, you can add to that as well. So if the property already has financing in the Trade Fi world, this structure is hard, because we can't really transfer unencumbered property into an LLC and then tokenize it right because there's a traditional mortgage on the property and there's a whole kind of thing that's a fillip off chain, in terms of financing. So it's not going to work. If primarily you're looking to get off chain financing, then this is not for you. You have to you know, sort of follow the traditional sense. But anybody that's open to purchasing this as a web three property and open to looking at web three financing alternatives. For those people, this absolutely should be something they should consider. The one kind of drawback or question we've heard from a lot of people as they need to become familiar with how to use crypto wallets and how to essentially convert money into USD C or some stable coin, and then use that to go and make a purchase. We're here to help with those types of Q&A, right? The, you know, until you do it for the first time, it's hard, but after you've done it, then it's you know, it's easy, right?

Just like when we, the, you know, iPhones first game, and people didn't know, you know, how do you which way do you swipe to do what, but then over time you get used to it and so we're absolutely happy to help anybody that's staying in the sidelines, purely because they don't understand the technology aspects of it, we can help them out. But for people that have financing constraints or other things, and you know, for them, it is until they can, you know, overcome those issues and look at sort of a pure web unencumbered property in the web three world with, then financing added to it on the blockchain. So for those audiences, that might, you know, until they figured out that, it might be a challenge.

Geoff:

I'd also add for owner occupants, the financing isn't fully worked out yet. So the financing that we added to the initial home sale a few weeks ago, that was very much geared towards an investment property, and for the immediate future, to the extent that we're building out the different options for defi lending, it looks like most of them will be focused on these as investment properties, as opposed to owner occupant properties and that's for lending law reasons, not wanting to cross over into a mortgage lending licensing requirement and it also just dealing with, you know, the people that are different in the, at that point, the underwriting is different as well, because it's not as easy to necessarily sell that asset if the owner is living in it and so that type of thing. So for at the at the moment, we're thinking of this mostly for investment property, use cases.

Michael:

Really, really cool stuff. For people that have questions that want to reach out that want to learn more, what's the best way for them to do so?

Geoff:

Reach out on Email or Twitter. We're, we can drop our emails here, but it's: gthompson@roofstock.com or is it sraghavan, right?

Sanjay:

Yeah, it's a sraghavan, so: S R A G H A V A N @roofstock.com. I'm also @eth_sanjay, Sanjay, Y on Twitter, so you can also reach out to me there. One thing before we sign off for today, we're super excited to say that we are in the process of closing our second property, that's going to get tokenized. Soon, this one's going to be in Georgia, at CES Atlanta suburb and we'll be going through the process as soon as this is closed in the next few days, we will be going through the process of documenting what the property looks like when we bought it and any Rehab we end up doing on it and you know, they'll be you know, talking about it on social media quite a bit as well as people who are new to real estate investing, maybe this is an opportunity for them to understand, well, you know, what are the kinds of things people should be looking at when they're analyzing a rental property and so as we go through the process of rehabbing this will sort of document that a little bit. But that, you know, once the rehab is completed that that'll get, they'll get tokenized soon, but once the rehab is completed, we'll have it available for sale.

Michael:

Awesome, we'll definitely have to keep my eyes peeled for the process and for the property once it's finished. That's super exciting. Well, guys, it's always a pleasure, great seeing you both. Thanks for hanging out with me.

Sanjay:

Thanks for having us.

Geoff:

Always great to chat.

Sanjay:

Bye!

Michael:

Take care and talk soon.

Hey, everyone. That was a wrap to our show. Thank you so much to Geoff and Sanjay. Super, super, super interesting stuff. Definitely leave us a rating or review wherever it is you get your podcasts and definitely reach out to those guys if you have any questions about web three, about tokenization about cryptocurrency home purchases. Again, really cool stuff. We look forward to seeing you on the next one. Thanks so much for listening. Happy investing…

The largest risk that one has is being an employee, with Neil Timmons Nov 19, 2022

Being only an employee leaves you vulnerable to the ups and downs of the market. Real estate investing is one powerful defense against job loss and economic downturns. In this episode, Neil Timmons provides insight into the real estate business and shares his experience with overcoming economic adversity to secure a robust financial position.

Neil Timmins is the CEO of Legacy Impact Partners, where they invest in real estate opportunities ranging from houses and apartments to industrial and medical offices. In 2021 Neil published his first book, Unicorn Hunting for Real Estate Investment Companies: How to Easily Attract, Screen, and Land a Unicorn. The book is tailored to helping real estate investors find and retain top talent through the strategic systemization of hiring. Neil also hosts his own podcast, “Real Grit” where he pulls back the curtain on real estate investing through interviews with industry titans. “Real Grit” provides listeners with the tools they need to secure their lasting real estate legacy!

Episode Links:

https://legacyimpactpartners.com/

https://legacyimpactpartners.com/podcast/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have Neil Timmins, who is an author, a podcast host, entrepreneur, real estate investor and he's gonna be talking to us about going from an agent and employee to building a significant business in the real estate space and what it takes to do so. So let's get into it.

Neil Timmons what is going on, man, welcome to the podcast. Thanks so much for taking the time to come hang out with me today.

Neil:

Good. It's so good to see you again. I appreciate the invite. Looking forward to this for some time now.

Michael:

No, likewise, the pleasure is mine. I'm super excited. So you and I of course know each other. We were chatting offline just before we hit record. But for anyone who doesn't know Neil Timmins, give us the background quick and dirty. Who you are, where you come from, and what is it you're doing real estate.

Neil:

High level out of Des Moines, Iowa, born and raised, started as a residential real estate agent built a built a brokerage there on to REMAX for a number of years was a top REMAX guy with my 20s and then eventually found my way stumbled into investing worked my way through single family investing, we still do a little today but morphed into commercial investing. And that's a primary focus today.

Michael:

Love it and I hear this this theme so often with agents start as an agent, got my teeth cut, then went into the investment side. My guess if you're a top performing agent, in your local market, you're making a lot more money on an annual basis than you would if you're investing. So why did you make that transition? Why'd you make that jump?

Neil:

Yeah, no good question. Well, the not so fun story is I was probably 31 ish at the time. Maybe 32, I came home one day to my wife of a decade in our three little kids, all about five or younger, and my wife had them all packed up and said she was leaving, leaving for good. I had spent the better part of seven years or so working like a dog every day of the week, I worked. My second year in real estate, it worked 355 days. So that business was built, ultimately, you know, I was able to put his team in place and that business, but it largely was built on my back and my effort and so it was at that point that, you know, I had an ultimatum and I begged and pleaded with her to go, you gotta give me give me an opportunity. I understand. So give me an opportunity. She did thank God. 45 days later, I sold my REMAX and took a whole bunch of time off to decide, well, how am I going to how am I going to do this? How am I going to make a living in contribute because I like doing what I was doing and not the not to the degree in which I did it. But I enjoyed real estate a lot, right? The people, all the fun things around it. So it took some time off to evaluate things and then ultimately plugged back in largely on the investment side.

Michael:

And today you own a business around the real estate investing space. Tell us about that.

Neil:

Yeah. So I own a couple of things. On the on the investment side of things. We're primarily focused on commercial investing, right, we buy by multiple asset classes, you're on a primary ladder, Des Moines, Iowa, we still do fix and flip in the office. Although I'm not largely involved, we've got a nice little machine that runs that really good. Contractor base in place, literally same contractor. Don't quote me on how many but we've done probably nearly 200 with the same exact crew. So it makes running things and the efficiencies there of all awfully simple. I love talking to people going you know what I don't like flipping because then I gotta go pick the carpet, I gotta pick the paint whatever else I'm like, What do you mean, you have to do that we picked it once. It's the same carpets, the same paint, same countertops, the same appliance, nothing, nothing changes. You're not doing a whole block of these things. It's not like anybody notices. You just pick it once yeah and so then also, I run an education business, which we launched this year, which has been very well received from folks who want to make that bridge want to leap into commercial real estate and, you know, figure it out either how to do their first deal or how to do their next deal.

Michael:

And I'm curious, Neil, because I also come from the education space, and the folks that you're working with, are they the DIYers or are they the folks that have heard of commercial and want to get exposure to it in some form or another are a mix of the two?

Neil:

Yeah, no, it's really DIYers. Yeah, that's not largely the passive investors, if you will, it's people who are active in real estate like, like using… if you will, you know, in my career was it just laid out you know, as well cradle to grave if you will, coming through I'd like if you were to go, how should someone progress? Although most don't do that, you know, they end up in one thing and often stick there, but I kind of work my way through that. Is this constant evolution of how do we elevate oneself and one skill set to take it to a to a new level and that's where these folks are they know they've done, they've done single family, they've largely been exposed to it, maybe they've been exposed a little commercial, but just haven't gotten to the results. They haven't they haven't been on a foundation, a legacy had been on a foundation of financial freedom and, you know, arguably, in mice that that commercial gets you there faster and easier.

Michael:

And within commercial because it is such a diverse asset class and really name where do you see folks going that are having the most success?

Neil:

Oh, good question there. You know, we bring people in, and we do a lot of things from a training standpoint, want to be in an asset class exercise to go alright, well, fill this little asset class matrix out, we have my hand if answer a handful of questions to go, you know, do you resonate better? Would you rather work with people or businesses, and we just bring them through a series of questions, and that lines it up to go well, top to bottom ranked, we focus on six level six largest asset classes, there's top to the bottom, here's what here's what it looks like and then my encouragement from there is, Listen, if number two resonates a whole lot better with you than number one on that list, that's what you should do, because it's just easier and you know, this, if we were to go work on something you can get passionate about, it's a whole lot simpler, then put a little more effort into it and something you're just like, huh, maybe?

Michael:

Totally, totally and, you know, I'm curious, so many folks, I think can go invest in single family on the side as a project as a test as an experiment, the DIYers that are doing commercial real estate, are they doing it on the side? Are they really jumping in with both feet, kind of like you did, and making this their full time gig?

Neil:

Yep, great question most are doing on the side, most are either stacking it on to their single family business or, you know, if they've got a day job and several folks do is they're doing this, you know, in the evenings, nights and weekends, side hustle, if you will and you think about you know, from makeup, a number of you were to go market to single family or markets or commercial just by being in commercial, the number of available prospects has been largely diminished. It's a much more manageable group of makeup, an asset class, let's say self-storage, you're going to go market self-storage is in your county, well, in comparison to houses, it is a mere fraction. So your ability to call text or you know, mail somebody or connect with a broker, perhaps it's very manageable. You don't have to do it full time. In fact, that would not encourage it, because you're gonna sit around, you're gonna get discouraged. Because there's candidly not enough to do versus the single family side, you could always find something to do.

Michael:

Interesting. Talk to us about kind of the exits and the thought process around the exit from that business. Because in my mind, and I think in a lot of other investors’ minds, a house is a house is a house, you know what it is? I know what it is everybody on the street, you know, that you bump into knows what it is, and knows how to buy it, versus a self-storage unit. I could maybe Name one person that I know that's involved in that business and so if I'm trying to sell it, who's gonna buy it?

Neil:

Yep, no, exactly. So that's, you know, what I do on the training side is bring people through, even if you know, largely set some goals, understand why you want to be in this business, and perhaps what you'll do get through the training go, I don't want to be in the business. And that's okay, too. That's okay because what you don't know or what you what you now know, empowers you, right? To make a better decision about what the path you should be going down. So we bring people through that large infusion for retraining to expose them to what this world looks like, and then how to, you know, identify an asset class that really resonates with you how to price something up, how do we get leads, so largely from a marketing standpoint, from a lead standpoint, what do we say then? How do we value it? How do we actually put something a price to it to go alright, this looks like a potential really good deal, then how do we put it under contract and then from there, you know, the exit plans largely are or we get to resell the property. Occasionally, we get a property that comes in our wheelhouse, what I call, it's not our perfect seller, so it's a good deal, just not for us. Now, can we move that along, so to liken that to single family wholesale it double close it novated right, do all the same things in the commercial side or, you know, we decide, hey, this is our perfect seller with the property we want to own. So how do we how do we close it up or we get to raise equity? How do we go get debt and then how do we bring the whole thing together to properly manage it? So that's what we show folks how to do and ultimately starts you know, on the front end of the process to go Alright, how are we buying this because I know what our required returns are and if it doesn't hit that I'm that's gonna lead us down a different path to either go it's either a non-deal or we're gonna get this moved along to another investor and cash up the big check that we can utilize for the next year.

Michael:

Yeah, that makes a ton of sense and you use the term that I'm not frankly familiar with novate. What does that mean?

Neil:

Novation is that this has become very popular on the single family side. So there's a lot of buzz on the single family side, especially for those in the wholesaling business. Okay, it is to replace one contract with one another with another contract. So essentially, if I was to, you know, say, for example, I was to buy a property from Mr. Jones, I have a contract in place with Mr. Jones, I decided I want to move this property along under innovation process, you would then provide me a contract that would replace mine, there's typically a difference in pricing, right, you're gonna pay more than what I've just paid and that delta ultimately gets paid back to me. As part of the process. I'm high level in here. There's some moving pieces but high level?

Michael:

Yeah, okay okay. Great to know. Neil, I'm curious if we can zoom out for a little bit, because you went from realtor agent, which is a kind of a unique profession and that, yes, you are an employee, but also you are kind of the business owner, your own of your own little business, your own little domain, and then you went and put a team in place, and then you ultimately sold that business. But for so many people that are employees in a traditional nine to five w two employee position to make the transition from employee to business owner, I think is a big leap for a lot of people. What was that like for you mentally going from? I'm going to be an agent to now I'm going to start and run and operate a business.

Neil:

Yeah, no good question in it. I think that's, it comes in incremental gains, right. So how do you how do you elephant, right, one piece at a time and so the same thing occurred from me mentally and I think that is? It's a terrific question because I think so much of this business, in business in general is mental, right? It's a six inch game in between your ears and so how do you combat that I read a book when I was probably 20 to 23 years old. The Millionaire Mind by Dr. Thomas Stanley. He wrote The Millionaire Next Door, that's probably his most famous book, The Millionaire Mind was incredible and it broke it down to, you know how millionaires think and my thought process, of course, is well, if you just think like a millionaire eventually, and then, therefore, act and operate like a millionaire, I will eventually become one, right. So it's not it's not hard success leaves clues. So there was a lot of things in there that that impacted me at a very deep level and one of them, the biggest takeaway for me was, the largest risk that one has is being an employee. They can let you go any day of the week, this is what I came to believe in, it's still my operating beliefs today are just risky, if you have no control and I, I am well aware that as a business owner, as an operator, as a real estate investor, we take tremendous risk. There's no doubt about it but I still think they pale in comparison to putting all eggs in one basket, men have an employer of someone else.

Michael:

Yeah, it makes total sense. So as you started moving things along, and created and formed and founded your business, how did you figure out who the right people were to put on the proverbial bus because I think, again, so many people have either a great idea, and they're really good at maybe doing that one thing. But doing that one thing isn't a business and so how do you scale it and have a proper functioning, running operational business?

Neil:

Yeah, no, great question and that's, that's probably, if I was to attribute any of our success over the course of last three ish years, two and a half years, somewhere in that range, we've had significant success in that period of time, it's largely been correlated to my evolution as a leader, knowing that the only way forward is ultimately with and through other people. And so I've had a focus internal so go back to a question you just asked earlier, from a mental attitude of taking that leap. For me, it's how do I develop as a leader how to become a better a better person, somebody that people look up to somebody that people want to be around, so many people want to listen to, and, and be on the same bus with going rowing in the same direction and so that has largely, that's been a big focus over the course the last couple of years. When I was at a spot where he's gone, it's time to grow. You can't hire and retain a player's unicorns as I call them. You can't hire and retain unicorns if you're not one. So how do you how does one improve their personal self to be able to get to that level? That other a players want to be around?

Michael:

Yeah, that makes total sense. So what it what did you do? Can you open the vest a little bit, let us peek under the curtain…

Neil:

Yes, you know, it's, I wish there was a silver bullet here, but it's largely just been, you know, what do they say what's mentionable is manageable and for me, it's just having that Cognizant thought that okay, well, now, I'm mindful of this and so now I need to give thought to this. How do I say things how do I handle things? How do I handle certain situations? What is the impact when making this isn't with an employee or with a team or with a customer in front of folks, how's this gonna resonate? What does this look like and then having the vision as a leader, as any leader, doesn't any organization, that vision to go, where are we going and this isn't about me, this is about us and so oftentimes you'll hear me say, we did this, I almost, you know, I try very hard to say that 100% of time, I didn't do anything. We did this collectively, all the results are collective right. It is us together and that reading, continuing to stay focused on that, stay ahead of what's transpiring, trying to, you know, hosting a podcast being around other people like yourself, other people in the industry having an understanding what's going on. So been trying to be on that curve from a knowledge base standpoint about what's transpiring that's helpful, too.

Michael:

Yeah, yeah. I love that and asking for a friend. I hate people and I don't think I want to interview people and screen people and that sort of thing. Does that mean that I shouldn't start a business with my great idea?

Neil:

The first part is I don't like people. So let's just call that the introverted, right? They don't want to interact with other people. My right hand gal is an introvert. She's not very gregarious as it relates to people. She's very good with people. But she wants to she's far more task oriented about how do we execute on what we're doing? I think that's terrific and now, what hadn't you hire her because she's the Yang, right? It's Ying and yang. She complements me in a perfect opposite fashion and I do the same thing. The other way around. Yeah, it's, I think that's terrific. I think it's wonderful, if you can, what you just expressed was, you know who you are, if you know who you are, you can identify a path forward and I would encourage you absolutely. Knowing what your deficiencies are is wonderful. We're all we're all given strengths someplace, just balance this balance your weakness with somebody else. Don't try to what are the what don't master in the weaknesses, right? So anytime we have a weakness here in anybody, you know, largely for me, it's going just don't do it. Don't master in the minors, because at the end of the day, you're still going to be a d minus for you, no matter how good you get at your weakness focus on your A's.

Michael:

Yeah. Oh, that's such a good expression. I can't tell you how many times I've heard people say, oh, I wanted to visit with my best friend. We're so similar that I'm like, that doesn't sound like a good partnership.

Neil:

Sounds like sounds like a great bar and I but not a good business decision.

Michael:

Yeah, I know. Totally, yeah right.

Neil, if we zoom back into the commercial side of real estate coming from the single family space, what is it that you see is the biggest hurdle of barrier to entry for folks that want to make that leap into commercial but utilize someone such as yourself to help them get there?

Neil:

You'll never guess us? Are you ready for this?

Michael:

I hope so.

Neil:

I know, you're it's a mental barrier. It's all made up in their head. It's they don't think they can't. Yeah, but they don't think that that is it because past that, the ability to go well, okay. Well, if you've ever let me let me liken it to single family. A duplex is like a single family rental house, right? It's just two doors and the numbers change a little bit? Well, a 20 packs is the same thing. There's largely, there's not much difference in these things you're adding some zeros are calculated a little differently, but it's pretty much the same. In fact, management, in my opinion, gets easier. The more doors you have, right, you get professional management, you get it, it becomes simpler. Yeah and then to make a change to go into some other asset class, we just have to make a bridge. What does that look like? They have to go to an industrial buildings on a triple net lease, which is probably the simplest thing to calculate and get one's head around when you're going, well, they just pay a lease rate, and then they fix all the stuff that goes wrong with it, right? That's it your true and your true and why is the rent, we've got multiple properties like that and we're the management company, which means we just get the rent and never hear Yeah.

Michael:

Yeah, that's by far the easiest piece of property in my portfolio is triple net.

Neil:

Yes, correct. But people are, you know, we're scared about what we don't know and that's true of all of us, right? We're scared about what we don't know, afraid to make mistake, which is totally understandable and so we just help folks, we educate them as we go answer questions as we go and show them the exact path to be able to get from, you know, I want to learn more about commercial real estate, I'd love to be able to buy a deal to actually get to a close.

Michael:

That's awesome. And I'm curious, Neil, what's your favorite asset class and why?

Neil:

My favorite asset class, although I own I'd have to calculate up four or five different asset classes, but my favorite today is going to be industrial.

Michael:

Industrial why is that?

Neil:

Yeah, industrial is in demand like crazy. Secondly, in 2021, had the second largest rent increase across all asset classes, only trailing two apartments. But in comparison to apartments, they're far easier to manage, right, I get a triple net deal, or a double no deal, there isn't much to do, there's very few moving pieces you end up with, on average, let's say a five year to 10 year lease is pretty straightforward.

Michael:

Okay. So if I'm playing devil's advocate here, and we're looking at this industrial building, this is suited only for a business. This is not for people can't come live here and the type of business you might have to build to suit it out for that particular business 5-10 years down the road, that might be a future Neal problem. But let's drive down that path that tenant leaves goes out of business, what have you economy turns? If businesses aren't doing well, in the area, are you stuck with this vacant building now?

Neil:

100%. If businesses are doing well in the area, meaning they're laying off or not employing people, my thesis is you still have you still have an apartment problem relative to occupancy and or rent rates. This goes back to earlier question is, admittedly, we have to take a risk someplace, right? It's just my comfort level and I like the box, you know, not a somehow engineering building has been added on to or defined for one, one person's exact use, I like a big giant box, just a rectangle, that's it, a business of multiple businesses come into that and fill it out in which way they want to. So like the fact that if I can buy my, my preferred buying is for buying some older not buying brand new stuff, buying some older buying something with a value add or on buying at a discount of some managers, the intent is to buy it correctly. And if I can buy a property, let's call it make up a number right now 70 to $80, a square foot brand new construction is gonna be 120 to 130 a square foot, I think I'm in pretty good shape over the course of coming years, I think that my dollars, and my rent rates get pulled up to the fact that sheer cost of new construction is gonna be 60% higher.

Michael:

All right, I dig it, I dig it and for anyone, I'm just realizing now, some of our listeners might not be familiar with the term double net triple net lease, can you give us a quick definition of what it is?

Neil:

Yeah, it just defines what people pay for double net, for example, is probably one of the least likely terms that use but let's say triple net triple net means ultimately that the tenant pays for everything, there may be some nuances inside the lease, but taxes, insurance, repairs maintenance, the tenant pays for that. So if your releases 100 grand a year, your net is 100 grand a year before, before your mortgage, any sort of debt payment you have on it. A double net means they don't pay for everything they pay for perhaps taxes and insurance, but not all the repairs and all the maintenance, and therefore your NOI is gonna be a little lighter, depending on what you have to maintain and pay for.

Michael:

Okay, perfect and I'm sure some of our listeners are hearing that and thinking like, this is the best thing since sliced bread. I'm gonna go put all of my single family homes and all my apartments on Triple Net leases. Why is it only a thing that's been heard of in the commercial space?

Neil:

Yeah, no good question. You know, to liken it to single family, you're like lease with an option or a contract sale, that's probably the closest thing you get to a triple net in the in the single family house side, right? So you kind of contract sale, somebody that mean that contract buyer is now responsible for everything associated with that house, right? That's what it looks like. If you look at the closest thing, there's some differences there. Obviously, a contract sale into a down payment interest rate. That's not the same as a triple net lease on the industrial side but that's probably the easiest way to liken it to single family.

Michael:

Yep. Yeah, that makes total sense and for anyone listening, like Neil mentioned, it's just the cap rate is like the easiest thing ever in the Analyze easy thing ever, you got a million dollar building cap rate 6% they're paying 60 grand a year, then bam, boom, end of discussion. You're not paying taxes, you're not paying insurance, you know, capex and maintenance. So you can calculate your true return, and then look to calculate what your debt service payments gonna look like and determine what your return looks like after that, versus the traditional single family rental or apartment or traditional residential space. They pay you a set fixed amount, the rent, and then you have to go figure out the taxes, insurance, repairs, maintenance, capex, that sort of thing.

Neil:

So hey, just because I like it or you know, in other investors likes something else doesn't mean it's right. There's only what's right for you.

Michael:

Yeah, yeah. I love it. Neil, this has been so much fun, man. I want to be very respectful of your time. Let's get you out of here. But before we go, like where can people reach out to you find out more about you continue the conversation if they're interested?

Neil:

Yeah, no, great question. Well, if you want to learn more about commercial real estate getting rich in what I call the 20x niche, why do I call it that? Well, because our target internally is to produce in a monthly return that's 20 times that of us Single Family return so we're scaling up largely is just go to my website give you a free download free report just you can learn more about the industry getting into commercial. So www dot legacy impact partners forward slash gift JF T legacy impact partners Ford slash gift: https://legacyimpactpartners.com/

Michael:

Right on thank you so much and before I let you go I mean I'm not gonna let you out of here without mentioning your podcast you're also the host of a podcast was that was a you're kind enough to have me on what is that called and what can people expect to hear on it?

Neil:

Real grit is the name of it it's about the trials tribulations anybody from real estate. So we talked about single family talking about commercial talk about everything in between. But really, so that we fully admit that you know, life isn't all about Lambos and big houses on cash and checks and everything on Facebook that or social media wherever you'd see it right? That there's ups and downs there's, there's we have to go through stuff and many times to be able to find our own personal success and so we talk through that and people's personal stories and how they got there because all bunch people, they get their different ways and it's really exciting. It's, we get into some really interesting, very dynamic conversation a lot of fun, love it. You and I had a great conversation.

Michael:

I had a ball. I had a ball.

Neil:

It was a blast, man.

Michael:

Awesome. Well definitely go check out that podcast, real grit, a lot of fun, really cool stuff going on there. Neil, thank you again. Any final words thoughts for our listeners?

Neil:

No, you're going to find me you know, like I shared it though the website I'm also on all the all the social media platforms. Facebook's the best place to find me Neil Timmins, or there are many Amin just spell it right you got me

Michael:

Right on, many thanks again. Appreciate you, see you soon. Bye.

Neil:

Bye, bye.

Michael:

All right, well, that was our episode. A big thank you to Neil for coming on the show. Really, really interesting stuff that Neil's been through seen and experienced. As always, if you enjoyed the episode, we'd love to hear from you with a rating or review wherever it is get your podcast, and we look forward to seeing on the next one. Happy investing…

Billy Keels on making the leap from employee to entrepreneur Nov 01, 2022

Today, we welcome Billy Keels back on the show to discuss how he went from living the corporate life to running his own business. We discuss his motivations, the mindset shift, the challenges, and finally, the rewards of his decision.

Before becoming a real estate entrepreneur, KeePon Cashflow’s founder Billy Keels worked in the corporate world. In fact, he was one of the best “corporate soldiers” you’d ever want to meet. Billy says that he was happy enough in his J.O.B., but something was missing. An emptiness and longing for a different life chewed on him, pulling him to what he knew he wanted to do more than anything else. Billy wanted to be an entrepreneur who brought two worlds together. So he took steps and kept on the path to his goals. Today, Billy is an international real estate entrepreneur, problem-solver, author, coach and mentor. He sees opportunities where others often don’t in real estate.

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Episode Links:

https://www.firstgencp.com/

https://www.firstgencp.com/paylesstax

https://www.linkedin.com/in/billykeels/?originalSubdomain=es

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today with me I have Billy Keels back on for another episode. For anyone who missed it Billy is an entrepreneur business owner ex former tech sales guy, and he's gonna be sharing with us today about how he started his business, why he started his business, and really the mindset shift around going from employee to entrepreneur. So let's get into it.

Billy Keels, welcome back for round two, man. How are you? It's so good to see you.

Billy:

Michael, what's up man? I, um, super excited to be back. This is nice.

Michael:

I'm super excited to have you here. So for those listeners that did not catch our first episode together, give us the quick and dirty who you are, where you come from, and what is it you're doing in real estate.

Billy:

Very cool. But you know what? You know what I have to do first man, because you're very kind to welcome me back and I just wanna say everybody, by the way, if you haven't already, Leave Michael a nice, wonderful, honest written review as well as rating. It helps to…

Michael:

Oh my gosh…

Billy:

Bring guests to you, which is phenomenal. No, I mean seriously. I mean.... The energy, you all bring the organization, you bring the structure. Uh, and also I know a lot of the things that you are doing are making positive impact cause you're helping to educate people and also inspiring them to take action. So it's the least I could do also as a fellow podcaster, um, to go out.

Uh, and, and, and ask of that. So, um, but yeah, Billy Keels, I'm still the, the same guy from the Midwest, uh, of, uh, of Ohio, who has spent the last 26 years of his life, uh, in corporate up until recently, uh, no longer, uh, in the corporate world. I've also been spending the last 21 years, uh, living in Europe. I know Michael, that's close to your heart as well?

Michael:

Very much so.

Billy:

And specifically, yeah, specifically between, uh, France. Italy and most recently Spain. I am someone who really, really had a great corporate experience. I really enjoyed it. It was fantastic. Some personal things happened in life that helped give me some clarity that was time to do some other things. Uh, and now I am very, very fortunate to be living, uh, you know, I'm living my, my best life and, uh, was able to make my nine to five optional and doing that in a point in time where I'm still in my forties and, uh, living between, uh, the US and, and Europe and that was part of my life goal. Uh, very, very fortunate and super excited to be back here and share another conversation with you, man.

Michael:

Oh my God, I love it, I love it. Billy, before we jump into it, I'm just curious, do you remember the best compliment you've ever received? Just outta curiosity.

Billy:

The best compliment. So you've kind of putting me, putting me on the spot, man. Um, I don't know. I think that's when you have to ask my parents. I don't know because they're , you know? I don't know. I just, I don't know. I, I, I can't remember. But usually it's, it's probably something that's not related to me, but something that I would've learned from my parents. More than likely. Um, but I don't remember specifically why, Why do you ask?

Michael:

I love it. I'm just curious, man. I'm curious to know if people remember, like human psychology, if people remember the compliments more, or do they remember the insults more?

Billy:

I spent 26 years of my life, uh, 20, one of the 26 years in sales and sales leadership roles. So the, the bad stuff I've learned to just kind of let it go. , the good stuff. I try to. Um, but if it, like, one of, part of the process that's happened with me is I try not to internalize too much of this stuff because then I kind of keep that and there's a tendency to say, Well, I've heard this so many times, therefore I am, um, I always try to work and be in the best version of myself, so even if I get a compliment, it's kinda like cool. I appreciate that. I probably learned that from my mom, from my dad. It's something I've seen from my brothers or something that my, my wife is helping me to be better in.

Michael:

I love that man, I love that. Can we turn back the clock a little bit, Billy, and talk about. Your corporate career, because I think that you have a, a similar story to a lot of folks, especially listening, have an amazing corporate job, are killing it in whatever it is they're doing. Um, and they can see themselves doing that maybe forever you had kind of a life change. I'm just curious, like why did you decide to go into business for yourself?

Billy:

So, you know what, Michael, this is actually super, um, such a wonderful question and I can tell you, I think the last time I told you that there was something that happened to me when my, um, it didn't actually happen to me. It happened for me when my son turned three, I missed his birthday right and I, because I chose to go to a business meeting that was in Germany because I was chasing the corporate dream. I was, you know, that was the thing that I was supposed to do, I was a really young father in that day. It was, I felt an incongruency in my, like, in my being right. I was, I woke my wife and son up to, you know, wake them up and our one year old just to give a hug to our three year old and kiss and then I was out the door. So that was the thing that made me realize like, hey, look, I've gotta kind of take action. I really like my, my corporate career, but I got lost somewhere along the way and my priorities got outta whack and so that helped me to take, start taking action, stop reading a lot of books. Cause I'd been reading books for probably three or four years, right? I knew all the numbers, all the theory, all the stuff, but I didn't take any action and I'm very, very proud to say that I've just celebrated a decade later, right? A decade later, I was able to accomplish the goal, which was being able to make my nine to five optional and even though I went in probably for the last three years and I didn't actually financially need to, I chose to go because, um, the life balance that I had was much better than it had been the previous years. Um, I was still enjoying the things that I was doing in my role. I was really well recognized. I was, you know, making way more money than I thought I ever should be, Uh, making and a decade later, like I literally just came back from, uh, Ohio, uh, where I was, uh, over visiting some friends, got to go to a, a sporting event, which was fantastic. Saw family members and then was able to be back here. Uh, for my son's 13th birthday.

So a decade later, I recognized that the action that I took for a decade while I was working my day job, having this side hustle, like it really, it's paid off and it hasn't been perfect. Michael, Um, not even close to perfect, but the fact of the matter is I got outta my own head. I started taking action. I started seeing results, and then I started multiplying on that action and. Even though I left the corporate, because something also non-financial, and I think we talked about this last time, happened with my dad, and it helped me to realize like, okay, I really like what I'm doing, but there's some other things that I can do now less than a year later and my son's, you know, 10 year, 10 years later, his 13th birthday, I'm at a point where I'm like, wow, you know, all these things that I dreamt and wrote about on my dream board. They actually came to fruition. Um, not perfectly, like I said, but you know, being able to be in this point now is, I, I, you know, I'm glad that I started taking the action and I'm glad that I started that side hustle and I know that I worked through a lot of, you know, a lot of crazy hours during some of that time, but it wasn't all for nothing.

Michael:

Yeah. That's amazing, man. Well, first off, congratulations. That is super, super exciting to hear and I'm sure your family is super thankful as well. Let's talk about like, I think so many folks get it in their head that they can't have a side hustle, or they can't go build a business of their own either because they don't feel creative enough, they don't feel inspired enough, they don't feel called to do something, or they just feel like they don't have enough time. So talk to us about the mindset around. I'm working my nine to five scraping by or doing really well, not even scraping by just doing really well, but I'm exhausted at the end of the day. How does someone like that even think about doing something else?

Billy:

Yeah, so, and you know, I, I guess I kind of put it in a, there's a couple different things inside of me. I kind of always knew that I wanted to do something else as well, because I think one of the best things about working in a corporate role is in specifically like I was in the IT sector, right and not only in it, I was in software. So this is like super cutting edge, massive profits, and so it was great place to be every single day and so there are so many, like I realize like for a while, I just wanted to continue to work and be an employee and, and things were great and I was really, really fortunate because I had great salary. Um, you know, I was given opportunities to learn to grow leadership opportunities, great training and so for that period of my life that I didn't really wanna do anything. This was like, this was the most amazing thing ever. But then also as I started getting into the other phases of my life, I realized like, hey, listen, there are other things that are really important to me. I want to be able to be here or be there, or just be nowhere when I want to do it and not have to worry about somebody else telling me when and so when those things started happening for me once again, I started realizing like, okay, well, number one, the things that, because I didn't grow up with money at all, but I got into a point where I actually was not just saving money, but investing money, but then I realized that it was outside of my control. Like the stock market couldn't control that, but that was the only thing that I'd been taught to do, which was buy low, sell high, not really a winning strategy, and I didn't take enough time to get educated on that. That happened in 2000 when the DOT combo will happen, and the same thing happened again in 2008 I lost 33% of my portfolio, so I knew that even though I was in a really great c. Opportunity and create corporate experience inside of me. I needed something else. I wanted something else. I just didn't know what it was and so it wasn't until I came across that little purple book that so many people have read that that started turning like the idea on in my mind.

But even with that, my goal, like I said, it took me like three and a half, four years to go from theory to practice and it took me missing my third, my son's third birthday to actually start to take that action and so, once I started, uh, you know, being able to, to take that action, I realized like, hey, listen, as long as I continue to give the outputs, cause I was in sales and sales leadership, like what are the outcomes that are expected In my role, I always performed at a high level. Like I was in the top talent program. I was going to Hawaii every other couple years for, you know, overachievement against quotas and stuff like that. So I felt like it was always important to be able to give everything that I gave during my corporate time because that was also providing me the income to be able to do the investments in the other stuff, which is actually creating my runway for my own life, like the one that I was building for my family. So it was finding that balance between being, a really good sometimes great. Uh, corporate employee, I think even, well, I don't think for on my, for a while on my, um, on my LinkedIn it said, hey, you know, happy corporate employee like that was my moniker. So that, that was like the thing and people were like, You really a happy corporate employee? Like yeah, I mean it's treated me really, really well. Yeah. Um, but it was something more that was inside of me that said, hey listen, it's time to do something else and I was afraid for a really long time because I was a high paid executive who was visible and people, you can't be doing anything else, man. You like, you need to be client facing all the time. You make a lot of money, you're doing this, you're doing that. But I knew that it was, um, it was something that I, I really wanted to do and there was sacrifice that also went on, right? Cuz you, you, you're in that type of role, you're expected to be on. Almost 24 hours a day. So I was waking up really, really early in the morning and I was staying up really, really late at night and fortunately both my, my, my wife and my kids understood that, um, once I got back on track, um, and, and it was about being able to find that balance. So I know it's maybe a little bit of a, kind of a longwinded answer, but I think it was about, you know, recognizing how fortunate I was in the corporate role that I was in and I did like it. Uh, I liked it a lot and at the same time, at a certain point I knew that I wanted something more. I knew that I wanted. The control. Initially it was of the financial, uh, outcomes of my life and what I realized it was, I really wanted to have more control over my time and it manifests itself just a couple days ago, which was a decade later, which was me being able to fly to my hometown, stay there for a week, hang out, and then be back for my son's 13th birthday. So, um, yeah, so that's. Hopefully that answers your question.

Michael:

Freaking amazing, man. So let's talk about like the next obvious question because you were an executive in it, tech sales. So what did you end up doing? Like what kind of business did you start?

Billy:

Yeah, so, um, so the thing that I started to understand was it was a thing that came across. It was really, this is kind of dumb luck. It happened, it just really happened that I read that low purple book. The proof of concept was really simple. He was like, okay. I was working in this intangible world selling software. You can't touch it. You pay multimillions for it and then there was, hey, you pay a couple hundred thousand, then a couple million, and you get this actual, physical, tangible thing that you can touch. People wanna sleep in it, so they'll pay you for it. So that's the revenue line. By the way you've gotta make sure that this place stays in order. So you've got some operating expenses, you know you gotta pay your insurance taxes, maintenance and operations, maintenance, repairs, things like that. Then afterwards you get to this line, which is net operating. Well cool and if you have some debt service or mortgage, you pay that mortgage and everything else you get to keep. I was like tangible, simple business model and there's a need for it. So I went and started investing in real estate and I think we talked about it last time, but here based in Barcelona, Spain, but investing always back in the United States, exclusively in the US. So I started with the, with the smaller multi-family and then I bought a mobile home park and then I opened my mind to thinking about new things and I was like, okay, cool. Once I understood that, I get the education, start to build a network around people and then start to continue to take action on this imperfect information I started seeing my asset base grow and those assets, you know, the smaller multi-family, the mobile home park, the ATM machines, and then I started investing with other people because that made a lot of sense for me because I was a high paid executive. So I started realizing like, this is really, really cool, but it's taken a lot of time.

I need to do something where I can actually leverage the e efforts and expertise of other people and I was somebody who was a credit investor. I figured that out later and so then I started giving, or not giving, but investing my capital with other people and things like the ATM machines and things like, um, larger multi-family buildings and some development projects in the hospitality space and then I kept having this one specific problem, which was, I was investing in all of these, and I don't wanna get too technical, but passive streams of income, like IRS definition of passive income and I kept still paying 40 plus percent in income tax, and I was like, this doesn't work. So then I started realizing that I needed to start asking different questions. I got into a specific area within the energy space, and that energy space helped me do a couple things, which was continue to build my asset base. That was generating income. This time it was active income, but it was also helping me out as a high paid executive. It was really helping me on my income tax because there were some specific, um, tax code rules related to energy production that helped me not just generate, you know, income moving forward, but it also helped me keep more of my income through income taxes and income tax deductions.

So it was looking at all of these different things. At a certain point when I left my corporate career, I thought, I really like this building the asset base. I like continuing to do it and I'd build a lot of relationships and the one thing that really made the biggest impact on me as a high paid executive was the, the thing that was helping on the generating active income and, and keeping more of my active income. So today I really focus, uh, my company in that area through syndicating capital with accredited investors, uh, for those people that are very similar to the way that I was when I was in my corporate role. Uh, and that's, my business has continued to evolve, uh, today. So hopefully that answers the question as well.

Michael:

I love it, I love it. And Billy, can you give us, I mean, because you're in the energy sector and if anyone's been paying attention to the news or the world or living not under a rock, the energy sector has gone a little bit haywire over the last couple months, years. So can you walk us through like, what has your business gone through over the last couple years with Covid and the war in Ukraine and this sort of thing?

Billy:

Yeah, man. So this is, so this is really, really interesting, right and one of the things that I appreciate us as, uh, as investors in real assets, right, is number one, it's just, and whether we start in real estate or we start in something else that's tangible, it, it starts to open up our mind to way of thinking, right? I remember when I was just doing stocks, I just thought about stocks. But then when I started investing in real estate, it was like real estate. Oh my gosh, this is simple. this makes sense and okay and yeah, and then it opened my mind to other things and so I was then open to, uh, doing other things and it's very similar, right? If I think about now what I'm understanding about energy, like energy has always been super important, right? If you think about it at a very high level, every single output that we have, it has two component. The first component is labor and the other is energy and I thought, wow, okay, well yeah, that kind of makes sense and as I start realizing that, and then I started saying because of some of the incentives that are related to energy and energy production specifically, it made it a place that I really wanted to learn more about right and, and it, I've now started learning about a lot of different types of energy. But to your point, because energy is everything and everything is energy regardless of what's happening at, um, at your house down the street or even across the world. There's always something that is going to impact energy and the need for more energy, and so, It's very similar to what I started thinking about from a, um, basic needs perspective.

When you need a place to live or you know, you need or want a place to live, the proof of concept already exists and so being able to explain the need for energy, to your point, I don't, you don't, I don't really need to explain it. It's just a matter of how is the energy being produced. That's where more of the, the explanations come. Um, and because of that, because it's something that most of us understand or understand the need for um, that part has made it relatively, uh, easy to have conversations about. Of course, there's always, um, very specific conversations or if I'm speaking to somebody who's in, uh, for instance the energy or oil and gas space, and they may be an expert, I always learn stuff, uh, as well. So, um, so just recognizing all the different things that have happened, uh, in the energy space and also having now a real focus on it. It's something that I've seen my business expand exponentially. Like what do I mean by that? So remember I was, uh, a high pay professional. I was, you know, very visible and at the same time I was, you know, syndicating capital, bringing people together around common goals and common dreams and just to kind of give you an idea from the first year, more or less that I was doing this, or a little bit year and a bit, Um, while I was still working my corporate role, since I've left my corporate role and have now done focus just specifically on helping accredited investors that are looking for these, uh, types of investment opportunities that generate returns and also help with income tax problems, um, our business has multiplied by seven right and so what that means to me is one, I have more of a focus now. Um, I'm understanding the accredited investor base that we are serving because also it helps that I am one of those people. I understand, uh, what it's like to go every single day, all day from early morning to late night and recognize that you're doing a hundred percent of the work, right? I was doing a hundred percent of the work, and many times I would bring home, you know, 50, 55% of the work at a certain point, I didn't like that, especially because I was open to learning about new investment opportunities because the real estate that helped open my mind is now continued to keep my mind wide open and so, now being able to look at new opportunities, evaluate those new opportunities, understanding the teams behind those opportunities, it's just, it's one of the things that's now an extension, uh, of where my business is and how we're serving, uh, those accredit investors and why and the energy spaces is one that's, I think, gonna be around for quite a while, kind of like real estate.

Michael:

That's great, man. I'm curious, Billy, for yourself, I mean, you're clearly a super bright individual. You're very open, you're very curious for the person that is just getting involved in the investment space or maybe in the real estate space that's new for them. They're high paid professional, they don't understand that world. They don't have maybe the same curiosity that you do. I mean, what's the mindset shift around hey, I know stocks and bonds. This is what I've always done and it's worked for me. Why should I bother with this alternative asset class this, this, something different?

Bolly:

Yeah. So I'm gonna probably, um, cheat a little bit here because we're asking the question and you are asking the question of me and the person that's listening that had that question. Here's the good part, You're already here listening, so you know that something inside of you knows that something's wrong, knows that there's something more that's out there. So what I would suggest is that you've already taken the first step, right? You're already here listening to Michael. You're learning from the guests that are here. So, you know, continue to go down that path. The curiosity's already there because you're already here, right? Yeah. Um, and the, and the reality find out, listen, um, you know, talked about it before. I mean, you have an opportunity to even leave an honest review and in your review, say, hey look, I would really like to have this question answered. I guess what, somebody's probably gonna respond to you and it's about being able to take the steps that you feel comfortable with, um, as an investor. The curiosity's already there. You're already here you heard the question asked, so give, you know, I would say I would give. The ability to continue down this track. Listen to more of the podcast. Start to read about the things that you believe will help to, um, move you forward, move you closer to whatever your, your goal is, um, because everyone has a, you know, have as an investing goal and allow yourself to get educated, move towards the things that you really want to be able to do and ultimately that's gonna help you. So, um, I only say that because I know that they're listening. If they're here, they're listening to the question that you ask, and they just need to give themselves the, uh, ability to keep going down that path.

Michael:

I love it, I love it. I'm curious, Billy, for most of the clients that you work with, the credit investors you work with, are you having to sell them on this idea of, of your business model and what it is that you're doing or are they already here coming to you saying, hey, I've already done the research. I know who you are, I know what the asset is, like, let me give you money and, and or throwing money at you. What does that look like

Billy:

Well, so I'm, I'm pretty particular, right? Like, I don't, um, if our relationship started that way, it wouldn't be a relationship that would last very long and, and what I mean by that is, is yeah. What I mean by that is if someone just wants to throw money, uh, at you, I don't want a transactional relationship right I want to build a long lasting relationship. It, that may be the person's intention. Hey, look, I, I eventually want to invest with you, but the type business culture that we're building is we're building an investor family. And so in the same way that we want to get to know one another, you know, I'm very intentional. Hey, let's you know, let's invest 20 minutes in getting to know one another. At least have a 20 minute conversation, 30 minute conversation, understand a bit more about your goals, your dreams, priorities, and also understand about me and my business, what are our business goals and priorities because if there's an alignment, then it makes it really easy for us to take the next step and say, okay, well listen, you can, I know you have an investment, uh, opportunity. You've probably seen something about me somewhere online, or you've listened to this wonderful podcast and you're thinking, okay, well listen. I think because we sound pretty similarly aligned, so what's the harm in investing 30 minutes to get to know one another, right? I'm doing that multiple, multiple, multiple times a day. Um, and so from there that, that's the first part is to, to be able to, to start the relationship on the right foot. Getting to know one another, getting to, to like one um, you know, one another, you like one another, eventually you trust one another. But also, like, one of the things, and this is probably comes from, you know, the 26 years of, of working in, um, you know, really a relationship based type of roles in the last 21 years in, you know, high value type of, of selling, um, and relationship building.

It's really about like, I wanna always help and I want our company to always help those accredited investors that we're serving to make an informed. because what we do, like the solution that we offer, it's the solution. Like it does what it does. So you have to be comfortable, you have to be informed, you have to ask all of the questions that you feel uncomfortable asking, and my team and I have to be able to give you the information or the data in the way that makes the most sense to you, so that you ultimately can make an informed decision. Because the worst thing that can happen is you look at something, you're like, Wow, this looks absolutely awesome. The numbers are fantastic. You don't spend time getting to know the person or the company that you are going to invest with. You don't know if you're aligned and you're making a decision just based on some numbers that you saw and when as soon as things don't go according to plan and you haven't done the prep work on the front. That's when things get really, really wild and out of, out of control. Like at least that's what I've seen at least in the last 21 years of my experience and so I do have a lot of focus on, you know, being aligned up front, being able to get to know one another, and then also being able to help someone make an informed decision and then after that, you know, if they're informed decision things go. Hey, listen, at least they were informed, they knew about the risks and you know, we will also wanna protect on the downside and, and talk about risks, because that's something that's also very, very important to helping someone make an informed decision. So, um, I don’t know if that's a little bit long winded, but hopefully that answers the question.

Michael:

No, it's, that's great, man. I mean, as you were saying that, I had this, this question you were saying, you know, we're not transactional. We wanna develop this relationship and in my head, I'm, I'm thinking, why, why, why, right? Because from a, from a growth standpoint, from a revenue standpoint, Yeah. I mean, people could look at, at you and say, well, Billy, you're doing it wrong. You're taking too much time with this person. You're spending too much time there. But I think you've explained the why so eloquently and it is because you're protecting the downside when something, if something, probably when something goes side based when something happens, you've got, you've got that foundational relationship to look back on and say, Hey, this, you know, we trust each other. There's not a finger pointing game going on, I would imagine.

Billy:

Yeah. Well, that's part of it and then also too, you know, I guess this goes back to the company, is that I've worked, been fortunate enough to work for, a lot of this is about business models. It's like I was talking about earlier, Well, let me, let me put it this way, maybe so, I like food. My kids like food and there are things that, like my son, when he's given the opportunity to go somewhere, well, he chooses to go to McDonald's, right and so that's where he likes to go and he likes to eat McDonald's. Um, I don't so much, but, um, the, well, sometimes when you used to a lot when I was smart, younger, and then there's other places…

Michael:

There Mc Flurry outta control, right?

Billy:

All right, I'll go agnostic, I'll go agnostic. Some people like fast food. I probably should have done it that way. Some people like fast food, right? Um, and there was a point in my life where I like fast food as well. I'll change it up a little bit. Um, there's also another point in my life where I like to be able to sit down and I wanted to have more of a, you know, you wanna sit in the booth and you wanna talk and you, um, you just wanna spend a little bit more time and then there's also a. in my life where I like to take my wife to. Very nice. Sometimes one, two or three Michelin star restaurants, right? The thing is, each one of those business models work. They can all be profitable. But the thing is the business models are very, very different. Do you like fast food? Do you like slow dining or do you like Michelin restaurants? All of them are profitable and it coming back to…

Michael:

It's got tingles, man, that's such a…

Billy:

But it's, but, but it's coming back to the question that you ask. , our business is not a high volume business, right. I would rather invest the time to build a deep, valuable relationship and that also means that the, the, the, the investor base that, that my company is serving, I is the investor base that we've decided to do is a, is an accredited investor, is typically a busy high pay professional. That once they have more control over their time and I recognize that for some people that's gonna be a challenge, but it's also for the person that's willing to invest the time. I know that that person has a much higher probability of getting to the goals that they're, that they're really wanting because they're gonna invest that time outside of the stuff that they're, that's keeping them busy and they're gonna be investing the time on the things that's gonna get them closer to their life priorities. That's our business model. There are other models that pretend that will prefer to go to a high number of, right? It's, but there's no wrong business model. That's just the one that I think works the best for me because I'm kind of that person today. Uh, that's the person that I understand the most.

Michael:

Yeah, man, I love that I love that so much and, and your analogy, the restaurant, different service types just was like, loved it…

Billy:

Use it whenever you want.

Michael:

Yes, Yes. I'm gonna, It's, you know, tm Billy Keels. Um, this has been so much fun as always. For everyone who's stung, who stuck with us this far, and there's like on the edge of their seats, what is the name of your company if they're like, I have to invest with this guy.

Billy:

Yeah, it's first Generation Capital Partners that you can find it at firstgencp.com and actually for people who are the credit investor, having that challenge around, um, being able to find things that where you can find investment opportunities that are gonna get you closer to your life goals, generate income for you, as well as provide tax benefits earned income side of things. We have a guide for you. You can go to firstgencp.com/payless tax. Um, that's a probably the best way to find out exactly, you know, what we're doing. Have a nice little white paper there and if it makes sense for you to continue to move forward, love to be able to get on the phone call and talk. Uh, have a conversation with you, Michael the other thing is, and this is the kind of, people can find out more about me as well, but they should go. Um, the going Long podcast, episode 2 21, where you absolutely crushed it . So going long, podcast episode 2 21 with your buddy Michael. Uh, and then from there, I, I think I'm the only Billy Keels in Barcelona, Spain. So if you wanna look me up on LinkedIn, you can go there. Uh, like I said, Billy Keels, Barcelona, Spain, just let me know that you heard Michael and I, uh, having a conversation here and it's gonna help us to, uh, keep our conversation going. So, uh, with that, I, you know, I love being able to be back here. I, I feel very, very thankful, grateful, uh, for the, uh, for the ability to be back here and share a little bit more of my story. Uh, Michael team really, really appreciate it. Thank you so much.

Michael:

Oh no. The pleasure is ours, Billy. Thank you and we will definitely be in touch, man. I'm looking forward to doing this again soon.

Billy:

Thank you.

Michael:

Take care.

All right, everyone. that was our episode. A big thank you to Billy for coming on again, opening his vest a little bit, showing his cards, being a little bit vulnerable, and sharing some of his mindset and what was going on in his life when he made some of those massive transitions. As always, if you enjoyed the episode, we'd love to hear from you with a rating or review wherever it is to get your podcast, and we look forward to seeing you on the. Happy investing…

Why you might want to have a Public Adjustor on your team Oct 29, 2022

In this episode, we welcome Public Adjustor, Andy Gurczak to speak about the role of PAs, and how you can make the most out of the undesirable experience of haggling with your insurance provider -- ensuring the highest possible settlement under the terms and conditions of the policy.

Andy Gurczak started in construction as a laborer and got his in as a public adjustor through a contractor he worked for. Quickly climbing the ladder, he helped grow the business by attaining new clients and further building relationships with existing clients. Andy started his own company, AllCity Adjusting, where he and his team process over 1000 claims per year.

Andy’s Contact Info:

https://www.allcityadjusting.com/

c: 708 655 4186

---

Transcript

Michael:

What's going on everyone? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today with me I have Andy Gurczak with All City Public Adjusting. And he's gonna be talking to us today about what a public adjuster is, and why anyone who owns property should consider using one if they have an insurance claim. So let's get into it.

Andy, what's going on, man, thanks so much for taking the time to hang out with me today. I really appreciate you coming on.

Andy:

Mike, thank you so much for having me on. It's a pleasure. It's always it's fun to do these. So I'm excited.

Michael:

No no. It's truly my pleasure. You're the first like we've done I think this is episode 300 and change and you're the first public adjuster we've had on so anyone who knows me knows that I'm a total insurance nerd and insurance buff so but for anyone who's not familiar, like what is a public adjuster and kind of give us a quick and dirty of what you're doing in real estate.

Andy:

First of all, Bravo on 300 episodes. Plus, that's awesome. So thanks for you guys. And I'm lucky PA so this is pretty cool. Yeah, so public adjuster is is licensed by the state, he's legally able to represent the insured in their claim process, negotiate and settle the loss for them. Whether it's commercial or residential. It's basically like having an attorney on your side or an accountant doing your books. It's the same exact thing. They're licensed by the state that they work in as well.

Michael:

Okay, okay. And I mean, it just seems like kind of counterintuitive. I go and pay an insurance company every single month, every single year to give me insurance. Then when I have a claim, an insurance claim, I go to the insurance company said, Hey, insurance company, here's this claim, pay me for the claim what I'm owed. So why do I need a public adjuster? Like why does your job even exist?

Andy:

Yeah, that's a that's a great question. The reason our job exists is because insurance companies don't pay claims and don't pay them fairly. We've talked about this before the show, Mike, you work the insurance side. So you know, that claims, actually two people that work in our office work the insurance side, and they've got they seen how bad a guy and came to our side. Because claims are handled, I mean, horribly every year, it gets worse and worse. And our we just had a meeting with a couple of attorneys just discussing what's going on and what we could do in some situations, because it's getting so bad, that, you know, insurance companies aren't responding for a month or two months, or just I mean, so having a PA on your site, even though it's your claim, and you think you have to remember that insurance adjuster, that staff adjuster and every one that they send out every vendor contractor they sent out, they all get paid by the insurance company. So they're all working for this one entity. And then you're by yourself. And you're thinking, well, they're on my side, no doubt on your side. It's all about profits, margins, all that good stuff. So…

Michael:

Yeah, I know it's so the word of news is sick. When you find out kind of what's going on under the hood. It's really what should be a partner relationship. Like you mentioned, everyone on the same team working for the same goal can be come very contentious very quickly. So you said it's like having an attorney or like having a bookkeeper on your side? I mean, it sounds expensive. How much do public adjusters charge? Like, how does that work?

Andy:

Easy. Yep, Pa is most of the time charge a contingency fee. So there's no retainer is nothing, it's all contingency on what they recover. And you know what the claim settles for. And standard is 10%. Like our company has adopted just a 10%, nationwide, whatever claim we're handling, whatever the size is now, some situations where we come in, let's just say months after a year after the claim has been paid, and we're just trying to figure out maybe another coverage or paid additional than it might be a higher fee of maybe 20-25 on the money that we recover above that amount that would the only difference,

Michael:

Okay, and so just so we get it crystal clear for all of our listeners, because I just went through this on a claim to fire claims I had on a property. If the insurance company comes into my claim, and says, Hey, Michael, we're gonna give you $100,000 For your claim, and I'm like, There's no way it's gotta be worth way more than that. You will come in or a public adjuster comes in, you end up getting me a million dollars, you're gonna take 10% of that additional 900k That you got me above and beyond what I was originally awarded.

Andy:

Yeah, exactly. And something in your situation. So when we have claims, and we have large investors and management companies, we have a pay scale that actually the percentage goes down once it reaches a certain amount. So reaches, you know, half a million that 10% may become nine, right for every client, we kind of work with them, just because we kind of know their position. And again, we want to create a relationship that is long term, because then we're getting called when before the claim even starts right because we want to be there. You know, another question is when do you want to hire PA for the day you have a claim, because you want to make sure if that claim is a legit claim, if you should even file that claim, whatever your deductible is, is that even a covered loss?

A PA will, you know, we do this for our clients all the time we do their policies with their claims without making any money or charging any fee. It just part of our relationship with our clients.

Michael:

Okay, I'm so glad you brought that up, Andy, because I get this question all the time. Because so many people don't like, insurance, education is not something that's really provided out there. And I'm wondering if that maybe is on purpose by the insurance companies, but like, how should people if they have something happened to their property? And statistically, if you own a property or enough properties long enough, you will probably have a claim?

So what's the process? Like if you could articulate and paint us a picture of as a property owner, whether it's our own property or an investment property? What should that process look like? What should what should owners be doing? Who should they be talking to?

Andy:

Yeah, if you don't have a PA, and you're kind of going to try to do this on your own, you want to first stop whatever loss happens, you want to mitigate the loss, right, you want to get first you want to you want to get your copy of your policy to you want to see if your agent because you most likely don't have a copy, because no one knows that they don't have a copy until they have a loss to be like, Oh, I have this page, I'm gonna get your declaration, you need your policy, your booklet, you know, no one gets that usually, until something happens. And then it's hard to get it from the insurance company, it's like, they don't want to give you your own policy, very normal. Then you want to mitigate the loss. So if it's a fire, you want to board it up, protect it, make sure no one can get in there. Or if it's a roof, you want to cover the roof, if it's a roof claim, and then you want to go and take pictures and document as much as you can, and then call the claimant.

And when you call on the claimant and you're trying to set the reserves high enough. So then when they come in, and let's just say you have $100,000 loss, but when you told them the claim, you might have said, well, it's a small fire in the kitchen, small smoke, they might have reset the set the reserves at 25,000. And now the claim is actually 100. So now when we're trying to fight it, we're going to five managers like what's the example at State Farm, for example, once it goes past the reserves, you're going through letters like five managers to approve one payment are one extra additional line item, it's it gets really crazy.

So the most important is mitigating, mitigating the loss, getting your policy, reserving the claim calling the claimant, right? And if you don't know the answer, when you're discussing that claim, when you're calling it in, just say I don't know, because a lot of people get into trouble by trying to say too much to be too honest. And it's not about being honest or not, or, or lying. But people say the wrong words, they might use the word like mold, I see mold. Oh, well, molds not covered. Here's a denial letter. Well, the water, you know, the water happened three days ago, we have there's mold, because you know it's wet, it's humid mold molds catch up, but there's still water damage that's covered.

So different words they use. So you gotta be careful with words you so you want to do your due diligence, or even call your agent to call that claimant for you. If you need help.

Michael:

Let's talk about that for a minute. Because in the agent world, you have captive and non captive agents. And so just like you were saying all the vendors are paid by the insurance company. I mean, in a lot of instances, aren't these agents paid by the insurance companies as well?

Andy:

100%. And I have friends that are agents and I know people are agents, and agents have a bonus if their clients don't file claims. So there is a bonus, there's a perk of them if their clients don't have claims or the correct. So everyone's got a benefit if the claim is not filed, and if it's underpaid, everyone gets points on that.

Michael:

So can we surmise that if you have a claim, you should just call a public adjuster immediately?

Andy:

100%. Because it's a free review, what's the worst is going to happen? He's going to come in there and say don't file it. You don't have to sign with that PA but at least get that expertise. Now you want to make sure you find the right one. But if you do you have them looked at it and in depth look at the claim inspect the roof, inspect the fire damage inspector water damage and let you know everything you should do.

Michael:

Yeah, I am. I had my first big claim to have them back to back couple years ago, I had two fires in a commercial building back to back a week apart, which I used to work as a professional fire protection engineer. And it's like statistically impossible to have that happen. I'm the one exception, right? So I went through the claim process I had the insurance company come out do their inspections like oh, it's small fire just like you said, you know teeny tiny claim payout. And I'm like dude, that doesn't even cover the materials that were sitting on the roof when I had the roof fire. So I brought in a public adjuster and they know about 15Xed that claim. So I can't sing their praises enough. When someone is searching for a public adjuster and you just mentioned this, you want to find the right one, like what does that process look like? What questions should you be asking?

Andy:

I've never been on the other side. When I look and talk to our clients how they found us obviously they were looking online Googling and stuff and they were doing a search engine and kind of we came up online we do a lot of blogs and stuff. So we'll come up there with a lot of tips and stuff for people so they'll find our name. Otherwise, so if you're not looking online, you know, you can check websites like patio, which is Texas associations of public insurance adjusters, California has their own, some states have their own. There's the NAPIA National Association of Public Insurance. So there's different associations that you could go on, and find adjusters pas that have been screened and have backgrounds and pay their dues, because they're part of an organization. So that would be your, you know, your best bet.

Referrals. Again, if I, if I knew you, I would say, Hey, Mike, you had a couple of fires, you know, did you hire who's a PA, you have someone to recommend. That's, that's your best bet. Someone that they worked for referral.

Michael:

That that has had the actual experience with them? Yep. Okay. Are there certain questions that someone should be asking? I mean, what separates the different pas that are out there? Because I'm sure if I google that would get tons of different results. Is one better than the other? Like, is it just based on the fee structure? What should people be be considering? If they're going to hire someone?

Andy:

That's an awesome question. So a lot of what you should be asking, and when you go online and look for PAs, a lot of them say, you know, fire water, they do all these things. But 90% of PAs handle just roofing claims, usually residential, some commercial. So it's, you have to make sure that hey, how do you handle fires? And how many fires have you handled? Or what do you specialize in? You might say, Well, we do a lot of roofs. That's not the PA, if you had a fire, you don't want the guy that's handling roofing claims. Right? For us, we do large loss, fires, water, hurricanes, we don't if someone calls for a residential roof. We don't we don't do residential roofs, we would love to, but we don't we don't specialize it. There's other PAs that do a great job, here's a couple of names you can call or, you know, Google and and find the problem just and it's in that it's just a committed, you know, attorney, some attorneys do, you know, personal injury, some do properties. Same thing with PA some PAs are better at some coverage than others.

Micael:

Yeah, that makes total sense. Andy, let me ask you a question. Because it happened to me. And I'm curious now with the hindsight, what the proper move is, so I had this fire, and it was on the roof. And it was during a reroof. So they had all the materials up there. So all the materials burned up. And my public adjuster said, Don't touch anything on the roof. He said, We got to come out, we got to photograph everything we need to take care of, you know, we need to document everything. And meanwhile, it's really windy. There's debris blowing onto the neighbor's property into their, into their, into their courtyard and their fence. And so the neighbors called me complaining threatening to sue, they got crap blown everywhere. And I'm like, I can't it's like an active insurance investigation.

So you were talking about you want to mitigate the loss stop the loss from getting any worse. But are there instances where physically mitigating the loss than is like evidence tampering is the wrong word, but you understand how it's changing the scene.

Andy:

Double edged sword? Yes, a double edged sword. We walk into properties all the time. And you know, or let's say we go into a hurricane area, or right now in Florida, and we see people outside with all their contents, right? Like all their house stuff, just in a pile. And I'm like, did you guys order material? Everything's gutted? I'm like, did you guys inventory take pictures? Well, no, but the insurance company said to just throw everything up. That's the worst idea ever. That's what they want. You just get rid of all your evidence. So that's a double edged sword. So when I say mitigate, you're supposed to mitigate the loss because they can technically your duties after last say you will mitigate. So if you don't, they can deny it. But what's mitigate right? If I had a pipe burst from the third story water comes as floods my whole house right? The insurance company is going to want to send a vendor out to pull some drywall or spray everything or dry everything and leave it. That's the goal. That's mitigation. But mitigation is you turning off the water. That's already mitigation, because it doesn't specify what technically mitigation is. It just says mitigate. So by me turning off the water, I have mitigated the loss. And I will tell my insurer just leave it because it's already all damaged. Whether you dry it or not, that's just gonna go against your thing. It's already damaged. It can't be its category three water. So it's got to be all replaced. Instead of paying a vendor all this money, this has got to be gutted, all that money should just go to you instead of that vendor.

So yeah, there is instances. So in yours, just because we have insurance, karma saying any Can we start rebuilding? Well, now because we're still fighting with the insurance company, and we're still negotiating, and if you start the repairs, then you you can date that's what they want. They want to keep holding, holding until you actually accept it and start the repairs.

Now, if they don't start the repairs, then they'll go well, why didn't the insured start the repairs? Right? So it's, we're trying to keep our clients in the best situation to make sure it's the best possible outcome. But it's hard sometimes, especially with landlords when they have tenants, right? Hey, my tenant is going to sue me or my tenants gonna go this if I don't do the repairs. Then do the repairs, I guess. And this is the settlement we're getting. So an insurance company knows this. So, in your situation. That's a tough call. What do you say like either the PA say, Hey, we got to do it this way. And he was doing it the right way. Because if you did mitigate or clean up that thing? And they come in? They're like, ah. Even if you document it, I'm telling you, it's like they don't even look at your photos. They don't care. Yeah, so they did the right thing.

Michael:

Okay, good. Well, that's good to hear. I'm gonna go, I'm gonna go send them another thank you text after this episode. Yeah. Andy, can you give us like, maybe two scenarios to stories that you've experienced one where things went perfectly well, or as good as they could have gone and what you you're insured what your clients did to get there. And then maybe a scenario at the opposite end of the spectrum where things just like, just like, give us like the worst thing you've ever seen happen? Just so we have a little bit of context that…

Andy:

Part of like claim handling or like? Okay, so I'll tell you, we were just like I said, we had the attorney, we were kind of going over claims and we have one, and I won't say the insurance company. This is in Gary, Indiana. This this poor lady that waged her claim has been handled, and it's by an adjuster that we've seen handle bad claims for other people in that area. Whether it's color, race, area, I don't know. But the way this this claim has been handled this lady the under oath and everything she's been through, like we thought we had it all over, they finally after six months, say okay, well pay the claim. And here's the money, we got to argue with them. They started at 30,000. It's $160,000 claim. But then we have contents another 160 that we sent wants to go and now we're asking what's going on with the content. So they come back well, well, which which was the insurance and which was her daughter's. Why does it matter? If you had a fire Mike, and you have your kids and your wife stuff in the house? That's all personal property? They're not on the pile? Are your kids on the policy now? Yeah, no kids are on the policy, but their stuff is covered. Right? So why are they're asking her so now they want to examine her again and her mom. So this is going to drag on for 10 months. So this and this claim is ongoing. So to us that to me, it's like, well, now I'm powerless as a PA. But what can I do?

So the only way is the attorney can help. But again, she's still going to have to do that examination. But it just shows how long they'll drag it and try to find ways of however, to underpay or just deny that claim. So that's bad. Yeah. And we have a bunch of those. So those hurt a lot of them, we win, this one again, we got the structure paid and figured out. Now we thought the contents was going to be a slam dunk, easy. Here's everything, even your vendor said, you can't clean this stuff. Great. Here's the list. Here's the pricing age of items. And now they come back with this. So, another tactic to delay the claim.

On a good note, we had one, it was a it was from another podcast, one of the investors students called us, he got the number to us and he called us he had a 16 unit in Champaign, Illinois, burned down here to ACV policy, you are familiar with actual cash value. Your listeners might not but meaning he would not recover depreciation, he would not get that amount even if he rebuilt. So he was just getting what's what it's worth now. So that building, he had a fit 550 limit that just came in, he wrote like 560. And they depreciated and cut him a check for maybe 300,000, something like that. So when we got hired, we sent our letter representation, and the adjuster called and said, Hey, Andy, you know, I paid this, I paid this to Max, I don't know why he hired you. I'm like, Well, you didn't pay loss of rents. And also you haven't paid demolition expense, and you only paid 300 when it's a 550 policy, you stopped writing, because our estimate is like 900,000. With no like edit, like this is just it.

So then we reconcile and the insured ended up getting 100%. So 550 plus 5%, debris removal, some other endorsements, plus he maxed out everything. So he ended up walking away with another 400, like 300K. So again, when an adjuster says, you know, we don't need you. And that's it again, there's many claims like that, those are the positives, it's the ones that drag on, and that you like, you know, you're close, but they're still like delaying, delaying, delaying. And it's like they want the insurance to just finally say, Okay, well, I'm done.

Michael:

I'll just throw in the towel.

Andy:

Yeah, it sucks. And, you know, there is statutes in each state, which they have to follow, but it's never followed, because no one ever calls them out on it. Because unless you actually go to court or litigation, that's when they show okay, we didn't do this. They didn't do this. But other than that, they don't really know. They kind of do their own thing.

Michael:

Yeah, because they're so big. And you bring up you bring up a really good point ACV versus replacement costs for anyone that's not familiar with the to give us from from like the PA side of things. What is the benefit of one versus the other? Because I'm sure your clients have seen like the reason your client probably had the ACV was because the replacement costs value on that 70 unit 50 unit was just probably astronomical. So it's often a cheaper policy to get like what's the downsides of going with one versus the other and what risks do people run by choosing one versus the other?

Andy:

So the riskier is with the actual cash value policy and most most policies are RCV based. And then they have the actual cash value endorsement that says we only pay actual cash value, what happens is why you would do that policy where some people might get that policy and our insured wasn't even aware of it. But the agent sold it to him didn't explain to him the differences. He didn't know that he had that extra cash value policy. So you know, that's another story. He went on his own. But, so what happens is you, it saves you a lot on your premium, especially if you're investing you're trying to make margins and you know, it could save you on a property like that 2-3-4K a year, right? Well, it's great until you actually have a loss, when you have a loss. You know, it's especially on older buildings, it's cutting your payment by half. And you can't recover that money because it's actual cash value. So the replacement cost of you know, your home today is 300,000, but the actual cash value after depreciation, your actual cash value is 150. Well, you're only getting that 150. Even if we got the settlement of 300. With insurance, your policy will only allow for the actual cash value of 150, which will leave you with only half the money to rebuild.

So you're always as an as an insured, you should always have a replacement cost policy. And now they have you know, different like guaranteed replacement costs and all this other openly, openly insurance actually has it. They don't even have its guaranteed replacement, because they don't even have a limit. I think it's up to one like there's no limit on structure a

Michael:

Holy smokes.

Andy:

So there's some new carriers that are really, really, really good, actually.

Michael:

Okay. And that brings me to my next point. And I'm so glad you brought it up. Like Should folks be involved in public adjusters in their insurance carrier decisions as they're looking to go place insurance on properties?

Andy:

I would hope so. Because all we do is read policies every day. All I do is read policies interpret policy. So I know when I'm looking at a policy, I'm like, Well, you have a good policy, but you don't have you have a finished basement, you don't have any water backup, you your roof is actual cash value only. Oh, I didn't know that. I didn't know there's a lot of stuff you you should be aware. So yeah, our longer term clients will actually inspect their properties, look at their policies to make sure they don't have any exposed liabilities. Right. Now, it's not our job. It's the agents job. But most of the agents now are just, you know, selling policies instead of actually doing their due diligence and ensuring the claim the right way, they insured.

Michael:

Yeah, I just want to echo exactly what you said, for all of our listeners, like now the public adjuster that I worked with on this on these fire claims, I sent him every policy and every quote that I get for properties, and he told me he's like, happy to do it. He's like, Yeah, this is a great carrier. But this is the other thing. And also, he can tell me like, Hey, I've run up against this insurance carrier, we see them all the time, like they don't pay claims, we're going to be working together a lot more if you have a claim if you go with this company, which is super great insight to have.

Andy:

That's, that's awesome. And that's the same thing. I would say, I would say this carrier, we have a lot we have, you know, this many claims every year. And you know, maybe it's a lesser policy, and that takes longer, but they'll pay the claims, right? These guys just don't pay or they didn't know, I have a list of insurance companies that I know that are easier to deal with. Now, it's your claim guarantee you're gonna be paid when you file a claim with them. No, it still might be a hard process. But they're much easier than these eight other carriers that they're that are out there.

Michael:

Yeah. This has been so great. Andy, my last question for you, man. How many claims do you handle a year just out of curiosity? So I can we give people an idea of…

Andy:

Yeah, we do over 1000 claims a year?

Michael:

Well, but how many how many public adjusters in your office?

Andy:

Oh, right now we have four. Right now we have four and we're just we just keep growing. We do a good job marketing and, and building our social media presence. And yeah, it's, it's, it's good. And I mean, I guess it's bad for the insurance. Maybe these claims are handled. But yes, tactically, we, our business grows and we get more calls.

Michael:

That's awesome. And I want you to share with everyone your contact information where people can get a hold of you and like what kind of I know you said you don't do residential roofs, but what kind of claims should people consider reaching out to you for?

Andy:

Any fire, you know, water claims, you know, whether it's broken pipes sewer backup, we can inspect those or at least advise sewer backups, usually, or water backup limits, they usually have a limit. So I see your limit is 10,000. I look at the photos and I'm like, Well, you max out the limit. You don't need a PA this one's just a max policy easy. A lot of people that call us if we get to two calls, three calls a day of clients that we just kind of give them advice because there's no need for a PA in some instances, they will but we can give them at least advice and help them out.

But fire claims hurricane even commercial roofs we do commercial roofs a lot. Residential roofs is just the one thing we don't really do. Just because we we don't have the staff to do it. So…

Michael:

Yeah, okay, fantastic. And for people that want to reach out learn more about your take advantage of your services, what's the best way for them to do so?

Andy:

The easiest way is my cell phone. It's literally for your clients they can for your listeners, they can call me it's 708 655 4186 that's literally my cell phone. They can text me call me I'm really easy to get a hold of while I still can. I'm able to get my phone away so write it down because I might have to switch here I might not be able to give my phone away and my wife gets mad with more calls.

Michael:

I hope you're so busy that happens.

Andy:

So ya know so far so far. Okay, wife's not getting mad, so…

Michael:

Awesome. Andy, thank you so much, man. This was super great anyone watching the video could tell I'm super giddy talking about insurance stuff. It's so great to meet someone that's also as giddy so no, I really appreciate the time.

Andy:

No, it's fun to actually have a host that actually knows that that area and yeah, it's fun. You You know you've been through it now yourself. So you kind of know the you know, you know, you know what we do and what a PA can help. So it’s, good.

Michael:

Big time, big time. Well, thanks again, man. I'm sure we'll be in touch.

Andy:

Mike, thank you so much for having me. I appreciate it.

Michael:

All right, everyone. That was our episode with Andy, A big thank you to him for coming on and sharing some great information, some great knowledge and wisdom with us. Definitely. If you are someone that is going through an insurance claim or will go through an insurance claim in your lifetime with the property you own, definitely consider hiring a public adjuster they are worth their weight in gold.

As always, if you enjoyed the episode, please feel free to leave us a rating or review. We'd love to hear from you all in the comments section and ideas on future episode topics. And we look forward to seeing on the next one. Happy investing

Can you crowdfund a 1031 exchange into institutional real estate? Oct 18, 2022

Mr. Fernandez is President and Chief Executive Officer of 1031 Crowdfunding. Before founding the Company, he was Senior Vice President of Healthcare Real Estate Group in Irvine, California. Since January 2001, Mr. Fernandez has been responsible for researching and compiling accurately verifiable documentation across various industries, including assembling compelling content for marketing materials related to the purchase and acquisition of various real estate holdings. He has over 20 years of inside and outside sales experience. He is personally involved in raising over $800 million of equity from individual and institutional investors through private and public real estate offerings. He hired and trained a national internal wholesaler and external wholesaler sales force.

In this episode, he shares how he interprets the current state of the economy and the real estate market; and how his company, 1031 Crowdfunding, creates opportunities to take advantage of during times of uncertainty.

Episode Link:

https://www.1031crowdfunding.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Ed Fernandez, President and CEO of 1031 Crowdfunding and he's going to be talking to us today about the state of the economy, the market, and his company, 1031 Crowdfunding, and how we all can take advantage of crowdfunding 1031 exchanges. So let's get into it.

Ed what's going on, man, thanks so much for coming on and hanging out with me today. I appreciate it.

Ed:

No problem. Michael, thank you so much for having me.

Michael:

No, it's really, really my pleasure, I am super excited to chat with you, because you've got a really cool company doing some pretty cool things. So I know a little bit about it but for all of our listeners who aren't familiar with 1031 Crowdfunding give us a little bit of background, what is it that you all are doing?

Ed:

Sure, so what we're doing is we're taking real estate, packaging it up and selling it to investors in little pieces. For those investors that are either tired of the tenants, the toilets in the trash, or they run out of this 45 day Id period that you have to actually do for the IRS and so if you're looking for institutional real estate, but you really don't want to go running around trying to find your own property in this limited period of time, you can come to 1031 Crowdfunding, where we have a slew of institutional property for those investors who are looking to be passive, and defer their taxes through a 1031 exchange.

Michael:

Man, I love it, we are definitely going to come dig deeper into that because I was under the assumption that you couldn't turn 1031 into a passive investment. So we've got a lot to talk about. But before we get there, I would love if you could give us a little bit of insight into where you see us currently in today's housing market with all the stuff we got going on. We're recording this towards the latter half of September and 2022. What's going on man?

Ed:

Well, as you know, yesterday, the Feds hiked rates again to another 75 basis points and so what's so what they're trying to do, obviously, and it's currently not working, by the way, they're trying to slow down in the housing market. But with money continuing to flood the economy, real estate prices are still exceeding and going up and people can afford real estate or housing, because interest rates are going up. So we're in a weird market today, I can say we can go back to 1991- 1992 and kind of look at that market, very similar type of events that are occurring today.

Michael:

Okay, and for all of our listeners that weren't plugged in to the to the real estate market back then what was going on back then.

Ed:

So back then it was the tech boom, right? Remember the tech bubble that blew up?

Michael:

Yeah.

Ed:

Prior to that event occurring, interest rates on loans were double digits 12-14% and people were still borrowing and buying houses and getting involved in real estate. But then the bubble burst in the tech industry and all that money flooded into real estate and that's where you had all this appreciation on the real estate side. So in today's market, even though we're not in double digit interest rates, interest rates are higher than what real estate is producing. So we're not as bad as we were. But we're actually pretty close to where, and who knows, we might get there. If the fence keep doing that. So those are the similarities where interest rates exceeded yields on real estate, and real estate just kept going up.

Michael:

Yeah, that's so interesting. I mean, I remember hearing about those double digit interest rates, but I also have to think back and you could go park your money in a bank CD and make 6,7,8, 9%, which now is unheard of. So it's, again, we have these super high interest rates, but you can't make a yield, letting your money sit in the bank. It's getting eroded by the high inflation. So it's a really unique time

Ed:

And I'm glad you brought that up. You know, what's very interesting is that Treasury bills now you could buy a federal backed treasury bill, fully liquid and get 4% where real estate is producing three and three and a half percent. So you're kind of seeing what's going on in this market.

Michael:

Yeah, yeah. Where do you think we're headed? I want you to break out your crystal ball, change the batteries out put fresh ones in there. What's going on in the next two, three years?

Ed:

You know, it's, it's, it's a weird market, you know, I'm not gonna get into the political frying pan of who's doing what?

Michael:

Yeah…

Ed:

Right. But if money continues to flood this economy, I don't know how you put on the brakes on inflation, if that continues to happen. So what has to happen and what I hope happens is that money tightens up so that the feds can kind of slow down and we can get real estate to a level where people can still buy a home, the millennials, those are the first time homebuyers and investors can still get a yield. I don't see that happening at least for another two years. That's where I think we're headed but we'll wait and see.

Michael:

Okay and are you thinking that the interest rate hike is going to continue along that two year frame or are we kind of plateauing and we just have to wait a little bit longer for the effects to take hold?

Ed:

Well, if Feds continue to raise interest rates, then now we're gonna go into a recession and how do we come out of that? So it's a fine line of how much to push and how much not to push. So we just got to wait and see, look, if I had a crystal ball, and I can tell you exactly what is going on, I would not be on this call. I'd be on my 200 foot yacht in Monaco watching F1. So I'm just letting you know.

Michael:

Totally. Yeah, that's a great point to make. All right. Well, I am very curious to see how it all shakes out, I think, as are many others, but and let's transition here and talk about temporary 1031 Crowdfunding.

So someone has an asset to sell. They've, they've seen the skyrocketing appreciation and let's just walk through it like some numbers as an example. Because I find that makes the conversation a bit more concrete. someone's property is worth a million bucks. They got 400,000 and debt on it and they want to go 1031. The thing, so they sell it for 1,000,000 1031 rule says they got to buy something for at least a million, if not more. Where does sentry one crowdfunding come into play here? Does someone have to bring additional 400k that was in debt to the table to invest in have a proper 1031, how does that work?

Ed:

No, no, absolutely not. So one of the one of the biggest things of a 1031 exchange is what we call closing risk, right and so you have 45 days to try to find something and then that's not, you know, there's holidays, weekends, that all counts, right? So you're out there, pounding the pavement, trying to find a replacement property within that 45 day period, which makes it very difficult. So in using your example, if an investor had a million dollar sale with $400,000 of debt, they can invest as long as they're an accredited investor and let me define that either an annual income of $200,000 a year for an individual 300,000 per couple or a million dollar net worth excluding the home you live in, you can come to our website and at any given time, we have anywhere between 30 to 50 different options to choose from and these investments are called Delaware statutory Trust, the term we use is DST been around since 2004, directly on the IRS website, and really what the DST is, is very similar to a living or family trust, where there's a trustee managing a trust for the beneficiaries, you as an investor, or a beneficial owner of a trust that's on title real property. So it could be a $50 million apartment building $100 million Amazon distribution center and for as little as $25,000, you can own a piece of this big property, right off all your expenses, like you're doing today, on your schedule II get paid cash flow on a monthly basis every 15th of the month, and when the property is sold, all the investors get 100% of the upside, and you're still in another 1031 exchange. So that's what we do. We're looking for those investors that are looking for passive investments, tired of the tenants and toilets in the trash or running out of time? Those are the ones that give us a call.

Michael:

Yeah, no, that makes total sense and it sounds awesome. So if we go back to our example, of the million bucks in the in the 400k in debt, how does it work because like, my understanding is if I'm if I'm selling something for a million, I gotta go replace that with a million dollars of property. So if I go invest with you all, do I have to bring the extra 100,000, how does that work?

Ed:

No, here's how it works. I'll give you an analogy. So let's say I'm a trustee. I'm going to go out and buy a $20 million apartment building. I'm going to create this broader. As the trustee, I'm going to the bank. They're approving me as the warm body, and they're underwriting the real estate, let's say they lend me $10 million. I'm the one that signs on the bad boy carve outs, and I'm the one that signs on the loan. So now the profit, I have 10 million of debt, I need another 10 million in cash. So I write a check for 10 million, and I close the property inside that trust. So to make the numbers easy, let's just call it 50%. LTV or loan to value and so let's say you sold your property for a million dollars, and you paid off the loan, and you got $500,000 in cash, and you got to buy something for a million dollars or greater. Well, when you invest in the DST, the DST already has a 50% loan on it and what happens is that it applies that debt to your position, along with the $500,000 of cash that you invest it. Now at closing, you own $1 million of this $20 million property, which allows you to satisfy your exchange.

Michael:

No way. Everyone watching this video just watched my brain explode. That is why that is super cool. All right. All right, I dig it and can people invest using an entity? So like, if I have an LLC that I own this property in that I'm now selling? I need to keep that same entity, right as my purchasing as my up leg for the new property can folks use their entities to invest with you all?

Ed:

Shoot, Michael, send me your resume I should be hiring you here quickly…

Absolutely. So, so yeah. So you have to use the same tax ID number, right. So one of the one of the things we do in process in talking to investors is we ask them, are you owning this as an individual, an LLC, a trust and based on whatever tax ID number they're using on the sale of the property that tax ID number is the purchaser of this DST. So yes, you have to invest the way you sold.

Michael:

I love it, I love it and are you I know you said you're passing on cash flows and 100% of the upside, which is insane. We're gonna talk about that in a minute but are you also passing along depreciation to the investors?

Ed:

Absolutely. So whatever remaining basis they have from the sale will carry forward to this investment and based on the asset type, if it's an apartment building or residential 27 and a half years, or commercial 39 years, yes, depreciation will carry forward, in addition to that some of the opportunities have what's called a Cost Segregation analysis done on it, where you accelerated depreciation on the personal property in the first year, which is a huge help to shelter cash flow from tax.

Michael:

Yeah, I love it, I love it. I've done several of those ad it's just been amazing to see what my taxes look like postclassic.

Ed:

Yeah, It's good stuff…

Michael:

And just getting back just for a minute on the accredited investor designation, because the question I'm realizing I've had for a while, and we always joke in the podcasts are super self-serving, I get to get educated here along with all of our listeners, we talked about the requirement having 200k as a single or 300k as a couple for the last two years. Is that adjusted gross income or is that net?

Ed:

Adjusted.

Michael:

Okay adjusted…

Ed:

That's adjusted and here's the here's why that's required. It's because the investments in a DST are illiquid, right? So the regulatory environment wants to make sure that if you do have a financial emergency, that you have other funds to go after, and it doesn't have drastically affect your life, because you are in an investment that's illiquid. So that's why the requirements there.

Michael:

Yeah, that makes sense and the alternative way to qualify as having a million dollar net worth or more, right…

Ed:

Correct, or let's say you're in the financial services industry, and your securities license, and you don't have the net worth or the income, because of your professionalism and the designations that you hold that also actually qualifies as an accredited investor.

Michael:

Okay, good to know. I was gonna say, yeah, because it could be kind of interesting. Speaking about cost segregation studies. If someone's got great income, but also has a great tax strategist, their AGI is probably going to be zero, if they know what they're doing and so that they could get discredited that way. But the net worth piece probably comes into play more often than the income piece, I'd imagine.

Ed:

It does. Yeah, because we deal our client profile is anywhere between 55 to 90 years old and so they're always saying that they don't have the income, but they definitely have the net worth.

Michael:

Yeah. Okay. Why is that? Why is your target demo in that age bracket?

Ed:

It's because if you're younger, you know, I'm a control freak, right? I want to control everything. When you're younger, you want to control your destiny. Though most younger real estate investors go by their own deal, they manage their own deal, and they live or die with their performance. But when you get a little older, and you've already built up your net worth, you get tired of those tenants in those toilets in those trash, right and so you are looking for a passive way to continue to kick that can down the street, i.e. taxes and so normally the demographic is 55 years or older, they're kind of slowing down on their real estate investment portfolios.

Michael:

Yeah and that makes total sense and so talk to us a little bit about what the exit looks like on some of your deals, because I was looking at your website, before we hopped on, I noticed you have some triple net stuff. So I'm just curious, you know, how are you exiting those assets?

Ed:

Sure. So it's got to be accretive to the to the beneficial owner or the investors, I would say triple net lease stuff. Those are bonds. If you're looking for a Walgreens $1, General and Amazon, you shouldn't expect appreciation on those opportunities, you should just expect that coupon plus getting your money back, right? If you're looking for appreciation, which I would call more like a dividend stock. That would be a multi-tenant asset, apartment senior housing, student housing, self-storage, where you have the ability to mark rents to market which gives you that that appreciation. So the exit really is going to be based on the economics is or are the investors making money. If they're not making money, there's no reason to sell because it's still producing the cash flow, right. So as soon as the property starts appreciation to a point where the sponsor or the trustee feels okay, it's time to sell. That's the exit, you put it on the open market, you got a real estate broker, you get the offers coming in, and then you pick the best offer and you sell the property.

Michael:

Love it and are you all targeting value add type of stuff, are you getting stabilized assets? What is the mix look like?

Ed:

So the DST cannot use value add assets, meaning it can't move walls, and has to be stabilized assets? Unlike a tenant in common, right. 10 in common, you can do that, right, so the DST is all stabilized assets and when I say stabilized, it's either if it's multi-tenant, that's 90% plus occupancy and if it's single tenant, triple net investment grade tenant corporately guarantee and leases.

Michael:

And is that regulated by the DSDM, is that a requirement of the entity structure that you're using?

Ed:

That is the structure, yes, sir. That's the structure. Because if you if you disqualify the structure, You disqualify the exchange and now, people pay taxes, because it's not approved by the IRS.

Michael:

Interesting. So the IRS is actually dictating what type of asset you can own in order to get this 1031 designation and benefits.

Ed:

Yeah, if they're, you know, there's a specific structure and a specific way that needs to be structured. That's why a DST should have a legal tax opinion attached to it, from your securities lawyers to show that the structure is complying with this approved structure, that it should not be challenged if you invest and qualify for the deferral of tax via 1031.

Michael:

Interesting, are there other vehicles out there that you could do something similar but have a value add component

Ed:

Tenant in common. A tick, we call it a tick, the similarities are very similar to the point where you own a fraction of a piece of property. The differences are huge. Tenant and Commons. The investors make all the investment decisions. A tenant in common can have a capital call, a tenant in common can use non stabilized assets, a tenant in common can leverage the property and so back in 2000, and 4,5,6, and seven, the tenant in common was the most primary way of syndicating 1031 exchanges. But then and so, you know, everyone is going to agree as far as the investors are concerned when real estate goes up but in 2008, great recession, you have savvy investors, not so savvy investors. It's called hurting the cats. They disagreed on everything, right and so about six and a half billion dollars went into receivership by tips and so banks will not lend to a tenant in common structure. So your question and previously of how do I replace the debt would not happen in a tenant in common. That's why more tenant in common deals are all cash and the way they address Sit to investors is, hey, all cash, no foreclosure is owned, by the way, we're going to lever you up, pull the cash out and get it back to you tax free. Well, that's what happened in 2008 and everyone lost their money. So ticks in our business is a four letter word.

Michael:

Very interesting. Okay, this is really good to know it. I'm curious and maybe some of our listeners are as well, because the investors are getting the cash flow, the investors are getting 100% of the upside, you're doing all the work, how does 1031 Crowdfunding make money, how do you all get paid?

Ed:

So it's aggregating a portfolio. So yeah, we charge an acquisition fee, right anywhere between two to 4%, upfront and then we also get asset management fees, it's anywhere between half a percent to 1% off of the cash flow, but you really don't get rich doing that but the idea as a sponsor is, if you're managing $5 billion worth of assets, and you're charging a 1% asset management fee, you're making $50 million a year just unfortunately, watching paint dry.

Michael:

It's not a bad business model.

Ed:

It's not a bad business model. But you know, there's a lot of work to it. I'm thinking I'm kind of, you know, dumbing it down, but that's how sponsors make their money.

Michael:

Okay, all right. This is great. If someone is considering investing with 1031 Crowdfunding or a different syndication, what are some things that they should be looking for? How do they go and educate themselves about the sponsor and about the deal?

Ed:

You know, that's, that's a big deal right there and that's a great question because these deals have an upfront expense, we call it the load, right and even though the load doesn't affect an investor's capital accounts, so if you put a million dollars in, you're getting credit for the whole million in your cash flow is based on that whole million. The problem is, is that you overpay for that property. So let's give you that $20 million example that I used earlier, right? Let's say there's a 10% load on it. Even though I bought it for 20 million, I have to offer it to you for 22 million and even though your capital account is not affected, it's when you sell the real estate when that becomes material and so you need to make sure that the real estate can appreciate above its expenses, before entertaining a sale, right? So that at least you come out at par if you're going to invest in these things, and you're using a financial advisor to advise you to do this, the most important question you should ask is, Mr. Advisor, when does this investment overcome its upfront expenses and if that guy is any good, you should be able to tell you that, that's the most important thing when it comes to investing in these DSPs.

Michael:

Yeah, that's super, a super great question to be armed with and so are most folks who are investing with you coming to you all via their advisors or via their team or they individuals. I mean, how do you find most of your clients?

Ed:

So I'm, we do a lot of marketing, right. So we do a lot of SEO, a lot of SEM, I do things like this, my PR team is working. So we get anywhere between five to 700 new registrations a month on our website and we currently have about 60,000 registered investors today and so they just Google 1031 exchanges, and we pop up. So we're not, we don't use the financial services industry to distribute these products, even though we are in that service. But people normally just find us on their own or an attorney might say a CPA might say their friends might have used us. We have wonderful Google reviews. They just find us that's how they get to us.

Michael:

Yeah. Okay, that makes a lot of sense and I'm wondering if you can shed light on like your worst deal ever, how it went wrong, and what happened?

Ed:

That's a great so 2020 on the east coast of Florida, apartment building got hit twice by hurricanes within three weeks. Okay and you probably it's right, that time when Maria was coming and all that stuff. The property got flooded. 50% of the units became uninhabitable. Cash Flow stopped to investors, enough cash flow to pay debt service and then you had to get to the insurance companies and get the catastrophic damage insurance payment and the renter's interruption insurance payment and remember, I told you in a DST you can't do construction, right. So how do you fix the unit, right? So there's a term called a springing LLC. That's an every single DST ppm or private placement memorandum and what that what that means is that you dissolve the DST and now you're a member of an LLC, non-taxable event, your exchange is still good but now in an LLC, you can do construction, you can modify loans, you can do all these things to fix the property, right? So you go and you start fixing the property, you release the property, reinstate cash flow, right. But the issue is, you can't go your separate way anymore. You're in an LLC. So the entire LLC has to do an exchange or not. So they don't want to mess up there at 1031. So the LLC sells the property, does an exchange into another property and then two years later, the terms called Safe Harbor, you can convert it back into a DST and then everyone can go their separate ways when the property sells. That is the worst deal that has happened since I've been doing this.

Michael:

And did the insurance proceeds cover all of your expenses enough in your business interruption to kind of make you guys hold in during the process?

Ed:

Yeah, absolutely. So even though the timeline was delayed, the investors did very, very well. They just lost cashflow for about a year but then when the property was sold, they did well.

Michael:

Yeah, I love it, I love and that's one of the things I really love about real estate investing as a whole is if you understand what you're doing the downside just isn't that scary…

Ed:

Yeah, I agree. I mean, dirt is never gonna go to zero, right? It's just not gonna happen.

Michael:

Right, right, man twice in three weeks. I mean, the only thing that I've heard of comfortable that I'm doing, I'm in the midst of a develop redevelopment project and I had two fires in the same building a week apart, during the course of construction.

Ed:

Wow. Oh, that's not good. It's sucked.

Michael:

It sucked, so…

Oh, man. This has been super fun, man. If people want to find out more about you, continue the conversation invest with you, or what's the best way for them to do that and get a hold of you.

Ed:

So you can go to 1031crowdfunding.com , like a crowd of people not a crown on your head, right or you can dial our number 844-533-1031 and you're absolutely you'll be able to find us.

Michael:

Good stuff. Well, hey, thanks again for coming on and sharing and helping educate our folks. We'll definitely chat soon.

Ed:

Michael, thank you so much. Looking forward to hearing back from you.

Michael:

You got it, take care.

All right, everyone. That was our episode a big thank you to Ed for coming on super interesting stuff. I learned a ton. If you are in the middle of a 1031 or thinking about it definitely an interesting option to take advantage of. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing on the next one. Happy investing…

The full story of REITs and fractional ownership with Daria Davydenko Oct 15, 2022

Daria Davydenko is a Securities Sales and Operations Specialist at Roofstock where she supports Roofstock's fractional ownership product, Roofstock One. Prior to that, Daria served as Vice President at Goldman Sachs. Her background in finance provides her with a unique view of financial markets and risk management.

In this episode, Daria walks us through the history of public and private REITs, and who might be a good fit for investing in them. Additionally, she covers Roofstock's exciting new investment, Roofstock One, a fractional ownership option for accredited investors.

Episode Link:

https://www.roofstock.com/one

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Transcript

Before we get into the episode, this podcast is intended for general informational purposes only and is not financial, investment, or tax advice. The information provided is not directed toward any investor or category of investors and is provided solely as general information products and services or to provide general investment education. Nothing in this podcast should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.

Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Daria Davydenko, who is our sales and operations lead for Roofstock One and she's going to be talking to us about the history of public and private REITs really what they are, and who might be a good fit for investing in them. So let's get into it.

Daria, what's going on? Welcome back to the podcast. Great to have you back.

Daria:

Hey, Michael, good to see you again. Thank you for having me.

Michael:

Yeah, my pleasure, my pleasure. Great to see you again. So today, we're talking about a really cool offering Roofstock has Roofstock One. Can you give us a really quick insight into what that is and then I would love if you could help walk us through kind of the history of REITs in this product and how it came to be?

Daria:

Yeah, sure. So Roofstock One is a relatively new offering that we have as part of all of the different products use that we have on roofstock.com. Roofstock One is structured as a private REIT. So one of the benefits of investing in Roofstock One is if you invest in real rental properties, you have the benefit of knowing exactly what your own. While it is a nice benefit, generally, it's not available to visit more passive real estate investments like REITs, public or private. However, we made Roofstock One different, even though it is structured as a private REIT. It is a fully transparent and customizable. So you know exactly what your own by buying a share of Roofstock One. So it is the first of its kind single family rental rate that's transparent and somewhat customizable to investors.

Michael:

Awesome. All right. Well, we're definitely gonna dig more into that here in a little bit. But I would love if you could give us again, a kind of a background, like what is a REIT? How did we get here public versus private, bring us up to speed.

Daria:

Yeah, so actually, what so REITs have a very interesting history, that I don't think a lot of people realize how the first I guess, you know, private equity firms have emerged, and then how can a REIT structure was created. So back in the 1980s, investors were mainly individuals and they were kind of using real estate to kind of harvest losses and shelter profits. So that was kind of the main reason why people were investing in real estate and also in the 80s, there was something that was called S and L. That they were created by the Federal Home Loan Bank act of 1932. They were like Savings and Loan Banks that basically had some caps on interest rates on deposits and loans, and but they were able to basically lend money to those individuals so they can buy real estate. Now, obviously, in the 80s, we all know that there was a recession and so because of the restrictions that were placed, placed on this SML banks, you know, because they had some caps on interest rates on deposits and loans, it greatly limited their ability to compete with other lenders as the economy slowed and inflation took hold and so for instance, as savers spelled money into the newly created money market funds that were yielding, like a much higher interest rates, like SNL just could not compete with those traditional banks due to their kind of lending restrictions and so when you add the recession of what happened is because the recession was sparked by the high interest rates that were set by the Fed in an effort to end the double digit inflation, which is kind of what we are kind of seeing right now, nowadays. So now we're left with little, you know, little more than, you know, kinda like a dwindling portfolio of low interest rate mortgage loans and so obviously, their revenue stream, you know, were severely tightened and so in the 1986, Reagan changed the law and then this indication was, you know, basically it was no longer working and there was no longer like the tax loss harvesting that was allowed in real estate, that can actually cause a real estate values to crater because a lot of people did not see any value of investing, I guess, are holding real estate anymore and so that actually caused SNL crisis and so I think a lot of people don't realize but during the SNL crisis, there were like 8000 banks that have failed. So, because of this, yeah, because of this kind of crisis that happened. I mean, this was like the largest crisis, you know, since the largest collapse of US financial institutions since the Great Depression.

And so like that, that kind of happened in the 1986 and so what happened, right, so once there's no kind of crisis happened, the government had to step in. So while they found that there was a lot of highly levered foreclosed personnel that owned a lot of real estate, and so government inadvertently owned those banks, and so they end up owning hundreds and 1000s of properties. What happened next is they have created something that's called the Resolution Trust Corporation, that basically became a property manager. So there sole purpose was to own and dispose of those distressed assets. So Resolution Trust Corporation or short, RTC was a temporary federal agency. So basically, from the 89, to the 95. You know, they largely were trying to kind of resolve this SNL crisis that happened in the 1980s, they, you know, they were basically like trying to do some property management, cleanup, what kind of what was left behind and another, I guess, purpose or creation, the RTC was to dispose of this assets. Now, the government wants to sell a lot of assets and so they need to have, you know, it's going to be highly inefficient for them to find like a single bar and buy, like, you know, who can just buy like a single property. So what they had to do is they had to figure out how to find a pooled vehicle that can just come in and buy this pooled kind of assets and so that's when the first private equity firms were created, who kind of came in, they were able to kind of pull financing, and then kind of buy like large amounts of this kind of real estate that was left behind after the SNL crisis. So that's where kind of their real estate or you know, kind of private equity investment was created. That's kind of the history of it. Now, the real estate investment trusts were a way for individual investors or intervene institution investors to get exposure to real estate without kind of having to go through, like active management of the underlying real estate. So Real Estate Investment Trust was a way to, for you to get exposure to, you know, real estate as a class. But you don't, you don't have to kind of forego, like, you know, the whole kind of financing closing, you know, property management aspect of it, while still enjoying the benefits of getting dividend distributions from the rental income, you know, the appreciation of the properties, etc. and then, in addition to that kind of REITs were created to encourage investors to get into the real estate market, and also get some kind of tax benefits from it. Now, I know I spoke a lot. So I just want to make sure I, you know, there's any questions that I can answer for you, Michael.

Michael:

This is super interesting. I mean, one thing that terrifies me is this idea of government, governmental property management, that just would have been an absolute nightmare, because we all know how that probably worked out. But no, I think that makes a ton of sense and so the so these private equity firms were created to buy all of the hundreds of 1000s of distressed assets that the government ended up owning because of the collapse and the financial crisis. But so maybe, help me understand what a REIT is, like, is a REIT a share of the private equity company that then owns these properties, is that how that works?

Daria:

Yeah, so REIT is basically like a pooled vehicle, you can imagine that, you know, let's say, like, just as a simple example, let's say you, Michael, you own kind of 10 different properties and you would like to allow other, you know, investors to kind of participate in ownership of those properties. You know, you can package them basically into a read. Of course, this is more complex than kind of what I'm describing, but in the simple terms, you can package it into the REIT and sell basically shares of the three to other investors who can get economic benefits of kind of owning 10 of those properties. REIT like many companies, they distribute earnings to investors in the form of dividends, unlike many companies have a REIT incomes are not taxed at the corporate level. So kind of that means that REITs are actually they avoid the double taxation of corporate tax and personal income tax. So instead REITs are sheltered from the corporate taxes so their investors are only taxed once and this is a major reason why investors value REITs over you know, other dividend paying kind of structures out there. Another benefit of REITs I guess, that they were created is that they're widely used because they're highly for favorable tax advantages are REITs are required to distribute 90% of their earnings to investors and so that kind of like allows them to avoid the double taxation that I mentioned previously and so this benefit kind of trickles down to all the underlying investors, you know, they're not being double taxed, and they can receive the maximum amount of capital from rate, I guess another advantage, I mean, we all know that investing in real estate, one of the biggest advantages of is the depreciation.

So depreciation can be passed through to individual investors, even in a REIT structure, basically, you because you get to offset your income is a depreciation kind of tax deduction. Let's say you might be earning tax dollars, that $10 per share, but you only will be paying like $7 as an example, paying taxes on the $7 of those earnings and in addition to that, if you're kind of holding your shares, for longer than a year, you will be paying the long term capital gains taxes, which is kind of much lower than your ordinary income tax. There was another kind, I guess, good, good question that you raised Michael, about what is the difference between private and public REITs, the main difference is private REITs are less liquid, you know, compared to public REITs, public REITs are the ones that are being traded on the public stock exchange and so you're basically kind of they're just like stocks, you can buy them and you can sell them and you will also be getting the dividends while private REITs they're not being traded on the public stock market and so hence, they're being sought after as like a less liquid option for you to own real estate. But at the same time, they're less volatile, obviously, because they're not subject to all of the changes that are happening in the public markets. So you just kind of there's just some kind of major differences, right? The liquidity but you know, because you're foregoing the liquidity, you're obviously getting less of like volatility in the stock price of your, you know, under the ownership of the shares of the REIT. So that's kind of the major kind of difference between public and private REITs.

Michael:

Okay. Yeah, that makes a ton of sense. Thanks for walking me through that. I guess the question that gets begged next is the Roofstock has been a marketplace for transacting on single family homes for years now. Why, like, why is this product coming about? Who is it designed to serve and who might not be a good fit for?

Daria:

No, that's an excellent question. I think we what we have found as we've been speaking with investors who come to the roofstock.com website and who really enjoy owning kind of real estate and single family rental properties, in particular, one of the feedbacks we have been receiving from investors is that they are some of them you know, obviously, if you want to buy properties outright, you are getting, you know, there is like a large deposit, I guess, that you have to put to buy a property, there is a financing, there is like a very long process of kind of closing, the Roofstock does a very good job at making sure that we simplify this process for investors. So we tried to make it as simple and as friendly as possible. But still, there are multiple steps for you to close on a single property. But obviously, you will be kind of subject to that single asset race grade, if you are only owning a single property you will kind of whatever happens with this property, it will kind of great greatly affect your cash flow, now we have created Roofstock One because investors have been basically asking us, hey, I really can enjoy single family rental investing, but I'm still kind of trying to learn the space and understand how it works. I've never owned single family rentals before and so kind of I'd like to dip my toes into this asset class and so I think Roofstock One kind of offers this perfect opportunity for somebody to own this exposure to this asset class, single family rentals, while you know being completely passive, so meaning you don't need to go through the kind of the whole process of closing on the property, finding the financing, you know, finding the property manager, we do all of that for you.

You just kind of buy the share of stock one REIT you get exposure to this particular asset class and then kind of get, you know, potentially get quarterly dividends from the rental income and kind of just learn a little bit about single family rentals, how it works, how you know how you receive the dividends and gonna get accustomed to kind of owning single family rental asset class, where we have seen as there are, you know, some investors who really enjoy kind of being actively involved in the day to day of managing properties because you get this kind of owner exposure means that some people really like and so for those people, maybe Roofstock One might be a little bit too hands off and so they might kind of prefer to do like the direct ownership of the property. But there are also like a certain subset of individuals who just don't have the time to, like, investigate and spend time with property management companies and figure out like, you know, if they should increase the rent, or drop the rent, just kind of just to find tenants for the house, or should they kind of, I don't know, change the roof, or change the water heater in a property or wait for another month or two. So it kind of…

Michael:

All the operational stuff…

Daria:

All the operational stuff, all of this kind of micro decisions that you kind of don't realize, but they do pile up and they do take a little bit of your time. So you know, some, some of those individuals are like, Look, I just want an exposure to this particular asset class, I want it to be passive, I really enjoy it, I think, you know, I believe in single family rental, kind of asset class in particular and so, you know, this is like, a perfect way for me to get a passive exposure, while still kind of feeling like I'm owning some, you know, underlying properties and we try to kind of make it as transparent as possible to investors, so they actually can see, you know, what properties are inside, you know, Roofstock, one reads, so they can understand, you know, what homes, kind of their tracking the economic performance of, and so they're still kind of getting the feeling of like, okay, with this share, I potentially can own 10 to 20 you know, how many properties they would like, still kind of feel like they're owning those properties. But you know, they don't have to spend as much time on the operation or day to day stuff. So yeah, that's kind of the major reason why we have created the Roofstock One is just to serve certain subset of our investors that we have seen come through roofstock.com website and, you know, obviously, there is absolutely still a lot of kind of benefit of owning the properties outright. But there's also like, you know, there's just a time kind of aspect that's involved in it as well.

Michael:

Yeah, that makes a ton of sense and you said something about, for those people that are still learning want to dip their toes into the water, Roofstock One might be a good fit. But if I'm thinking about like a traditional REIT, I can go buy it on the stock market, I buy a share of it. I don't hear from anyone, I don't know what's going on in the day, like, I have zero insight into this. Is that different with Roofstock One like can someone truly expect to learn a little bit about what it's like to own single family rentals with roof stock one, or is it going to be just as hands off in passive and kind of, at a distance, like a traditional route would be?

Daria:

I'd say it's somewhere in the middle. So I mean, it is just as hands off and passive. But I guess the major benefit is in public creeds, I guess it's a little bit more of like a pooled vehicle. So just by buying a share of like a public REIT, let's say, for example, that there are like 60, and 1000 properties that are public REIT owns. Now they can be in different like various markets, right. So there could be across many different states in the United States and so you kind of get exposure to all of those kind of little, you know, properties a little bit. So Roofstock One allows you to be a little bit more targeted, if you wish to do so, we have something that's kind of cool, called like a tracking stock, which is like a mini portfolio of subset of properties. So let's say if you're interested in a certain region in the US, just as an example, let's say Georgia, because you believe in this region, or maybe you have invested in this region before, you can get exposure only to the properties in Georgia instead of kind of getting the exposure to all of the properties inside the Roofstock One. But at the same time, if you don't have anything, you know, any convictions and you just kind of enjoy single family rental kind of asset class and you just want to have diversification, then you can also just kind of do that and you can just by exposure to all of the properties inside the restock one read. So we kind of just provide like an ultimate flexibility of investors coming in and kind of creating their own journey. Almost like a custom rate, create your own custom read…

Michael:

The subway sandwich of REITs…

Daria:

Exactly. Yeah, it's like a Subway sandwich. You're correct. Yeah, that just you know, you choose whatever you want, like and you can even choose your own sauce visit.

Michael:

Except we use real fish and real meat in our subway sandwich. Don't know if this is the best analogy but people get the point.

Daria:

Yeah, like yeah, we're you know, we're the like a guest who's probably accretes you're just kind of getting the you know, whatever the prepackage Subway sandwich that, you know, is not customizable, and you can't even choose your sauce. So that's kind of how I would think about it. I think the benefit of it is like, look, you can still kind of see what are the properties, underlying properties inside the, like those mini portfolios, for example, which is definitely something that you want to get with like a traditional public REITs, I feel like that they're kind of more giving you like, hey, this is our general structure, or a general investment objective, this is what we're doing this is like, let's say, 30% of our portfolios in Georgia, like x percentages in some other state, which is also great for those people who don't really have much conviction, and maybe they just want to get the general kind of diversified exposure. But you can also have to just be mindful of this kind of this still difference, there is still like this difference that exists between private and public REITs, where no public REITs are still subject to the same market volatility as any other stock would be, you know, I wouldn't say that there is like one, right or wrong way, just kind of, it's all about diversification, and what fits your investment goals and investment needs, and what makes sense for you, and for your investment portfolio and, you know, we're just kind of offering a way for real estate investors to create their custom REITs, if they want to get exposure to the whole asset class, if they wish to do so. They can also mix and match they can invest a little bit into public rates a little bit into private REITs and again, you know, there's it's always, diversification has always been a good way for you to kind of diversify your risk, so…

Michael:

Yeah, okay, I do get well, Daria I have a question. That's maybe on every buddy's mind who's listening, you talked about the hurdles and barriers to entry of investing directly, and that's usually coming in the form of down payment heavyweight financing and there's steps involved, how much does investing in recycling cost? What's Is there a minimum investment is our maximum investment, like walk us through what that looks like?

Daria:

Yeah, so we actually kind of tried to bring it down to minimum investment is $5,000. So anyone who so there is like a limitation that we you do have to be an accredited investor and accredited investor is something that's basically set up by CC, that's kind of their rules and regulations that in order for you to be invested in private REIT, you kind of have to be an accredited investor and I think it's kind of basically done for the benefit of the investors themselves. Since it is a limited liquidity you do want to make sure you have enough liquid cash that kind of set aside you know, that you have access to because you will if you're invested in into like any private vehicle private REIT or anything else, usually you know, you will not be able to like us you know this drill those money for like five years or so and so, I think that accredited investors just kind of really done to make sure that investors understand that this particular funds will not be able they will not be able to access it and they have enough liquidity on hands to you know, meet any some sort of like liquidity needs that they have during their like day to day life. Now accredited investor, someone who, who is an accredited investor, guess accredited investor is someone who has a net worth of a million dollars and that can include their real estate, investment portfolio or retirement, you know, retirement portfolios, or, you know, bank assets, kinda you name it, it can't include their private primary residence, but if they have secondary homes, and, you know, if they can only count equity basically on those properties, so if they have like a mortgage on the secondary home, they will have to figure out like how much of equity they have, and they can count it towards their networks. Another way to understand if you're an accredited investor is if you are making over $200,000 per year, and you've made over $200,000 per year, in the past two years, or you and your spouse or partner are making over $300,000 together this year and in the past two years. So those are kind of some of the limitations that beans set and they just kind of follow those limitations. But as long as you are kind of accredited investor, you can put you know $5,000 into like a Roofstock One REIT and there's $5,000 can be invested across all of our offerings. So we you know, we are not limiting you can only put $5,000 into like a separate a single kind of mini portfolio or a tracking stock. What we call, you can, you know, put $1,000 or $100 into tracking stock and the rest into like a giant, like a bigger font or you know, vice versa. So you can customize this $5,000 as much as you would like. So yeah, that's, that's kind of the limit. Yeah…

Michael:

Great. Okay and I would imagine that other private REITs and for sure, public REITs that have been around for a while, have a track record the history of performance does Roofstock One have that yet or is it too new, like, how has it been performing to date?

Daria:

Yeah, we do have a track record on Roofstock when you launched Roofstock One in November last year. So we are a little bit close to like a year of existence. So we have been distributing dividends and the dividend yields that we have distributed for the historical or like our past offerings, they are listed on our website. They can be accessed here, the investor reports and we also do have appreciation of the assets that has happened since we acquired them back in, let's say, November. So we just recently started to calculate something that's called nav, which is net asset value of our investments and that's in general, how private REITs figure out what is the value of their shares. So unlike public REITs, where the share price has been determined by the kind of just the normal forces of the markets, private REITs, because they're private, they, you know, they had to kind of figure out a way to value the assets, the underlying assets that they have and so the net asset value is kind of the common term where NAV is kind of a common term that they use to figure out what is the share price of their rate and that's what the Roofstock One does as well. So we are just like any other private three, we calculate NAV, we publish it, and then can investors are able to track estimated value of their shares. Now the reason I say it's estimated is because obviously, until we sell the assets, we wouldn't know the exact value of, of the underlying assets, we can only kind of do like an estimation of where we think it is right now. But it is, you know, a good proxy, I guess, for an investor to think, hey, this is like my estimated value. But you know, until you can actually sell the assets and just kind of the nature of real estate market in general, that it's very illiquid, and you wouldn't know the value of the asset until you actually like listed for sale and you started getting some buyers who are interested giving you offers etc. So very similar, you know, in REITs, because we own underlying assets. There, you know, we're kind of subject to the same market forces as any anyone else who owns real estate. But you know, net asset value is a good measure for someone to use to determine what is the estimated value of their shares.

Michael:

Okay, okay super informative from the history to the product offering and why it makes sense. This is awesome. If people want to learn more about private REITs chat with you learn about Roofstock One, where's the best place for them to do that?

Daria:

Yeah, we can be found on the roof stock.com website, or someone can just type in www.roofstock.com/O N E -one. That's our website. Now feel free to give us a call there is a button that you can click on and request a phone call and we have very friendly people to chat and they're always happy to talk about real estate, private REITs single family rentals investing. Now we love investors ask us questions and they love talking to them on various subjects. So yeah, you know, feel free to check out our websites style by ask questions and we are always happy to chat.

Michael:

Amazing, well thanks again and definitely looking forward to seeing where Roofstock One goes from here. Talk soon.

Daria:

Thank you Michael. Thank you for having me today.

Michael:

You got it, take care.

Okay, everyone, that was our episode A big thank you to Daria for coming on really interesting stuff with the product offering as well as the history of REITs themselves. So go check out the website at roofstock.com/one. As always, if you enjoyed the episode, definitely love hearing from you. All ratings and reviews are super appreciated and we look forward to seeing the next one. Happy investing…

The facts and fictions of asset protection with lawyer, Brian Bradley Oct 11, 2022

Brian T. Bradley, Esq. is a nationally recognized Asset Protection Attorney. He has been interviewed and a featured guest on many top shows such as: Bigger Pockets Rookie, Flipping America Podcast with Roger Blankenship the “Flipping America Guy” and member of the Forbes Magazine Real Estate Council. Brian was selected to the Best Attorney’s of America’s List 2020, Lawyers of Distinction List three years in a row (2018, 2019, 2020,) Super Lawyers Rising Star List 2015, nominated to America's Top 100 High Stake Litigators List, nominated to the 2017 Law Firm 500 Award. Brian also writes on high-end asset protection.

Ownership of real estate has many benefits from an investment and tax standpoint. There is downside risk, however, since the value of real estate holdings may be significant and can be used to cover damages awarded in a lawsuit. Therefore, it’s important to consider asset protection strategies relating to real estate holdings in order to minimize such risk. In today's episode, Brian lays out how asset protection really works from a legal standpoint and dispels some common myths that are thrown around in the industry.

Episode Link:

https://btblegal.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Brian Bradley, asset protection attorney and he's going to be dropping some knowledge about all the things we should be aware of as real estate investors when it comes to protecting our assets. So let's get into it.

Brian, what's going on, man? Thanks so much for taking the time to hang out with me today. I really appreciate it.

Brian:

No, absolutely Michael, thanks for having me on. It's going to be an important topic, a fun topic, I'm gonna try to keep it fun and not legally dense and you know, just like I'm not anyone's, you know, Attorney here legal guru. So we're just gonna be talking generalities, right? We're gonna learn a lot in this, you know, it's gonna be a lot of fun and as you're building scale and making more money, you know, you're getting a bigger red button on you and so like this world of where we're gonna be talking about asset protection is kind of a big deal. There's just a lot of ways to skin a cat, different layers, different strategies for where you're at in your life. So, you know, I think as we break these down, hopefully I can, you know, make this will make a little bit more sense for you and your listeners.

Michael:

Yes, it will. Thank you. I am super excited to learn a lot because before we hit record here, you and I were chatting about some of the topics that we'll be covering today and I was like, what is that totally brand new. So I'm really excited from a self-serving perspective. So give everyone that quick and dirty background who doesn't know Brian Bradley, who you are, where you come from, and what is it you're doing in real estate today?

Brian:

Yeah, absolutely. So, you know, I'm an asset protection attorney, you know, we're talking about it off recording, like from Lake Tahoe, so you know, big snowboard ski, you know, ski bum, you know, Lake bum, I got into asset protection from the litigation side of the law, I was selected to America's best attorney list 2021-2020 Super Lawyers rising star 2021-2015.

Michael:

My guess is that no, that's not like an online survey, you filled out to get that…

Brian:

Oh, no, and another do with me, that's really just people that you work their butt up in court, and then they recommend you or judges recommend you and I have nothing to do with it and it's actually pretty, you know, I appreciate even just the nomination, let alone winning it, you know, to where I think they only say 1% of all attorneys in the nation even get nominated for those awards, let alone then, you know, 1% of those even gets picked to as a as a winner and so…

Michael:

Congratulations…

Brian:

Thanks, yeah and for me getting into, you know, asset protection, which will define what that is, you know, in a minute, like, that'll be like our think our base starting point. I just, I just got into this weird area of law, because when I like money, I like investing, I like, you know, not paying as much taxes as you know, as I can and as you grow, you got to be smart with your money, right and who can take it from you and so as a trial lawyer starting out, I just had so many clients who were being sued and their lives just turned completely upside down coming to me after they're already being sued and at that point, you know, you're just too far down the rabbit hole, you know, it's like going to get a car insurance after you already got in an accident or, you know, home insurance after your house already, you know, caught on fire, it's just, it's not gonna happen and so I see a lot of people thinking that they don't need to do anything is another misconception. You know, it's kind of human nature, right? You know, like, I'm just gonna ride lady luck. I'll deal with it when I when, you know, it hits me later on and that's just not how anything that needs to be proactive in the legal sense is going to work like insurance or asset protection. Wishful thinking is not a protection tool. You know, that's how everything you know, like, go to Vegas, go to breaks and hit the roulette table and see how long your wishful thinking is gonna last for you, right? You know or, you know, as you're leveling up, people forget about this. Like, as your wealth is leveling up, you're leveling up, you don't level up your protection, you don't level up your insurance. Yeah, people go buy an umbrella policy, but they don't realize what an umbrella policy is just like everything else, right?

You know, it just provides more access and money to, you know, for coverage, but it doesn't, it's not the same escape clauses, you know, like, there's no insurance in the world that's gonna say, okay, hey, if I go punch you in the face, are you gonna cover it for me? No, like, they don't cover you for intentional wrongdoings or allegations of fraud and intentional wrongs and so that's how they have their escape clauses out especially for very big cases. You know, if you're talking about like a million dollar or more lawsuit. A couple other big misconceptions that we need to address as we lay this landscape is just, you know, the revocable living trust, if people think like, oh, yeah, I have a trust, right, that you know, they don't realize trust. There's a lot of different types of trust. Your family estate plan, your revocable living trust are not designed to protect you while you're living in they don't have the lead have teeth to be able to. So once you pass, they're only designed to avoid probate not protect you while you're living from lawsuits and then over the last five years, I've noticed this massive misconception about the use of limited liability companies. LLCs and they just think that they're like, you know, Silver Bullet Dracula slayers and you guys miss, like, first word first letter, like limited, I tell you. Whereas, whereas this happened, where's this come from? Like, they're not hiding the fact they tell you like they titled it telling you limited liability. So like, now we have to reeducate people on this, like, yeah, don't put everything in the world under one LLC. Otherwise, if it gets pierced, you're gonna lose it on like, What are you talking about, which we'll break that down, you know, in a little bit. And then the sad thing is like, and I think it's worth explaining is this, if you just look around, and you look at, you know, our legal system and the world we live in, it's just broken, it's a broken system, you know, and we're so happy nirvana and just to like, kind of lay this framework down a little bit more. We're no longer about justice. We're about redistributing wealth from the haves, which is you, your listeners, people trying to grow and accumulate more to the have nots and over the last 40-50 years, things that didn't happen in the past, or that weren't allowed to happen in the past like contingency fee lawyers or law from advertising their common place. and then this created a cultural shift of a predatory legal system that's no longer about justice. So it's about profits now and then when you get on the road of high net worth, in affluent families and wealth, this level of protection, now we have to deal with taking a macroeconomic, more of like a global look about what's going on and the big picture here is really that we have a global financial system that has structurally deep rooted issues. You know, we have government backed fiat currencies that are now in question. This is also including the US dollar. So don't think like, just because we're in the US, we're exempt from all of this, you know, monetary policy today, you know, the one that exists is, you know, inflate or die and then you got governments looking for a deep and accessible pools of financing and meaning our money, you know, the hard workers, the people who are investing, along with financial repression, monetary economic manipulation. So this just adds all the challenges that we have to deal with when we're looking to protect your assets and so asset protection is that modern best bet to level this playing field by using a lot of the tools and the combination of the tools that we're going to talk about today to make it very hard for you to be collected on and so what this is really about is just like a talk about giving you peace of mind, lifestyle preservation, and you know, really just how collectible are you at the end of the day…

Michael:

Love it. But well, I am all about doing things to help peace of mind and insulate ourselves from the world at large. This you happy world at large. So help us understand Brian, like, what are some of the things when someone says asset protection to you like, Brian, I gotta protect my assets? What does that mean to you? What alarm bells are going off in your head?

Brian:

Yeah, absolutely. One is like, do you understand the difference between tax mitigation and asset protection and I've been getting this a lot, you know, especially this last year, obviously, as we see what's going on, you know, within inflation, taxes and everything right now, asset protection is not tax mitigation, like that's your CPE and wealth managers job. If creating an asset protection plan or an asset protection, trust or going offshore, you know, where to create tax havens like one that's illegal, it's fraud, you know, so system won't work, and then you go to jail for that type of stuff.

Michael:

So don't do that is what you're saying.

Brian:

That's not what this is about. So people always like, oh, I want to protect my assets and I don't want to pay taxes, completely two different things. The asset protection plan is to protect your assets from predatory lawsuits and litigation, not saying I want to not pay taxes, that's tax mitigation, talk to your CPA and wealth managers. First, lock down your assets from lawsuits because if you get sued and lose everything, what's your miracle working CPA going to be able to do for you if you have nothing for them to work on, so order of operation, protect your assets, then let them work through the system that's created to actually like mitigate, you know, forced depreciation, all those wonderful things that they do cost segue analysis…

Michael:

Yeah but Brian, to that, to that point, really quick. I'm just curious, like, do you work with a lot of CPAs because I can see, I can envision a scenario in which the legal side of things is super buttoned up super tight, but maybe isn't very tax efficient and so my guess is there's probably a happy medium, or some input that a CPA or wealth manager can inject into the situation to help make both things as tight as possible.

Brian:

Correct. You got to, you know, the issue generally is people don't involve their lawyers until later on down the line and it creates a lot of problems. So for example, a lot of CPAs will set up S Corps for investors, especially real estate investors for some reason, and great for tax purposes, horrible for litigation and I get this call a lot, you know, and most of my clients are calling with like 50 $100 million of real estate all stuffed in one S Corp. Okay, great again, for tax mitigation, horrible for let's say you get sued and now you're S Corp and all the shares get frozen and cease, there is nothing I can do for you. At that point, I can't move assets out and then even if I want it and you realize like, oh my god, I have so many pieces of property under one corporation like this is very risky, I need to start diversifying and employing these assets out, you're stuck, you're not going to be able to and I just had this call yesterday with a potential client. The reason is, when you're all the benefits of the S Corp, right? You know, deferred taxation and all this stuff, you're kicking the can down the road, once you start taking the assets out, you have to pay the money back and so people don't generally have millions of dollars sitting in their bank account saying like, okay, hey, I feel like you know, taking all the assets out of my S Corp now and now I'm going to go and pay the piper and the IRS.

So because you don't have that money sitting around to pay the IRS and the taxes, we can move the assets for you and I'm not going to force you to go, you know, and have the IRS coming after you to collect on you and move the assets out anyways, because now you're just creating a bad situation for the client. So the lesson here to learn is if you're thinking of investing, you need to talk to both the lawyer and the CPA, because a lot of CPAs, they shouldn't be giving you legal advice. They're not lawyers, and they're not going to understand the aspect of what happens actually in court with s corpse and C corpse, when it comes to litigation, and why we don't want to use those to protect your assets. So we have to all talk together. The problem is I get this all I get the mess after the fact right, and then I have to start supporting afterwards and so when done, right, really, the modern, you know, estate planning is asset protection, what we're doing is creating legal barriers between your assets, and your potential creditor, the person suing you, the person trying to come after your money before it's needed and that's it, you know, it's like a safe for your gold or your guns or your valuables. Anything of value, you know, you want to put behind the legal barrier and out of your personal name so that it's not easily attached with a lien or reached and so I just like the rich, I really liked the Tony Robbins saying success leaves clues. The rich don't own things in their personal names their businesses do their trust, do they just get the beneficial use and enjoyment out of them while separating out that legal liability and we do that through just like different tools and mechanisms that we have kind of like key concepts and roadmaps like LLC is limited partnerships and trust.

Michael:

Got it. Okay and so when real estate investor comes to you, they're just getting started. They are moist clay, you can totally mold them, they don't already have a bunch of issues. What is your go to, like ideal scenario for asset protection?

Brian:

Yeah, so there, I mean, you're just starting out your green horn, like really just going to be an LLC and insurance and that's where you're gonna go, okay and as you think about how to use these systems and how to grow within them, okay, I want you and your listeners to think about winter, okay, like we were talking about this before we started recording like I'm from Lake Tahoe, snow, cold snowboarding skiing, I lived in Michigan, freezing cold arctic, you know, minus 40 degree weather for a while, well, I'm in Portland damp cold, you got to really layer you and so the first entry layer is as your base layer, when you're getting dressed, it's going to sit on your skin. This is the equivalent of an LLC and insurance. This is you know, when you're just starting out investing in you have zero to three units, or you know, zero to three properties, you're exposed net worth generally is like 250,000, net or below and then as you grow, and you add more assets, and you hit around that four unit or four property mark, you could be starting to invest in a couple different states as well, you know, you have now around like 500, to 700,000 exposed nets, what you need is a mid-layer, which is usually a little bit thicker, that's going to be made out of like a merino wool sweater, or for you ladies a car and again, this is your management company, like a limited partnership and I can break down that later on if we have time and then when you hit around that 1 million net worth mark, you know, you're gonna want to water shell waterproof layer.

This keeps you nice and dry and warm when the weather's really bad. You know, this is your doomsday lawsuit protection layer is going to be an asset protection trust and specifically for our clients, we use a hybrid trust, which is combining an offshore trust and domesticating it through the IRS. So when a client comes to me, I receive it I realistically, you want four things you know, you want you're going to want an effective plan to have, you're going to want to control your plan. Three, you want a reasonable and sustainable cost, you know, depending on what layer you're at, is going to be individual for the for the client profile and then four you want a plan that's going to be easy to maintain compliance on what the IRS like I can create the strongest thing in the world for you. But if you're not going to be maintaining it and you don't want to do the IRS compliance with it, eventually you're just going to stop doing it and the whole system falls apart. So as you go through the valuation process and you're talking to different attorneys and you're vetting the process, just remember the acronym ECCC effectiveness, control cost and compliance and as long as you can start checking off all those boxes, you know you're gonna have a really good system. If you want to I can break down the first layer if you want to Trying to kinda go there like LLCs, or just really wherever you feel like directing this.

Michael:

Yeah, so I think our listeners probably have a good handle on LLCs. But I would love if you would walk us through what this hybrid trust is because it's not something that I'm familiar with, I've never heard of before.

Brian:

So yeah, and I think the reason why is like not many people focus on asset protection at a high level, you know, I think events like insurance, a lot of people wonder not only purely asset protection attorneys, right, they're generally business attorneys who do some asset protection or their real estate, you know, attorneys who do a little bit and they take continuing legal education course, learn about LLCs, and the kind of stops there and like insurance, they kind of tried to cast a large net nationwide, what was one thing you can cast nationwide and LLC and so I kind of think that's why like, the base layer, knowledge kind of stops there, because not many people just focus on, you know, very, very strong protection. This comes with the asset protection trust. So it's this final layer, the bad weather, you know, the outer shell waterproof layer, is this asset protection trust, it's going to be really the heart and soul of the system, especially when you have over 1 million exposed and that wealth and what I mean exposed is like your 401 K is exempt. So I don't include that in a net worth evaluation, because it's already a reset protecting some states, like if you're a Florida resident, we have a very strong homestead exemption of 100% of your of your primary residence. So I will take that out of the equation too, depending on the state you're in and the homestead. So what we're looking at is exposed unprotected, and that, you know, equity and wealth, all right. The great thing about trust is that they can be sculpted, to fit how you need them and they can morph as you need them without dealing with funding issues that you're going to fall into an LLC and other business entities that get their protection pierced, meaning now you're going to be held personally liable. So I just love trust and having a trust at the very top of the planning is very powerful and this is where picking the proper jurisdiction for a trust really comes into play.

The standard 101 trust that I'm sure like everybody's familiar with, you know, kind of started in the 60s is the family revocable living trust. So you know, like when trust, you know, trust don't die. So then when you do, you act, and you fund your trust, which a lot of people forget to do, like, oh, I created my estate plan, and then they never transfer title into it. Remember, fund that fund the trust, if it's just, you know, your revocable living trust, the benefit of it is when you pass you don't have to go through probate, you can just skip the court system and probate and it changed the landscape of estate planning. Then you have what are called land trusts for real estate, you know, you hold your land, and then you connect them to an LLC. But land trusts don't have any protection in and of themselves. They're only as strong as the LLC that they're connected to, you know, so they're just a privacy mechanism, not a protection mechanism. Okay from there, you have higher levels of trust. They're called asset protection trust and I really want to spend the time, you know, with this and break down the three different types, you know, and after this, I think you and probably 99% of your listeners are going to know more than 99% of all the attorneys out there about asset protection, trust, they came, yeah, they came about in the early 1980s. You know, and so an asset protection trust is what's called a self-settled spendthrift trust. All sell settled means is that you created it for yourself, you know, they're for you, by you, as your own beneficiary, and they have very important spendthrift provisions in them. So this lets you protect your assets while you're actually living, you know, from creditors trying to sue you from not having to relinquish control of your assets. The difference is that they allow you to protect your assets, not just for your grandkids, but for yourself, which you weren't allowed to do in the past and then like I said, you're probably familiar with another type of self-settled trust the revocable living trust. They're the same and that they're self-settled created for you by you.

The difference is that with an asset protection version of this trust, it includes these critical provisions called spendthrift provisions and what spendthrift provisions are is they are provisions that allow you to protect your assets from the creditors, they're the actual teeth behind it and for those to work, the trust them has to be not revocable, but it will revocable. So it's a very different type of trust, you know, just like chocolate or vanilla, both ice cream, just different types of ice cream.

Michael:

Yeah…

Brian:

You know, this is where the fun really starts to actually happen. There's two major school of thoughts here you can go international meaning offshore, another country jurisdiction, you know, you hear about Cook Islands, Cayman Islands, Belize, in the Bahamas, or domestically here in the US, you know, Nevada, Delaware, Wyoming, Texas, um, so you can set them up here in the United States and you know, if you don't mind, I think a great way to talk about it, just kind of talking about it through historical context, because I think if you understand the foundations of both offshore and domestic then you understand the principles of how we combine them together and why you want to

Michael:

Yeah, let's do it.

Brian:

Alright, cool. So again, you really have these three options, right, you can establish them offshore, you're going establish them domestically, and then we can hybrid them out like a hybrid car, take the best of both worlds put them together. So from the historical concept, the offshore trust actually came first, in 1984, when the famous Cook Islands, they created the first asset protection trust. I like and choose the Cook Islands if and when it's applicable, just because it literally offers the best home court advantage and why it's the best is because asset protection is just what these trusts in the Cook Islands were specifically drafted for and the power here is they have this wonderful word called statutory non recognition of any other jurisdictional court orders in the world, including the United States and so what this means is that if you have a judgment against you, in the United States, and you took it down to the Cook Islands, your US judgment is literally worthless, it literally has no value whatsoever. statutorily the Cook Islands they prohibited from recognizing it even from their own constitution and so if somebody wants to sue your trust, and it has a Cook Islands, you know, clause in it. So as a Cook Islands trust, they will have to start their case all over from scratch, the person who's suing you, they're going to have to prove their case beyond the reasonable doubt. This is the murder standard, the highest legal standard in the world that 99% sure standard. Not that you know, 51%, preponderance of the evidence, I'm not sure we don't know what happened. But we don't like the way they look right now. So let's just let's just give it to them.

You know, you can't get a contingency fee attorney to represent you, because they're just not allowed down there. It's an ethical in the Cook Islands, just like it used to be unethical here in the United States. But then that got changed in the 60s, the claim meaning the lawsuit, you know, it's not amendable. So what this means is that it can't be changed or amended after the discovery process starts like we can do here in the United States. Like we can literally just say, okay, I'm suing you for this, dig around start discovery, then completely change what We're suing you for, because we started using as a fishing expedition. The person suing you, yeah, no, I mean, this is just like standard trial tactics is like, okay, hey, let me just flood you with discovery and like, start poking around and say, oh, hey, we didn't even know this was right here. Now I'm gonna add this to the complaint and sue you now, for this looks like a better cause of action anyways, I can't do that down there. But we can do it here all the time in the US.

Michael:

So it sounds like I need to go move to the Cook Islands.

Brian:

Now. Well, here and maybe not right, because you know, there's, there's cons to things, we'll get to the cons in a minute. So the person suing you, they're gonna have to front the entire court costs by the judge from New Zealand and if you lose your pay, you know, and I honestly think this is one of the worst things that we don't have here in the United States, though, like the loser doesn't need to pay the legal fees and the cost of the winner. So if you get sued for something completely bogus, I mean, a frivolous lawsuit, and you spend $200,000, defending yourself on legal fees, then the judge finally is like, this is ridiculous. I'm throwing this case out, you're still out 200,000 bucks, you know, the person who sued you, they're not going to be getting the bill for that because our legal system in the United States, they just that will discourage lawsuits and our legal system is run by trial lawyers who don't want to discourage lawsuits and there's only a one year statute of limitations. So if you go back to those four things I mentioned, right, remember, like effectiveness, cost, control, compliance, I mean, effectiveness, five out of five stars, nothing really nothing beats statutory nonrecognition. So what about the other ones, right, you know, control costs and compliance. This is kind of his kryptonite, you know, these are the drawbacks. If you're going to be purely foreign, like a purely foreign trust, you have a lot more IRS reporting, compliance and disclosure. So you have these things called IRS forms 3520 3520 A's. What this is, is a full balance sheet disclosure of everything that trust owns, and sometimes even the entire trust agreement to be disclosed and submitted to the IRS and it is expensive for this IRS forms to be done every year. Also, you're going to have factor compliance, because you're going to have a foreign bank account at that time.

And of course, we're these trusts to work, you're going to be out of control of the trust. That's why they work so good. That's why they're the creme de la crème and clients are just not comfortable with this. So while we literally have the most effective trust in the world, by far, it's not something that I generally start with, I probably only say like 1% of my clients, I will go to a purely foreign trust with which then brings us right to the second option. Okay, we're not going to be going forward and what about these domestic trust? Yeah, they came about 10 years later down the road of all places, Alaska started it out and then not to be outdone, obviously, you're gonna be like, Well, hey, we're Wyoming and Nevada and Delaware like this is what we're known for. So we're jumping on the gravy train, right and then now about 19 other states now have created some form of asset protection, self-settled trust statutes. So we're seeing as a state starting to jump on board seeing yeah, our legal system is a threat and things have to get done to protect your assets and so as to protection the United States is very is very important to understand this ballot on It's just the concepts like how you go about doing it is very important. The issue with a purely foreign under the purely domestic asset protection trust is that, you know, we live in the United States of America, we have a Constitution, Article four section one for Faith and Credit Clause. What this provides and means is that every state has to grant the full faith and credit to the judicial proceedings of every other state. What this is means what it's telling you is that, for example, Nevada can pass and has passed an asset protection statute, okay, but it cannot ignore a California or Washington or like another states court orders. So where the Cook Islands can literally just throw that California judgment in the trash. Nevada can't do that. Nevada has to respect it constitutionally and even litigate it and then you have courts that are just simply ignoring the choice of law clause. So I mean, like literally, like bait levers more dissent in re Hubber, cucumber Steelman, Dover still all great facts, all great cases, they should have one of those cases, and judges literally just use their superpower public policy, we're ignoring the you know, choice of law clause, trust is breach means loss of assets, that's just completely unacceptable and so because of the case law that we're seeing, I'm not a big fan of a purely domestic asset protection, trust or anything purely domestic without something offshore built into it. This is why I prefer the hybrid version called like, we just call it a bridge trust, but it's really just like a hybrid, hybrid trust, think of them like a hybrid cars, okay? What we're doing just combining the best of both, and then making a better product and so these trusts have been around for almost three decades. So they're not, you know, the new lady to the dance, they've been around for about 30 years now and at the end of the day, what you're doing is taking a fully registered foreign Cook Island, offshore asset protection, trust, what all that for two years of solid case law, again, so it's fully registered offshore from the day we created with the offshore trustee, they're there in standby just in case you need them and then we build a bridge back to the IRS for IRS classification. So the IRS is literally taking this foreign trust and then they're classifying it as a domestic US trust, by complying with USC Section 7701. It's called the court test control test and so because of that bridge, as long as we have our compliance in place, we stay classified domestically and what this does is that the trust is now going to be cheaper to create.

So generally, a purely foreign trust is going to cost like 4550, even $60,000 plus $12,000, a year to maintain very expensive, a hybrid trust is going to be cheaper, you're generally gonna be talking about, you know, 23 to 30,000, to set up a hybrid trust, plus no IRS tax filings whatsoever, while you're domestic because it's classified as a domestic US grantor trust, so you have no more IRS tax filings, unless God forbid, we have to break that bridge and now you also get the power of the offshore trust. If and when we need it. It's in our toolbox now, just like a contractor who says like, okay, hey, I don't need to use all my tools today. But I'm going to need them possibly at some point. So now I can use them as I need them. Versus coming to me later on after the fact oh, my God, Brian, I mow somebody over with my car, like, can you help me? You know, like, I want that foreign trust? Well, no, sorry, it's after the fact I can't do it now. But if we have the hybrid, I could have engaged it. So that would be like during the State of duress, we would break the bridge, stop being an IRS compliance, you are what you are a foreign trust. Until that point, you want to be classified domestically. So that hybrid trust is very, very effective, you may control of your assets, you may take control the trust, right up until that doomsday scenario where you don't want to be in control of it anymore. You know, maintenance and compliance with the IRS. Very simple. So at that point, you've now checked off all the boxes, effectiveness, cost control and compliance check, check, check, check, check and so this is where you know, for our clients, we generally are starting with these hybrid trust.

Michael:

Wow, this is wild, is super cool and so are you thinking that most folks that are in that kind of million dollars of expose net worth, this is where that starts to make sense.

Brian:

That's exactly like, so our main client profile that comes in you would think they'd be like, you know, 10s of millions of dollars for us, like realistically, I would say 75% of our clients generally around that 1.2 million, exposing that. Some high risk, probably like a doctor or surgeon lawyer, or just straight real estate investors. I have some of my favorite clients, nurses, firefighters, cops who self-funded their retirement through cash flowing properties, and now they're about to retire and they realize like, I can't lose all of this now because this is literally my nest egg and my legacy. Yeah, they need to lock it down and so you generally see the average client profiles like 1.2 to 2 million of exposed net with some risk, and it makes sense at that point. Yeah, get the LLC get the limited partnership get the trust for like 30,000 dollars locked down a million plus, and then sleep well at night. That's when the investment kind of makes sense for this type of protection.

Michael:

Yeah, that makes total sense and what would you say because I would imagine, after listening to this folks might go to other attorneys they work with mentioned this type of hybrid trust and they might be told now you don't need an LLC is good enough. I mean, what's the I know, we've talked about kind of a counter argument, but how does that conversation get ahead?

Brian:

Most of the time, I was, say, like the one the estate planning attorney, they will know about this, because their knowledge base, you know, is just not going to be around, let alone foreign trust. I mean, there's not that many people who even know like that much detail about how a foreign trust works, let alone using the incorrect domestic asset protection trust, you know, how many times I have California residents, using the Nevada asset protection trust, and the person who set it up for them, like the lawyer has no idea like, okay, what about this case? We're still in 2012, California case that said, hey, you're a California resident, we don't recognize asset protection trust, because we don't have the statutes here. So your Nevada asset protection, trust, and sorry, it's worthless, it's not gonna it's not gonna work, you know, so unless you go to an actual specialist and say, hey, here's the case law, here's what's going to happen down the run. Most people don't have that level of education, because they're not in that world. They don't exist in in it. So I feel bad for the clients because where's the knowledge come from? You think you're going to an attorney who was specialized in this, but you're not taught this in law school, you're not taught this for the bar exam, so how you develop this level of knowledge is really just did you get into the right group of people and were you passionate about it enough to like transition your practice into it…

That's why I do these talks is just to educate people and you know, just the base thing, like, why not just an LLC, they're disregarded entities for tax purposes. So they're disregarded for taxes. That means it's disregarded to you for lawsuits and liability, meaning you're pierced. If you're using them for real estate. They're not businesses, they're holding companies, which means the number one argument that will win and pierce that every time is well, Your Honor, this is an actual business. It's an extension of Michael is just a holding company. Boom, you're pierced funding issues, bad accounting systems, like there's four ways to pierce that veil right there and I don't even have to think part about it. Charging, charging order protection mean, like what state do I go set these things up in? You know, how many times I hear people like, oh, just go create a Wyoming LLC? Are you a resident of Wyoming? Is the asset in Wyoming and the answer is no to either one of those, you just tried to buy another state's jurisdiction, that you have no connection to try bringing another state's laws to like California and other state that you're not connected to, and there's no reason to, you're gonna get laughed out of court. Like, it's just you can't go by other states more beneficial laws and bring them, you know, to another state that, you know, that has no jurisdictional connection to it and anonymity is the other like, really, like, flavor of the last like, two years is like, oh, create this anonymous, Delaware or Wyoming? Trust and Ghost the lawsuits, right? Yeah, well, that's not how these that's not how it works but that's how it's being sold by, you know, law firm salesmen and promoters. Yeah, create this and get a really crazy operating agreement and then next thing, you know, like, you're never gonna have to show up in court. I'm sorry, you have a personal agent of service for these out of state law firms their sole job, like, let's say, Mike here is my, you know, personal agent of service, he's gonna get my service and he's gonna say, hey, Brian, here's your service. That's why dude, you just…

Michael:

Got to show up in court…

Brian:

Court now and amenities done at that point. So the only way that an amenity works is you show up the court, a judge is gonna say, Hey, you're getting sued for a million bucks. Here's your you know, asset disclosure list. Tell me everything that you own, because we didn't know what can be collected on or not, at that point, and amenity or a quote, unquote, air quotes, Secrecy is now up to you. So you're gonna decide, am I gonna lie under oath and hope to god, I don't get you know, my operating agreement will hold up and commit perjury in court, or do I just disclose it. So like, you're the weak link at that point and then if you lie and commit perjury, under oath, you're going to jail on top of losing your assets. So it makes more sense just to say, hey, create a proper asset protection plan, LLC in the state that is layered up into a management company, once you hit the net worth put in the trust, and then sleep well at night because at the end of the day, I don't care if you lose your lawsuit. I care about it for your collectible or not, you know, like you can lose the 10 $50 million case. I just if the asset protection trusts setup strong and in the right jurisdictions with a proper exit strategies, does it mean that you can be collected on and then it lets me settle a case for pennies on the dollar…

Michael:

Dang this is nuts, Brian… This is like or this is earth shattering stuff. We got to have you back on to talk more about this. But I want to be very respectful of your time get you out here for people that have a similar response and you're like, holy crap, I gotta call this guy Brian, immediately. Learn more about this, reach out for your services. What's the best way for folks to get in touch get a hold of you?

Brian:

Yeah, one great resources, jump on my website, www.btbegal.com , I use it more as an educational resource with a lot of case law client studies. I just want you to be educated at the end of the day like, listen this here's the case law. Like, that's what lawyers should know about, especially trial lawyers. That's why I'm a good trial lawyer. I tell stories through case law and then another great way is through my email, you know, Brian: B R A I N @btblegal.com. I do you know, free 30 minute consultation, whether we're a great fit or not, like we'll figure that out over the phone. I would just rather how people have an educated decision, and then they can like go shop around.

Michael:

Love it, love it. Well, hey, man, thanks again for coming on. Really appreciate the time and we'll definitely be in touch.

Brian:

Yeah, for sure. Thanks brother…

Michael:

All right, everyone. That was our episode, a big thank you to Brian for coming on talking about a lot of things that we've never heard before on the show and definitely bring up some excellent counterpoints to be thinking about as always, if you enjoyed the episode, feel free to leave us a rating or review wherever it is to get your episodes and we look forward to seeing the next one. Happy investing…

How different corporate structures work and how to choose the right one Oct 05, 2022

As a lawyer in Nashville, Tennessee, Brian Boyd helps clients with real estate, construction, and business matters. It is with that knowledge that he and his wife, Dawn, have grown their portfolio to a six-figure income. Brian earned his BA from the University of Tennessee—Chattanooga, a JD from Samford University’s Cumberland School of Law, and an LLM in Taxation from Georgetown University Law Center. When not practicing law or working with Dawn on their real estate ventures, Brian can be found on the Brazilian Jiu Jitsu mats at his local gym. His newest book is Replace Your Income: A Lawyer’s Guide to Finding, Funding, and Managing Real Estate Investments

Today Brian talks about corporate structures, how they differ, and what you could be doing to protect your assets.

Episode Links:

www.briantboyd.com.

www.boydwills.com

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

What's going on everyone? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today with me, I have Brian Boyd, who is a legal tax professional as well as an author and active investor. He's gonna be talking to us today about what we need to do to protect our rear ends. So let's get into it.

Brian, what's going on, man, thanks so much for taking the time to hang out with me today. I appreciate you.

Brian:

Hey, Michael, thanks for having me today. I'm glad to be here.

Michael:

I am super excited to chat with you. Because you are a legal attorney and investor something we don't often see too much of.

Brian:

Yeah, I am. I started out in Washington, DC as a tax attorney at a company called Ernst and Young. And over the years, I got into real estate and investing because I was representing a lot of contractors and developers and started looking at the way they were doing their businesses. And from there, I started tweaking their models trying to figure out well, how can I make this a little bit more tax efficient, create a little bit more loss with a lot more cash flow. And so that's when my wife and I in 2017, decided to get into real estate investing on our own. And now we're up to 25 doors, and we're cash flowing just fine. You know, in, in fact, maybe in the next year or two, she could step away from her full time job. And we'll just manage real estate.

Michael:

Man, I love it. And so is your background in tax or on the legal side of things, or both.

Brian:

So I have a JD and I have an LLM, which is a master's degree in, in law. But It specializes in tax. So yes, I do corporate formations. I do business transactions, helping people the real estate, anything and everything to do with businesses, individuals and their finances. In real estate investing. That's what I do. So there was a time I used to go to court, but I don't go to court anymore. My partner goes to court, and I just do business transactions and real estate investing.

Michael:

Man, I love it. And before we get everyone's hopes up, you are located out in Tennessee. But is that the only state in which you practice in? Or can you help folks all over the place?

Brian:

So I am licensed in Tennessee and Vermont of all places. My partner is licensed in Tennessee in Maryland. But if it has to do with federal law, I can work all over the country. However, if people are asking specifically about California law, I'm not your guy, call a local attorney speak to a local attorney. But from a structural standpoint, I can give you the basics and kind of point you in the right direction. But unless you're in one of those jurisdictions, and you want me to practice in those jurisdictions, those are the jurisdictions I'm limited to.

Michael:

Okay. Well, let's talk about that for a minute. Because I think we were chatting before the show, we hit record, and there are a ton of Californians physically moving out to Tennessee. But my guess is they're probably a lot of Californians investing out in Tennessee. And so for those folks that maybe live outside Tennessee, but are investing in Tennessee, in terms of structuring their team around them, should they be thinking about having a local attorney local to them, as well as someone such as yourself or a an attorney located where the property is? How should you be thinking about that?

Brian:

No, that's great question. I actually had an attorney contact me a few weeks ago and he is a he's in Chico, California. He called me and said, Hey, I properties in Tennessee. Can you help me on what? Yeah, I'll absolutely be happy to help you. And so what we did is we structured a Tennessee holding company with a wholly owned Tennessee subsidiary. And even though he's out there, he owns the LLC here. And as he invests around the country, like Texas, or Florida, or you know, any of the other states, you know, we'll set up other holding companies to represent those entities. But he can stay in California and own these companies, as long as they're structured properly, to pass through to him over in California.

Michael:

Okay, awesome. Well, Brian, give us like, the quick and dirty if there is such a thing of what investors need to know, because I think a lot of our investors are starting to scale their portfolios that got a couple of deals under their belt, and they're really looking for some asset protection. What are some things they need to be aware of and where have you seen people go wrong?

Brian:

So I have seen people go wrong with a few misnomers about what they believe series LLCs are and what land trusts are. So a series LLC, I know that everybody hears therefore multiple properties. and they are. But they also don't understand that when you have a series LLC, you have to have a separate bank account, a separate tax ID separate books, all of that creates an administrative burden on you to keep all these bank accounts separate all these books separate all these tax IDs separate. And typically I see those used more efficiently if you're a developer, that way you can develop a series, sell it, and not worry about it. Again, if you're holding your assets in series LLC, and you have series one through 10, for example, that's 10 tax IDs, that's 10 sets of books, that's 10 book keeper entries every month for those separate things.

Whereas if you just have an LLC, and you treat it properly, so your corporate veil cannot be pierced. And a corporate veil is the corporate formalities that you have to adhere to. So your corporate structure is honored by the courts. And typically, here are the things that people get popped for, they'll pay for their groceries out of their LLC, they'll pay their own mortgage out of their LLC, or they'll just treat their LLC like a checkbook. And that's not what it's for. It is a standalone entity, and it has to be treated and respected that way.

So if you don't do those things, you're fine. Your one LLC is going to handle it just fine. For example, my wife and I have, we have a parent company, and that parent company has two LLC is underneath it. And one LLC is for our portfolio over here. And the other LLC is for that portfolio over here. And it all flows up into the holding company, which is a perfectly fine way to structure your holdings. Yes, it is more filing fees every year, it's three filing fees. But if you're trying to get away from filing fees by creating a series, LLC, you're losing the war to win the battle on a filing fee. Because you're gonna pay all these other expenses for tax IDs and book entries and bank statements. And you're just creating a mess. I would not use series LLCs.

Now as it relates to land trust, we mentioned that earlier, I've heard a lot of people say, Well, I want to use a land trust. Why do you want to use a land trust? I understand that land trust, get it out of your name. And I'm well aware of that. But it doesn't really create any protections like an LLC would. A lot of people say, Well, I want the anonymity of an LLC, well, you can have the anonymity, you know, of an LLC without using Land Trust. Many states, Wyoming, Tennessee, Texas, you can file your LLC documents, and your name won't appear anywhere on there as long as you use a registered agent. So you can receive the benefits of the anonymity that comes along with the land trust by simply using the LLC. And you'll get more protections with the LLC.

So I would encourage your listeners to go talk to a lawyer about setting up an LLC to hold their assets, I tend to eschew Land Trust, they don't really provide the protection that people think they do. Unless you're using an irrevocable trust, which is a trust that gets it out of your estate. Not only does it get it out of your estate, it gets it out of your control, and you can't do anything with it, you have to go through a trustee and that trustee is supposed to use their best judgment on what to do for the trust. So think about that, as you move forward. And these these ideas that people read about online, I really like LLCs, my wife and I use them, I encourage my clients to use them. So that's just coming from my experience and what I do day to day in my practice.

Michael:

Yeah, from a lot of the folks I've spoken to it sounds like the LLC has come like the Colt 45. For real estate investors. It's reliable, it's standard issue, it can do a lot of the things you need, you need it to do. It's nothing fancy, it just can get the job done.

Brian:

No, absolutely. I agree with that statement completely. Okay, cool.

Michael:

And, Brian, I think you're a good person to ask because I think we have similar styles of investing and asset protection, which I'm glad to hear. It sounds like you've broken down your portfolios into two separate LLCs What comfort what level of comfort do you have with the size of your portfolio in each LLC, before you want to further break it up or bring additional LLC online?

Brian:

And you know, that's a good question. So the way we have treated our LLCs is we go by city, what's in each city. So for example, in Chattanooga, we have an LLC for Chattanooga, and Knoxville and Gatlinburg, we have an LLC for those properties. And in our short term rentals are Montana and the West Tennessee property. We have a separate LLC for that because they're out west So we've kind of broken it down over here, over here and over there. And then we have a parent LLC over top of it. So it's not really a matter of the number of doors or number of properties that have in an LLC. For me, it was geographic, and being able to keep everything separate. And especially for our bookkeeper to know that, hey, these are Chattanooga, they're in that LLC. When you run that k one, it needs to include all these properties. Same over here. So it wasn't a matter of my comfort level with the number of properties, it was just a matter of how can I segregate out all the separate assets that we have and make it user friendly? And also, we're not clumping all of our assets into one LLC. We're spreading them out. But we're doing it geographically.

Michael:

Right. Okay. And as you and your wife do start to scale, I mean, is there a number of value that you that you'd see hitting in a particular LLC and saying, oh, that's maybe a little heavy, and that LLC, even if I'm investing in the same geographic area, let me bring online, another LLC, just so I don't have so much value sitting in a singular bucket? Or is not? Is that not really a concern of yours?

Brian:

No, that's not really a concern. And here's why it's not a concern. It's because it doesn't really matter how much my entire portfolio is valued at, I'm always going to be deploying that equity somewhere else to get into another deal. And that equity may get deployed into another LLC. So it's not really a matter of oh, we're too heavy in this particular market. If I had 1000 doors in Chattanooga, I would still leave everything in that one LLC.

Michael:

Okay, right on. Let's talk about insurance for a minute. Yeah, how much is enough?

Brian:

I would tell people, you can't have enough. You can't. So we, we have homeowners insurance on every single property. And then our LLC is have business insurance as well. So we also have business insurance for the LLC. And each property is fully insured. And then we require renters to have homeowners insurance. And on top of that, we require renters to use a product called say Rhino, which is security deposit insurance. So they're not paying us a security deposit that we're holding an escrow for them, they're paying monthly, you know, let's say, you know, a month's rent is $1,000, we typically require two and a half months of rent for a security deposit, will Rhyno only requires them to pay like $8 per 1000. So they would much rather pay 20 to 24 bucks, as opposed to tune $2,500 in security deposit. And over the over the year, it comes out a lot cheaper for them. And we're safe and secure, knowing that as long as they're paying that Rhino insurance. If we have to make a claim, it's there, we've got it, they'll take care of it. So we're we're layering insurance, on insurance, on insurance with every everything we can do. So not only from a corporate standpoint of the company, and the asset, but also the tenants and the security deposit. So that's four layers of insurance.

Michael:

Run that by me again, what rino does so so they are basically ensuring the security deposit, then you can make a claim for damage against that security deposit up to that limit.

Brian:

Yes, yes, absolutely. That's exactly what they're doing.

Michael:

And what about the tenant that goes haywire, decides I'm gonna stop paying rent? I'm not paying this right. No nonsense. So they stopped paying it. They've paid six months to date. How does that work?

Brian:

Yeah, we make a claim. Like if, and so we're, we're on top of our rents and our tenants. And it's in our lease that you have to pay all this stuff. And they do. And if they don't we just make a claim immediately.

Michael:

And how is your claim experience spin with those folks?

Brian:

We haven't had to make a claim yet. But the person Yeah, the person I learned this from, he turned us on to it. And we're like, what, have you ever made a claim? He's like, Yeah, they paid us in four days. I'm like, done. You know,

Michael:

Yeah, I'm sold. I gotta go check this company. What's it called?

Brian:

Say Rhino. Okay. And, you know, we looked into it. I did my research on it. I think they just did another round of fundraising. And we were sold. We've talked to him, they're easy to work with. They won't reject any of your tenants regardless of credit. As long as you approve them, they're approved. So I take it look, yeah, no longer holding escrow and no longer dealing with security deposits. Let them deal with it. And our experience so far has been great. Let's knock on wood. I don't have to use it. But if I do They'll also pay attorneys fees. So, if you have to let somebody Yeah, go make a claim.

Michael:

Man, this podcast just took a wild left turn, but I love it. I've totally here for it.

Brian:

Yeah, it's, it's, it's great. And that all goes into ensuring our company, ensuring our tenants making sure everything's taken care of, but also protecting us, because we have put a lot of money a lot of time into these assets. And, you know, we want to protect those assets.

Michael:

Yeah, no, it makes total sense. Speaking of Brian, let's talk about this topic for a minute, because you're another good person to ask because you have both short term and long term rentals. Do you see a difference in risk exposure between the two and grouping both asset classes in us in the same LLC?

Brian:

No, I don't. The only risk that you run with short term rentals is the seasonal market. In that, you know, we were just talking about Gatlinburg, you know, and people don't realize that the high season is actually summer in Gatlinburg, and it's not winter, which is kind of weird. But yeah, people don't want to go to cabins in the winter. So you've got to be able to weather those low months. But no, I would keep both assets in the same LLC if it's in the same geographic area for me.

Now, that's not to say it's not right for you. And you know, we could also talk about what's best for you. But no, it doesn't matter to me. Because for us, as everything flows up into our tax structure, we've created this, this LLC step tax structure, that everything flows to the top as a pass through. So everything's flown to the top and the parent company pays all the mortgages on everything. So if you have long term rentals that are just, you know, clicking along and you have a week, month, say in Gatlinburg, like we both know that January, February is a week, month in Gatlinburg. You know, there's plenty of money just to go ahead and pay that note. So that's, that's how we do it. And that's what I encourage clients to do. Because you're, you're not really breaching the corporate veil of everything flows up in the parent company's paying for everything. And that's how we structured it. So we're still, you know, adhering to the corporate formalities, respecting those corporate formalities, and everything is paid from the parent company.

Michael:

Okay, cool. And then from like a legal risk mitigation perspective, short term rental doesn't sound like it poses any additional risk as compared to a long term rental.

Brian:

No, I wouldn't think so. Because the the management companies and I don't know, if you use the management company, but they have them sign all these documents, and they have their own attorneys, or all these waivers in there, and they have to put a security deposit down, you know, to rent the property and, you know, a cleaning deposit. And there's so many different deposits that we tend to get good renters at all the properties.

Michael:

Okay. Okay, fantastic. And as someone is thinking about scaling their portfolio into multiple properties, maybe some different asset classes, from an entity structure, is there anything that they should be aware of, or they should be doing differently, if they've already, you know, started using LLC us in the past?

Brian:

I would stay with LLCs. If you if you turn to like a C Corp, you get the double layer double layer of tax. If you turn to an S corp, I think you're gonna have to deal with more corporate formalities than you are with an LLC, an LLC is very flexible with what you can do with it. I wouldn't go with a partnership, a general partnership doesn't tend to have the protections nor does a limited liability partnership. You really want the corporate structure of the LLC to stay in place.

So there is no other entity out there that I would encourage people to use other than the LLC. You know, reasonable minds can differ on that. I wrote a chapter in the book on it. But at this point, I am not advising clients to use any other structure other than the LLC, it's very flexible, it's easy to buy and sell assets through and quite frankly, you know, it's it's easily respected in the state of Tennessee and in other states as well, I'm sure you know, LLCs are just common now, you know, as common now as s corpse were in the 60s 70s 80s and up to the 90s.

I would also encourage people to look at Wyoming, Wyoming is on the cutting edge of LLC formation. You know, they recently came out with a new type of LLC that has to do with crypto currencies and blockchain protections. It's it's crazy what they're doing out there. Tennessee follows shortly thereafter and we're all still trying get our heads around it because one, I'm not a crypto guy. I don't know a whole lot about it. But you're starting to deal with like blockchain technology for the way people can vote. It's, it's really fascinating. So I do like Wyoming, I have a Wyoming LLC for one of my assets. And, you know, it's a great state as well.

Michael:

I dig it. You mentioned your book, let's talk about that for a minute. What's it called? Where can people find it? And what should they expect to find if they get a copy?

Brian:

Sure. It's, it's called replace your income, a lawyer's guide to finding funding and managing real estate investments. And they can find it on Amazon. Or they can go to www.BrianTBoyd.com. And they can order it through there. So the reason I wrote this book is because I'm having conversations very similar to what we're talking about now, about, how do I form things? What do I form? Why do I form it? Should I put all my assets in one LLC? And this book came about as a compendium of all those conversations I've had over the years with, with clients in real estate investing, how do they get started? How do they find properties? How do they get a loan? You know, what kind of loans are available? What platforms do I use? Do I do I use, Say Rhino? Or do I use Bildium? Or, you know, what's available? How can I do this using technology to leverage efficiency here? And so it's 13 chapters on all of that, including tax benefits, finance tips, how to structure an LLC, what you need to think about when you're putting together an operating agreement? You know, what's the difference between an operating agreement and bylaws? What's the difference between a charter and an articles of organization. I try to break it down. As if I'm talking to my 11 year old son, anybody can understand it. And that's what I want people to know about this book. It's, anybody can invest in real estate. You don't have to be a professional or have, you know, a six figure income, you can be a college student and start house hacking. You can easily you know, get a loan go buy a small two bedroom, one bath apartment somewhere, and get a roommate, move a roommate and then charge them rent and now your house hacking and now your real estate. And so it's possible for everybody.

Michael:

Yeah, I love it. I love it. Brian, curveball question here. What's the best compliment you've ever received?

Brian:

That I married up?

Michael:

Is that Is that a compliment to your wife? Is that a sort of backhanded compliment to you?

Brian:

It's probably a backhanded compliment to me, but I I, I could not do what I do without my wife, my wife is, you know, she's an inspiration. She basically runs the entire company. She only lets me talk to people if she can't figure it out. And she is the backbone behind this company. And the funny thing is, I had to drag her into real estate investing, I kept telling her about all the tax benefits of this honey, we can, we can make passive income. And, you know, let me tell you about appreciation and depreciation and how we can, you know, offset some of our income taxes. And she didn't believe me. Now, mind you, I have a master's degree and like, I went to school to do this. And I actually did this for a living for years. And somebody handed her Rich Dad, Poor Dad, and she read it and we're lying in bed when I was like, Hey, did you know that? If we did this, we could pay for a car?

I was like, yeah, she's like, did you know we could write our phone bill up? I'm like, Yeah, I did. She's like, did you know like, we could buy a computer and write it off in one year? I'm like, yes. I've been telling you this. And she doesn't believe it coming from me, the guy who has two graduate degrees and does it for a living, but she believes it from the guy that wrote the book, and I'm like, Okay, well, maybe I need to write a book and she'll she'll listen to, but she still doesn't listen to me. So it is what it is. But she she runs this company. And you know, I couldn't do without her. So when somebody says, I'm married up, I'm like, Yeah, I did. And I'm very lucky I did.

Michael:

Amazing. So amazing. Well, Brian, that brings up maybe my last question for you. Before I let you out of here. I think there are a lot of folks probably listening to this that have a partner significant other that aren't interested or aren't involved with a real estate investing, but they would really like them to be or they need them to be. And so you went through this struggle with your wife, how how should people be thinking about bringing their other partner into the fold?

Brian:

What I would tell them is you don't have to buy the book. You can look online and see the tax benefits of it. Is that You're going to create positive cash flow. And you're going to create tax deductions that's going to offset not only your cash flow, but your current income tax liability. So if you would like to pay less in income taxes every year, look at real estate investing. Look at it. You know, if you decide not to do and it's not for you, okay, don't do it. There are other things you can invest in. But our Congress has codified our public policy of investing in real estate in our tax code. It is there for you to take advantage of, look, when it comes tax time every year, I always kind of get a little tense, but then I'm like, Okay, well, let's go go buy another property. And then we can cost segregate that property, accelerate the depreciation, and create a larger tax deduction for ourselves, and it's not so painful come tax time.

I'm sure you know that as well that, hey, we can cashflow this property. And, you know, the government actually is encouraging us to go buy real estate, the government is encouraging you to succeed. And that's all I want for anybody is to succeed. You know, this book, I think it's 19.99. It's a lot cheaper than sitting down with me for an hour. And this is everything I've already talked about with people, and I do on a regular basis. So if your spouse is struggling to get on board with your idea of real estate investing, you know, maybe buy the book for them and show them that, hey, this is possible.

You're talking to a guy who worked two jobs to put himself through law school, and then two jobs while I was in graduate school on top of that, and I'm still paying off student loans. But you know what, I paid off a student loan last week. And I did it because we got a refund. That came back to me as a result of the deductions I have through real estate. And the first thing I did with that check was, hey, it's enough. I'm going to pay off that loan. And I did. So it's, it's a real example of how real estate can affect your bottom line.

Michael:

I love it. That is awesome. And congrats on getting that loan paid off. That's really exciting.

Brian:

Oh, thanks so much.

Michael:

You got it. Brian, we're gonna get you out of here. If people want to continue the conversation, learn more about you. What's the best way for them to do so?

Brian:

They can get in touch with me at the law firm. The website is www.BoydWills.com. And, you know, you can reach out to me on the Brian T Boyd, Facebook page and on Instagram.

Michael:

Okay, amazing. We'll be sure to do that. Brian. Thanks again for sharing some amazing wisdom man. Appreciate you coming on. We'll talk soon.

Brian:

Thanks, Michaels. Good to be here.

Michael:

You could take care.

All right, everyone. That was our episode. A big thank you to Brian for coming on and sharing some wisdom about LLCs asset protection, tax benefits and some loopholes that we can take advantage of as real estate investors. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing on the next one. Happy investing

What is happening in the mulit-family market today with Neal Bawa Oct 01, 2022

Neal Bawa is a technologist who is universally known in real estate circles as the Mad Scientist of Multifamily. Besides being one of the most in-demand speakers in commercial real estate, Neal is a data guru, a process freak, and an outsourcing expert. Neal treats his $947 million-dollar portfolio as an ongoing experiment in efficiency and optimization. The Mad Scientist lives by two mantras. His first mantra is that "We can only manage what we can measure". His second mantra is that "Data beats gut feel by a million miles". These mantras and a dozen other disruptive beliefs drive profit for his 700+ investors.

In today's episode, Neal gives his take on what is happening in the multi-family market today, the dynamics of the current economy, and what he sees coming over the next year.

Episode Links:

https://multifamilyu.com/

https://www.linkedin.com/in/neal-bawa/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today joining me again is Neal Bawa, who is the founder of MultifamilyU and a big time multifamily syndicator and Neal is gonna be putting his finger on the pulse of the multifamily market and sharing with us some pretty hard hitting facts. So let's strap in, and let's get into it.

Neal, welcome back to the show. Thank you so much for taking the time to hang out with me. I really appreciate you coming on.

Neal:

It's great to be back, Michael. Great to be back.

Michael:

Thank you, Neal. So last time, on our prior episode, we talked a lot about the single family space and what we saw going on with the market today. I'd love if we could focus our conversation on multifamily, since I know that you do quite a bit in that space as well.

Neal:

That's right. I live and breathe multifamily. I started with single family like a lot of you know, the folks that are using your platform did, but multifamily is more scalable. So we currently have about a billion dollars of multifamily 31 projects about 4800 units that are either in construction or in lease up or you know, are stabilize, right. So, you know, a significant portion of them are already stabilized that we're holding, but we're also building a bunch of them, and working on the construction of some of them. So it's you know, what's happening today is so dramatic and so unusual. We you know, one could compare, maybe it's not as dramatic as the first three months of COVID. But otherwise, it's pretty crazy. It's pretty dramatic, dramatic. So it's, it's a great time to talk about multifamily.

Michael:

Yeah. So a billion dollars and just turning back the clock a minute. I'm curious, how long did it take you to get to that point from when you started?

Neal:

So I you know, ignoring a past company where I was a partner, this particular company has basically gotten to that billion dollars since February 2018. So, so about four and a half years, roughly.

Michael:

Holy smoke, I was just interviewing a gentleman who's got a business he wants to scale to a billion dollars over a nine year period. So you mourn cut that in half, that's incredible growth.

Neal:

Well, keep in mind, I don't want to demean what we've done, because we're very proud of it. But with a when you're purchasing multifamily, the numbers get big, pretty, you know, quickly, right? So 100 unit multifamily today is $20 million. So you do get up there very fast. So I still consider myself to be a mid-level syndicator. There's dozens and dozens and dozens of companies that have bigger portfolios than I do and also, for reference, a billion dollar portfolio usually only equates to about 10 employees in a syndication business. Now, in my case, I have 30 employees, because I've 20 of them in the Philippines and that's helping me scale and so I have 20 full time employees in the Philippines in addition to those 10 people. But I think it's useful to have that frame of reference, I think that you're setting targets in multifamily, a billion is actually not a bad target the set.

Michael:

Okay, I will definitely keep that in mind as I as I scale my portfolio. That's, that's really great to know. But Neal, let's transition and I would love to get your thoughts because you are a data scientist, you have so many great analytics to kind of backup your thoughts and opinions and viewpoints. Tell us what like what's going on in the multifamily space as we recording this today late, mid to late September.

Neal:

Prices are falling and they will continue to fall. It's a bad time to buy any kind of multifamily in any market in the US and I rarely, I've never actually said that before, maybe with the exception of you know, first month COVID. It's currently right now, no one should be buying anything in the United States. But here's the good news. You don't have to wait very long. The market is now adjusting very rapidly. So I think that I think February March of next year would be a terrific time to buy you know whether it's the one to four units that get listed on Roofstock. By the way, I currently have a triplex listed on roof stock, check it out, it's on Brandon Avenue in Chicago. Whether it's those units or it's the you know, the larger unit we were also selling, you know, a 200 unit property at this point in time not on Roofstock but we're not buying anything. I mean, we've basically told our acquisition people to be pencils down stop looking, stop talking to brokers stop traveling to properties, because we are halfway through a correction.

So and I'll explain why. Multifamily is a very different animal from single family. So let's say Michael is buying a single family property and it's next to another one that's identical to it. So there's two row houses and next to it. Well, if somebody last month paid a million dollars for the first one, Michael can get a loan that appraises for 1,000,000 value for his property, he can get that easily, regardless of what really happens in the market, he can get that, you know, and prices take so long to fall that even if the price actually falls, Michael can use a comp from half a mile away to still get that million dollars in value. So the banks on the single family side are really trusting you to do your, you know, to not to overpay, right. So if they're just looking at it, is there a comp that matches it and if it does, we'll just give this guy alone, right and if they feel like the times are hard, they might change their LTVs from 75 to 70 and but that's pretty much as far as the single family market goes. The multifamily market is radically different because a multi one multifamily property is a business. It's like you're buying a Tommy's carwash, or you're buying, you know you're buying a subway or a chain of subways, that's the best way to look at it. It's a business. So your underwriting really doesn't matter. It's the banks underwriting that matters, the bank that's giving you the funding and the moment that we start seeing interest rates go up in the market, the value of the property immediately decreases. Why? Because the bank's underwriting decreases the value of the property, because multifamily properties are based on just two things, something known as a cap rate, which is basically the market's estimate of what the property should be worth and then something else known as net operating income, which is basically rents minus expenses right? Now, the moment and you know, the moment your interest rates increase, and most multifamily today in the US is on floating rate debt. So what that means is, as interest rates go up, your mortgage is going up something a number called DSCR. I won't go into that into detail on that. But there's a number called DSCR, that basically starts to fall. So the higher your mortgage goes, the lower that number is. This means that, you know, let's say I'm a buyer and I'm selling two multi families and they're right next to each other, right. So they're same number of units, same occupancy, same design, so that their net operating income for both of these properties is exactly the same, like down to the last cent right. Now one, let's say one soft sell sold for $30 million. Okay, and I waited a month like 30 days, and the Fed raise interest rates by 100 bits right, but basically 1%. The second property now is worth less. It's worth less, even though there's another property that sold 30 days ago, that's identical with the same number of tenants with the same rents. It's now worth less so multifamily is on a sliding scale and that sliding scale is affected by interest rate hikes much sooner than single family.

Obviously, single family is also affected. We've seen there's 90 bond markets in the US where single family prices are coming down, but they're coming down really slowly, right. Like the I think the average decline in the last six weeks has been 2%, right and I mean, seasonal declines are bigger than 2%. So I don't even know what to make of that 2% yet, but on the multifamily side, depending upon the market, we've seen declines of six to 12% in multifamily prices already and in remember, the Fed only really started raising in May of this year that you know, we're doing this in the middle of September, right. So in five months, the Feds basically raised everything there was a tiny raise back in March, but it was it was so tiny that it really didn't make any difference. So in five months, the Fed has basically affected multifamily prices to the tune of six to 12%. Here's the bad news. That's not the end, because everybody including yours truly was thinking that when last week's inflation report came out, we would see a downward trend, and the Fed would give us some guidance that yeah, okay, well, instead of raising by 75 bits this week that there's a Fed meeting going on this week, we're gonna raise by 50 and then we'll see what happens in November, maybe we'll raise it by 25 and we were like, okay, if that happens, great. You know, where the Fed funds rate is at 2.25. They raised by 50 pips this week, then they raised about 25 pips in November at 3%. We're done with the Fed funds rate, and that means that multifamily doesn't have to drop any further. Well, it sucks but that didn't happen. Inflation didn't drop and so now the Fed this week is definitely going to raise interest rates by 75 bits, maybe they might even do it by 100 and that basically will spike up interest rates by 100 points immediately and then they'll have to do 75 points in November and maybe another 50 points or 25 points in December. So because of that bad news, we now know that we're midway through this drop in multifamily, right. So we think that there's another five or 6% drop coming by February or March.

Is this bad? No. If you're not, you know, if you're not buying anything, just wait for five or six months and you get five or 6%. You know, you know benefits. What the heck is wrong about that because the market isn't bad. Rents haven't decreased, rents are continuing to increase nationwide for both single family and multifamily. So this isn't like 2008, where there's 5 million empty homes show me empty homes. I mean, there really aren't any, the market is an amazing occupancy levels. This is just one single factor, the cost of debt. So, if you can, in February, buy a property for 5%, cheaper, you will have had two advantages. Number one, the next six months, you're not paying for that high cost of debt, right? Number two, you would, you know, say 5%. So your property is cheaper, so your debts less right? Number three, you will be within six months of the Fed cutting interest rates. This is the part that most people don't understand. The Federal Reserve is not trying to kill us. They're just doing their job. and their job is to control inflation because if you don't control inflation, really bad shit happens really, really bad should happen. So it's much better to control inflation and obviously the industry that is most affected when you raise interest rates is real estate. No other industry in the US is affected as much as real estate by interest rate hikes. Here's the good news though. If you look at the last 61 years, the Fed raised interest rates nine times sharp up sharp down. So if you buy in Feb, by, I think July or August, the Fed should be dropping interest rates or at least talking about dropping interest rates.

Why is that important? Mortgage rates are guesses. So single family mortgage rates and multifamily mortgage rates in the US are just guesswork where the market tries to guess what the Fed will do next. So if the Fed starts talking about interest rate declines, the market starts to prices in., right and when the Fed says oh, well, we might hold, right the market reacts. So the interest rates basically adjust even before the Fed actually does anything. Perfect example of this: In December, the Fed started talking about interest rate hikes, but didn't actually raise anything. They didn't change anything until March. But in those four months, interest rates went up 100 basis points, they went up an entire 1% because the market was guessing what the Fed would do. So if you buy a multifamily in February and the Feds basically start to lower rates by June, July and August. Now you're in a better environment and as long as your rates are floating, they may float the other way, they may float down and give you a benefit. Where you start high and then you float downwards. That's why I think it makes sense to wait. I've seen a lot of my friends that have larger portfolios and me 2 billion 3 billion send emails to their investor saying we're pencils down. mean, what that means is we're not even underwriting a property we you know, we see 10 properties a day and normally we underwrite three or four of them. Pencils down means you just click the delete button 10 times and you're done with your job for the day.

Michael:

Wow, I have so many questions. But I guess the first one is, why are mortgage rate guesses? Why doesn't, why don't banks look at actual data and what the actual borrowing rate is today and not worry about forecasting, but use hindsight. So it takes the guesswork out of it.

Neal:

I'm not 100% sure on that. Just so you know, that's what the multifamily market does, right. So the multifamily market has two kinds of loans or I should say three kinds of loans. One of them is the guesswork kind where they try and guess what the Fed is going to do. The other one is one that's based on LIBOR or now called Sofer, these are basically and basically they're based on like treasury bonds and what those numbers are those loans. The moment the Fed hikes the they're going to hike this week, right so that they have a meeting on Wednesday, that we're probably going to hype it by 75 pips. Well, if I have that kind of loan, and I do at some of my properties, guess what, on Thursday, my debt is a lot more expensive. 75 basis points more expensive. So you can see that on the multifamily side. I have never, ever seen a single family loan do that. Every mortgage that I've seen 30 year 15 year five year ARM, they're all guesses forward looking guesses on the Feds rate. Why? I have no freaking clue.

Michael:

Okay… We'll have to find someone out there that can give us a definitive answer as to why that is. But I'm also curious now, you mentioned at the beginning of our conversation that in the single family space, the banks are kind of depending on us as borrowers to look at the value of the home and determine hey, this is worth or not, which seems very counterintuitive because the majority of multifamily investors that I know, tend to be able to underwrite really, really well, oftentimes better than the bank and so why is the bank's taking the power away from a multifamily investor and really giving it to a single family owner it seems a little bit backwards now.

Neal:

Single Family is considered to be a REIT in the United States and single family lending is encouraged by politicians. The overall banking system believes that even if they go a little it over on the single family side, it's not such a bad thing, obviously 2008 was 2007 was different because it was not a real estate failure. It was a failure of lending standards, you know, they were basically giving gardeners million dollar loans, right. So that's not going to end well. So obviously, I don't see any evidence of that kind of stupidity existing today. So there are lending standards, they're pretty tight on those lending standards, they're not going above them, you have to be, you know, a good, good buyer. But beyond that, they as long as there's an appraised property that similar your property will appraise. I am not in favor of this other countries do not do this. Banks underwrite single family loans in other countries, the way that we underwrite multifamily loans. But because of Americans believe that single family is a very key part of their life. We've seen this appraisal based system for the last 30 or 40 years and every once in a while it blows up a bubble just like it did in 2007. So this is a conscious decision that the people that run this company had a country have made, and it has lots and lots of good sides, because it tends to overall increase the prices of single family appraisal, you know, somebody buys for more, the your property is more than next was more next one's more. So generally, it has a beneficial effect on the real estate market. But it also tends to create more bubbles than other countries.

Michael:

Interesting. Okay, that's really good insights. So knowing that this isn't the ideal time to buy multifamily. What should people be doing? Is this the time to get educated, is the time to go get capitals is the time you know, what should folks be doing right now?

Neal:

Um, I think that I'll give you some ideas, right? So I'll give you kind of a sense of, Well, what would Neal Bawa be doing and what would maybe somebody that's newer than Neal Bawa, you know, doesn't have a lot of multifamily should be doing. So let's just focus on that piece first, right, because what I do is really different from what you should be doing, depending upon where you are in the process. So let's say you're early in the multifamily process, you should be educating your investors, that an extraordinary opportunity is going to present itself most likely in q2 of next year. So that's, you know, April, May, June and that opportunity is there for the first time since the Great Depression, that in the 2008, depression, we have an unusual thing happening, and that will be multifamily prices, not single family, but multifamily prices will be low in q2 next year, compared to let's say, now, or compared to, especially compared to a year ago, they will be low. But the economy will not be anywhere like 2008, it'll still it'll be weak, it will be in a recession. But this is what is known as an artificial recession. So recessions are of two kinds, they come in two flavors. Number one, a recession that is artificially created by the Fed to cool down inflation, and we're about to go into one of those recessions, those tend to be shallow, and the they don't damage the economy in the long term, they create short term damage, and the economy tends to recover fairly quickly from those unemployment doesn't tend to go down too much. You know, so, so go up too much, I should say, you know, so. So we're about to go into one of those and those are the kinds of recessions where you want to buy multifamily. Why because multifamily prices still decrease as interest rates go up, regardless of the strength of the underlying economy. So the underlying economy right now is amazingly strong, right. So with all the hand grenades that the Fed has thrown at us for over five months, they've managed to move the unemployment rate from a historic 3.5% to a historic 3.7%. In five months, they basically haven't managed to dent the unemployment market at all and even that point, 2% increase has largely been because of being because of more people joining the workforce.

So post COVID, a lot of people took a year and two years off, a lot of those people are now returning to the to the workforce because they're running out of that stimulus money and that's really what that point to otherwise, when you see like you might see, you know, news about layoffs in the United States, Google it actually look at the statistics. Anytime at any point in the economy, there's layoffs, right. But there haven't been more layoffs than they were six months ago or 12 months ago. It's just the regular layoffs that happened in a normal economy. So there's the economy is extraordinarily strong, and it's going to get dragged into recession simply because the Fed is going to keep throwing hand grenades until the economy goes into recession. But because the underlying economy will stay pretty strong during this shallow recession, you've got a onetime opportunity to buy cheap multifamily because multifamily is just as affected in terms of price. Whether the economy underlying is weak or strong right and you have a quick chance to come out of it and make a lot of money. You should be educating your investors telling them about this opportunity, because I haven't seen that opportunity at all since 2013.

Michael:

Interesting.

Neal:

That's what you should be doing, telling every investor about this and telling them, I am not buying anything now. Well, you probably know me, you know, don't have the investor money to buy anything now. But what's the harm in saying it's still true?

Michael:

Right, right, right. Do you think though, Neal, that at that time, q2, next year, that folks, sellers, owners are going to see that, hey, there's this dip in prices, and therefore, I'm not going to sell because I don't want to sell at a loss I bought 234 or five years ago, I'm going to hold on to my property and no, there will be an inventory shortage, or do you do not foresee that happening?

Neal:

There is already an inventory shortage in multifamily prices have still dropped. So the if you look at the inventory available to sell in the multifamily market, it's half of what we had a year ago. But multifamily is different from single family in single family is shortage of inventory tends to drive prices up. With multifamily a shortage of inventory cannot drive prices up because banks are underwriting and they don't give a flying F about what the inventory is. They just care about your debt cost and your debt cost is going up. So when so the key thing is that the single family and multifamily markets are fundamentally different. One of them is just a business and the business is based on its debt cost, and its net operating income and nothing else right. Whereas single family is based on demand. If there's nothing available on your street to sell whatever appears is going to sell for more. That's not how multifamily works. So even right now, supply is pretty low. But that doesn't mean that people are over able to over bid, because if they over bid, guess what happens, Michael, they can't get a loan for that amount and now they have to raise lots of extra equity, which reduces their returns and so a lot of them are like this is painful, we're just going to sit back for three to four months for the market to adjust. Buyers have sellers have to understand that either they just keep their property off the marketplace, which you know, you can do infinite infinitely, you can do it for some amount of time or they will adjust their pricing as they already have. Remember, we've already seen a six to 12% delta in just six months. That's how quickly multifamily reacts and I think that's why I'm in the multifamily business because I liked the logic of that. If your costs are increasing and your profits are decreasing, you should get a lower price, right.

Michael:

It’s pretty black and white.

Neal:

Yeah, yes and that's how it works in multifamily. With single family, you can very often see costs increasing, but because everyone's holding off, nobody's basically selling their property. Everyone's like I've got lots of equity in the property. Now there's no property in the marketplace and even with costs increasing, you can often see increase in pricing. To me that has no logic and so I don't play in in that in that field.

Michael:

Yeah, yeah, no, it makes total sense. Neal, let's talk about multifamily loan products and some of the different ones that are out there. You mentioned there's three different loan types. There's the fix for five 710 years, there's the LIBOR, floating rates, what's the third one?

Neal:

So the second one is tied to so I'll go back, right. So the first one straightforward, fixed, usually it's five years and 10 year fixed. The second one is tied to a number called LIBOR or LIBOR or so far, these days, it's called Silver. That's kind of the new version of LIBOR. So it's a number and the loans will be, you know, LIBOR plus something LIBOR plus 2.25, right and what that means is the moment the Fed changes, interest rates, that's gonna change, right? So your, the interest rate, you're paying changes the very next day, right, the bank's gonna send you a letter saying, hey, Sofer has changed, therefore your interest rate is now x, right and boom, you're paying more, the third one is available, that is basically a rate that you it's a floating rate. right, but it's not tied to LIBOR. It's not tied to Sofer. It's speculative in some sort of ways. Now, it does tend to go up as interest rates go up, it's really tied to treasuries. Now, US Treasury bonds are a speculative product, right? So today, something happens in China or something happens in Russia, something happens in Ukraine, and all of a sudden, treasury bonds will shoot up or shoot down and so that particular rate is tied to the treasury bonds. So it's speculative and so, you know, Fannie Mae and Freddie Mac, often these floating off of these floating rates. Now, in the end, the rate is going to end up more or less where the Sofer one is, but it's not immediate. It's not like you don't get that happening the next day after the Fed raises interest rates and I'll tell you why because it's tied to treasuries and treasuries move upward. Are downwards because of 100 different factors. Only one of those are interest rates. So geopolitical situations can often make treasuries move downwards. For example, if the Chinese economy collapses tomorrow and there's blood on the street, treasuries will go downwards, even if the Fed continues to raise interest rates. That makes sense? So, to these sorts of things, these movements can happen so that rates that are tied to the US Treasury bonds tend to move up and down with Treasury bonds. So those are the three kinds.

Michael:

Okay, and who is do you think well suited or conversely, not well suited for each type of loan?

Neal:

So in terms of who is the lender?

Michael:

No, if I'm a buyer, and I'm going to buy … Yeah…

Neal:

I think, yeah, yeah. So there's also something known as a bridge rate, when it bridge loans, which no one is getting, I don't know, if a single person that's gotten a bridge loan in the last 30 days, because there are simply very high there are 7%, or even higher in the last, you know, 30 days. So the vast majority of people today that should be buying, let's say you have to buy for whatever reason, you're not stopping you want to buy the key advisors, everyone should today should get a floating rate loan, because if you believe like I do, that the feds job is to raise rates and then drop them and that's what they've done nine times in the last 61 years, then you have to believe at some point in the future 6-12 18, 24 months rates will be lower, because right now, they're pretty darn high, right? So if you believe that locking in your rates doesn't make sense. So the market today, all we have is really Fannie Freddie floating lanes, rate rates, which are similar to what your local bank would provide. So maybe you have a smaller project, you want to go with local bank, those are the same kinds of rates that Fannie Freddie provides, they're probably charging you a quarter point more, but you've got a relationship with them, their points are lower. So lots of people go with local banks. But I think that's the only game in the market for multifamily today and the other thing that's happening in the multifamily market, which is driving prices down as you get multifamily, you might in a really boom time environment, you could get loans that are 75%, loan to value, right and then when the market starts to tighten up, they go to 70. Well, a few weeks ago, most lenders went to 65. So they're giving you a lot less loan to value for the same property forcing you to raise more equity. When you raise more equity, your returns go down, your underwriting suffers. So once again, people are like this not working. I'm not going to make any money. My investors have something known as pref or preferential treatment. So the property underperforms, they're going to make their pref I'm gonna make nothing. So a lot of people are stepping back, pencils down.

Michael:

Yeah. Yeah, that makes total sense. That makes total sense.

Neal:

And, and none of this has anything to do with a crash, you know, the 2008 scenario. If you believe that that is going to occur in the next 12 months, you're not data driven because the 2008 scenario, if you look at every if you list the top 10 factors that caused it, because it wasn't any one thing, right? None of those factors, not one of those factors exist today, right? What we do have is we pulled demand forward in 2021. In 2021, we basically helicoptered $10 trillion, worldwide, not 10 trillion in the US, luckily, 4 trillion in the US, but 10 trillion worldwide, we helicopter money to people for the first time in modern history. We've done a little bit of it before in 2009. But remember, we were bailing out banks, we were bailing out General Motors, the money wasn't going directly into people's pockets, right. So here we helicopter $10 trillion worldwide, and there's an inflationary effect. It pulled demand forward, everyone, all of a sudden had money, everyone spent money and so we pulled demand forward from let's say, 2023, next year, to 2021 and when we did that, we ended up creating massive amounts of inflation, nothing to do with the economy itself, but it created massive inflation and now we have no choice but to deal with it. I can tell you this if on the one side you said you know will you take 7% single Family interest rates right over the Fed stopping you know their program now just let him stop it I would say don't do that. Hyperinflation is so insanely dangerous, and so insanely destructive, that I would, even though it would really hurt me. I would take 7% interest rates any day, I will take 8% but I wouldn't tell the thread to stop doing what they're doing. 9% inflation if it gets entrenched if everyone believes that two years from now we're going to be at 9% It's astonishingly destructive.

Michael:

Wow, wow. Okay and Neal, I'm just curious in based on your research the nine times over the last six to 10 years, the Fed has raised rates and then pretty succinctly thereafter dropped them. How far do you think we're gonna get, how low do you think inch rates are gonna go? I want the Neal Bawa prediction the crystal ball, if you will…

Neal:

The federal funds rate, right, the Fed funds rate is what the Fed raises, they don't raise or lower mortgage rates. It's currently at 2.25% and in two days, it's going to go to 3%. We believe currently that the peak is going to be either 3.5 or 3.75% for the Fed funds rate and we think that on the downward path, they'll cut it all the way down to 1.75%. So from their peak, they'll go down 2%. So from the peak, whatever that peak interest rate is, it should go down 2%, right. Now, sometimes they have to go past that 1.75 on the downward leg, because they've hurt the economy so much when they were raising rates that they have to compensate. But we think that the Meet the perfect equilibrium rate for the Fed is around 1.75. Now, in their, in their public, in the public, they talk about it being 2.25. That's where they would like equilibrium to be. But they never seem to ever achieve that. It's always lower than that in a normal market. So they just like to talk it up a little bit to set expectations. So we think that whatever that top interest rate is that you're going to see the highest interest rate, the mortgage rate. Once the Fed is done and brings it down, you should see mortgage rates 2%, lower. So it there's a possibility that sometime in the next 180 days, you'll see a 7% mortgage rate, right. So it might touch that number, but I don't think it goes further beyond that. Okay, but I could be completely wrong, because if the Fed doesn't kill inflation, then all bets are off.

Michael:

Right, right. Yeah, this is all under the guise of inflation getting tampered back because of the moves and so just to kind of put that in perspective for people as the end users, 2% reduction of the Fed funds rate will typically constitute a 2% drop on what a borrower is going to pay. So if rates get up to 7%, and then Fed Funds pullback to two by 2%, we would expect mortgage rates to hover on that 5% in the consumer market.

Neal:

Yes, exactly four and a half to five and a half going up and down a little bit, you'd remember it's speculative, but you'll have plenty of opportunities to you know, lock something in under 5%. So I think the key message is this, never be afraid of 5%. It's really beyond 5%, that the single family economy starts to you know, it starts to miss heartbeats. That's where it starts to be problematic until five, I've really not seen much of an impact in the marketplace, there'll be a little slow down in price increases and right now a slowdown is healthy, they've gone way too much way too fast and so retrenchment is a very healthy thing.

Michael:

Yeah. Okay and just for frame of reference for folks, during COVID, the Fed funds rate was zero, right?

Neal:

They dropped it. It was zero, correct. So there were we've gone from zero to 2.25, in five and a half months, right and they were threatening to do it for about four months before that, but they wanted the market to adjust before they actually raise the rate. So we've gone up to 2.25. It was zero for two consecutive years. So two years, in two months, the Fed funds rate was zero.

Michael:

And has that ever happened in American history that you know if?

Neal:

No, I think that pandemic is very unique. We saw the Fed funds rate fall to about 1% in 2009 2010. But they didn't take it down to zero. So the only time they've ever taken it to zero is this time, I expect all future crisis will go beyond zero now that the eurozone has gone negative and Japan's gone negative. There's no stigma attached to going negative. So I think the next crisis will go below zero.

Michael:

Wow and that'll be an interesting time to have a loan tied to LIBOR or Sofer?

Neal:

It'll be is it's fantastically interesting. I think what we are, Michael, we're living in the middle of the greatest financial experiment in history and it's, it's an experiment that has no precedent, it doesn't have anything that you can look back to, right. We're doing some truly crazy stuff and we're hoping that it will work out even though we have about three years three or 3000 years of monetary history that says it's never worked out for anyone in the past. So we're just hoping that we are different so right it's all about you know, as long as the musical chairs are going people are you know, people are walking and that's how it's going to be and I don't know when the real challenges happen. I think we're getting closer and closer. I feel like China is just about ready to combust at this point. We'll see what happens.

Michael:

Okay, well, I will definitely stay tuned, Neal. This was amazing as always, for people that want to pick your brain more, continue the conversation learn more about you. Where's the best place nice for them to do that,

Neal:

Um, you can connect with me simply by typing in my name. I'm the only Neal Bawa on the worldwide web. So just NEAL BAWA, hit enter, there's a couple 100 podcasts that I've appeared on. There's webinars, conference recordings, where I'm on stage. If you'd like to chat with me on LinkedIn, once again, I'm the only Neal Bawa on LinkedIn. So go ahead and connect with me there or go to my website, multifamilyu.com. So that's multifamily, followed by the letter u.com. There's about 30,000 people that attend the webinars that are on that site, we have a new one coming up, which is the impact of interest rates on the economy, and the upcoming recession. So real estate at this point is officially in a recession. The housing market is now in a recession, because it's declining. But I think the rest of the economy is going to follow it and so we have a webinar on that and I think that's going to be in three weeks.

Michael;

Okay, fantastic. Well, Neal, thank you. Again, really a pleasure to chat with you and have you on and I'm sure we'll stay in touch.

Neal:

Awesome. Thanks for having me on.

Michael:

You got it, take care.

All right, everyone. That was our episode a big thank you to Neal for coming on love his data driven approach to his conclusions, which I think we probably all could use another dose of that. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing the next one. Happy investing…

Entity structures for investing, and which one is right for you w/ Garrett Sutton Sep 24, 2022

Garrett Sutton is a corporate attorney, asset protection expert and best selling author who has sold more than a million books to guide entrepreneurs and investors. For more than 30 years, Garrett Sutton has run his practice assisting entrepreneurs and real estate investors in protecting their assets and maximizing their financial goals through sound management and asset protection strategies. The companies he founded, Corporate Direct and Sutton Law Center, currently help more than 13,000 clients protect their assets and incorporate their businesses. Garrett also serves as a member of the elite group of “Rich Dad Advisors” for bestselling author Robert Kiyosaki. A number of the books Garrett Sutton has authored are part of the bestselling Rich Dad, Poor Dad wealth-building book series.

There are three types of entities most commonly used to own real estate: Limited Liability Company, S Corporation and Limited Partnership. Tune in for todays episode where Garrett provides a quick summary of the best entities for real estate investment.

Episode Link:

https://corporatedirect.com/contact/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Garrett Sutton, who is an attorney, investor and author with over 1 million copies of his book sold and today Garrett is gonna be talking to us about all the different entity structures we should be aware of as real estate investors, as well as wherever we might want to think about forming those entities because it plays a big role. So let's get into it.

Garrett, thank you so much for joining me on the show today. I really appreciate you taking the time.

Garrett:

Thanks, Michael. It's a pleasure to be with you today.

Michael:

No, no, the pleasure is all mine ad I'm super excited to chat with you. I know a little bit about your background and what you do kind of on a day to day basis. But I would love if you could share with our listeners who you are, where you come from, and what is it that you're doing in real estate today?

Garrett:

Well, I grew up in the San Francisco Bay Area like you and I moved to Reno in 1989 and Nevada is a great state for setting up LLCs and corporations along with Wyoming. So I practiced corporate law since 1978, and became associated with Robert Kiyosaki and have written a number of books in the rich dad advisor series and you know, have enjoyed talking to people around the country around the world about how to protect your assets. As you start investing in real estate, you need to think about how you're going to protect that real estate because we live in a very litigious society, people sue each other all the time and unfortunately, they don't teach this in school, you have to get this information on your own and so that's what we provide is the information you need and then we offer a service to help you protect your real estate and brokerage and other assets.

Michael:

Love it and just right off the bat, I read one of your books for our Roofstock Academy book club, it was a great read, so I can definitely vouch for it. But what are the books that you've written and then what talk to us about your most recent book?

Garrett:

Well, I've written a number of books in the rich dad advisor series, including start your own corporation, that's kind of a foundational one, and then run your own corporation, a lot of my clients and I set up a corporation now what do I do, and you have to run it properly. Then I also did loopholes of real estate, which is kind of the tax and legal strategies for investing in real estate and then the newest book is veil not failed and that deals with the corporate veil, you set up an LLC or a corporation to be protected and too many people do this themselves, Michael, they just set it up online, and they don't realize that there are additional steps you have to take to stay protected and so if you don't want your veil to be pierced where someone can sue the company, there are no assets there. They can go through the veil of the company and get it your personal assets, if you don't want that to happen and that's why you set up an LLC.

Michael:

That’s the point, yeah…

Garrett:

It’s that you don't want it to happen. You need to follow these corporate formalities and so that's what the book veil not fail is about kind of stories, horror stories of people who didn't follow the rules and then in the latter part of the book, it shows you how to follow the rules so you can stay protected.

Michael:

Yeah, great. and where can people find out if they're interested in picking up a copy?

Garrett:

Amazon has it the veil not fail. It was supposed to be out in April, but we have this thing called supply chain problems.

Michael:

I've heard of that.

Garrett:

Not enough paper out there. So it's not out until November but you can go ahead and preorder it.

Michael:

Fantastic. Garrett, let's talk about I think a pretty hotly contested and debated topic in the real estate space and that's LLC versus no LLC, I think and it's tough because we're I'm California based. A lot of our listeners are California based and so to have an LLC in California, you're paying at minimum 800 bucks a year and with today's cash flow based on some real estate investments that can eat in to your investment pretty significantly and so I've heard folks say, you know, forget the LLC, go get umbrella policy, go get high liability limit insurance and call it a day. Don't worry about it. What are some risks pros cons associated with doing that, that you've seen folks run into?

Garrett:

You know, there's a whole area of law called Bad Faith litigation, and that's when insurance companies collect the premiums and then find a way not to cover you. All right, the insurance companies have acted in bad faith over the years. errors in collecting the premiums and then having exclusions, that little tiny print that you never read and so, you know, the insurance companies, let's face it, they have an economic incentive to not cover every claim and so they're going to find reasons not to cover you and so I always recommend that people have insurance. That's the first line of defense but these LLCs are the second line of defense, in case the insurance company doesn't cover you, or what about a situation where your insurance is, say 2 million, but the judgment is 4 million, right? I mean, you're personally responsible for that extra 2 million. If the property is in an LLC, they can get what's inside the LLC. But if you've done it, right, if you if your veil is strong, they're not going to be able to reach your personal assets for that extra 2 million. So the idea that you're just going to rely on insurance is, in my opinion, quite naive.

Michael:

Yeah. Okay, I love it. I'm of the same opinion. I always, I never like to play my hand, though but I love hearing that because I come from the insurance world. So I know how bad things can go and I also have seen how they're supposed to work. But I think you're totally right, there's totally an economic incentive to not pay claims and the insurance industry as a whole gets kind of wrapped in with the folks that are doing the latter, not the former. So I think it makes a ton of sense.

But Garrett talked to me about I've heard this concept, and this idea that, okay, there's this, you can be over insured, there is such a point. Now, if I go get a $10 million umbrella, because I really want to be protected. Does that then put a target on my back for a claim or a plaintiff to say, well, hey, he's got a pretty a pretty massive insurance policy, you know, I was only going to sue him for a million, but let's go after the full 10.

Garrett:

Well, I mean, there are a number of factors there. I mean, having enough insurance is not a bad thing. If the claim is a million, it doesn't give the attorney the right to try and collect 10 million, you know, I mean, the claim is a million. So you know, the fact that you have extra insurance isn't a bad thing. The attorneys, you know, what we like to do, what we tell our clients is you want to have enough insurance to cover any claim and so you want to have insurance on the property fire casualty, right? You want to have a personal umbrella policy of insurance covering your home and your autos because I think that's the biggest risk out there is a horrific car wreck, right. Do you need that umbrella policy, a commercial umbrella policy over your various rental properties, maybe I had a part such a policy for a while but here in Reno, it got pretty expensive and so I just have regular insurance on the properties. I have regular insurance for my home and autos and I have an umbrella policy for me personally and so you get in that horrific car wreck. There's enough insurance money for the attorneys to get at. They know how to get at insurance monies, they get a percentage of what they collect and then if everything else is held in LLCs you know you'll have a an LLC if you own a property in Oregon, you have an Oregon LLC on title, you own a property in Utah, you'll have a Utah LLC and tie on title and then those two LLCs are owned by one Wyoming LLC. That's how we like to structure things and the attorneys are going to have a tough time collecting from a Wyoming LLC and so they leave you alone on the LLC. Do you have enough insurance to pay the claim and they'll leave you alone on the LLC is that's how we recommend our clients structure things.

Michael:

Okay, and why Wyoming LLC because I know you made a very deliberate point of saying where is formed, what's the point?

Garrett:

There are three really good states out there and they compete against each other to be the best which is good for us. Instead of having one federal law that applies to every single state. After the American Revolution, each state wanted their own corporate law and so now we have each state with their own corporate law in Delaware, Wyoming and Nevada compete against each other to be the best. You know, the filing fees every year that come in are pretty good. It helps fund the government. So the reason I like Wyoming over Nevada and Delaware is all three protect the owner of the LLC the charging order is the exclusive remedy and all three, but in Nevada and Delaware the annual fee is $350 a year and in Nevada they list your name on the state website. In Wyoming the annual fee is $62 a year and your name does not show up on the State web site. So Wyoming offers lower cost, better privacy and equal protection. So a lot of our clients set up Wyoming LLCs.

Michael:

Yeah, okay, well, I'm sold. So being a California guy, though, this is what I've heard and would love your insights. So I've been told that California they want their piece of the pie. So I've got to register any LLC that I own. In California, because I'm a resident here, I live here, even if it has not doing business, because the way California defines doing business is basically me living here. So if I do I own property in Oregon, I own it with an Oregon LLC, that LLC is owned by the Wyoming LLC, but then I gotta register both of those here in California?

Garrett:

No, you raise a very good question. So in our example, we had an Oregon LLC and a Utah LLC and if those were owned by you, as a California resident, we'd have to pay 800, twice, once for Oregon, once for Utah, by having the Wyoming parent there, the Wyoming LLC, and we qualify that one to do business in the State of California. You don't have to pay the 800 for Utah, or Oregon. So that's a way to save the $800 for all the title holding LLCs yes, one of them has to pay right $800 to the state of California and you know, California has gotten a little bit looser, you don't have to pay the 800 the first year, that $800 is a credit on the first $50,000 in profits. So it's not like it's wasted. So, you know, I've had people move from California to Nevada, because of that $800 fee. It's just infuriates people. But there is if you love living in California, there's a way to work it so you have protection, and you don't have to pay $800 for every single LLC you own across the country.

Michael:

Okay, fantastic and then in going back to that example, if I've got the I've got to register the Wyoming LLC here in California, do I lose out on any of the anonymity that Wyoming affords me because now it's registered here in California?

Garrett:

Yeah, you'd have to list your name in California.

Michael:

Okay, all right. Yeah, maybe I will think about moving, who knows?

All right, Garrett, in your book, and I want to get really nice here for a minute, because I've got you. You talk about quitclaim deeds versus warranty deeds and I think a lot of our listeners out there have utilized this practice, or have heard about this practice because if you go get a conventional loan from a traditional bank, they won't lend to an LLC. So you go get the name the loan in your name, then transfer the property title to an LLC after the fact, right. In the book, you talk about quitclaim deeds versus a warranty deed, can you give us a little bit of insight into what the difference is and why someone should think about using one versus the other?

Garrett:

Well, the warranty deed or the grant deed says, I warrant that I own this property and if I don't, if I transfer it to you, and I don't own it, for some reason, you can sue me. All right. So it's a more powerful deed. The grant deed, the quitclaim deed rather, says, I don't know what I own. But I'm transferring whatever I own to you and the title companies go, well, he quit claimed that property and so that severs the title insurance, right because he didn't know what he had and so we're not going to cover him on it on a quitclaim deed and so and too many people pronounce it quick claim.

Michael:

I know, I know.

Garrett:

You know, and it's the same deed with a couple of different words in it. But you really always want to use the grant deed or the warranty deed because in many cases, you sever the title insurance, when you use a quitclaim deed, okay, and that's….

Michael:

Okay and that’s even if you're going from yourself as an individual owner to an LLC that you own 100% of?

Garrett:

Right, yeah, just ask for the grant deed. Also, if you're buying property from someone, you want to insist on a grant deed or a warranty deed, because if they don't deliver the title that they've promised they are going to deliver, you have the ability to sue them for failure to perform.

Michael:

Okay, super good to know, super good to know, Garrett, as people who are just getting started on their investment journey, I mean, what's the appropriate time to set up an entity because I've heard people say, I'll do it later. I'm too small. It's too expensive. You know, what are your thoughts there?

Garrett:

Right at the start, you know, it's just not that expensive. We do not charge a lot of money to set up LLCs for people. It's very affordable. It's a business expense, you get to write it off. But I'll give you an example Michael and I I've told this story 1000 times, but I was in San Francisco at an event and I gave a talk about asset protection and this lady comes up to me and she goes, Well, I'd like to transfer title. I just bought a duplex and I'd like to transfer title into the name of an LLC. I go, that's a great idea. I go in California, it's $800 per year per entity and she goes, oh, I can't afford that and so I'm giving a talk in San Francisco again and she comes up to me and says, I've been sued by a tenant, I'd like to set up that LLC now. Well, it's too late, right? You know, the tenant rented from you, in your individual name, UX, they have a claim against you as an individual, and they can reach all of your personal assets as a result and once you've been sued, or even threatened to be sued, it's too late to set up an LLC. I mean, you can't put a seatbelt on after the accident. Yeah, right. So you really want to set this up right at the start and I've heard CPAs say, oh, well, you know, just set it up when you can and that's bad advice. I mean, you know, the joke I tell is that CPA stands for can't protect assets. It's just, you need to set this stuff up right now.

Michael:

Yeah, yeah. Okay. I think it makes a ton of sense and I love the seatbelt analogy. I think that really hits home for a lot of folks. So as someone that's getting more sophisticated with their investing strategy, what like tools or strategies should they be aware of as they're starting to scale up and they're investing?

Garrett:

Well, I think having that Wyoming, LLC is the parent holding LLC is a good strategy. We talked about an Oregon LLC and a Utah LLC owned by one Wyoming LLC and that Wyoming LLC is passive. It's not going to hold real estate, it's not going to do business with anyone, because if someone sued the Wyoming LLC, they could get at Wyoming at the Oregon and the Utah LLC. That's what the Wyoming LLC owes. So that Wyoming LLC is passive, it doesn't do business with anyone because we don't ever want it to be sued. All right. So that's a key strategy in protection. Now, if your clients are holding brokerage accounts, right, bank accounts, gold and silver stock brokerage accounts, in their individual name, the same rules apply. If they get sued personally, and they have all these assets at a Charles Schwab account in their individual name, someone can very easily get those and so what we do is we set up an LLC for the paper assets for the bullion and if you get sued, and that horrific car wreck, they're in an LLC, it's much different, much more difficult for an attorney to get at those because the exclusive remedy in Nevada and Wyoming is what's called the charging order and that is a lien on distributions in the state of California if you own an LLC that owns a piece of real estate in California, the law in California is that the car wreck victim can go to court and the judge can say yes, you've been injured, you can set forth the sale of the duplex.

All right, and that is not good asset protection. So we like Wyoming and Nevada where the court says, okay, you have a claim. But here's the remedy that we offer in our state, you are entitled to distributions that come through the LLC, you can't barge in and force the sale of the real estate, you have to wait for distributions to come and that's not a good use of the attorneys time. You know, monitoring if distributions are made there on a contingency fee, they get paid when they collect on the insurance monies. So their time is better spent going to the next case that has insurance. So that Wyoming LLC that offers the charging order remedy, not where they can barge in and force the sale of the real estate but where they have to wait and monitor distributions that go to you. It's a much better system for protection than choosing a weak state like California, Utah is a really weak state, New York is weak. So we have to understand which states are strong and weak and structure your plan accordingly.

Michael:

Yeah, interesting and Garrett, talking through all this kind of makes me beg the question of in our Utah, Oregon, Wyoming, California LLC example where the Wyoming LLC owns the properties. There is a holding company rather, if the tenant in Oregon falls and Sue's sues the owner. I mean how far Is this go and where is the court date held, how does that all work?

Garrett:

Well, if you, if the tenant has is renting from the Oregon LLC, that's or they're in contract with, so the claim would be tenant would sue the Oregon LLC, the lawsuit would take place in Oregon, right? That's where the property is. That's where the tenant fell. The action stays within the Oregon LLC, it doesn't give the tenant a right to go down to the Wyoming LLC, which is the parent, it doesn't give the tenant the right to go over to the Utah LLC. That's a separate business entity. So the key here is that if the tenant sues, you want to get notice of that lawsuit as soon as possible, right, you want to turn over this claim to your insurance company, so that they can assist in settling the case. Too many people, Michael have this idea that if they use a land trust, where no one will ever know who the owner is, and no one will ever serve you is just nonsense because you want to get notice of the lawsuit as soon as possible. In the Land Trust scenario, they say, well, geez, no one will ever find out who the owner is. Well, what happens is they go to court and they say, Look, we tried to sue the land trust, we couldn't find out who the owner was and the court says, okay, well published notice in the newspaper. So they published it little two point type in the newspaper that We're suing the Oregon LLC, or the Oregon Land Trust, rather and you don't get notice of that either. They go back to court and say we tried to serve them, we published notice in the newspaper, and no one ever showed up.

The court says default judgment, meaning the tenant has won and then when they're trying to collect, you know, you find out that you've been sued, the insurance company can say, Well, look, you should have had notice of this lawsuit, we could have defended you, but we're not covering you now. You didn't give us the proper notice and so this whole idea of a land trust and privacy is just nonsense. You want to get notice of a lawsuit, so you can turn it over to your insurance company.

Michael:

Yeah, that makes no sense. I guess it's kind of like the ostrich approach like if I stick my head in the ground, I don't see it. I don't hear about it. It's not a problem.

Garrett:

Yeah, it is a problem.

Michael:

Interesting, okay and Garrett talked to us about some of the different entity structures that are out there. Because there's the C Corp, the S Corp, the single member LLC, multi member LLC, like should we as real estate investors be thinking about utilizing some of these different corporate structures or is really the LLC that that kind of 45 of structures.

Garrett:

Pretty much the LLC is the way to go, if you're going to hold real estate, you in some cases, the limited partnership can work. If you're syndicating real estate and you want to absolute control, the limited partnership can work, you're not going to hold title to real estate in a C Corp or an S Corp or any other kind of corporation, tax wise, it's just not the best way to go. So the LLC is pretty much I mean, 98% of our formations for real estate are LLCs. The other 2% would be LPS for syndication purposes, or, you know, for estate planning purposes where mom and dad with an LP, the general partners, which would be another LLC can own as little as 2% and have absolute control over the property. So mom and dad through their LLC have 2% ownership, the limited partnership has 98% ownership owned by the kids as limited partners, and the kids can't force mom and dad to sell the property. So there are cases where the limited partnership works but in the vast majority of cases, it's the LLC that is on title to the real estate.

Michael:

Okay. Good to know, good to know. I had another question for it and it totally escaped my mind.

Garrett:

Well, how about fail not fail the new book?

Michael:

Yeah…

Garrett:

You know, people have these promoters out there just say that most wrongheaded stuff about LLC. I mean, they say that you don't need an operating agreement- wrong. They say that you never have to issue stocks or timber membership interests certificates- wrong. So you you'd need to treat your LLC, like a corporation whereby you have to follow these formalities. You have to have the annual meeting, right and the idea that you never have to have a meeting is when you get into a court of law, you're in front of a judge or a jury. I want you to have a minute book with the minutes of every yearly meeting in it and these promoters say, well, you never have to have a meeting. I want you to walk into court and tell the jury, yeah, I ran this property for 12 years and never had a meeting. It just doesn't work.

Michael:

It’s not going to fly.

Garrett:

It's not going to fly. So you know, the reality is, when you're in a courtroom, the reality is not when you're in office with a promoter telling you don't have to do anything to maintain your LLC. It's just not accurate. Yeah, so that's why I wrote the book, because there's so much misinformation out there about corporate formalities. So with a corporation, you need to follow the corporate formalities and with an LLC, you need to follow the corporate formalities because someone suing can pierce the corporate veil on a corporation, they can pierce the veil on an LLC. It's very, and the rules are not hard to follow. They're really easy. It's just if you don't follow them, they can go through the LLC and reach your personal assets.

Michael:

Yeah no, that's such a great point and also, Garrett, I mean, to that point, if someone listening is thinking about reaching out to an attorney for help with forming for entities or restructuring entities, I mean, what are some questions they should be asking and things they should be looking for, with an attorney that they want to put on their team?

Garrett:

Well, does the attorney invest in real estate? I mean, I think that's a good question to ask because, you know, I invest in real estate, I've been through the wars and so it just helps you appreciate what the client is going through to have done that yourself. You know, I think some attorneys specialize in personal injury. In contract cases. I mean, you want someone who really knows the ins and outs of LLCs, and appreciates that we have good states and weak states, and that you have to put the combination together to fully protect the client.

Michael:

Yeah, that makes total sense and we're recording this, let's see September 2022, what is like the reasonable cost to form an LLC, and then what are any kind of maintenance fees associated with maintaining the LLC?

Garrett:

Well, we charge a flat fee of $795, in that, and then the filing fees are on top of that. So Wyoming, for example, is $100. That 795 includes the registered agent for the first year. So you're not paying any extra for that. We also have a system whereby we keep all your documents and if you have lost your operating agreement, we give you a portal where you can go on and download your documents. So we kind of have this backup service for you and then so you pay the 795, the first year, and then the second year, it's already formed, so everything drops down, you only pay 125 to four, the registered agent. Now we give you a book that shows you how to do the minutes because you really should do the minutes every year and even though we give you the book with the forms in it, a lot of people don't do it. So we offer a service where for $150 a year, we'll make sure that your minutes are done and we want to keep you in good standing, we want you to have those annual meeting minutes in your file, just in case you don't want to be in a courtroom and say I never had a meeting.

Michael:

Right, it's too late, then like you said, Garrett, this has been super informative and people want to reach out, continue the conversation, take advantage of your services, what's the best way for them to get in touch?

Garrett:

Well, they can go to https://corporatedirect.com/schedule/ and set up a free 15 minute consultation with an incorporating specialist that you'll work with this person all the way through the process and they'll give you a quote for what our services entail and you know, just see if there's a fit, we're happy to talk to you and so we set up entities in all 50 states, maybe you're you set up your entity already, it's an LLC, you don't have an operating agreement, you haven't issued the membership certificates. Don't tell anyone but we can clean it up for you. We also offer a registered agent service in all 50 states. So if you've got one company here, one company there we can be your one company to serve as the registered agent in all 50 states. So we'd be happy to help your listeners Michael and you know, have them call corporate direct or go, go visit the website, corporatedirect.com and there's plenty of information and articles there and kind of tells you what we do.

Michael:

Amazing. Well, Garrett, thank you so much for that. One final question before I let you out of here. We've said the term a couple times. But for anyone who maybe isn't familiar, can you bring them up to speed on what a Registered Agent is and what the importance is?

Garrett:

Well, the Registered Agent is someone in the state where you set up the entity or where you're qualified to do business and the idea is that instead of having someone who's trying to sue you search all over the state of Texas for you, right? The Registered Agent is an address where someone suing, you can go and serve the registered agent with service of process. So it's just it's kind of an efficient way for the justice system to work. It's one place where you can serve an LLC or a corporation, and then they're responsible for forwarding that on to you and so you want to use a reputable registered agent service that knows the importance of a lawsuit, if we get a notice of a service, we're on the phone immediately to our client, because you've only got 30 days to get an attorney and answer that complaint. So you don't want a mom and pop that is going to go out of business or doesn't appreciate the consequences of being served with a lawsuit. So it's an important function and if you fail to pay the Registered Agent, they're going to refuse service a process and then they're, you know, the person suing us is going to go back to court and get, you know, authorization to publish notice in the newspaper, and again, you're not going to get noticed to this cert of the claim. So you want to have that registered agent on your team at all times.

Michael:

Yeah, yeah, super great point and the Justice Department looking for efficiencies. That's not something I maybe I've ever heard before. So really exciting stuff.

Garrett:

It's something that does exists, so…

Michael:

Oh, Garrett, thank you. Again, this was super informative, and I definitely would love to have you back on once your book comes out in November.

Garrett:

That sounds great. Thanks, Michael.

Michael:

You got it, take care. We'll chat soon.

Garrett:

All right.

Michael:

All right, everyone, and that was our episode a big thank you to Garrett for coming on. Definitely take advantage of that. 15 minute free consult if you're interested. As always, if you liked the episode, feel free to leave us a rating or review. We'd love to hear from you all and we look forward to seeing on the next one. Happy investing…

How investors can use private capital to scale with Derek Dombeck Sep 17, 2022

Derek Dombeck, a Real Estate Expert hosts and runs the WiscoREIA based out of Wausau, WI. There he coaches and teaches other real estate investors his keys to success. He is currently hosting 3 national Mastermind groups called the R.E. Circle of Trust and puts on an Advanced training and Networking event each winter called The Generations of Wealth Voyage.

In the last podcast episode, Derek talked about creative financing solutions for real estate investors. In today’s episode he will be tackling the other side of the coin and will share some insights about private capital, lending and how that plays into real estate investing.

Episode Link:

https://gowvoyage.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Derek Dombeck again on the podcast and for those of you who missed his first episode, I highly recommend you going back and giving that a listen. But Derek is the owner of best REIA funding a private lender, he's also an investor. So today, we're gonna be talking about private lending, and also what we need to know as investors and how to utilize it. So let's get into it.

Derek, what's going on, man? Good to see you. Thanks for coming back on the pod.

Derek:

Yeah, absolutely. Glad to be back.

Michael:

I'm super excited to have you on. So last time, we talked about creative financing solutions for real estate investors. Now we're going to be tackling kind of the other side of the coin and so talk to us about private capital and lending and how that plays into real estate investing.

Derek:

Well, I like to talk to our clients that are coming to us for loans in more along the lines of what how would they want to structure if they were the lender? So it makes more sense to them why are we asking for what we're asking for? We design our company, primarily because we were borrowers ourselves, and we want to do it in a way that would be probed by our borrower, but still safe for our investors. So a couple examples, we don't collect monthly payments, we don't collect interest payments, we let it accrue. Very, very few lenders do that. The methodology is that when you're when you're the lender, and a payment is missed or late, that gives you an indication of something could be going wrong with the loan and that's true. But we don't want to have to collect payments every month on 175 outstanding loans, which is typically what we're carrying at any given point in time. It's another staff member that we would have to have basically just to do that do collections. So as a borrower when I was borrowing the money, that's what I would have wanted, right?

As a lender, it's different. So a lot of times I'm trying to have these conversations with our borrowers, as I mentioned, in a way that shows them that we're their ally, we're not just somebody sitting across the big fancy desk with a, you know, a suit and tie on looking down their noses at them. We want them to really realize that we are their business partner, in one way, shape, or form. Most interactions with borrowers if they've never met me before, it just starts out with a brief overview of our loan program and I often tell them, well, if you were going to be the lender, if it was your money, what would you want to see happen, especially if they're, you know, if your listeners are out there trying to apply for loans. There's three things two to three things that I think are super important. First one is whether they're going to a bank, a hard money lender, or a private lender, or their great uncle, have all of your documentation ready to go. At the I mean, at the drop of the phone, right? Like we get off the phone, bam, you can submit it. What drives every lender crazy is when they send stuff in piecemeal. You know, and we always have to ask for it and then we have to remind them and follow up that makes you look so foolish in the eyes of a lender. Okay, another thing for us, we don't require appraisals, but most people do. So, and we don't require appraisals in our loans, because I don't trust appraisers. They have no skin in the game, we have way more experience. But we're in a niche lending market of lending on rehabs and some appraisers may never have picked up a hammer in their life. How do they know what the after repair value is going to be based off of a scope of work? You know, if I get a scope of work that's submitted on an application and they claim they're gonna put a brand new kitchen in for $2,000 I'm gonna call bull ** because I know what it cost to put in a low end, middle end or high end kitchen. But again, as a borrower trying to help your listeners in that regard. If you're going to an appraiser or you're coming to us and we don't require appraisals, but having your data somewhere you had to come up with your numbers, right? When you made your offer to buy the property, I want to see, an appraiser may not want to because some of them don't necessarily like to help. But I want to see, because, you know, some of them are just arrogant. Let's be honest at it.

Michael:

It's the ego play, yeah…

Derek:

It's an ego play. But for me, it's not for me, it's required. I want to see those comps, or CMA, or a BPO, from a real estate broker, something to show me how did you come up with your valuations? If it's going to be a rental property, where's your cash flow analysis, you wouldn't believe it how many times we get applications in and they want to rent borrow money from our short term to fix the property, get a tenant in there and then refinance. But yet they have not talked to any long term lenders, typically banks to even know what their refinance terms would be or if they'd be able to get refinanced. They haven't done a cash flow analysis. Again, have everything ready for your lender as much as possible, right? Gosh, what else as a borrower, you know, coming in with a backup plan, a plan B, is so crucial. Our job as the lender is to expect you to fail and every question we ask is, is asked, because we want to know, if something goes wrong? Can we either take the property back or lien against the, you know, the borrower to get our money back? I mean, that's what it's all about. We are asset based lenders, banks are gonna look at the asset and their income, every lender is a little different.

But the bottom line is, can we protect our investors’ money? Can we protect our money and if that borrower walked out of closing, sign the papers and got hit by a bus and died? Can we recoup our money, right? Borrowers don't think that way. Borrowers think sun shines, and sunshine and unicorns, right. Nothing's ever gonna go wrong, the project is going to be on time on budget, we're gonna get under budget. You know, it's total bul****. But that's, that's our jobs to explain that to them in a way that's, you know, we're not trying to drive them from our business, we want to do business with everybody, that's got to legit good deal. But they've also got to be realistic and the number one, two spots that most borrowers come in sunshine and unicorns, their budget is too low on their renovations, and their comps are too high. So they want to use the top comps and we don't, why don't we because the markets shift. Now, if they came in on evaluation, I'm going to use Wisconsin numbers, you know, because that's what I'm used to, if they come in with an after repair value of $200,000 and I look at the comps that they submitted to me and there was one house that sold for 200,000. But the majority of them sold for 175. Which one do you think is the lender want to use?

Michael:

Yeah, the 175.

Derek:

Right, so we're going to lend based on 175. Now, that means they're going to have to put some of their own or more of their own money into the deal. If they sell for 200 bonus for them. That's great, I hope they can. But as the lender, we can't live on hopes and dreams, we got to live on reality and what happens most of the time is they're trying to come in with as little money out of their pocket as possible by using the highest comps, the lender takes on all the risk, which is why we use the middle of the road comps and I don't go to the very low end either. But we're using the middle and again, if they have to put in 10 20,000 extra dollars, and they're confident in their numbers, they shouldn't have a problem putting in 10 to 20,000 extra because according to them, it's going to sell for 200 they should get their money back and then some but when you start changing that or having that conversation with them. Boy, it's amazing when they have to use their own money, how they start to sing a little bit different tune.

Michael:

Yeah. Interesting. So it's almost like you have to protect them from themselves.

Derek:

Absolutely and we will tell them that I mean, there's plenty of times where we have just flat out told people you should walk away from this deal. Like we want to do business with you in the future. We want to give you a loan, but you are setting yourself up for failure on this deal and most lenders wouldn't typically do that most lenders will just say, we're only comfortable lending up to x, go ahead and do the deal and then when they fail, the lender will take the property back and the lender is in good position depending on loan to value. But we don't, I don't really like that model. I mean, it's certainly not our model and at the end of the day, if I take care of that investor, and I save them from themselves this time, hopefully when they come back around, they're more educated, and they bring us a really great loan, they've got a really great project. That's what it's supposed to be all about.

Michael:

Yeah, yeah. Well, let's talk about that for a minute, Derek. So it sounds like the things that you asked for, from your borrowers. It's really an opportunity for them to showcase their experience level that they've taught, crossed, the T's dotted the eyes and really thought about it and in very proactive in that, what if someone's just getting started? I mean, how much hand holding should someone expect from their lender or can they expect from their lender to help them get to a point where they're feeling confident or do you tell people hey, you know, go kind of skin, your knees somewhere else, and then come back to us when you're a little bit more polished?

Derek:

So the answer is, it depends. There's, most lenders out there do not want to deal with brand new people. I mean, it's just a reality of life. We are different in that regard, too because we may say to the applicant, alright, we want you to partner with somebody, and that person has to have, you know, we'd like to see at least three deals worth of experience. Now, I don't care if they get mentored for free, or if they split the deal 50-50. I don't care what that partnership looks like. But we would like to see somebody with experience that is backing this deal and if they can't do that, or they don't want to do that, then we typically would say sorry, but we can't lend on this deal right now and if they don't know anyone else, which happens, we have an extensive network throughout the state. So we can pretty much in any market, we can line them up with somebody that would be willing to, to mentor them and get some feedback from them. So but I don't think there's a whole lot of lenders that would do that much hand holding… Yeah, you know.

Michael:

And that makes sense to walk us through because you're a private money lender. So you are kind of this middle person where you take investor money, and then lend it out to other investors that are that buying real estate. So when the Fed talks about interest rate hikes are this sort of thing? Like, how do you set your pricing and what should listeners be expecting if they're going to private lenders in terms of rates, right now, we're recording this almost near early September and August 2022. What are you seeing an image of you'll be expecting.

Derek:

So it's very volatile, depending on where you are in the country, and how much competition there is, we certainly have national, hard money lenders that are that are, you know, advertising, much cheaper rates than we offer. But they sell off their loans. Almost many before the ink was even dry. They're white labeling almost everything, which means that there's a hedge fund or another note buyer, that is fronting the cash to close the loan and at the closing table, that loan gets transferred and you know, the person that you signed the paperwork with may still be the servicer of the loan. So you may not even realize it's been sold off. But most of the national lending companies, that's what they do. The challenge with that is, when the borrower gets to any kind of a challenge, we'll call it with their loan, maybe they need an extension, or something's just going terribly bad. Those lenders are not going to be willing to work with them because they don't own the loan anymore. It's gone. It's in some hedge fund on Wall Street, and it's just a number. It's just a loan number, they don't care. They just okay, you failed, get out, we'll take your property. As private lenders, we don't currently we don't sell off any of our loans.

We are 100% privately backed, so I don't have any institutional money at all. That has their thumb on us telling us what we can and can't do and our investors are all individual people there, some are mom and pop. Some are, you know, a little bit higher net worth individuals, but we can have conversations with them. So for example, let's just assume that the markets crashed and 20% of our portfolio defaulted and we had to go take these properties back well, if the market isn't really viable, viable option to sell them off and be made whole, we can go to our investors and we've done this with all of our investors. Prior to them even getting started with us, we have this conversation, but we can go to them say, okay, you know, we still myself, my business partner still run a full time real estate acquisition company, we have rentals, we have everything in place. So we're gonna have to take these, you know, whatever it is 20, 30, 40 properties, and we're going to lease them out and we're going to just collect rents until the market comes back and our investors are, that's not their first choice, but they're okay with it, because they know it's a Plan B, I mentioned that before, you know, the, the borrower's don't want to come in with a plan B or Plan C, we've got that in place with all of our investors upfront and, you know, we pay our investors 9% currently, maybe they would have to agree to go down to 7% or 8%, it would have to look at the cash flow numbers. But that's still better than the alternative of losing money.

Michael:

At zero, yeah, zero or negative.

Derek:

As far as rates are concerned with us, what we pay our investors dictates what we charge and at 9%, we've got a three to four point spread on interest rate. So we charge 12%, throughout the bulk of the state of Wisconsin, and we charge 13%, currently in Milwaukee and it's really just to be 100% honest with you and your listeners, Milwaukee, we could probably charge more, because our competition is charging 15%. So we don't really have any intentions of increasing our rates, we don't have a lot of junk fees, that's another thing your listeners really should consider looking at when we're looking at any lender, the interest rates might be much, much better, but their junk fees, I know of a lender within my state, who charged something like $3,500 to get paid off. In order for you to pay the loan off, you had to pay a payoff fee, which is asinine.

We see a lot of lenders that are charging several $100 to do a construction draw, or a loan or an escrow draw for your construction proceeds, that's your money as the borrower and you now have to pay three, four or $500 to get your money out of escrow. It's crazy, you know…

Michael:

I've seen that.

Derek:

All these fees are they're nuts. We do charge an extension fee if they go past our six month term and it's equal equals to what if we weren't able to redeploy that money and another 12% in three origination points. So for an extension fee, for us, it's a point per month, up to three more months. Why because we want that money back to redeploy it. So we could charge three more points, right? So but it's not some 10 points in some crazy, crazy astronomical numbers, it's really just trying to get our same level return on our money, whether it's extended or redeployed to a new loan.

Michael:

Okay and people listening might be getting excited about using private money, because it sounds like so much more flexible, and just investor friendly. Other people might be a little bit scared hearing this and so I'm wondering if you can talk to if those people are listening, can they get involved on the investor side of things where they're funding other people's deals, and just clipping that 9% coupon or whatever the return is?

Derek:

Yeah, absolutely. I mean, if whether it's with me or with somebody else, I'm more than happy to talk to anybody about it and if you invest with us, you do if you don't, I don't, that's fine. But I would say there's some very important things that everyone should know if you went and borrowed money from your family. Okay, so maybe they're talking about a private lender being an individual that they have relationship with, or they might be using somebody's retirement account. I've seen this happen so many times, it makes me cringe. There was a couple young couple, I mentored them years ago, now they're, they're super successful, but they were just getting into the business and they were, they bought a flip house and they said, We borrow the money from my uncle at 2% and we can pay it back when we sell the house. So that's fantastic. That you know, this was back before 2% was popular, right? Yeah and I said, okay, did you put a note and a mortgage in place to protect your uncle and they said, no, he didn't care. He just said, pay me back when you get it, you know, when you get the money? I said, okay, do you have the property insurance? You know, the listing them? In case the place burns to the ground? Nope. Did you get them title insurance? Nope. All these things like they did not protect their family at all. So picture them getting sued by a contractor or anybody. Here's a free and clear property without a recorded mortgage against it and not and they lose it. Let's say we lose a lawsuit property gets taken away from them. Now they still owe their uncle all this money, and he had nothing to protect himself or we go back to the they get hit by a bus walking out of the title company, right?

Property, the money's gone, the money went to whoever they bought the property from, how does that family member collect or get their money back, if they don't have a mortgage in place, they can't foreclose on the property... So I just caution, anybody that's, you know, on the borrower side, that's going to borrow money from friends or family, make sure you always get title insurance to protect your lender. You know, the property insurance, the lender should be listed as a lender, not as an additional insured, there's a big difference and, you know, go through a title company, go through a closing attorney, make sure everything's aboveboard note mortgage in place, or deed of trust, depending on your state because you're just, I mean, you're hurting your family if you don't do it the right way. So always, always, always protect your lender, no matter what and if you're going to take a loss on a property or a project, I don't care what it takes, you make sure your lender is made whole, because we've lent money to people that screwed up their deals, but they took care of us and next time around, we lent the money again but you got to take care of your lenders. On the other side of it, if you want to be a lender, there's a lot that you have to consider just the whole underwriting of the deal. Is it a good deal? Is it not a good deal and how are you going to make sure that you get paid back are you going to have third party that goes there and make sure that the property is being managed, right, or if it's rehab, or you're gonna have somebody that's checking on the project and releasing money on construction escrow drawers. If you do want to collect monthly payments, who's going to do that who's going to service the loan. So there's a lot of things that it don't get me wrong, it's a great business, but there's a lot of things that people don't necessarily think about and I've seen it happen enough times where, you know, somebody has 100 200 $300,000 sitting around, and they just do a handshake deal, and lend the money to somebody, again, not getting the proper documentation in place. We had one ***hole and I say that, because he really was an ***hole, he took money out of his disabled brothers, IRA, to fund a rehab project and he had three other lenders on that project and he never he told his lenders, he was going to record all their mortgages for them and he never recorded the mortgages and it turned into this in this really nasty lawsuit. But he lost his disabled brothers IRA in that transaction and he's just the snake, you know, and they're out there. But you got to protect yourself. You know, I still believe in taking somebody at their word and believing the handshake. But that doesn't mean you don't write down and memorialize what you just shook hands about.

Michael:

Right and if someone wants to get involved in the lending side of things, but you know what, you just said, what you just shared kind of makes them a little bit gun shy, or they want to have someone else take care of the day to day operations. I mean, are there businesses that they can plug into it? So here, take my money, pay me a return, I don't want to hear about it or know about what you're doing with it.

Derek:

I mean, there is there's a lot of crowdfunding companies that you know, that became very popular. It seems to have died off here lately. You know, I don't hear as much or see as much marketing about crowdfunding. I would say the best way to do it is either find somebody in your local market at a RIA meeting, or, you know, a meetup group or even online, Bigger Pockets or something like that. But you got to spend some time getting to know who you're doing business with and, you know, Google the hell out of them, do background checks, all that kind of stuff. I invite anybody to Google me I have nothing to hide. You know, I'm never I just, I never tried to screw anybody over you know, and I mean, yeah, and it shows. But at the end of the day, you've got to know, this is I don't think this will ever circle back around. But I was invited to be on somebody else's podcast and I won't say the name. But then that gentleman was having a four day online conference and he asked me to speak for 90 minutes on this conference and I said, yeah, absolutely, I'd love to do it. He was expecting, you know, four or 500 people and so I was gonna send it out to my email list and help advertise it for him and it wasn't out there for 30 minutes, and two of my closest friends, one being a really good attorney were emailing me saying, Have you lost your fricking marbles? Like this guy is the biggest con artist and scammer there is and he actually the attorney sent me case studies of actual cases that this guy lost, and how he's not in jail, I don't know and I was just, you know, took and took him at his word. He's got a reputable podcast, right? So I'll go and speak on his conference. Well, who will you associate with can reflect very horribly on you, especially on social media.

So I didn't mark it to anybody at that point, I still, I still spoke because I said I would and I believe in you know, I gave my word and I and there was a lot of other speakers at that event that were good. But I would never do business with that man and so that's the same thing. If you're going to lend money, or you're going to borrow money. Do you want to borrow money from a lender that doesn't want to be flexible if you run into trouble? Yeah, for us, we've only had to foreclose on nine properties in the last 10 or 11 years of lending, which is, is very, very, very low as far as the default rate. That's not to say we haven't had other people that had problems because we have, we have borrowers that have problems every week. But we're there to help them work through it, versus the lender, that's lending money as a backdoor way of getting properties.

Michael:

It's a much more adversarial relationship.

Derek:

Right, so you got to vet your lender, no different than if you were vetting somebody that you're going to invest with, we have a very clear in writing no ***holes policy within our company. I swear to God!

Michael:

I love it.

Derek:

If I have somebody that and this has happened, I've had people that had several million dollars that approached us and said, We want to invest in your company and after half an hour, 45 minutes of talking with them, we just knew they were going to be the biggest pain in our *** and we turned them down. Same thing with our borrowers. If our borrowers stopped communicating with us, and stop doing what we agreed for them to do, then the ***holes policy kicks in and we will have to default we will have to foreclose or at least we're not going to give them a loan next time. But the life is a lot better when you wake up in the morning and enjoy doing what you're doing and dealing with people that are not fun to deal with takes away from that. Yeah, we just don't do it. You just avoid it entirely. So I'd love to work with any of your listeners, unless they're an *hole. Don't call me.

Michael:

Okay, fair enough. Fair enough. Derek, on that note for people that do want to reach out that do want to work with you that have more questions about private lending, what's the best way for them to do so?

Derek:

My, my personal email address is Derek spelled DEREK, @ bestreifunding.com (Derek@bestreifunding.com) and I keep an eye on my own emails, my if I miss something, my assistant will grab it. But I'd love to chat with anybody that's got questions and again, it's this isn't a sales pitch. I mean, if somebody just says legit questions about lending, and they have no intentions of wanting to work with me as an investor, whatever, that's totally fine. I don't it's not about that for me and then the other thing I'm writing a book right now about lending in from start to finish. What happens when an application comes in all the way through closing and servicing after the fact and that's going to be coming out towards the tail end of the year, November December it'll be published. So I'd love to give your listeners that for free the electronic version for free.

Michael:

Awesome.

Derek:

So they just send me an email that same email address (Derek@bestreifunding.com) , and say, hey, I heard you on this podcast and put you on the list when the books published we'll get it out to you.

Michael:

Fantastic. Thank you so much and I just have an ask for all of our listeners that do reach out to Derek if you wouldn't mind please referencing that you heard him on the Remote Real Estate Investor in the subject line. So he knows where you're coming to him from. That would be super helpful.

Derek:

Absolutely.

Michael:

Well, Derek, this was great, man. Thank you again for coming on the show. Really appreciate it and I'm sure we'll be chatting soon. Can't wait, can't wait to read the book.

Derek:

Yeah, I can't wait to finish the book because it's great when you're writing a book, except some weeks are more stressful than others trying to hit deadlines and stuff. So I'm looking forward to it, but I'm really looking forward to it being done, too.

Michael:

I can imagine I can imagine. Well, hey, man, we'll definitely be in touch soon.

Derek:

Awesome. Thanks so much for having me.

Michael:

You got it, take care.

All right, everyone. That was our episode, a big thank you to Derek for coming on again and sharing his time and knowledge with us. As always, if you enjoyed the episode, feel free to give us a rating or review wherever it is eat your podcasts, and we look forward to seeing in the next one. Happy investing…

Buy real estate on the blockchain with Roofstock onChain Sep 15, 2022

Raising finance for new real estate projects is difficult. Property development firms face interest rates as high as 29% when working with banking institutions as single-source loan providers. They also face challenges with multiple loan sources as crowd financing can be difficult to administer. Blockchain simplifies access to alternative financing models by facilitating investor management for developers and ensuring investment transparency and continuous ROI tracking for investors. In today’s episode Goeffrey Thompson, Chief Blockchain Officer of Roofstock, and Sanjay Raghavan, Head of Structured Securities and Co-head of Digital Securities Initiative, walk us through what blockchain technology is and how they are tokenizing properties in a revolutionary way to buy and sell property.

Episode Link:

https://onchain.roofstock.com/

https://twitter.com/rsonchain

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Geoffrey Thompson, who's the chief blockchain Officer here at Roofstock and Sanjay Raghavan, who's the head of web three initiatives here at Roofstock and we're gonna be talking today about what blockchain is, and how it applies to us as real estate investors. So let's get into it.

Goeff, and Sanjay, thank you so much for hanging out with me today. I am super excited to chat with you both.

Sanjay:

Likewise.

Goeff:

Thank you for having us, thank you.

Michael:

No, absolutely, absolutely. So I know a little bit, obviously, who you guys are because we work together. But for anyone who isn't familiar with you. Give us a quick and dirty description who you are, and what is it that you're doing at Roofstock? Goeff, I'll kick it over to you first.

Goeff:

Sure. So I'm Goeffrey Thompson. I currently have the title of Chief blockchain Officer at Roofstock. Previously, I was General Counsel and I've been a lawyer for by training for a long time and now heading up the blockchain initiative at rootstock together with Sanjay.

Michael:

Awesome, great.

Sanjay:

I'm Sanjay, head of web three initiatives. Previously, I was leading securities initiatives at roof stock coming up on actually three years this week. So super exciting tomorrow, I think.

Michael:

Right on, so really quick follow up questions for you both. Jeff. Were you just like a crypto guy in your everyday life? I mean, how does a real out as a lawyer turn into a blockchain official at a company at the C suite level? I mean, that's incredible.

Goeff:

Yeah, I kind of backed into it. That wasn't a plan but I had been advising friends. Since 2017, during the ICO boom, the initial coin offering boom, and I started hearing people in my network, talk about it and say things like, oh, well, it's not a security because it's a coin. So you don't have to follow the securities laws, you know, and I thought, I don't get a lot of the technical stuff that talking about, but I know I can help them with the legal stuff. So then I just I was acting as legal advisor for a couple of years and, and then Gary, our CEO knew that and last year, maybe 12 months ago or a little bit more, our board came to our CEO and said, you guys, Roofstock, you need to get smart on blockchain. We're not saying you have to do it. But you know, we want you to have an idea of whether there's something there and so he asked me and Sanjay, because he knew I had some crypto background and there's a lot of legal and obviously, the financial structure is critical as well, so we kind of got into it together.

Michael:

Awesome and Sanjay, at the risk of sounding like a total rookie, what the hell is web three man, I hear so much about it. Break it down for us.

Sanjay:

All right. So I know it's so web low. So let's take a step back, right. So web one, which was kind of the first incarnation of the internet, right? There were sites that had static information, you could like type a URL, URL and go and, like, consume that information. But that's all you could do is just a read only type of a platform and then a few years later, the internet evolved to kind of web two, which widely is known as the read write version of the internet. So not only could you consume information, but you could go and, you know, provide information and content to the internet as well as a consumer and what happened with web two was it you know, that ability to read and write created all kinds of new interactions, and that allowed a lot of kind of the internet economy to bloom around it, where the Googles and the apples and eBays and other large companies were able to curate a lot of the content and manage a lot of the traffic.

But you know, with social media and stuff, you are providing content as well, and you are consuming content, there was ecommerce, so a lot of these things came about, but the power resided with a very few large corporations that kind of controlled all of these transactions and the when, when web one started, the kind of original vision behind it was a more collaborative environment, where the consumers and the creators and consumers could actually work with each other and use a token economy and share you know, revenue and monetization. So that idea of you know, read, write and then adding on to it at the end. So it's a read write own type of economy that's decentralized. permissionless trustless has its own native payment rails, where the content creators and con Then consumers are all working together and you know, there's no power resting with large corporations, but it's, you know, giving power back to the people. So that's how that's how I would sort of succinctly describe, three and it's so it's a sort of a new way of thinking about things and it's super exciting.

Michael:

Yeah it does sound super exciting and so give us all like a background again, treat me like a third grader, because that's probably my IQ level when it comes to the crypto and blockchain world. Give us all an idea of like, what is blockchain and what is cryptocurrency and then we'll get in maybe on how to be thinking about it. With regard to the real estate space and why it even belongs here you don't think this…

Goeff:

Yep, sure, so the core concept for blockchain is that it's a network that can be validated the data that's recorded onto the network, which is the chain can be validated by an a limitless number of third parties who aren't organized or connected in any other way. So these are called validators I could have when you could have when they just computers that read the information that's coming in from the blockchain, they perform some mathematical calculations, and then they verify that the data that's been submitted is, is what it says it is and then at that point, it's formalized and recorded to the block and then, so these blocks are really just pieces of data, data that had been put together and then as you form one block after another, that becomes the chain. So it's really just a chain of data that's been validated by third parties that are completely decentralized. So why is that important because it means that there's no third party, a corporation or government, whoever it might be, that can intervene in the functioning of the blockchain, once it's up and running, and you have enough people who are validating and writing to the to the system, it goes infinitely, and it can't be shut down and so the first use case that really grabbed a lot of attention was payments, right?

That's what Sanjay was alluding to, in the early you know, the current web two universe, you don't have an easy way to send value to another person without going through a bank or a financial services company, Blockchain, Bitcoin allows you to do that, it's just simply on the on the chain, if you have value in the in the form of Bitcoin, you can send it to any other address anywhere in the world, instantaneously and no one can stop you from doing that. So this really arose from kind of an idealistic perception, like, we have to be able to have to guarantee our own freedom, you know, the government can't intervene and prevent me from sending money to you and that's where, you know, it came from, like the sophisticated cryptographers mathematicians who had an idealistic view, and that's where Bitcoin came from and then since then, it's expanded to a lot more utility, where you can do much, many more things other than just send payments. You can, you know, NFT, you can have lending platforms, you can have social media companies that are effectively on a blockchain and can't be shut down or controlled by third party. So that's, you know, that's the overview of kind of where it came from and why it's important today. Sanjay, anything to add?

Sanjay:

Yeah, no, taking a step from there right and that's exactly right, Geoffrey, the original idea was, you know, this all came about during the great financial crisis of 2008 2000, you know, 10 or so, where people thought that these, you know, financial intermediaries are, you know, in control of our lives and so Bitcoin kind of, you know, that was the reason why it came about as a peer to peer system where you can exchange value without involving these intermediaries. But then over the years, we've kind of seen that world expand rapidly and there's other cryptocurrencies now and one of the notable ones is Ethereum and on the Ethereum network, there's actually the ability to create what's known as a smart contract and a smart contract is essentially a piece of computer code that will execute based on a certain event occurring and why that is important is if you think about it from a disintermediation perspective, you know, in a transaction where two parties are involved, and party A needs to provide a good or service and party B needs to make a payment for that. You need a way to make sure that both parties are adhering to their portion of the agreement, or contract, right and so oftentimes, what happens in the financial services world is, in order to make sure that both parties are compliant with their aspects of the contract. You create an intermediary in the middle that takes that position of collecting information or payment from both parties and sending it across and a very common example of this in real estate. Michael, you as a, an owner of, you know, dozens of properties, you've gone through this process many, many times. But you there's an escrow agent involved exactly what I was thinking sure that, you know, right, the property title moves over to, you know, the buyer and the money goes to the seller, right. But imagine you had a piece of computer software that executed on a sale, and it made sure that the two parties were both appropriately receiving what they were expected to receive and there was no intermediary involved in this process. So this, this all executed, basically on the click of a button, right? Like that would be game changing in the real estate world and that's what we're trying to do now with through stock on chain.

Michael:

Holy crap. For anybody who's not watching this video, I just didn't pick up my jaw up off the floor, because that was totally a game. So I have so many questions, I want to take just a step back and so Goeff, you were talking about this, these validations that can be done by any number of people. So I'm thinking about like a real world example. So if I go to the store, and I buy something with my credit card, I put down my credit card, they give me the goods and then in this case, would the validator be like the credit card company that says, look, this is the charge that like how do I think about that from like a traditional example.

Goeff:

That's exactly right, the validator or usually there are multiple, but they'll they play the function of the credit card company. But instead of sending your data and the transaction data to the credit card company, where the credit, you know, the data goes to the credit card company, the credit card company says okay, this person has credit and the transaction is now going to be posted on their account, and then they send the okay back to the merchant. Instead, the merchant would send the data to a blockchain, the blockchain validators would pick up that transaction, they would validate that, you know, all of the details are the same. Usually, it's a small number of validators that have to agree on the transaction details to make sure that there aren't, you know, nothing's been missed and then once they've reached that consensus, whether that's five or 10, validators, or whatever it may be at that point, then it goes back to the merchant and as it says, The Merton now the blockchain has been updated to show that this transaction occurred, Goeff, or you or whoever was spending the money now no longer has that money. So I had that money in Bitcoin. I gave it to the merchant, the merchant side of the blockchain and said, hey, guys, can you verify that you're debiting Goeff’s account and you're adding it to my account? Everyone said, okay, verified, validated, coming back. Now, I can't spend that money, I don't have it anymore and it's in your account. So that's, you know, a high level how that would work.

Michael:

Okay

Sanjay:

And a couple of more things there, right. Like, if you, you know, credit card transactions for small dollar values is one example. But if you look at larger dollar values, and there's ACH transactions that take three or four days to get validated through the banking system, a wire transaction, if you're trying to buy a house, and you need to make a wire payment, you're rushing to the nearest retail brand, scheduling an appointment to go into the wire, right?

Michael:

It's such a pain.

Sanjay:

It is all such a pain and like, imagine you had a way 24/7, right, like, you're looking at, you're browsing a site today, you find a property you really like, you want to buy that property, it's Sunday night at 10pm. You just click the button, and you know, your wallet says you have enough money and the smart contract validates that you have the money transfer property over to you, right, like imagine a world that's like that, where you don't have to worry about waiting three or four days for an ACH or running to your bank and getting an appointment waiting in line to get a wire done and it's all literally you're doing all this from your computer, click of a button 24/7 AMS and payments do anywhere in the world.

Goeff:

And the cost is in most cases, negligible. You know, the wire fee is whatever 35 $50 It takes a day, you know, some amount of time to process ACH could be clawed back. The claw back concept that exists with ACH that doesn't happen in blockchain that doesn't exist. Like once it's final, it's validated, it's done and you could, you know, a simple payment transaction might cost from a few cents to a few bucks, but it's not going to be anywhere near the cost of a wire transfer.

Sanjay:

And the transaction is immutably recorded on the blockchain, nobody can contest it, because you can go and open up that transaction on the blockchain and say, these two parties agreed to this transaction and it's hot, you know, it was hashed on the blockchain and there's this unique hash that represents this transaction, right. So there's no disputing later on. The parties agree that transaction gets done, it's instantaneously recorded and so that that makes this platform as a technology choice. You have innumerable number of possibilities because once you have those types of payment rails, you can build all kinds of applications around it.

Michael:

This is insane, you guys. So like, we were talking about the validators and Goeff, you were saying, whatever, four or five or 10 validation points and people are doing it. So is it literally like people on their computer going, like watching their screen for these payments going back and forth or is this happening automatically?

Goeff:

No, it can happen. It happens, it's automatic. Yeah, you set up a server that has the right hardware, there are different hardware and software requirements for different blockchains. But it runs silently in the background, or in some cases, it's, it's loud, because there are a lot of fans this morning.

Michael:

I heard that, yeah…

Goeff:

Yeah, but it's happening 24/7 In the background, and, and in most cases, it's just set or forget, set and forget, you don't have to be online all the time, doing anything manually.

Sanjay:

And one other thing I wanted to point out was, you know, obviously, with banks, you can go there on weekends, after hours bank holidays and such, but even a MasterCard or Visa, if they're having a problem with their servers or something, you can have outages where you know, for a couple of hours, you're not able to do any credit card transactions, right? Whereas on the blockchain, that doesn't happen, right because there's blocks can be like, even if my computer was one of the validators, but for whatever reason, it's not working right now there are hundreds of other computers that are doing the same thing that are waiting to pick up the next block and compute it and solve the puzzle and so, you know, as Goeff was saying earlier, once the blockchain is up and running, and there's, you know, enough infrastructure in terms of validators that support that blockchain, you know, it's then it's permanently out there, and it's you can shut it down.

Michael:

So that kind of brings to my next question and so you both are talking about this decentralization aspect and I think I've heard so much about the crypto world, it's like getting away from big banks and government and that sort of thing. But if this information is, I mean, it's public at this point, right? When I, Goeff, when I send you money or buy a service from you, it's now public information.

Sanjay:

Just to just to clarify on that, right, the part of the information that's public is that this wallet address transacted with this other wallet address. But it's not necessarily public that, you know, Michael transacted with Goeff, right. So what's publicly stored is just the, you know, so, you know, when we talk about privacy, oftentimes, people use the words privacy and anonymity interchangeably, but they're two different things, right? You know, in one example, where there's just two wallets transacting with each other, you both still have full anonymity but the privacy concerning the fact that the transaction occurred between two wallets, that may be public information, but that's the kind of subtle.

Michael:

Got it, yeah okay. Okay, that makes total sense, because, well, I was going with the question is, if I send Jeff money for a service, I mean, that could be a taxable event on the traditional world, like, if you were a credit card company, or you were a merchant, I send you that you have sales tax to pay. So I'm imagining government's point to the me sending you money and say, well, now we're going to tax it. But Sanjay, what you're saying is that the actual dollar amount, or what it was for, might not be available to them, all they could see was, someone sent money to someone else, end of story…

Sanjay:

We use you the amount of money that went from a to b, but you don't like people don't automatically know who a and who B where the US are going as far as…

Michael:

Or what it's for…

Sanjay:

Right, in the US people are required, basically to report their own earnings and that's, you know, whether it's on the in the crypto side or non-crypto side, but, you know, you're required to report your earnings and in other countries and jurisdictions, they've passed laws where crypto transactions are not necessarily taxable. So, like, if you bought Bitcoin for, you know, $5,000 and sold it for $20,000, you may not have capital gains taxes in other jurisdictions in the US we do and that's, you know, self-reported, for the most part,

Michael:

This is so nuts. Okay, so, taking one more step forward, we're talking about these coins. We talked about Bitcoin, and we mentioned Ethereum, as well, what gives these things of value? Is it just that we have generally I mean, the same thing can be said for the dollar, it's enough people have accepted or any currency have enough people have bought into this idea that this piece of paper that has an old president's face on it is worth what we've decided it's worth, same thing for Bitcoin and Ethereum.

Goeff:

Exactly the same. All right, yeah. Nothing else. There's nothing else to we, you know, we all agree today that Bitcoin is worth 20,000. If it goes up, then you know, that's literally the market price. It's set by the people in the market who are transacting on a you know, every second and so it's a very clear pricing mechanism.

Sanjay:

In a way you know, it's pure demand and supply that drive pricing for the these types of alternative currencies or crypto currencies, the dollar, for example, you know, we price $1 bill to be worth $1, right and so you will always be able to redeem $1 for $1. But, you know, inflation and other characteristics might make it less valuable to you, right like if a loaf of bread was 50 cents, and now it's $1, you know, you're paying more money to get it, but you know, you're not paying more bills necessarily, you know, like, the dollar bill is always $1 Bill, right? Whereas, one, one Bitcoin or one Ethereum, its value can go up over time, almost like the stock market, right? If you're looking at a share of Microsoft, it's $100 today, but because we all think Microsoft is very valuable, or Apple is very valuable, and the next iPhone is the most sexiest thing that's come out, and therefore, you know, we think we should, you know, put more value to the Apple stock, right? So the concept is similar with Bitcoin and Ethereum. It's simply people that are there are people who are, you know, buyers, and then there's their long on Bitcoin and then there are people who are short on Bitcoin and if there are more people long than short, then the price is going to go up. If there are more people short at a particular point in time price will come down. There's fewer demand.

Michael:

Cool and so we mentioned, I think you both mentioned a couple of different use cases for the blockchain and for crypto. What, like, where do you see this going and for Roofstock, specifically, maybe you could talk about what we're doing as a company with regards to blockchain and where do you see it evolving from here?

Goeff:

Sure, so, the, you know, the easiest use case for the blockchain technology is for something that is entirely on chain right payment is a perfect example, right? The you know, I give you send you something of value, call it Bitcoin, you accept that, and that's all on the blockchain and that's pretty easy. What we're doing is, we think taking the next step forward for blockchain and we're not the only ones. But we think that we do have something to add here, which is to bridge blockchain to real world assets and that's where things start to get a little bit tricky because let's say that you have a home, you call it a home on chain, a tokenized, home, whatever it is, and you have a token, a blockchain representation of a home, but it's a real world home and so you know, you say, oh, I go to my blockchain wallet, my crypto wallet, and I see I have this home token. That's great but let's say it's not the home that I live in and in fact, it's a home somewhere else in the country and I haven't been there for a while. How do I even know that there's still a home there, right and if I want to sell it to you, you know, you like the idea of using a smart contract to buy and sell this home? You like the idea of having a one click transaction of having certainty that you're going to get what you know, the home token in exchange for your money. That's all great. But how do you know that you're actually buying a real home and not just something that is called a home on a blockchain, whatever that even means, right.

And so that's where we've spent all of the last nine months and the better part of the last 12 months, diving into the nitty gritty legal details to understand and practical implications to understand how we can put this together in a system that works and the answer is, you have to have some type of validation from the real world as well, obviously, you know, the scenarios that I just mentioned, we can't allow that to happen where someone purchases a home token, and finds out that the home burned down three months ago. So you know, you just got nothing and so the way that I think what Roofstock can bring to this equation is the deep, detailed knowledge about how real estate transactions work, plus the blockchain, the blockchain, structuring the legal implementation and that's the value add that we have. I think there are a lot of others in the space and we encourage everyone to get out there and try, you know, try to build, but we do see others who don't have the real estate experience and even though they have a beautiful blockchain strategy, they don't know how to connect that and that you end up with something that's not useful. So what we're doing is designing a system that ensures that before any home is transacted, it's gone through all of the usual checks and balances that are necessary for real estate transaction and inspection has been done recently. We've done you know, made sure that taxes are paid, made sure that insurance is in place, make sure that the title is you know, unencumbered. We do all of that, because you have to do all of that no one's gonna buy it, if you doubt, but we do that behind the scenes, and so went by the time that you as the buyer come to see our site and you see the home, the home tokens that are listed there, you know that you have a data room that shows all of the documents that I just mentioned and more. So your diligence is already done for you. You don't need an inspection contingency, because you have an inspection report sitting right there, you know, you don't need on the on the on the flip side, you know, you don't need an escrow agent, because the smart contract simply it won't execute, it won't perform its function unless the buyer has the funds that it says it has. So you know, this smart contract at the time that you as the buyer purchase, you click, I want to buy this home, the smart contract checks, do you have money, the right amount of funds in your wallet? You know, they check the other side. Does the seller have a home, which is already been approved by Roofstock to be sold? Yes, yes, the transaction happens, and it's not and if one of those isn't true, then it fails and you know, we have to go back to the drawing board and fix whatever was wrong.

Sanjay:

Right and then to add to that, right, the kind of the first version of smart contracts and NF T's and all these things that came about on web three, you know, a lot of those assets themselves had the value in it, right. So you might have heard about projects like board a, or crypto punks, these are well known NFT projects where people are spending Saturday 98 to buy, you know, a JPEG image of you know, this popcorn ape. But in those cases, that image itself has that value embedded in it and when people get that image when they buy that they've already exchanged value, right. But the example Goeff is giving us with a real life, real world asset, the NFT is a representation of that real world asset, but it's that real world asset that has the value in it and so when people are transacting these NF t's on the marketplace, Roofstock has to make sure that you know what they're buying and selling corresponds to that real world asset that has that value and we've gone through the inspection and other diligence process to make sure that is still true, right. So that's the sort of the next leap in the web three world where you go beyond just the you know, cryptocurrencies and crypto Native Assets getting traded and now you start looking at real world applications.

Michael:

Goeff, I'm thinking about is like, so if I'm trying to understand this, I'm I buy this token, which the underlying asset kind of backing the token up, if you will, is the home, right? So I then own the home as well. How does that work for like, insurance purposes? If I gotta go get insurance on his home? Am I Michael, like going out to my traditional insurance people and saying, okay, well, I own this home, or like, who's on title of the home? How does that all work, is the token on the title?

Goeff:

All the right questions. So the way that we're setting this up, each home is titled in its own LLC. So we have a limited liability company where the home is titled and so that really facilitates the transfer between different parties, because you don't have to record title, every time that home token is sold. The title obviously has to be recorded the traditional way at the county recorder’s office, the first time that it's transferred into the LLC and then from that moment on, it doesn't need to be retitled because the only thing that's changing hands is the LLC, the ownership of the LLC, the membership interest, it's called like the share of the LLC. So that's, that's how we unlock that. So that when I sell you my home token, I'm selling you an LLC that owns the home and you as the owner of the LLC, you have full control of the LLC, and thereby full control of the underlying home. So you can do whatever you want with the home. If you want to rent it, you can rent it, if you want it to be a long term rental, a short term rental, you get to decide all of that you get to decide when you put a new roof on or if you want to repair the roof instead of replace it. You make all those decisions. As far as the insurance question that you asked, we do have an agreement with an existing insurance company that's tech forward, and they're interested in working on this project. So we've already set that up. The first time you buy a home from us, it will come with one year of property insurance, it's prepaid. If you want to change that you can you can change it if you want to cancel it and replace it with a different insurer. You can what we found is that a lot of intermediates in the space are not necessarily comfortable and dealing with this type of transaction. So we've spent a fair amount of time diligence seen a lot of, you know, providers in the market and we think the ones that we have are very good, but it's up to you as the owner, if you want to have a specific insurer, or a specific title company, you can do that. But otherwise, it's already in place and it's really as easy as just paying your annual premiums you can, you don't have to think about it, if you don't want to.

Michael:

Okay, so the follow up what popped in my mind immediately, and then we're going to get you guys out of here, but we live in California. So Roofstock obviously doesn't have a very big footprint here, because there's not a lot of cash flow potential, or it's much more difficult to make the numbers work as compared to a lot of other parts of the country. So, Sanjay, if you buy a home for a million bucks, tokenize it and now you your property taxes in California are based on your purchase price. So if five years down the road, you sell it to me for 2 million bucks. Traditionally, my new property tax value is going based on that 2 million bucks. But are you saying that because this trent this sale isn't getting recorded, as it would traditionally that my property taxes are still gonna be based on your original sale price of a million bucks.

Sanjay:

In many state that's, that would be true. But in California, unfortunately, prop 13 would pick that sale up. That's it's a state by state analysis and in most of the states, you know, the transaction would be fine. You individually report any capital gain on your taxes, of course. But in California, the transfer does get picked up.

Michael:

Damn it. They always get you somehow but maybe in some states, it sounds like that might not get picked up, right. There's less of an issue…

Sanjay:

That’s right, in many cases…Yeah.

Michael:

Interesting. Okay, man, I thought I had this huge unlock but clearly you guys have already thought of, of all this. So this is this is super exciting, guys. We definitely need to continue the conversation, got a lot more questions, a lot more information. I would love to disseminate to our listeners. But thank you both so much for joining me. If people want to learn more about web three and blockchain and crypto in general, is there are there good resources out there that we can point people to?

Sanjay:

Yeah, I mean, definitely come to our website to learn about real estate tokenization. That's https://onchain.roofstock.com/ and also, you know, follow us on crypto Twitter. It's at @rsonchain and then individually, like Goeff and I do contribute in Twitter and LinkedIn and other areas as well. So, you know, look us up and follow us as well, on those platforms.

Goeff:

And don't feel don't hesitate to reach out. Like you know, we're happy to talk we're here. We're you know, we're doing something new. We know a lot of people have a lot of questions, and we're happy to answer the questions and then he conversation. So ping us, we're happy to chat.

Michael:

Amazing, amazing. Well, thank you both again, for coming on and super looking forward to doing this again soon.

Sanjay:

Thank you. Thanks for having us.

Goeff:

Likewise. Thanks.

Michael:

Alright, anyway, that was our episode. A huge thank you to Goeff and Sanjay for coming on. We're gonna definitely be having them back on again soon. So if you have additional questions about things you just heard, or blockchain things in general, we'd love for you to see those in the comment section. Wherever it is, you get your podcasts, and we will try to get to them on the next episode with Goeff and Sanjay. As always, if you liked the episode, feel free to leave us just traditional rating or review. We love those as well and we look forward to see you in the next one. Happy investing…

Systems to scale up a healthy portfolio with Steve Rozenberg Sep 13, 2022

An international commercial airline pilot who, after the tragedies of 9/11, was forced to realize that his “Safe and Secure career” was nowhere near as safe and secure as he had thought. Steve Rozenberg chose real estate investing to be able to control his own destiny and create his own generational wealth. He created the fastest-growing property management company in the state of Texas. Managing over 1,000 properties across 3 major metropolitan cities. Steve built the business up and created maximum cash flow positioning his company for a very profitable exit.

He has been a guest and collaborated on countless panels, webinars, masterminds, conferences, and podcasts as well as being a published author. In today’s episode, he shares his story, how he began real estate investing, and how important your mindset is to be successful in this business.

Episode Link:

https://steverozenberg.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Steve Rozenberg, who's an airline pilot and entrepreneur, and he's gonna be talking to us about the mental mind shifts we as investors need to make in order to scale and have successful businesses. So let's get into it.

Steve, what is going on, man? Thanks so much for taking the time to come hang out with me today. I appreciate it.

Steve:

What's happening, fellas, good to see you.

Michael:

Oh, super good to see you, Steve. I am super excited to share with our listeners a little bit about you and your background, because I know a little bit about it. But for anyone who doesn't know who Steve Rozenberg is, bring us up to speed quick and dirty. Who you are, where you come from, what is it you're doing in real estate today?

Steve:

Sure. So I live in Houston, Texas, born and raised in Los Angeles, actually, my career brought me out here and that careers, what got me kind of involved in being a real estate and being an entrepreneur. I'm an airline pilot by trade and I got hired at 25 years old. I was the second youngest person ever hired by this particular major airline and hired at 25, I had the best job in the world is flying all over the globe. I was 25 years old and it was the most safe, most secure job that anyone could imagine having. Until a certain day in history. That day was 9/11 and that day changed my life, it changed a lot of people's lives. It changed my life because on 9/13, two days after 9/11 in the towers fell, I got delivered a furlough notice and I was basically told, hey, Steve, you know what that safe, secure job that you thought you had, it was never safe and it was really never secure and you're about to be on the street with 50,000 other pilots.

So to say that I got punched in the face very, very hard within about 48 hours would be an understatement and it was it was rough. You know I always I ever want to do as a kid is be an airline pilot. I didn't want to do anything else. I was fulfilling my dream and this something happened, which I realized it had nothing to do with me but it affected me. You know, I didn't I wasn't a part of 9/11 but I was a repercussion, a ripple effect, if you will and so I started to talk about what I could do, what could I do? What to survive to make a paycheck, right? All I knew was to be a pilot, but there was many, many other pilots out there probably better pilots than me to be honest with you that you know, we're also on the street and I looked and I saw that everyone that was tied to wealth somehow was tied to real estate. I didn't know anything about real estate, but I was like, okay, I mean, I knew some pilots who had rental properties, but I didn't know much about it. So this is 2001. So there was no YouTube or Facebook. So I had to go to the library. I had to get a library card.

Michael:

A lot of our listeners are probably asking, like, what is that?

Steve:

Yeah, yeah, exactly. It's a big house with a lot of books and so I had to start learning about real estate, I read a book a week and I just I read everything I could, because I thought that I was behind the curve of figuring out what I was going to do with this airline thing. If there was another terrorist attack or something happened, I was gonna be out of work and so I learned all the different things you know, now it's very cliche, you know, burrs and all this other stuff. But I just I learned how to buy I learned how to flip I learned how to wholesale properties. I got lied to, I got ripped off, I got cheated on. I mean, you name it, I just kept getting pushed down face down in the mud every time. But I kept getting back up because I had to I didn't I didn't have a choice. I had to figure out this combination and I, I saw people that were successful. So I was like, okay, there's a recipe. I just don't know it. But I can think like, I'm not the dumbest guy in the world. But I could figure this out and then I started getting better and I started winning a little bit more than I was losing and I started figuring out and what I realized was communicators are actually the ones that are the most successful, not the contractors.

It's four walls in a roof. It's relationship driven. It's not anything else and that relationship is driven by business models, and it's driven by systems and so I started realizing that the four walls and a roof and the dirt really had nothing to do with being a real estate investor. The successful people were good communicators, and they understood the value of leverage and team and then I started looking back at my real estate in my airline career and I started looking at how airlines run and I was like okay, systems, procedures structure and I kind of started melding the two and that led me into start learning to become successful as with my, my old business partner, Pete Newberg, who has been on your show, he and I built a very, very successful property management company, by understanding how to leverage those models and how to leverage systemization and then I've gone on to do a lot of other things, coaching people working with people, helping people understand the systemization of a business is very fundamental to be successful, is what I've learned and that's what I help people with.

Michael:

I love that and we're gonna get into a little bit more of the systemization here in a minute. But for anyone listening, it's like, well, Steve, Michael, I'm not an extrovert. I'm more of an introvert, I'm more of an insert inside kind of person, like, Am I just doomed to never be a real estate investor like, what should I be doing if that's me?

Steve:

So that's a good question because a lot of people you know, are a lot of people that go into real estate, what I've learned is they're running away from a life or job that they don't want you when you talk to real estate investors, and I coach a lot of real estate investors all over the world and when I talk to them, I'll ask them, why are you doing this, and a lot of them will tell me, I don't want this, I don't want that. They're running away from something and what they're running away from is a life that they don't want to have. Unfortunately, when you're running away from something you don't want, that's what you're focused on, and you run right back into it. I mean, that's the cycle, right because that's your filter. But what I've learned is, you don't have to be the best communicator, but you have to have good communicators on your team. There's things that I am really, really good at and there are things that I am horrible at. It's a matter of understanding, what are my strengths? What are my weaknesses, I don't think that I should become like, that's just my opinion. I don't think it makes sense to work on my weaknesses. I don't know anything about accounting, I would make a company go bankrupt if I started doing the accounting books for my business. So why should I go and take two year courses at a junior college to learn how to do books, or I just hire someone and that's what they do. So I've taken my weakness, and I've actually turned it into a strength because now I don't have to think about it, I don't have to focus on it. I have someone in place that is run by KPIs and metrics and accountability and I just, I just parceled, that whole piece of my life off.

So to answer your question, I don't think you have to be good at that. A business needs it like my business partner, Pete. He was the integrator and I was the visionary. I was the forward guy, I was the guy out in front. But I sucked at the operational side, he was like the mushroom in the in the back room and, you know, my job was to break his business all the time. It's like I wanted to have so much sales and marketing coming in, that he would go Steve, I can't take it anymore and that was like my victory lap of showing. That's the that's the sales and marketing tug of war that goes on, right and so I don't think that you have to be good at everything because the reality is, is you're not, you're probably good at one thing and you suck at everything else that you do. It's a matter of identifying what am I good at? What am I not good at leveraging out those other things and focusing on that one thing to be the very best that you can be and if you can do that, you will help the business, the organization and you'll be much happier too.

Michael:

I think yeah, I think it makes a ton a ton a ton a ton of sense. So talk to Steve about like, you got three to five properties, you're looking at scaling up, you're realizing maybe a little bit more and more, you're self-managing, hey, this might be more of a job than I was anticipating I'm trying to get out of a job that people what are some systems people should be putting in place and how should they be thinking about systemization if that's a new term for them, that's never something they've done before?

Steve:

Yeah, that's a great question and let, I'm going to back it up a little bit if it's okay, because a lot of people, if they have three to five properties, and I get a lot of people that will call me and ask me that question like, hey, Steve, you know, if I'm in front of them, they'll put a deal like three inches from my face and they're like, hey, is this a good deal like being closer makes it more sense? I don't know. But they'll put this right to my face and they're like, is this a good deal? Well, I don't know what a good deal is for you. So first question is, what's the goal, right? What is the date of that goal? So if they don't know the goal, and they don't have a date, and a timeline and a way to achieve that goal, I can't tell them what to do. I can't give them directions. It's kind of like if you said, hey, Steve, we're all gonna go to Disneyland and we got to be at the front gates at 8am on Friday morning and we're going to leave our house at 6am and we're going to take the 405 to the 91. Get off on Disney drive, and we're gonna go into the gates to be there ready to go. Well, if along that way, you get lost, you're gonna pull over and you're gonna go, hey, Steve, can I get directions? What's the first thing I'm going to ask you? Where are you? Where are you going? If you say, I don't know, I'm just driving around today, I'm gonna go with it. I can't help you, because I don't know where you're trying to get to. So if you take that same analogy, many people buy properties. They don't have a goal. So they say, should I buy more properties? My question is, is I don't know what's the goal? Because, you know, many people, you know, they think that owning rentals is the goal. That's just the strategy to achieve the goal. That's like saying, I'm going to get on the 405 freeway and you're going, where are you going? I don't know, I'm just gonna get on the freeway and drive and the reason I know that is when Pete and I first started buying properties, that's what we did. We were just buying properties and we're going the wrong way, in the wrong direction at a very, very fast pace and nobody stopped us to say, where are you guys going because we're just driving. We're like, we're making great time. Unfortunately, we're going in the wrong way. So to answer your question, to going back to what you're saying about systemization, every business normally has about eight to 11 systems in their business, it's a matter of looking at what you do and systemizing everything. So if you took a system and put it in a vertical, let's just say when you're going to rent a property, what is the system that it takes to rent that property, you've got to basically first thing you've got to do is maybe the first trigger of that system is when the Make ready is done. Now the property is in rent ready condition, it now triggers this system to happen. What's the first thing you got to do?

Well, maybe you've got to go and take pictures and video of the property. Step one, what's the next thing you got to do? Well, then you've got to do some comps and check out the area and see what the property is renting for. That's step two. So you're going through and you're just basically talking to me, like I'm a three year old or third grader and you're explaining to me in very painstaking detail, what you're doing. These are all steps in the process of a systemization. Once you create the system all the way through to getting the property rented, once the property is rented, that system is complete. Maybe that system is 19 steps, right? Then you look at that system and go okay, is this the most efficient way to run this system, does or is there any redundancy? Is there any things that we don't even do or should not do? Are we missing some things? Now, let's say for example, this person, he, let's just say he grows and he gets an employee to do these tasks, right and or he subs it out to a company. This company needs to know very, very clearly what they're doing because the definition like look, I think we can all agree that when you own one business, or you own 50 businesses, which are rental properties, those are businesses, that you've got to treat it like a business, right? The challenge is, most people don't they don't have any systems that don't have any structure and it's chaos, which is why so many landlords get sued, because there's no systemization or standardization, meaning how you lease a property. When you're in the airlines, right, we'll go back to being an airline pilot, if I'm an airline pilot, and I came out and said, hey, everyone, this is gonna be a great day today. We're off to Hawaii. This is my first time ever doing this. So wish me luck. I'm just gonna wing it and hopefully we make it there. How would you feel?

Michael:

Yeah, a little bit shaky.

Steve:

Right but yeah, you'd probably be like, I'm not getting on this plane. Yeah, but that's what many people do with their rental properties and they're doing that with their financial lives, right? This is your real life, you're trusting me with your life but you don't do that with your financial life. So there's a disconnect as to the training and, and the way that you can scale because if you have to do everything in your business, you don't own a business, you own a job and a job is not scalable, because you have only so many hours in the day, and you have so much knowledge of what you're good at and what you're bad at. So I don't know if that answered the question but there's, that's a very hard thing to unpack.

Michael:

No, it totally does. It totally does. Two things. First thing is I think you must be having been out of LA for a long time, because your analogy you're talking about getting on the 405 Dizzy land, you leave by six get there by eight. There's no world in which that happens today. Yeah, first and foremost. But secondly, so like, how does someone make that mindset shift because I think so many of us and specifically, it seems to be pretty pervasive in the real estate world, this DIY mentality, you know, I do it myself, do it myself, do it myself. How does, how do you make that mental leap of, okay, I'm going from doing it myself, small business owner to hiring someone or contracting it out or putting it to somebody else so I can get out of my own way?

Steve:

Sure. Well, there's a couple things. Number one, you've got to you have to be willing to let go of your ego and pride, right? Because ego and pride are success inhibitors, they will kill your success quicker than anything. I should do it because I'm in charge, right and so let's go back to the goal, right? If I said, hey, what's your goal and you didn't, you didn't and this is what I use this example when I coach people, I'll tell them, okay, let's just use this as an example. I call it a 2020 2020 properties in 20 years, giving you $20,000 a month in passive income. It's a bait. It's a goal, right? Yeah, it's, it's got a time limit on it. It's something that we can attach an actual goal to and we know how we're going to achieve that goal because we have a scoreboard to see if we've made that. So that means that each property needs to be giving off $1,000 a month in passive income to get 20 properties give me $20,000 a month. Okay, that means, okay, so let we're gonna, I'm gonna, I'm gonna answer your question in a roundabout way, we've got to say, Okay, if we want to have 20 properties, that means by year 10, we have to have acquired all those properties so that from year 10, to your 20, we're going to pay those properties off, because we want them free and clear by your 20. That means between year one and year 10, we have to purchase 20 properties, which means we have to close on two properties a year, which is every six months, which means every three months, we have to be looking for deals.

My first question is, is do you have the finances to even make this happen? Do you have the do you have the financial means to achieve this goal? If they say I don't have a job, I'm gonna go well, then we're done talking because first thing you need is the financial means to make that happen. That's number one. Then we say okay, when you achieve the goal of 20 20 20, right, and we get to where we want to go, what I have learned and what many people I'm sure some people will learn, it's not a bad thing to learn. But a lot of people identify success by their accolades, meaning how much money they have in the bank, or how many properties they have, how many doors whatever they want to whatever they want to use as their gauge. That's how they quantify their success, or lack thereof. Now, I had Pete and I had a very successful property management company that we sold to a venture capital much larger firm and I can tell you that when you get that money in the bank, it is very, very, very anticlimactic. Like I mean, literally, like after we sold our company, and we sold it for well into seven figures, all of a sudden, I thought I'm done, like, oh, this is awesome. Now, mind you, I still am an airline pilot this whole time. So I'm okay financially but I thought, man, if I just if we sell this company, we're good. You don't happen Monday morning, after we sold the company?

Michael:

You put on your uniform and go fly a plane.

Steve:

My wife said, hey, don't forget, take the trash out the trash bin or come and I'm like, when I sold the company, like I sold my goods just like, don't give a shit. Take the trash out. So, but the point is, is like all of a sudden you think you're in some magic club like you think you break through this glass ceiling and the reality is, is nobody cares and the reason I'm saying the reason I'm going somewhere with this is that we think that once we achieve a mark or a goal that's going to make our lives complete and sadly, it doesn't, it actually makes it more hollow because you realize, like, wow, I've been doing this all these years, and nobody even cares. Like they're, you know, everyone's moving on. So what I always tell people when I talked to when I told you earlier that a lot of entrepreneurs, they buy real estate, and people want to get involved in real estate and I asked them why they say I want more freedom, right? I'm sure you've probably heard this, I want anytime freedom, do what I want, blah, blah, blah, they use this word freedom, like it means something special to them. I tell them okay, well, let me ask you this, why don't you just sell all your shit today, go live in your car at the park, and you'll have all the freedom you need. No one will bother you, you'll have your freedom. They think about that I'm like, but you know, what you won't have is you won't have the memories that you want associated with that freedom.

So we're really not buying freedom. What we're buying is memories. So when I sell a business, or I have rental properties, giving me cash flow, what am I doing with that cash flow, it's giving me the ability to have freedom to go buy the memories. It's the memories we want. So going back to your question, how does somebody step out of what they want? I would first ask them, what memories do you want to buy because at the end of the day, we're not leaving, we're not leaving this earth with anything except our memories, right? When we go when our when our expiration date happens. We're not going anywhere, except with memories in our brains. What memories do you want, right in the real estate, and the cash flow or whatever you're doing with that will give you the means to buy those memories. So buy the memories don't buy the time is you go to prison and have all the free time you want. You may not like the result, but you'll have free time by the memories, right? Go to you know, have dinner on the Mediterranean in Greece, right? Go to this African Safari, the Rolling Stones in Wembley Stadium. Those are the memories that you want and that's what real estate gives you. So going back to your question when someone says, hey, like, you know, how do I get out of it? I'm like, what memories do you want? Do you want to be an employee? That's trading time for money because that's what you're doing? I'll give you an example. So my son, he bought a rental property at 14 years old. Okay and everyone's like, oh, that's awesome. Yeah and he bought it with his money, you know and so everyone's like, man, that's awesome. That's great. Like, did you have him do the rehab and clean the house and I'm like, No. Why would I do that? They're like, so he can learn. I'm like, I don't do that. Why should I make him do that? That's being a hypocrite. I want him to be a business owner, not an employee. Don't get me wrong. There's nothing wrong with being an employee but that's that that is not the goal of one rental property like, hey, congratulations, you want a rental property? Now go learn how to cut wood lay tile, put it insulation but dad, you don't do that. I wouldn't even know how to do that. Like, again, working on strengths versus weaknesses, right? People seem like when they get a rental property that like, all of a sudden, I've got to learn how to put a toilet in and I gotta get up on the roof and inspect it. I'm like, have you ever done that before? No and I'm like, Well, then why in the heck would you get up on a roof? If you didn't know what you're doing like this is how you become a statistic. But we think we should because of ego and pride. So that's kind of a long answer but that's my answer.

Michael:

I love it, I love it a great answer. Steve, great answer. Talk to us a little bit about, like, the qualities and what you see really successful people do who are able to implement systematization like what like, what skills should people be go out there and refining in order to be able to execute here really, really well?

Steve:

Well, yeah, that's a great question and I've studied a lot of very successful people. I've been coached and mentored by some very successful people and I'm a constant student, I still a mentor to this day. Anyone who says that they don't need to be coached, and they don't need to be mentored, is missing out on a lot of opportunity. I look at Tiger Woods, Michael Jordan, these guys are at the top of their game, and they still have coaches and mentors. All professional athletes have coaches, you don't become a professional athlete, and then lose the coaches. They make you better.

Michael:

So I'm done.

Steve:

Yeah, it's like I'm done. Um, you know, even Kobe Bryant, I mean, everyone, they all have coaches. I mean, that's how it works, right? Right, it's brings the best thing out of you. So number one, I think you always have to have somebody holding you accountable and if you look at all successful people, they have accountability. They have somebody holding them accountable in somebody, you know, a three feet distance is a world of perspective, right? In the simulators. When we find the simulators and we're practicing engine failures and all these things. The simulator instructor is about three feet behind us the control panel, and we joke and he they know, they're like, yeah, I'm the smartest guy in here because I'm three feet behind you, I can see all the mistakes you guys are making. You don't see it, because you're in the heat of battle. He's like, I can see it coming a mile away. I'm the smartest guy in the room. So having somebody three feet away, is a world of perspective, having an organization help give you guidance to when you're looking to acquire a property that's giving you that three feet difference. That's a world of difference, right? So, there is a recipe for success and I'm a firm believer. If you look at all successful people, they follow a very simple recipe. It's not magic, people who are failures, they follow a recipe also and I think that every day that you wake up every day that we all wake up, we have a decision to make. It's very simple.

Am I going to be better than yesterday or am I going to be worse than that, initially, is our decision that we make every day because you're not good, you're they're getting better. You're getting worse, we never stay the same ever and so when you wake up in the morning, what is the decision you're gonna make? Are you going to do any reading? Are you going to do any I’m statements? What are you going to do to focus on solution based questions slash trying to be better or are you going to be in blame excuse or denial? So going back to your question, I think that people that if you want to learn how to become better at systemization, then talk to someone who knows what they're doing and that can help you become a systems expert because, look, as an airline pilot, right? I've been I've been flying for almost 30 years, I've been trained by Boeing, I fly one of the most complicated aircraft out there a Boeing 787. I didn't, I wasn't born that way, I had to be trained and guess what, we still go back to training every six months, and we go back through all the initial stuff. So just because you reach the pinnacle, you don't stay up there and if you look at people that are successful, they're always trying to be better, just because you have three houses or five houses or 500 houses. Look, the crash to the bottom is much faster than the rise to the top, as we all know, and seen, you know, with banks crashing and other things. It's the people that are cognizant and follow that recipe and again, I don't think it's a very complicated recipe and if you look at people, you know, they do a lot of things in the one thing that I've learned, I'll give you a quick story. I was with one of my mentors one time, guys. 11 businesses, right. He's on the board of 11 businesses and he was my mentor, and we lunch and I was like, man, I don't know how you do it. Like you have 11 businesses. I'm like, how many days a week do you work? He's like, Tuesday, Thursday, and sometimes half a Friday. It was like this guy was talking Martian to me. I was like, like, how is that even possible and he goes, You know what, Steve, you know what the difference is? He says, I say No, way more than I say yes and I said, you know what, that's easy for you to say because you're this multimillionaire that has 11 businesses and he said, I would have never become this way. If I didn't start saying no and he said there's an opportunity cost that every time you say yes to something, you are saying no to something else, right.

So he goes every time you say yes to doing something that is not the most high income producing activity, you are saying no to something. He's like, it's again, he goes, it's your choice. So when I coach people, one of the things I do, and this will be a freebie for people watching is, I always have them do a two week time study, okay? So it's a very simple time study that they have to go and they have to write down for two weeks, every single thing that they do, right, you want to go on a diet, you start tracking your food, you want to see where your money's going, you go on a budget, you want to see where your time is going and start tracking it at the end of the day, they have to give me an executive summary. Tell me how your day went? I don't care. I don't care what you did. I just want to hear it from your words. Within one week, within one week, they will be like, I now know where my time is going and most people think they're so productive, like, oh, I work all day long. I'm like, bullshit, you don't work all day long. Yeah, study and we'll see. After they do the time set, he's like, man, I'm only working like three hours a day. I'm like, because everything else is reactionary. A five minute interruption, a five minute phone call is equal to 23 minutes of lost time. How many times as a as a real estate investor entrepreneur, do we get the sideways calls that interrupt our data, and they sidetrack us, if you get 10 calls a day, that's 230 minutes that you were never expecting to lose, you just lost that chunk of time. So now you're living what's called a reactive life and when you're living a reactive life, you're in chaos and when you're in chaos, you're not in control and when you're not in control, you're not making money. So the challenges is what people don't put a factor into this chaotic life, is the mental stress that it weighs on you. So once they do the first week, the second week, they have to go back in every day, they have to do this and I and just the type of coach I am, every day, they have to send me a picture of their time study and I tell them, the day you don't send this, to me is the last day you will hear from me, because I can't want it more than you like it's very simple. Like, even if you pay me all the money, you're done like that's just how it is I can't I don't have time to waste if you don't want to be better. So when they do this, the next day is they have to put an H or an L next to that high income activity, low income activity. And guess how many low income activities they do on a day?

Michael:

Probably the majority…

Steve:

Probably the majority. So then what we do at the end of that next week, we go, okay, these are the things that make you money. These are the things that don't we need to outsource systemize or automate the things that you don't make money on of these high income activities. Which ones do you like doing? Which ones are you good at? I like this, and this, okay, this is the focus, we need to find someone else to do these other high income activities. We don't ignore them and so my point is, is one of my mentors said that he goes TV goes understand saying no is not saying that. No, the way you think it. He goes when I say no, it just means I'm not doing it. He goes, I just make sure that other people are getting it done, but it's not through me. He goes things to have to get done in a business but he goes, it doesn't have to be you. That's your ego and pride, thinking that you have to be the one doing it all. So that was a very valuable lesson for me that I share with you, you in the listeners.

Michael:

Yeah, thank you. I mean, as you're saying this, I'm just like, oh, my God, I have so many hours in my day, this is insane.

Steve:

Yeah, we do. We all look, we all do. And it's a matter of stepping on the scale whenever I'm coaching someone, or someone gives me a call, like, man, I just feel like I'm losing it. I'm like, just do a time study. I mean, it sounds it sounds so simple, or whatever but I'm like just do the time study you will see very clearly, and then just fix it. Look at the pendulum swings. It's okay but you got to do something to take corrective action. Otherwise, it's going to keep swinging, it's never gonna go back on its own. You don't all of a sudden become more organized and more productive. It doesn't work that way, right? You're always gonna go back and you've got to start focusing on making that decision every day. What am I doing? You know, and it could be something simple. It could be reading for five minutes, could be writing your day could be whatever it is, but start creating habits and those habits become patterns and those patterns will change your life.

Michael:

Mike drop exit stage left, Steve, that was amazing. Man, I want to be super respectful of your time. If people want to talk with you more, learn more about you reach out, have you as their coach, what's the best way for them to do so?

Steve:

Yeah, they can find me on all social media handles. It's Rozenberg, Steve on Instagram, Steve Rozenberg on all the other stuff. They can also go to my website. My website is https://steverozenberg.com/ , it's ROZENBERG.com and you know, I do a lot of coaching. I do three day masterminds with very high level, people like Bradley, the iron cowboy, other people, I bring them in. It's all about mindset and it's all about, you know, the one thing I'll say real quick before we go and I want to be respectful of your time is don't be selfish, and to the people watching and what I mean by that is as entrepreneurs, we watch these shows, right? We buy real estate, we do all these things, and we do it for the people that we love but here's the thing, we never actually share the knowledge that we've learned with the people we're doing it for. To me, that's the definition of being selfish be selfless. Like I said, my son bought his first rental property and 14, create generational wealth, right? Bring them into the loop. Don't be selfish, because when you're selfish, you're isolating yourself, have an open mind and the ability to give abundance and share the knowledge that you learned from this podcast, show reading, bring the family that you're doing it for into the mix, and you will have a much, much more fulfilled life and you'll be much more successful not just financially, but personally relationship and all that stuff. So don't be selfish.

Michael:

Yeah. I love that, Steve and one more final question before I let you go. You mentioned you're running a mastermind and I think a lot of our listeners maybe have been to how to coach or been to seminars or been in real estate trainings, and just whoever reason can't implement it. They take the classroom knowledge, but they can't execute a role. So what have you seen people do who are really successful at that and actually applying what they've learned and taking that excitement and went out and actually ran with it…

Steve:

That's a good question. So and the reason I created my mastermind is that very reason, right? Everybody goes there, rah, rah, they leave in there, like two weeks later, they're like, it's in their car underneath their seats, all the dogs chewing on it and so what I do when I do my masterminds is once they're done, they get unlimited coaching from me, they get my phone, they get my text, they get my email, if they need me, they call me. So I'm there as accountability for them every single day. It's not that hey, I know you have a problem Monday morning with a tenant exploding your house but we're supposed talk Thursday at three so call me then that doesn't work in the real world. I don't think that that's a very successful model.

I give unlimited so that they have me and they have me as accountability. I think the biggest challenge when you leave these events and coaching is the accountability part. If the coach if you have a coach and he's not accountable, find them accountability person, one of the things I do when I coach partners is I have a board of directors meeting, I create a board of directors for them going over the P&I statements going over balance sheets, going over the goals. This is what you need to do in any organization, all businesses do it. Most people don't. So if you can't make your coach be accountable, or you can't afford a coach or whatever the case may be find a friend, a family member or go to the bum on the corner. I don't care but make someone hold you accountable that you actually have to answer for what you're doing and I think if you're accountable, based on what you learned, that's why I do unlimited coaching, you're going to be much more successful with achieving the goals that you set out to achieve.

Michael:

Makes total sense, Steve, this was a total, total blast, man, thank you so much for taking the time to hang out with me. I really, really appreciate it.

Steve:

Thank you, man. It's good having you appreciate you having me on.

Michael:

Hey, we'll definitely talk soon.

All right, when that was episode, a big thank you to Steve for coming on super, super, super great stuff. As he was talking. I was like, oh my God, I need to start doing a lot more of what Steve is talking about. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing you on the next one. Happy investing…

Learn about estate planning and trusts from an attorney Aug 27, 2022

Kellie Chrisman is a California licensed attorney who has experience in estate planning, trust administration, contested trust matters, conservatorships and business/corporate law throughout California. Following graduation, Kellie found her passion for helping people and clients by making the complexities of the law accessible and approachable during the worst of times, planning for a loss or following the loss of a loved one.

It is with great pleasure that Kellie feels she can take the worries and difficult tasks of legal issues off her client’s minds and allow them to simply be in the moment and focus on what is most important to them. Tune in for today's episode where Kellie shares her insight on what you as a real estate investor need to be aware of to protect your estate and some real-life experiences of some of her own clients.

Episode Link:

https://www.taylorchrismanlaw.com/

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions, and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have Kellie Chrisman who's returning on the podcast with me. Kellie is an attorney extraordinaire, and she's going to be talking to us about all the things we as real estate investors need to be aware of when it comes to protecting our estate. So let's get into it.

Before we get into the episode, I would definitely encourage everyone listening to go check out the Roofstock Academy at roofstockacademy.com. It is a one-stop shop education platform that comes with over 50 hours of on-demand lectures one on one coaching access to private slack forums and our community as well as a bunch of other financial benefits depending on which program you opt to enroll in. Just come check us out at roofstockacademy.com. Looking forward to seeing you in there.

Kellie Chrisman, welcome back to the show. It is always a pleasure to have you on.

Kellie:

Awesome. Thanks for having me.

Michael:

No, it's totally my pleasure. I'm super excited. You are an attorney, an amazing person, a mother a rockstar. For anyone who hasn't heard your prior episodes, give us a quick and dirty who you are and what it is you're doing.

Kellie:

Oh, this morning…My name is Kellie Chrisman. I'm an attorney I practice law in California and kind of I practice California law for other people throughout the United States. I grew up in Chico, which is in Northern California town, Sierra Nevada, beer, Chico State, things like that and then went to college at UCLA law school at Loyola and then my husband, I say we got stuck in LA for about 10 years. But we loved it, we had so much fun and then moved back to the Sacramento area to be close to family and really close to the mountains, we can get to Tahoe in an hour and a half we can get to San Francisco or an hour and a half. It's awesome. So that's where I'm based now and practice state planning, business for setting up business entity that has information and strategy for smaller investors and real estate clients and if I can't help somebody I like to send them where I would trust. So yeah…

Michael:

Love it, I'm so glad you mentioned estate planning since that's the topic that I really want to focus on today. So I think I mean, in full disclosure, you are my attorney, you've helped me so much with estate planning and entity formation and just getting all my ducks in a row. So I want everyone to know how amazing you are and I can personally attest to that.

Kellie:

You can say it I can't, you know I can't.

I really appreciate it…

Michael:

Absolutely. So let's talk about what investors specifically real estate investors need to know when it comes to estate planning. What are some things that people should be aware of? What are some things they should be doing? What are some things that they should be thinking about kind of long term?

Kellie:

Yeah, I think that, for me as an attorney in this area of law, because I do I do before people pass away the planning part and then I do when people don't plan anything. So I've seen both sides, and I've seen the worst of both sides but it's not necessarily just investors, it's anyone over 18 than then then when you add on, if you own property in California at all, we'll get into the dirty details, I'm sure, then you not really needing to trust powers of attorney. If something happens to you while you're alive, who's managing your investments, who's making sure you know, tenants are paying who's making sure you know, you're in the middle of a transaction and that it can close all that type of stuff, is stuff you can accomplish through an estate plan and I think it becomes this big giant thing a lot of people don't know anything about and a lot of attorneys try to make very complicated but it doesn't have to be.

Michael:

Okay. So it sounds like just having a will from Legal Zoom, that maybe isn't going to cut it.

Kellie:

I mean, it'll, it'll get you somewhere.

Michael:

Maybe it’s not where we want to go.

Kellie:

I legally was great and so I think that there's this is one of those areas where I actually had a conversation with a client yesterday where she was very surprised by the cost and I told her, you know, there's always going to be someone cheaper, there's always going to be someone more expensive. You can go to Costco and buy the wills drafting program or go to Legal Zoom and buy a will and it will do some things it'll avoid, you know, maybe getting your property where you don't want it and you can get your property where you want it.

But there's a lot of little nuances in this area where I think if you do it right the first time you, you don't have to pay for it. Again, it's an investment in your future and it's a gift to your family down the road. So it's interesting.

Michael:

Needless to say, so talk to us about like, what a trust is, how does it get set up? Like, what should people be thinking about in terms of cost, or like who even needs one as opposed to just a will?

Kellie:

Yeah, so the difference between a trust and a will and I think the big thing in this area is probate and probate. People get very scared, and it's simply the court monitored administration of an estate. That's all it is. So you can pay, go to Beverly Hills, pay $10,000, for a will, or by your Costco will drafting program and pay $40, for your will, and you're both going to end up in probate. The scary thing about probate it's public. So if you want to know what was in a celebrity's a state that had a will, you can go and look it up, see where it went. They publish about it and it takes about a year. I say a year you say your NADs about a year and a half, with the way that COVID has affected the court system, and it's expensive. So the attorney ends up taking about two to 3% of the estate, the fees are set by law and then the administrator or executor, whoever does it takes two to 3%, then everything is distributed. Versus a trust is when you have enough that you need to trust which is in California $166,000. Whether you have a mortgage or not. A trust avoids the whole process. It says here's who I trust, to administer my estate and here's where I want it to go. The court is not involved. That's the that's the goal and that's the difference between having a trust you've done yourself, or trust that's been done completely, and having it done in tailored to us that the trust has been created correctly, it's funded correctly, and it just functions seamlessly down the road for you.

So the will is great, and it says where your property goes. But it's probated and the trust is the same thing. Avoiding the probate process.

Michael:

Got it, and so why, like, Why does a will exist versus a trust? Like, it seems like a trust is the obvious choice for anyone that has more than 166,000 in asset or value?

Kellie:

I think so many so many levels to that answer. I mean, the will is something that has been adopted from common law, something that's been based on what was done in the UK back in the day, which is where a lot of our laws are from and at a basic level, not everybody needs a trust. So if you don't own over 166,000 and assets, so you don't really in California, I just assume if you own a house, you're over that. In every state's a little bit different. I've noticed in some states, I know not everybody's California, some states that's as low as like 45,000. So it's, it's vary state to state. But it just, it's there because it's easy. and so if you don't have enough assets to maybe make the trouble of a trust worth it, then the will is there and allows you to say where you want your things to go. So it avoids what the basic, okay, the other thing is, uh, wills a lot easier to create.

You can hand write a will, as long as it's signed and dated, which I've told some of my friends, they they're going on vacation, and I'm like at least handwrite it out.

Michael:

If you don't want it on the airplane on the napkin.

Kellie:

You can do it on a napkin. You can do it, people have done it, you know, dying with a crayon on a wall, that's a valid will wow. At that, at that core level, it's just easier. You don't need a notary, you need witnesses. So it allows you to do things, if you have kids, that's where we do guardianship. So wills do all sorts of things and then and then to add a layer of attorney complexity, if you have a trust, you're also going to have a will which actually ends up making sense, but it just doesn't do as much.

Michael:

Okay, okay, got it and so yeah, for all of our listeners that are not California based, is what we're talking about, at a very high level universal in the sense of if I have a will I'm going to probate if I have a trust I'm not is that was that national universal?

Kellie:

Pretty universal and you can pick you don't necessarily have to have a trust from your state. Obviously, an attorney in your state is going to know the ins and outs of the probate law. But if I have a client that I set their trust up and they're in California and they move to Texas or New York, that trust is still valid, and they can continue to use it and that a lot of times I have clients that are not in state and they elect to use a California trust and we work together and I can fund and do everything the same way. So, yeah, this is something that these, these documents that comprise an estate plan are pretty universal.

Michael:

Okay, cool and it's funny, because we so often hear that California law is like the worst for real estate investors or investors. So why would someone elect to use a California trust? I guess, specifically, like, what are the provisions in that that make it attractive as opposed to any other state stressed?

Kellie:

I think that it's not necessarily the law itself in this area is pretty similar. It's not like business law, business is pretty unique. If you're talking about LLC formation, and, you know, Nevada, Delaware versus California. Like all that's a, it's a hot topic. But in this area, it's kind of not the exciting parts of this law, area of law come from other really the family dynamic, but yeah, it's, there's not much different. So a lot of times people will choose California law because they have an attorney that they trust that's in California, or it's simply where they were living or whatever it might be.

Michael:

Okay, cool and so I live in California, now I invest almost exclusively out of state and I think a lot of listeners are in similar situations, should they be using a trust in the state in which they invest or should they be getting a trust in which the state they live or does it not even matter?

Kellie:

Oh, I have to I have to use my typical lawyer phrase, it depends. It doesn't really matter. What matters is that whatever trust you choose, you fund it, that you when you get assets later, you add those assets into your trust, because you can have the best trust in the world and if your assets aren't in it, you're going to probate

Michael:

And so I could have a trust and still go to probate?

Kellie:

You can and that's why I, I say I fix a lot of Legal Zoom trusts, because people create this fabulous trust and they've, you know, they hey, it's super simple. I've got, you know, two kids, it's going to them equally and they don't fund it, or they don't maintain it, or their kids are under age, there's so many different considerations. Their kids are under age, and now they're getting a check it 18. So if you don't fund your trust, you don't add the title of your property. So you deed your property into the name of your trust, you update your bank accounts, an attorney will work with you to say this asset should be in the name of the trust, this one's okay out things like that, then you go to probate and that's where you have what's called a pour over will if you have a trust your will says everything I have that's not in my trust, goes to my trust, it pours over into the trust pot and the trust does the work.

But it's still probate. So Funding Your trust is extremely important and in California, we have a couple of tricks to avoid that process. So you can we avoid probate at all costs. But it still can be avoided just by doing it right the first time.

Michael:

Yeah. Okay and when you say fund the trust, I mean, it just sounds expensive. Let's say the listener has five properties. This is just the first time they're hearing about maybe thinking about, they should have a trust or set up a trust. What is involved with that listener for a couple of properties that they have that are titled maybe in their personal name, or to the name of an LLC?

Kellie:

Yeah, so to fund a trust, there's a couple of I always say there's like good, better and best. Good is that you listed in your schedule of assets. So there should be a page to your trust. Usually, it's the last page and it should list everything you intend to be part of your estate, or your trust and your intent is a lot of the law. It gives me my defense down the road, hey, he intended this to be in his trust, but they took it out to refinance. So therefore give it back to the trust. So you listed on your schedule of assets better is it's titled correctly. So primary residence is titled in the name of the trust. It's in the Kellie Chrisman trustee of the Kellie Chrisman trust. That's what puts it into trust, LLC. If the property is owned by the LLC, we kind of trace up right so we have the property properties owned by the LLC, then we put the LLC into the trust and so then when we trace down, the ownership is still in the trust. So we don't need to change necessarily the details the property. So that's better. So good is scheduled assets better is titled correctly and then best is both if I see both of those things, there's no argument hey, you know, he didn't want that to be part of the trust. It's like, well, he clearly did.

Yeah bank accounts can be the same thing. So you can either make the trust the owner of the account or are the beneficiary. So funding doesn't have to be scary and I think the signs of a good attorney that's going to help you with this is they're going to give you instructions, they're not going to hand you the trust and say, all right, thanks for the money. They're gonna say, here's the next steps. Here's what to do. Here's what to watch out for. Here's the support on the back end, that when you buy a property five years down the line, and you're like, What do I do? I don't remember, you can call their office and they're there to support you.

Michael:

Okay, fantastic and if someone is looking for an attorney, maybe they're just getting started with their real estate investing and haven't had a need for one in the past? What are some questions that they can use as like screening questions, or red flags to look out for as they're trying to reach out to an estate planning attorney, if they're going to use someone other than you? Which I don't know why anyone would do but you know, teach the round?

Kellie:

Yeah. Well, and I like to offer people I mean, when I talk to clients, I see if they're interviewing people, I say, here's what to look for, right? You want somebody that that you trust. You can I think referrals from friends are great. If you're Googling, you know, try and look for Google reviews, or there's a website called Avvo- AVVO, it's like, the Yelp for attorneys. How exciting. But they'll kind of narrow it down in your area, look for great reviews on that.

But things to look out for, what are they including? Are they doing the funding for you? Are they doing more than just, you know, the bare minimum? Are they and then what are they? What are they charging down the road? Right, so I see a lot of attorneys charge a yearly maintenance fee. That's great for the attorney, there is no reason you need to do that and I think if you have an estate plan, you've never had to do anything to it. There's no maintenance, I don't do anything as your lawyer, you know, I have a PDF copy here and, you know, if you need help, I'm here. So watch out for those yearly maintenance fees, you don't need them watch out for what's included. So you want to at least in an estate plan, a typical state plan is a trust, certification of your trust, the funding of your trust, then you want to will powers of attorney for finance and a health care directive. Those are kind of the core documents, we say trust Well, Power of Attorney health care, okay, the core four, make sure those are there.

And then see what amendments cost down the road. That's the other thing, you know, they might be super cheap, but then you want to change something and it's quite expensive. I like to offer my clients, I do amendments for free for a year because I have major buyer's remorse. Like if I make a decision, I'm always like, we have to so and they're pretty simple to change. So that's kind of in you want that support, you want to be able to oh my gosh, I'm closing tomorrow, and they, they need a copy of my certification of trust, I'm on vacation, or I don't know where to find it. My clients will shoot me an email or give me a call and I just, you know, fire it over to title or whatever they might need. So what you're getting for the money, I think is huge.

Michael:

Okay and is there a ballpark like figure that people should have in their mind as they go to an attorney to get this thing because I know you mentioned you know, the Beverly Hills $10,000 will versus the Costco $40. There's a big range there.

Kellie:

Yeah, she'll be in the middle of that. It depends. So generally, and I think that it's going to depend by state right, but what I am seeing is pretty market is about that $3,000 Mark, for a married couple, the what… I guess one of the other key things you're going to look for is most attorneys do this on a flat fee basis. It's not hourly, because they'll make money. It's a standard process and usually if we can estimate how many hours it's going to be in, then we win some and we lose some right like some clients, I end up spending way longer with and make less…Excuse me and some, you know, it's, it's pretty easy and standard, but it's a lot of paperwork and so that flat fee would be a structure I would look for and that I would lean towards if I was paying somebody or telling family. But every stage is different. So will is cheaper. If you're a single person having an estate plan for yourself, should be about 1500-2000 and then I look for you know, if you want to have a trust and your wife wants to have a trust, look for discounts, I mean, an attorney is going to have to do far less work. If they know you and they know your wife then there so there should be some kind of a benefit there as well.

Michael:

That's great to know and then from a like a lending perspective if someone is going to buy a property, they're going to get the loan in their personal name, but they want to take title in the trust. I mean, is that our lenders open to that or do they need to close in their personal name and then quick claim deed it over into the trust? How does that work?

Kellie:

Every, every lender is different. So it's, it's more and more common for trusts to be there and I think that lenders get the benefit, if you're to pass away, it being in your trust is a huge benefit to them, because they're able to follow the trust. So the lender should let you close in the name of the trust, super easy. If they don't, or if it's some huge hassle because sometimes, you know, either lender or title is not familiar or comfortable. It's very easy, we ended up just doing a trust transfer deed after we closed. So a lot of times, our client will say, okay, Kellie, it's closed, and then it's a one page document that you have to assign in front of a notary. Some states have more expensive transfer fees, or transfer tax, that you'll have to pay. So that's a consideration to watch out for and those can be pretty significant, like five or $600. So in those states, it might be more advantageous to close in the name of your trust, but a simple process if, if you forget, or if you're if there's a property.

Michael:

Okay, awesome. What else should people investors need to be aware of when it comes to planning their estate?

Kellie:

I think managing who you trust, you know, who's going to take over who's going to get your property if you're gone. I think that a lot of the law assumes that an adult is 18 and over, so if you have kids, and, and they are under 18, or they're not responsible, and over 18, or the you just don't want them to get a large sum of money and trust should be able to contemplate all sorts of things. I see a lot of clients, you know, hey, I love my kids, but I don't want them to get a lot of money. I want them to, you know, work for it. So everything is held for the kids benefit, you know, education, whatever it might be, but they're not getting money until 25 or 30.

The other thing I often see clients worry about is you know, who's going to be in charge, you know, if I am incapacitated, I get in a car accident, having those people that you trust, and then if that person is not there, then who I always say always tell clients in my intakes, and like, I'm going to come up with the worst scenarios where every person you tell me is unavailable and ask you for someone else. So yeah, watching out for that stuff.

Michael:

Okay, love it. Can you tell us like a gooey horror story of when something went really wrong?

Kellie:

So many, I mean, even like, amongst my, my lawyer, friends, everyone's kind of like, Oh, you do that area of law, like, is it boring? It is fascinating. Um, because families are fascinating.

Michael:

Family dynamics. Yeah, for sure.

Kellie:

So one of the reasons, I guess one of the reasons to have a poor overwhelm, I would say, we had a, there was a situation where somebody won at a casino, very exciting, when a significant amount of money, went out and bought a motorcycle, didn't put the motorcycle in the name of the trust, which is fine. But didn't put the money anywhere. They you know, it's just in a bank account, it was coming their way, crashed their motorcycle and died. Now we have this huge amount of money out there and that's not in the name of the trust. So the goal is to pull it in and probate it. So we go to void and we don't have to probate. So we have stuff like that happen.

I've worked on cases where, you know, the parents have an estate plan that's been in place for 25 years, and then dad has dementia and suddenly has an amendment play a month before he dies, that leaves everything to one kid and that's the kid that took him to you know, the attorney.

Michael:

Oh, my gosh…

Kellie:

There's so many nightmare scenarios. That stuff we can get overturned. But I mean, all of these have solutions, right? If you already have it in place, and then families just fight. I mean, I think especially if you have a family that's going to, you know, your kids don't get along or you know, there's that one person I always tell people, every family has something or someone and if you don't know who that is, or that what that is. It's the right client. Also, you need to look at yourself like what's, what's good because the state plan can take that into consideration. I had a client that had a DeLorean and four boys and she said sell it and I said, okay, you don't want it. We can come up with solutions. You know, do you want to have a to flip a coin, do you want to have draw straws and she said, no, whoever wins, the other three will hate them and I said, okay, so it has to be sold and I, and then I was thinking to myself and like, well, if it was me, I'd have my buddy buy it right, like, and then I get the DeLorean. So it had to be sold, like out of state to a third, like a dealer or somebody like we had, it was so detailed, like pages about this DeLorean. This is one of those situations where I lost on a flat fee, right, because I'm drafting a car. But it was fascinating, because she goes, I know, it's gonna ruin my family and I want it sold. So we could do that.

Michael:

Wow. It's crazy. That's pretty impressive.

Kellie:

Yeah.

Michael:

Okay, cool. Well, Kellie, I want to make sure that we are very respectful of your time. But before we let you out of here, you said something, and I just want to kind of come back and double click on it about in California, if you've own $166,000 and assets, then you're going to probate unless you have this trust and you said that if even if there's a mortgage on the property, so let's say I own a property, it's worth 200k. I've got 100k mortgage on it. My net value are my, my net worth is only 100 grand. So do I fall into that bucket? Where do I land?

Kellie:

Yeah. So there's a there's a, I think, yes, you do. So you start thinking about all these other things. So the way that that probate law works, is they look at the value of the property, not the equity in the property, the value of the property because they see a significant asset that somebody could sell out from under the mortgage company, which is hard to do anymore, but and run away with and so they look at the value of the property itself, and then the equity down the road in the probate in terms of what everybody's paid off, and what is distributed is taken into consideration at that point. So I have clients that will say, well, I don't really want to pay for the trust, I just want to pay for the will and because I'm gonna put beneficiaries on all my accounts and my property, I'm just going to play joint tenancy.

All of that works if everything goes perfectly according to plan, right?

Michael:

So which it always does…

Kellie:

Always goes according to plan. You know, parents always outlive their kids. They live till they're 90, the kids are responsible, never get divorced, you know, they never see anything else happen. The problem is when it doesn't work. The last thing your spouse or your kid is going to want to do when you pass away is to see a lawyer which unfortunately, they usually need to do. But that property then if joint tenancy goes to one person, and now it's just one person that owns it, and it's not a trust, so it's you know, your husband dies now the wife owns it, and the wife isn't going to she's grieving. She's doing all these things and isn't going to think about it and then when the wife dies, it's probated. Same thing with kind of beneficiaries on accounts are you know, if I leave it to my husband, he passes away. Now where does it go, that money can go into probate. So that's where we get IRAs 401 K's things like that can end up in probate so people will list their kids next, I'm avoiding it. I still not over that. 160,000 miles, I have a contingent beneficiary.

My question is then what ages are your kids getting it? What is you know, now we're letting that fidelity or whatever company whatever bank it might be, come up with where it goes, if one of your kids is in the car with you and dies with you and your husband now where's their share going? Is it going to your grandkids is it going to the other kid there's and so by having a trust you lease the trust is that contingent beneficiary it goes into the trust and the trust does all the work so if the worst happens a good lawyer has already contemplated if a kid dies before you what ages all of these things, and you'll avoid the whole mess but yeah, if you want a house in California estate plan if you are trust or if you want significant assets, significant amount of stock, things like that beneficiary accounts yeah, you can technically your pay on death pod. You can avoid it but it scares me. I make a lot of money off of people that do that because they pass away and I would rather probate I make a lot more money probating for clients than I do doing estate plans but that's not the goal. That's not why I do this.

Michael:

Yeah. I love it, I love it. Super, super helpful, Kellie, for people that want to learn more reach out to you for your services, just chat with you because you're a cool, interesting person. What's the best way for them to do so?

Kellie:

So I mean, I'm great with email, and my website is just https://www.taylorchrismanlaw.com/ TAYLOR Chrisman is like a Christian man stuck together, CHRISMAN.com. My email is just Kellie@taylorchrismanlaw.com, AWAL I am on there are my phone number you know, you can always reach out I've got someone that answers the phone all the time. 916-292-8646. But yeah, whatever people have questions on I'm always more than happy to help. I guess you should look for a free consultation because I that's I'm always happy to talk to people and if they're not if I'm not the right fit or you want to find somebody in the you know, in your state or whatever it might be, I like to help connect people where it might be I think if you put that good karma out there, it helps.

Michael:

Amazing, amazing well Kellie, thank you so much. Again, this is super insightful as always, and I'm sure I'll be chatting soon.

Kellie:

Yeah, sounds good. Thanks, guys.

Michael:

Got it, take care.

All right, everyone. That was our episode. A big thank you to Kellie for coming on, as always in sharing some wonderful wisdom and really great insights. As always, if you enjoyed the episode, feel free to leave us a rating or review wherever it is. You get your podcasts and we look forward to seeing the next one. Happy investing…

Learning from the mistakes of a veteran investor w/ Pete Neubig Aug 24, 2022

Pete Neubig is a realtor who focuses on investment properties. Pete has been investing in real estate since 2001. He has owned and managed a 39, 52, and 100-unit apartment complex. He currently owns single-family homes and a 52-unit apartment complex. Pete created a property management company based on the motto "By investors for investors". His property management company has clients from Houston and all over the world. His technology-based systems allow owners to see everything that is happening at their property without having to be involved.

Tune in for today's episode where Pete talks us through some of the mistakes that he made as an investor and how he's doing things differently today.

Episode Link:

https://www.vpmsolutions.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Pete Neubig who is a real estate investor and CEO of VPM solutions and Pete is going to be talking to us today about some of the mistakes that he made as an investor and how he's doing things a little bit differently today than maybe your typical investor. So let's get into it.

Pete, what's going on, man? Thanks so much for hanging out with me today. Appreciate you coming on.

Pete:

Michael, thanks so much for having me, I'm really looking forward to it.

Michael:

No, me too and so before we hit record here, you were telling us about the three different lives that you've lived. So you are a super interesting guy. Needless to say. So for anyone who hasn't heard of Pete Neubig before, give them the quick and dirty rundown of who you are, where you come from, and what you're doing in real estate today.

Pete:

Sure. Well, real quick. Let's see, I'm from New York City originally, I moved to Texas in Houston back in 1995. So I have a gun. So I guess I'm a Texan now.

Michael:

Give me one when you move to the state, like I think…

Pete:

They give you a cowboy hat, a gun in some boots, you know. So I started buying real estate in 2001 when I bought my first property, actually, I bought a duplex and a single and a a 100 unit apartment complex like same day, like I closed on the same day, I ended up owning bunch of property that I ended up starting a property management firm and I got so busy doing that, that I stopped buying real estate for a while just to build the investment, the property management business, I ended up selling the property management business and now I started a an online platform. It's a virtual property management solutions or VPM solutions where we connect the real estate industry with virtual talent around the globe, so…

Michael:

That’s so cool. Pete just taking a total step back to say you're from New York now living in Texas, do you remember like I don't know in the late 90s, early 2000s there was that pace salsa commercial where like all the cowboys were sitting around like, where's that guy from New York City, New York City? When you say that, that's like the first thing that I thought of like, oh, hey, salsa commercial.

Pete:

And I still can't say y'all correctly I get I get I get yelled at all the time and I'm down here saying y'all, so…

Michael:

Y’all with the New York accent, I love it, I love it. Well, you did you I mean, this is a really cool trajectory that that you've ended up on and I would love to focus on kind of the first stage of your investing career where you own a bunch of rentals and again, we were chatting before we hit the record button, and you were saying that you had sold a bunch of them off, and then actually paid off some of the remaining ones.

So walk us through, you know, like, why because I think I think a lot of people would be like, oh, that's stupid, like, what is Pete doing? You gotta have leverage. That's how you juicy return. So, you know, walk us through how you built up the portfolio and then why you decided to sell them but then keep some free and clear.

Pete:

Sure thing. So I started buying on my own first right so I own like 12 I think it was like duplexes. I was for some reason I was love duplexes. I think most people would say, well, it's the cash flow, right? Duplexes, have a great cash flow and I was always looking at just cash flow and I think if I go back in my, in my investor life, I can tell you, Michael, I've lost so many millions of dollars by not buying houses with very low cash flow, because I forgot about this thing called appreciation, right? I wasn't buying cash flow, right and my goal at the time, I was a young man, I was early 30s, like 30-31 when I started buying, my goal was to get enough cash flow so I can just leave my corporate job. That's kind of what the way I was thinking. So I buy a bunch of properties and then I get I get talked into being a passive investor for 100 unit apartment complex and I told if I buy one apartment complex, I can retire right? So I'm like, oh, great, you know, monopoly, I'll buy a bunch of houses, sell them and all that good stuff. Well, it just never materialized. I was buying lower income homes and if anybody knows the lower income homes a cash flow is really just on the sheet of paper. It's not it's not true returns unfortunately, because there's little things like you know, the evictions or you know, not getting all the rent and in the make readies are not a couple 100 bucks or a couple of $1,000 because people in low income they take what's called parting gifts. You know, they take your AC, your doors…

Michael:

Your goodie bags, you know…

Pete:

Yeah, good. Yeah, exactly. Exactly. So, so I ended up connecting with a business partner named Steve Rosenberg, who he's kind of a a national speaker now but Steve and I ended up finding his guy who is offloading a lot of his portfolio. So we thought this is great and we ended up buying like 30 houses and we were both enamored with buying property. But we didn't had no idea what to do once we bought them. Like we were terrible and how to manage them. So what happened was…

Michael:

Pete was this was this local in New York or local in Texas, there was this remote?

Pete:

Yeah, great question. So I was, I was, I had lived in Texas at the time, we're buying everything in Houston. I there was no such thing as Roofstock that we knew have to go buy stuff in other areas and back in the early 2000s, the average price of a single family home in Houston was like around 130. I was buying it for 35,000. Like, lower low income houses. Yeah.

Michael:

But not have roofs, like, what's the deal?

Pete:

Man, they were just in low income and today, those houses are now worth about 150, right, 20 years later, and I was buying them at 35 and they were worth 50 to 55,000. So I was buying them below. But I just found an investor who wanted to offload stuff but he was offloading me all his problems, right and if you don't have good management, behind you, if you have a good management company, by the way, it's really difficult to manage these low income stuff. It just is because they don't pay online, they don't abide by the lease, they have dogs, when they say they're not going to have dogs, all that all this stuff that you have to deal with. It's just difficult and so Steve and I, we ended up buying 31 homes. So now I have 31 homes, and we advertise bad credit, okay, no credit, okay, like you have you have a pulse and $1 will, we're gonna let you in the house and of course, that comes back to bite you to the point where not only are we not making the cash flow that was projected, but we're losing money at the end of the year, now I have to come in and pay for my taxes and my insurance and so now I'm working even harder at my nine to five than I did and I'm working hard to manage these properties.

But all of a sudden, this this like, dream that you have is becoming a nightmare and so, you know, caution, number of cautionary tale number one for your listeners is buy absorb, right, and then buy some more like don't just keep buying if you can't manage the assets, or number two is go find a professional management company that will take your properties. My problem was I had my problems was so low, I couldn't get a professional management company to take my properties. The manager companies know how hard they are and I'm like, Well, I'm gonna give you 25 They're like, Yeah, great. Keep it like, we want to charge you more. So I ended up creating the management company with Steve so we can manage our own properties and so there's been two there's two things, the two big instances that happen in my investing life that has propelled me to pay off properties, right. So let's get to your question.

The first thing was I bought all those properties, and I wasn't making cashflow, right, but I had to pay the note every month, right and at the end of the year, now I'm getting in tax and insurance. And so there was no cashflow there and there's no appreciation I just told you it took him 25 years to get that double or triple of appreciation. So I own these properties for 10-12 years for 35,000 and they were worth like 45,000 right 50,000 I told you I got equity, but that nothing ever increased. So when that when the banks are coming and asking for their money, and I gotta go work a double because I need more money, or I gotta go sell off stock because I got to. So that that was something that kind of made me realize maybe I want to be the bank myself, or maybe I don't want to owe the bank so much money. So that was the first thing. The second thing was, I ended up buying that 100 unit apartment complex that I told you about and that 100 unit apartment complex. I am still today friends with the lead investor, he's a good guy, we just had a bad plan. We lost the apartment complex. Now I was a passive investor and now here's cautionary tale number two for your investor listeners. If you're going to be a passive investor, make sure that you either A have an attorney you trust or be read the documents yourself. So I was a passive investor, but I was legally on the hook for with my credit. So I personally signed the note. Yeah, I see you I see you if you for those of you not look, for those of you listening and not watching the video, Michael's jaw just dropped, right and so and then what happened was because the plan was bad, we couldn't we couldn't make a payment and so the bank led us to believe that we can restructure our debt. Well, they ended up having somebody that would buy the debt would buy the property from under us. So they foreclosed on us and sold the property for more than what we owed, which in normal cases, you think that's fine. I owed 1.1 million they sold for 1.5 million. I should be off the hook. Well, there was a little checkbox that said no, if they foreclose on me regardless how much they sell, they can sue me for that amount. So I got personally sued for one point $2 million.

Oh my god all because now I will tell you this, I paid a mentor and I paid an attorney. Before I got into that deal thinking I covered myself, I got a guy who's done a bunch of apartment complexes, I have an attorney, they just missed that. They just missed it, the mentor wanted to deal to get done because he was the broker on a deal. So it really was it wasn't aligned. You know, are you know, of course, at the time, I was like, get the deal done. But he needed to protect me from myself at that time and so when you owe, so long story short, I ended up selling. I had a six unit apartment complex that I sold, made 30 grand, and I actually was able to, to pay $30,000 to make the lawsuit go away. So the bank knew that what they were coming after me, they knew that they didn't really have a good case because they made their money. So they just wanted their attorney fees paid for but that put the fear of God in me to be quite honest and so I vowed that I don't want to ever be over leveraged, right and so of course, Kiyosaki talks about other people's money and every you know, rich, Guru, Rich Dad, Poor Dad, guy, every guru out there will tell you, if you can borrow 110% borrow 110%. Well, back in the early 2000s, you were able to borrow 110% I don't know if you remember and so I did that, right now. I was fortunate that I was able to overcome when the properties weren't making any money because I had a job. But if you are again, a cautionary tale number three, if you are a full time real estate investor, you cannot survive when you when your cashflow negative, it's very, very difficult, and you have to sell off assets. But if the assets are worth less than what you owe, that's a challenge. So when I got into property management, I realized pretty quickly that people will manage Class B homeless people will buy and rent Class B homes, I always had this mindset that people will only manage or rent Class C or D homes.

I'm like, no one's gonna pay $800 in rent or $1,200 in rent, and go buy a property, a nice property and have $1,200 on my mortgage, right? Like it was a mindset thing and so another tale is if you're an investor, don't you don't try to buy anything that you would live in you. Other people will live in stuff that you like, why would they rent stuff when I when you can buy something? So when I found that aha moment, I pivoted and I hired a property manager. Finally I was trying to property manage and I was terrible at it. Like, I'm like, I had to hire a property manager. First day she comes in, she goes, okay, we're gonna fire half your clients, this tree store, we had 67 doors, 30 of them were mine. She's like, we're gonna fire half your clients, because those houses are in are in a low income area. They're not worth managing. We're gonna pivot, we're gonna get these Class B homes. Oh, and by the way, you need to sell off your homes. We're not managing your homes either. So you know what I said, You know what, I've been trying to make this work for so many years and are every year I'm coming at the end of the year, I gotta pay money. Now I quit my job to start my property management firm, which by the way, I was making $105,000 a year now making $12,000 a year am I okay? These properties, they can't be an albatross around my neck. So I sold a bunch of homes. So I had, I think 31 of them and 25 are in kind of the lower income area and I couldn't get rid of some of them. So I owner financed them and that was when I had an aha moment. So I was able to wrap the note, I had a very good, I had a local bank and I had a very good relationship with a local bank, and they allow me to wrap the note, right. So basically what that means is I've sold the property to you Michael, right. But I still own the property, you pay me 10% 20% down, you're gonna pay me a mortgage, and then I'm gonna pay the bank, the mortgage, and I get the spread. Yeah, the first time ever that those properties made me money.

Michael:

Wow, okay. Were you able to sell them for much more than you paid for him? I know, you said there wasn't much appreciation.

Pete:

No appreciation. But remember, I did have equity. So I sold them for like 50,050 to 55,000. I bought it for 35,000. So I was able to make money that way but if you think about it, I lost so much by owning and by doing the rehabs that I kind of broke even. Okay, it's great. Like, I'm able to be on podcast now. Tell that story, I guess. You know, it's the school of hard knocks, right? That's it. So college is way more expensive than that, by the way that just took me a lot of time. I ended up breaking even and making a little bit of money on it. But what happened was so when I when I started my property management firm, I don't know if you've ever started a business from scratch, Michael, but it is not easy, right? I didn't I didn't build it. I didn't buy somebody else's business, right. I built it from scratch and, you know, it's at 90 hour weeks. It's every day, you know, and so I got away from the investing thing. So I sold off my assets at a 52 unit that I sold office well took a bath in there, investors lost money.

So I don't like multifamily. I can just tell you that much. I know you do. I've listened to some of your stuff. But we could debate that on another pod. A lot of fun things off. So when I, when my property management firm seven years later started becoming like I was working now five hours a week, 10 hours a week, I started getting back into buying investment properties. So I was able to find and a bought a couple of properties for about $120,000. It's called Baytown. So it's a little bit it's like a Class B, B minus area, blue collar, I like it gray area of town in Houston to buy in, because there's a lot of renter's there, but I started buying them and I started buying cash. So of course, you have to have the cash, right. So I had some cash I was able to buy in cash and so all my other properties that I did keep, I kept paying those down, and I have those in cash. So today, instead of 31 non producing properties, I have eight properties, one of them is paid for, and I own the note. So I sold it, I did an owner financing sell and I make more money on that property now than I ever did when I rented it out. I have three others that are paid for three or four, four others that are paid for and then I have four others that have a note on them. With the four that I bought the last four, I bought a boat with a note, it was one of those commercial loans. Package note, I had to put 30% down I did, I bought them in January of 2020. So right before the pandemic, there I bought it for 535 from a California investor he was done. We I gotta because I own the management company. So before I went on the market, I made him an offer and so I got him for 535 they appraised at 640 and I put 30% down and they kept they cashflow beautifully and I have I have a small note and now if I want them to sell one of the houses, I can take it out of notes, sell it pay the note down. So now I own eight or nine properties total and they're worth you know, close to, I want to say like one like one, let's call it 1.2 million, I only want 300,000 or 350 on the whole thing, right and my cashflow is about 12,000 a month, uh, me a little bit less, a little bit less, a little bit less, maybe like 10, five around there and so, so I'm a big fan of owning the property outright. So I have both houses that aren't paid for right, so.

So it's just hear me out on this, I am now in my 50s. So in my 30s I was a big fan of taking out mortgages, as much as you can bind as much as you can, because you got this thing called time on your side, you can make mistakes, right? At 50 you have less time, right? I've 20 years less, so I can't really make the same mistakes. So I believe even though I make less cash on cash, right? Less overall, I have this thing where I can sleep better at night, right? The house is paid for like, for example, I own a house, I just had to put in a brand new AC and heater, right cost me like I think like six grand. That's cash flow for a year in most in most instances, right and you can't afford it because you don't have the money. Well, when the house is rented for 2500 a month. That's only two to three months. It's not terrible. It doesn't it doesn't knock you out of the game. You're not always stressed for cash. In my in my in my bank account for my business, my housing business. I got like 30 to 35 to $45,000 sitting there all the time, right. So if anything ever happens, I'm okay and so that in now because they're paid for I have more cash flow. I don't have to pay all the notes all the time. So, so again, as you get older, you're like, okay, well, how can I have like, How can I afford to live day to day? Well, if I have $12,000 a month coming in, and I only have $22,000 going out for principal and interest. Well, now I'm at 10 grand and now you figure another 3000 a month in taxes and insurance. So now I'm at seven grand. Well, that's, you know, that's almost 80,000 a year in Texas. It's not terrible and of course if maintenance happens, which always does you never get that full 70% right you never get that full deal. So because of my past issues with banks, by the way the bank on the 100 unit apartment complex really, they really screwed us they let us believe one thing and kind of did the end around and so because of that, I'm really you know, just I was scared is not the right word, but very unjust and very hesitant, hesitant to do it now.

That doesn't mean that I won't take on a note, especially if I can't afford to buy something in cash, but I'm gonna He's going to put 2030 40% down, whatever, whatever the bank wants, and then a little bit more and then I'm like, I'm at the back into my life, right? So I am looking to, to pay these things off. So I have 20, year amortizations. If I could, if I could pay them off in 15 years. Okay, I'm 60-65 and now I have no notes, and I have all these houses paid for and at the end of the day, you want to live on cash flow, right? You don't want to live on like hoping that your properties increase in value, and then you can take the money out. If they're if they're paid for in 10 years, I can go take you know, 80-70, 80% of the value of the house, which are increasing now. tax free. So I have so I do have ability to, to go take the money out. Should I should I choose to do that?

Michael:

Yeah, man, this is wild, man. This is this is such a cool story and of course, I'm so sorry to hear that you had to deal with all that nonsense, Bs. But it sounds like it helped lead you to the decision and kind of path where you are today. So would you say that you're thankful for those experiences as crummy as they were?

Pete:

Yeah, look, whatever doesn't kill you makes you stronger and I am truly I think I'm a better business partner today than I then I was back then I'm a better investor today for sure and so overall, I feel like I'm, I'm better, I'm a better as a person, because you won't like, like I said, if it doesn't kill you, the one thing that you as an investor, as a real estate investor, you have to make sure that you don't make the mistake that could put you out of business, right. So in my when I had the 100 unit apartment complex, I use my 401k. No my IRA money, so I went and did a self-directed IRA and that's how I invested my money, lost it all, by the way, okay. Again, at 31, I lost 120 grand, which is a lot of money for me back then. A lot of money for anybody right now. Okay but it didn't put me out of business.

Once I once I was able to clear my name with the bank, my credit was cleared, everything was clear. Like it was never it's not on my it's not on my credit history at all, because they know that they messed up and I was part of our deal. So that allowed me to get back in the game and by I had another pair of business partners, that they ended up taking bad advice, they ended up using credit cards, taking money out of their credit cards, cash advances, to put money down to buy this apartment complex, because some guru told them that he did it, just because he did it and it's possible doesn't mean it's the right thing to do. Well, they had declared bankruptcy. So they were they were out of the game. They you have a bankruptcy, you're not going to be buying investment properties. Why don't you know, you're not going to buy your personal home, let alone investment properties. So as a real estate investor, for the for if you're listening to this, you know, it's great to take on some risk. I mean, obviously, we all take on some risk, right? We know there's no guarantee price is gonna go up. There's no guarantee that people are going to pay their rent. There's no guarantee but don't take on a risk that will put you out of business.

Michael:

Yeah, I love that and I think that makes a ton of sense. Pete, you said something kind of at the beginning of your story that I want to come back to and that's you were buying these low income properties, and you bought them and you scrimped and you saved and you and you put these deals together, and they really hadn't appreciated very much and you sold them because your property manager, right, yeah, that after that, they appreciate it.

So like, talk to us about how people should be thinking about if they're in a similar situation, they bought a property. They did all this work to get the deal done. they scrimped and they save and they just haven't seen very much appreciation. Maybe they're in a similar situation where it's not cash flowing, or it's just covering its expenses. It's just not what they thought it was going to be. When should someone cut their losses and run and maybe go try something else or how do they know maybe they should keep hanging on because we're right around the corner from that appreciation jump?

Pete:

Yeah, that that is if I had a crystal ball, I could I could answer that. I can just, I can just tell you from my perspective, I did everything I could to make those properties work. I mean, I would put it you know, like when we did a rehab, we made the house even nicer than it was right? We got rents up, but for whatever reason, and we just can never get them to cash when we were losing money. After about five years, I think you got to if you do not have the cash flow, where you can lose money every year on your properties, and it hurts you. You know, I think you got to cut the cord after a couple of years of trying everything. You have to try everything though. I'll tell you my grandfather before he passed away, he was in his 80s and he when he passed away, he was worth I think 30 million. So this is a guy who knows a thing or two. But he told me one of the last conversation I had with him he said, Pete, never sell your property. When grandpa died here. We had a lot of property it was he was a mess. The guy didn't put any money into it. Son of a gun when we had to deal with it, but it was luckily all those properties appraise or appraised value over time, time heals all wounds if you can afford it and knowing like, hey, like, I can tell you this when I bought the properties in my early 30s, I needed the cash flow as a means to I try to exit out of the of my, you know, my w two life, right?

Luckily, my w two allow me to handle those properties, right, allow me to handle the losses. When I got into starting my own business, I knew the upside of starting my own business was great but starting my own business meant I had to take a huge step back in how much money that I can afford, that I was going to be able to extract out at a business. I wasn't venture backed, none of that stuff, right. I mean, I literally just hung a shingle and I started working. Well, I couldn't afford to lose the money on those properties anymore. So that was, that was a big reason on why I decided to sell. Now I will tell you, I sold all those properties in 2015. I bought them in like 2008 2005 I bought most of them and I saw them 10 years later. So it wasn't for lack of trying Michael like I tried right? Even after 2015 they didn't jump up until recently, like this pandemic has me all jacked up, I have no idea what's up what's down, like, I thought the price would come down. So I sold my last property in that area of town for 120. I bought that piece of property for 50 in 20 in 2005, so here we are. So it kind of matches up right 2005. Here we are 15 years later and that thing actually, you know, more than doubled. Now that property I owner financed, I sold it at 120. It was probably worth 100. Alright, so probably doubled in value over those 15 years. I always pay, I always sell it for a little bit higher because I'm holding a note. I want to build in that appreciation. You want to go through the numbers on it real quick?

Michael:

Yeah, let's do it again. All right.

Pete:

So when I when I own the home, and I rented it out, I was renting for 1000 bucks a month.

Michael:

Okay, you bought it for 50 renting for 1000. So crushing the 2% rule. Everyone on paper is like, oh, you're killing it.

Pete:

Right? Exactly. On paper, right. So 1000 bucks a month. So now you like Pete, you're making $1,000 a month. But am I Michael? I'm not making $1,000 a month, right? What do we have? We have taxes 300 bucks a month now making 700 a month? What do we have? We have insurance 120 a month. Okay, so now I'm down to 580. My management fee was 80 bucks, I'm down to 500 bucks a month and that's before you get into maintenance and turn, right. So on my best month I make 500 bucks a month.

Michael:

Oh no.

Pete:

You wanna go through the numbers?

Michael:

Yeah, let’s do it, man.

Pete:

Or go through the numbers. Okay, so I'm renting that property for $1,000 a month, right? I bought it for 50 rent it for $1,000 a month, right? So am I making $1,000? a month? No way? No, right because the taxes were 300 a month. So now I'm making 700. Right, my insurance is 120 a month. So now making 580 and my manager fees are 80 bucks a month. So I'm making 500 bucks a month and asked me for any kind of maintenance happens or turn. So the best I can do is 500 a month, right? So now I sold the property I sold for 120 got 10% down. So the notes 113. I sold on a 20 year amortization 7%, I found a company that will actually serve as the note for 30 bucks a month that I pushed on to the buyer. So right now it's cost me nothing. The principal and interest on that house is 7-78 and it's like I think it's like $67 is principal and $7 is interest and that's what I make on that house every month, right? If taxes go up, does it affect does it affect me and my cash flow? No insurance goes up doesn't affect my cash flow. Refrigerator breaks doesn't affect my cash flow

Michael:

Vacancy could be vacant doesn't affect your cash flow.

Pete:

Doesn't affect my cash flow. Now I ended up selling this one to an owner occupied. So I didn't sell to an investor on this one. So the owner occupied and he pays and all I gotta worry about is if he doesn't make his payment, I can foreclose on him. I don't know what the laws are in California in Texas, it's about 21 days. Before we before we can start the process and start the process.

Michael:

Okay, okay. Okay.

Pete:

So 21 back in the day used to be 21 days, you get them out now it's like…

Michael:

That's what I was going to ask. Yeah. Okay. So just real quick on owner financing, because I think this is something that a lot of our listeners who own property should hopefully their ears are perking up. How do you underwrite a buyer, someone who's going to be, you know, seller financing from you as the lender as the owner.

Pete:

So, I don't really care about credit at that point because if they had good credit, they're not coming they're not buying.

Michael:

They go then to a bank…

Pete:

Right, exactly. So what I'm looking for and what I'm always looking for is why is it credit bad, right? So are they not paying their rent or are they not paying the you know, the electric bill or whatever, whatever, you know, car or bill or whatever it is, right? So I want to know what kind of why they're why they have such bad debt. I don't care why they have such bad credit, I don't care that bad credit and then I'm looking at cash, how much money they make. So what happens is a lot of these guys, so guy that that bought my property, he's in like the construction business, right? So he has his own little deal, he can't show he shows no income, but he showed me his bank statements and he showed me his deposits for the last couple of years and so I just look at how much cash do you have, can you afford it right and then, as a property manager, I always go to two and a half to three times. So if I can get two and a half to three times of cash for what it's going to cost them all in, then I feel I feel at that point, it's not that big a deal.

Also, he's paid me 10% down. So I have some cash there. So if he did move out, or couldn't afford any more, I got a little bit of cash, I could make the place a little bit nicer. Okay but the mentality of somebody who buys your property, even if it's owner finance verse, somebody who rents your property, let me just tell you what happens, right? When somebody used to rent that property, what they used to do there give me a long list of stuff that didn't work in the house, that they wanted me to fix it, right, even though the lease says, as is all that good stuff, right? When somebody buys a house, they're getting a long list, and they're improving the house. When somebody rents your house, they're paying the car to pay the electric, they're paying their damn Hulu bill before they pay you because they know that they can they know the eviction process all the way through and how long it take them right? When they own the house were they paying first and for paying…

Michael:

The mortgage first. Every time they pay the mortgage, first…

Pete:

Hulu gets put on the back burner, the car payment gets put on the back burner. So the mentality is completely different. I've only I've only you know, I think he's been over there a little over a year, never had one issue with payment. Knock on wood.

Michael:

That's great and is the term is the note do you get it full term to 20 years or is it a couple of shorter year term with a 20 year AM?

Pete:

I will have to double check but I'm pretty sure it's just a 20 year amortization and he just pays me to 20 years and then that's it. So what a lot of people say to me is well, Pete, you're missing out on the appreciation, right? Like, if you sold the house or 100, or the house is worth 120,000 or 200, right? So if you think about this, Michael, most people don't pay extra. Most people don't pay the house off early or if they do right grade, they pay the house off early. They make my money. But he's paying $60 In principal and $680 in interest, right? If you if you pay that house off in 20 years, he's gonna pay that he's gonna pay about 240,000 hours on that house. I think I got my appreciation.

Michael:

Just fine. Yeah. Oh, man. I love it, I love it. That is so cool Pete. That is such a great story.

Pete:

I built into cushion of 20,000 so that he can't refinance right away. Right, because the house is only worth 100. So by no one's gonna give him $110,000 or whatever it takes to refinance the house. So by increasing it a little bit, you save yourself at least those first you know, five years or so.

Michael:

Super, super smart. Super smart.

Pete:

Yeah, that's a good one.

Michael:

That's a that's a really that's really good, man. Pete, we could chat for hours, man. What's the best way if people want to learn more about you reach out to you for, nobody gets to cover your VPM solutions today, but learn more about your words, where is the best place to do so?

Pete:

Yeah, you know, best thing is they can actually I'm on all the socials I guess. But it's Pete Neubig NEU big and you can email me at: pete@vpmsolutions.com or you can just go to our website to https://www.vpmsolutions.com/ and check us out.

Michael:

Right on man. Well, thanks again for coming on and sharing some wisdom, really appreciate you.

Pete:

Thanks, Michael. Very good talking to you.

Michael:

All right, when that was our episode, a big thank you to Pete for coming on super interesting way of thinking and doing things just a little bit differently than maybe we hear about what we need to be doing as investors. So as always, if you've liked the episode, we'd love to hear from you ratings and feedback are always appreciated, and we look forward to seeing you the next one. Happy investing…

The life-changing impact of adopting the investor mindset Aug 20, 2022

Real estate investor, author, and podcast host Henry Washington entered the industry in search of building passive income to achieve financial freedom. In just three and a half years, Henry built an impressive rental portfolio and now turns his focus to teaching others how to create wealth through real estate investment. Listen in todays episode where Henry talks us through how to work with small banks to get initial loans, make contractor connections, market effectively to generate leads, and adjust your mindset for success.

Episode Link:

https://henrywashington.clickfunnels.com/order-485129501621009952063

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Henry Washington and Henry is an investor and he's gonna be talking to us about how he went from zero to like a gazillion doors in a very short amount of time, and what he did to get there. So let's get right into it.

Henry, what's going on, man, thanks so much for coming on and hanging out with me and I really appreciate you.

Henry:

Hey, man, thanks for having me, I appreciate it.

Michael:

No, it's gonna be a lot of fun. So I know a little bit about your background but for those of our listeners who might not be familiar with the Mr. Henry Washington gave us the quick and dirty who you are, where you're coming from and what is it? You're doing real estate today?

Henry:

Yeah, Henry Washington, I'm a real estate investor based out of the Northwest Arkansas market. So it's the northwest corner of the state. It's this like little unique bubble have an area. There's so much huge recession proof industry here. So it's a lot of money in this little part of the country that makes this market pretty unique and so I've been investing here, four and a half years, I'd say close to five years now I bought my first house five years ago and prior to that I was a nine to five or working for I worked for Walmart and so they're headquartered out here. It's one of the companies, you know, that's, that's based out here and so I did data analytics and software development for them for 10 years, and made a great salary and I also spent a great salary and so I often found myself not having money before I was to get paid again and, you know, I think a lot of people find themselves in that situation.

My, I guess the pivot for me came when I got married, got married fairly quickly, my wife did not want to run out of money before we got paid again and that was that was the first time where…

Michael:

A reasonable request…

Henry:

I guess. It's so I, you know, I started to realize that the path I was on financially wasn't going to provide me the life that I truly wanted and I knew that but when it was just me, like, there was no like, I was okay, I was like, whatever, I'll figure it out but like, when you have somebody else who's depending on you, you know, a lot of those things become a lot more real and so I had a panic attack one night, after we tried to buy a house together, and I couldn't be on the loan, because my credit was so bad and the bank said, hey, you're gonna ruin this for your wife, if you guys want to be able to buy a house and so then we, you know, we had conversations as a couple of about our future and what we wanted and kids and dream houses and you know, all the things married couples, young new married couples talk about, and I was like, I can't afford any of this. Like, I just, it was just as unsettling realization that like, even though I did all the things inside me told me to do, you know, I got the good grades, I went to the good schools, I got the good degree, I got the good job and I still couldn't do normal things, you know, without an extensive amount of like planning, budgeting, and like, it just was normal, things were going to be difficult and I just, I didn't want life to be like that and I didn't want her to feel like she was struggling by choosing me as her partner, and so I had a panic attack. Three in the morning woke up in a cold sweat because I was like, I gotta figure out a way to make some money and so I googled, how can I make some money and that's when that's when real estate kind of hit me over the head were really, really long story short is that's when I started to like pay attention to the articles that were popping up about passive income and about building wealth and well, you know, all those buzzwords that we all hear all the time, but like none of it seems to stick in our brains.

Well, it started to stick and I started to realize that like, owning real estate was feasible. I just never thought it was feasible before. I just thought super rich people in corporations on real estate, but like, stumbling upon us across articles on bigger pockets and all these places and seeing that it's just regular people that have real estate and they are building wealth and they are retiring from their jobs and I was just like, This is crazy and I didn't I didn't know it was I didn't know it was achievable, you know, and so I just made a decision that three in the morning and then I was going to figure it out because I figured it if all these people on the internet have figured out how to do it, there's no reason that I can't figure out how to do it. Pretty smart guy, so I'll just I'll just I literally said, I'll just do this and I had bad credit still and I had only had $1,000 in my savings account. So I didn't have any money. I had bad credit, but I made the decision that I was going to be a real estate investor and, you know, at the time, I'm sure that sounds like a crazy idea. But you know, now fast forward five years, I've got, we just counted yesterday, we've got 75 doors, and we are, we flipped 10 to 12 to 15 houses a year and I teach people how to be investors now and CO hosts a couple of Bigger Pockets podcasts and you know, why stick in a crazy turn in five years.

Michael:

Dude, dude, that's amazing. So, okay, I have so many questions. Tell me some of them in the episode, when you say we are talking about we owning sending code, or is that you and your wife is that you and a partner, tell me about that?

Henry:

Yeah, so when I say we, I'm referring to my wife and I, so my wife and I own the majority of our portfolio. Together, I have about 25 doors that I do have with a business partner that we bought early on in my investing career early on, I'm still early on in my office, but like in the first couple of years, and then I've got a few other doors and some partnerships, but you know, it's a mix, but the majority we owe…

Michael:

Okay and so there's a pretty big gap in your story here, Henry, from the day that you woke up at 3am, Nicole 12 1000 bucks to now having $74. So fill in a little bit about for us and let's start with kind of that first deal. I mean, what did you do because I think so many people listening to this right now are in a similar boat. They're like, what I'm doing isn't working and I just discovered that real estate investing. I've always thought it was for other people. But I'd realize it can now be for me. So walk us through how do you get that first deal done?

Henry:

Yeah, man. So I'll give will give to a couple of mindset and a couple of practical pieces of advice. So what I've learned, through retrospect, I didn't I wasn't the smart one at AG when I actually did it. I didn't know what I was doing. But now that I've looked back here, and I see I see what it was right and so I think the thing, the one thing that I did, that led me to where I am today had nothing to do with buying real estate. It had everything to do with mindset and I know people get all like, ooh, it's not that easy. You can't just make up your mind. You're rich, like, you're right, you can't but you can make up your mind that you're gonna do whatever it takes to hit to your goals, right and so that's what people that's what people mean, when they say the mindset changed their life because without the mindset, none of this was possible and so for me, the thing that I did, that led me here, the one thing was at three in the morning, I decided I was going to be a real estate investor, I made a decision I chose right, decide the suffix of the word decide aside, like suicide, or homicide, it means to kill off, there's no other option, right?

It's option A, or there's no option B is going to work or it's gonna work, right and when you decide, what you're doing, is you're telling your brain that this is what is going to be. So when we can't figure out how to do something, brain, go help me figure out how to do it, right, and you just open your mind up to helping you search for the answer for the root for the path for the thing that you need to get around the obstacle, like our brains are powerful, they do that. Like, if you tell your brain, if you tell your brain that we're doing something, it's gonna help you try to figure out how to do that and I think that most people, when they go down a path of anything, a business or a new venture, you know, fitness, whatever it is, like when you go down that path, most of us say, well, yeah, that looks cool. I'll give that a try, right? I'll try that out and when you say you're gonna try something, what you're telling your brain is like, we're gonna do it until we don't know what to do anymore and then we're not going to do it, your brain is just not going to help you navigate the difficult parts you didn't tell it to. You just told me you were trying it. You did, right and so I think the most powerful thing you can do is like truly make a decision in your heart and your mind. Like no matter what option A there is no option B, I knew I was gonna be a real estate investor, period, I was gonna figure it out and so everything I did to that point, like all the subsequent decisions that were made, were made with all that in mind, right and so when I bumped into walls and I obstacles and things. It was it was never like, well, I can't do it. It was just like, how are we gonna get around this obstacle, right? It's got to be a way people are doing this right and so I would say that's the biggest thing you can do is like, really do some serious soul searching like, you're you? Like, are you interested in real estate or are you committed to real estate, right? And if you're interested in it, that's cool. Do some research. See, see what's out there, right. But being interested in is isn't gonna get you to wealth being committed to it is, if you're committed to it, that means you're doing it no matter what, right, so.

Michael:

Yeah and so what? Yeah, walk us through, like what you did, like, clearly, at the very end, you're committing to it, like, what did you do next?

Henry:

Yeah, that's a great question. I had no idea what I was gonna do and so I just like….

Michael:

You had to put it out to the world, you declare him….

Henry:

I put it out there and then my thought process was like, alright, well, I don't know how to do this but somebody here is doing it. Like maybe I can just find people who are doing it and so I just started Googling, like real estate investment groups, meetups clubs, like I did all the words I could find to find people who were into this kind of thing. Who me I mean, there's, there's knitting groups, and there's, you know, there's dog walking groups, and there's, you know, you know, absolute backgammon groups, and like, I was like, there's got to be some investor groups, right and so that's what I did, I went and I found every investment Meetup group club, you know, association, wherever there was investors in a room in my area, I got in the room because I've always, you know, even before I was investor, I've always believed like, you know, who you know, who you choose to be around, let you know who you are, right? We are the sub parts of the people who are closest to us, right? We naturally as humans take on the characteristics of those who are closest to us. It's just human nature, we can't help it, right and so I was like, well, I'll just get around other investors and then it'll do a few things for me, it'll start to show me like how they're doing it. So maybe I can do it similarly, or how they're doing it. So maybe I don't want to do what they're doing or it'll start to show me what's possible because we like as people, we determine what's possible, based on what we see those closest to us doing, right?

Our views are limited to the knowledge that we have about a particular subject based on the people that are around us, right and so like, I knew that it seemed daunting, and I knew I had no idea how I was gonna buy a property. But I knew if I got around people who were buying properties all the time, it wasn't gonna seem as daunting anymore and so and so I would say the best, the next best thing you do is just surround yourself with people who are doing what you want to do, you will naturally start to take on those characteristics and remember, you told your brain, you're gonna figure it out and so as you're in these rooms, and you're hearing these people talk, and you're networking with these people, and you're starting to understand what's happening, your brain is listening, it's actively listening for the things that you need to know, that's going to help you down your path, right. It's the, you know, I would say it's like the, it's the red truck. I forget what they call it Pavlov's law or something like where it's like you buy a red truck, the truck you see is red. It's the same thing, right? You've told yourself, you've told your brain, I'm going to be an investor and so now every time something like it still happens to me, like if I'm out to dinner, and I hear somebody say something like rental, I'm like, who's to rent a property? There, it is good like, my brain is actively listening for it like, and then I'm like, yeah, I rented this boat. I'm like, it's not like your brain, it's gonna help you out, right and so when you go, and you surround yourself, you're not only learning new strategies, that you're meeting the people who are going to be able to help you down that path. That business partner I mentioned on 25 doors with, I met him in a real estate group. I met him at that same real estate group that I googled and found that that first day at the panic attack, the title company that I've used for almost every single closing I've ever done, I met through a connection at that real estate investment meetup and they have been a godsend to my business. I've met several contractors that I've used in that group, the banks that I've used, that have financed my deals at almost 100% sometimes I found in that group and so like you are, you are building your network, you are learning what to do and you are you're putting yourself in a position to be successful, you're putting yourself in a position to be ready, when the opportunity calls when the opportunity knocks. You know, we look at people sometimes and we say yeah, he's Henry's real estate investor, but he just he just fell into it, you know, because my first deal came from a friend of mine who heard I was buying houses and so from the outside looking in, it just looks like oh, your friend just called you and had this great deal, that's not going to happen to everybody.

Michael:

I don't have any friends that are in real estate.

Henry:

Yeah, right that that happened because I put myself in a position for things like that to happen and for me to be ready for them when they happen. That happened because I surrounded myself with other investors, I just started telling people, I was an investor, I had never done a deal, didn't know how to do a deal. I only had $1,000 and I had bad credit but I started telling people, I'm a real estate investor. That's what led my buddy to call me and tell me, hey, I'm in a tough spot with this property, I need somebody to buy it, right and so it wasn't luck. It's positioning, you've got to position yourself to be ready to take advantage of opportunities and so by just getting in the room, and it's not just going to one meetup, because I think that's what a lot of new investors do. Everybody knows, like, yeah, real estate investment meetups, but what happens is they go to one meeting, and then they go to maybe the second meeting the next month and then when they're gonna go to the third month, like life kicks in again, right, and they've got a kid thing, or they got a dog thing, or they got up, work early the next day, and they don't go and so the consistency is not there and when the consistency is not there, people don't know your face, people don't know who you are, what you're trying to do, they don't know how to help you, investors will genuinely try to help you. If you show up over and over again, you know, who else shows up over and over again, people doing deals, and when they see you in there, and they see you're hungry, you're trying to learn, you're making sacrifices, you're in there trying to contribute, and people will help you, they will help you, they'll send you deals, they'll send you contacts, they want you to be successful. It's a super cool group people.

So get in a very, very long winded way of saying, get into every real estate investment group you can get into because that is 100% what I did, and it really started to change the trajectory. You know, I listened to a story. I can't remember who it was but it was a guy whose first deal was a large apartment building and I remember hearing him get interviewed on a podcast and they said, well, what made you buy a you know, 150 unit apartment building for your very first deal. That's crazy people, like people work the way up to that they don't do that and he said, I didn't know I wasn't supposed to all my friends that I hung out with bought apartment buildings. That's what they did and so that's just what I did, right and I just thought that that's boom, that's it, like you have to surround yourself with people who are doing what you want to do well, because it will just make it seem like that's that means it's so achievable. If you tell somebody who's never ever bought a house ever, that they can go buy an apartment building, they'll look at you crazy, right but if you buy somebody tell somebody who's never bought a house ever, but all they hang out with is do to buy it, but grant cordons then they'll be like, yeah, I'm gonna buy five apartment buildings, right…

Michael:

Like that’s right. Yeah, I think that's such a good point and then also with regard to like, get getting around meetups and go into these events. I think the investor that goes to one or two, and then the life thing comes up that I think also the mindset like, oh, well, I don't own a property yet. It's like, this isn't working, or I don't have anything to add, like, what's the point? I'm like, no, like cart before the horse, my friend.

Henry:

Absolutely. You know, it's, it's interesting. So I did, I went to Hawaii with my family and then I had a, I met up with a local real estate investor out there who I just happen to follow on social media a lot and so I was like, well, let's meet up and then we have that. Then it turned into this whole, like meetup and people coming from all over to go to this meetup and we went, I went with my family and a good buddy of mines, family, we all went together and got this big, you know, Airbnb property. So all of our kids were hanging out super fun, right and that guy, he is. He and his wife, I have like been trying to drag them along into real estate investing, kicking and screaming for like, several years and so I finally gotten them to buy a property, one that I had found, and then I sold to them, right and so like, they bought it, and I manage it for them, right. So it's like, they're kind of like their foots kind of in the water, right. You know, they own they own a property, right. It's and so but I don't think that they see themselves as real estate investors, I think that they just see themselves as, you know, folks who happen to have a rental property and so we went to this meetup and my buddy, like, I remember it, you know, he, he said to me, it kind of seemed like maybe, I don't want to say that he kind of like felt out of place, but it kind of felt like, there was a bunch of investors there and then he was there with me. Not like he was there as well, right and so, you know, when I talked to him afterwards, I was like, you know, what do you think and he was like, yeah, it's kind of cool. You know, some people were doing some stuff and I was like, like, you belong. You're one of those people investor.

I was like, half of the people over half the people I talked to never bought a property. You own more property than half the people there, right? You fit there more than half of those people did, right and so it's all just like, it's like mindset is so huge is like if you see yourself as an investor, like the opportunities follow the relationships follow on like, if you have approach that meeting with the mindset of you're just a person who's not who's there who's not an investor, then you won't get as much out of it as if you approach it as I'm an investor and I'm here to help some people and gain some information and some knowledge and grow and grow as a person and grow as an investor and those things, you'll get those things.

Michael:

Yeah, I just took Henry this class, about mindfulness and self-compassion and it was a six week course it was amazing and they said, okay, I want you to think about how if your friend is going through a hard time, how do you talk to that friend? What's your body language? What's your tone, what kind of words you're using and then think about that? Okay, that was the reason they said, and now think about how you talk to yourself, if you're having a problem and we're like, idiots, who have you beat yourself up? It is the same thing like, I feel like so many people look around the room and think every one of these people has something to offer me, but they don't think about themselves. So I love that you shared that story and has your friend has your friend since changed their tune a little bit, did it click a little bit for him?

Henry:

He's closing on his second property tomorrow.

Michael:

Yes, I love it, I love it, I love it. Well, Henry, I think so many who are listening to this, especially who are just starting out or maybe have a couple of deals under their belt, look at you 74 units, and you're like, holy crap, that's like not even the top of the mountain. That's a whole mountain range, right? That's the Everest and so it's something I hear all the time and I'm sure it because you coach and mentor folks as well. You hear too? Well. What about the 10 loan limit? Like how do you have 74 doors? How do you get? Talk to us a little bit about what the scalability looks like and how should people be thinking about that because I think a roadblock that I hear stumbling blocks that people share with me is like, yeah, I can do one to whatever through 10. But then, but then what do I do, like I really want to blow this thing up? How do I make it big? So talk to us a little bit about how you've been able to scale so massively?

Henry:

Yeah, great question. So you need you need to solve two problems in order to scale, right? You need deal flow, right. So you need a consistent flow of deals that you can purchase under market value, right? So you need deal flow and you need money flow, you need money to be able to buy these properties. If you can solve the problem of getting enough deal flow coming in, and having the money to be able to close on them, then you can scale as fast as you want to. I know that's like yeah, Henry, of course, you need money, right? I get it right, but…

Michael:

Just turn on the money…

Henry:

We're buying real estate, there's a bajillion ways to buy a property and so they only teach us the traditional ways to buy property, which is some conventional loan, right, where you can put 25% down and buy a property. But that's just one loan product, there are hundreds of loan products that you can use, you have to go educate yourself on what they are, so that you know that all the tools at your disposal and so what I learned early on, we never got into talking about that first deal. But when I bought that first deal, what happened was I told you, my buddy was in a tough spot with the property. He heard I was buying property, he was like, hey, come buy this house. If you could buy it, I need to sell it out, I need to make this amount of money, I need x for this property and that because that gives me the exact amount of dollars I need, because I have to go buy this property for my church and I was like, okay, he's like, so I need to sell it to you for 115 because it gives me the money I need. It's worth like 150-60. I don't care about that. I just need this amount of money as long as you can close on in 30 days, you can have it for this price. He was like, can you buy it? I said, yes. I had no idea what…

Michael:

The price was in 1000 bucks. How are you going to come up with 115?

Henry:

Right, right. But most people would do that most people would go I would love to buy it. But I don't have the down payment because they think they need it, right? We make decisions for other people all the time, right? We decided we can't buy it. Who told you that databank tell you that? Nobody told you that? How do you know? Like, go figure it out first and so I told him, I was like, yeah, I can buy it, even though I had no clue. But I had that network of investors and I went to them and I said, Well, how are you guys doing this and they told me about like, you know, go talk to go talk to a bank. They'll talk to a bank and see what they can do and so I went to the closest bank to my work happened to be this small local bank and I went in and I walked in and I had the contract in my hand. I said, Hey, I need to speak with somebody who could potentially do a loan for this investment property.

Michael:

It's your money person.

Henry:

Yeah. Who's, who's, who's the guy that gives people dollars? I want some of those. I would like some please. Yes and they looked at the contract and they went, you know, this is really good deal and I was like, yeah, yeah, yeah. Will you give me the money for this really good deal and so they line me up with the commercial lender. The commercial lender told me he was like, look, we'll lend you 85% of the purchase. We'll give you all the money you need to renovate it. as well, as long as you can come up with a 15% down payment, and I was like, he was like, do you have the 15% down payment and I was like, yeah for sure, right and so I went to I went to my, told them, yes, because I wanted the money in real estate investors and I was like, hey, people who do this all the time? How the heck are you coming up with these down payments and they just started like, the guy who was actually my business partner. Now that I met in that room, he was one brainstorming with me. He was like, hey, try this in. What about this and what about that? And I was like, no, no, no, those are gonna work and he was like, oh, well, you can borrow against your 401 K and I was like, what's that mean? I don't want to pay penalties. He was like, no, no, you can borrow.

He was like, so you can take a loan out against a 401k and then the, you have to pay yourself back with interest. But it's your money. So you get the interest too and your employer will just take the money out of your paycheck, and they take it pretax, so reduces your taxable income and I was like, and then you buy the real estate asset with it, and then the cash flow pays back. So your tenants are essentially paying back your 401 k loan with interest to yourself, and you reduce your taxable income and I was like, that's a cheat code, like that's a thing. Yeah and he was like, yeah, and I was like, cool. Now I gotta go find a 401k. I told you, I wasn't gonna love it. So my wife, obviously was the smart one with money and I went to her and I said, hey, remember that time when I said, we were going to be real estate investors? Well, we need to borrow $20,000 from your 401k. So we can buy this property and she said, Let's do it and we did and that's how I got that first property, right and so all that to say, like, most people don't know, you can do that they don't know about 401 K loans. They don't know that there's a commercial bank, there's a commercial loan product that you can use. That only requires a 15% down payment and not a 25% down payment. And you can use it on single family homes, and you can use it on single family homes and they don't care where your down payment comes from, like if I would have tried to do a conventional loan, and then I told them, I was gonna borrow the money from my 401k. Like, I would have had to give him like blood samples and like my firstborn child, money would have to be in my bank account for like, 72 years before, like, it's officially my money to be able to use. There's all these hurdles, right? Yeah. But with a commercial loan, they don't have those hurdles. They're like, I don't care. You can bring the down payment, we will loan you and we'll give you the renovation money and I was just like, right, but because I told myself, when my buddy said, hey, can you buy this and I said, yes, even though I didn't know how it forced me to go figure out how, right and so there's more loan products than people say. So yes, I don't commercial loans from small local banks, you can have as many as they will let you have, like, it's up to them and as long and what you're doing, so small local banks, what I learned because after I bought that property, the bank called me and they were like, hey, that property that you bought, it was a really great deal and there's equity in it. So we want to give you a line of credit against that equity. So you can go bring us more deals like that and so they opened, they did a HELOC for me and I ended up with access to like another 30 grand and like, 90 days before that I had a panic attack, right and now I had an asset that was paying me in the bank gave me access to $30,000 and so like, now I could go rinse and repeat and do that again and what I learned through that process, and what I want people to understand is like, when you're a real estate investor, like small local banks, in order for them to stay in business, they don't do like conventional loans to stay in business.

That's what big banks do. Small banks loan money to small local businesses, right, they're lending money to small businesses in order to stay afloat and most small businesses fail, right within the first five years. So if they if they have to choose between loaning to like a new food truck, versus loaning to a guy who's buying a property at 115,000, that's worth 150. If we both fail, in the rest in the food truck, they get access to like a food truck that they can sell for not the value it was worth or scrap that right or they can get an asset of a house that they can sell even though it's you know, they lend it 115. But they could probably sell it for 130, it was worth 150 they'll make more money doing if I foreclose they make more money on me than they do if I just pay my interest. So it's, it's like they want to loan to you and so you just have to go out and do the research and find out what loan products are out there and available to you. There's more than just what's out there and so don't take what you hear as fact, you've got to go do the research and you've got to talk to people who are actually doing it. A lot of the times when people say, well, there's a 10 loan limit and my debt to income ratio is not good. Well, you don't know that. You haven't spoken to a lender that told you that your debt to income was bad. You just assume it is. Go, go figure it out for yourself.

Michael:

Yeah and even if you do find not to be true, like there are tons of people with bad credit and high incomes that are still investing in property. So like, go find a way…

Henry:

All the time.

Michael:

Yeah, Henry, we're running short on time here. But I want to circle back to something that you said. You said, buying property under market value but the deal flow, why is that so important? What about all the people who are like I want to buy turnkey, that's my strategy.

Henry:

So for me, it's about multiple exit strategies because especially when you're new, there's so many things you don't know that can cost you money, right? You don't know how to estimate rehabbed values as well. You don't know how to estimate ARV, or after repair values as well, you don't, you might not truly know what a really good deal looks like yet and, you know, you don't know how long it's going to take you to renovate a property, you may think it's going to take you 90 days, but it's probably gonna take you six months, right and all these things end up costing you money, the best protection from all these mistakes, isn't to get better at doing those things. I mean, those things do help but the very best protection is cushion is your how much you bought the property for versus how much you're going to be able to disposition that property for and so the better deal you buy, the more exit strategies you have, if I buy a deal, if I buy a really, really, if I buy a house that's worth 200,000, and I pay 100,000 for it, I may be able to wholesale it to somebody for 105 110,000 or I can wholesale it and stick it on the market and sell it for 125, 130, 545,000 or I can spend 3040 grand fix it up and sell it for 300 or 200,000 or I can take that good lead and not close on it, not assign it and just call another investor and say hey, here's a phenomenal lead.

I got them they agreed to pay, you know, to let me pay you 100 for this, you can take this lead and just give me you know, just give me two grand after you close, right? Like that's five different ways. I just told you that you can monetize on a good deal and the only reason that that thing is possible is possible is because you bought it right and so if you do a turnkey, your only exit strategy is to keep it as a turnkey rental because you're paying market value for it, you probably can't turn around and sell it for more than what you're paying for it plus there's a tenant in it, which is going to make it harder to sell unless you sell it to another turnkey investor. So the only exit strategy you have is to continue to rent it. But if you buy a deal under market value, you can rent it you can flip it, you can wholesale it, you can wholesale it, you can just birddog it to somebody and so it's just better protection.

Michael:

I love it. It's like that game Bob its wholesale spirit. That's Dude, that's like a million dollar real estate investor game idea right there. Let's trademark it. We're gonna blow it up.

Henry:

Oh, man. Oh, man.

Michael:

Henry, this has been amazing. Like we get I'm sure we could chat all day but I want to let you get out of here. For people that want to continue the conversation reach out to you ask your questions. Where should they do that?

Henry:

Their best place is Instagram at the Henry Washington on Instagram or go to my website www.henrywashington.com .

Michael:

Right on well, hey, man, thanks again. Definitely look forward to chatting again soon.

Henry:

Thanks so much.

Michael:

You got it, take care.

Okay, well, that was our episode a big thank you to Henry for coming on. Super great stuff loved, loved, loved the mindset discussion because I think it is so applicable across so many things in life. So as always, if you liked the episode, we'd love to hear ratings, feedbacks reviews from you all, and we look forward to seeing on the next one. Happy investing…

Learn the secrets of creative deal structuring with Derek Dombeck Aug 18, 2022

In today’s episode, Derek shares his strategy for creative deal structures and how he raises private money to execute more deals.

Episode Link:

https://gowvoyage.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the real estate investor. I'm Michael Albaum, and today I'm joined by Derek Dombeck, who's an investor, owner of a private lending company as well as conference host. So let's get into it and hear about Derek's private money and sophisticated purchasing strategies.

Hey, Derek, what's going on? Thanks so much for taking the time to hang out with me today.

Derek:

Yeah, I just appreciate you having me on.

Michael:

I think it's, it's totally my pleasure. I think we're gonna have a lot of fun today, because we're talking about a pretty interesting topic here but before we get into the meat, and potatoes and sausage, as you mentioned, the in from Wisconsin, give all of our listeners a little bit of background and insight into who you are as an individual and what it is you're doing with real estate today.

Derek:

Well, don't forget about the beer in Wisconsin as well.

Michael:

That's right. Before we get to the beer and sausage…

Derek:

Yes, I just started out as a construction worker back in the day and started in 2003, just like most people do, you know, we buying and selling at that time holding rental properties and we were buying in the state of Wisconsin buying cash flow properties but we also got, I don't want to say sucked in in a bad way. But we kind of got sucked into the craze of building new construction in Florida in the early 2000s, which went really well until it didn't. So and in 2007, you know, in that short period of time, my wife and I had built up a pretty nice portfolio and, yeah, it we lost it. We lost it all down there. Fortunately, we didn't lose our personal residence but the majority of our holdings, I mean, at that time, we had about 29 doors, right around $4 million in assets and just within months, it was down to a million dollars in assets on paper, cash flow was negatives and I look at that now, as such a blessing. It didn't feel like a blessing back then. I mean, it was definitely a blessing in disguise. But we would have never been forced to learn how to get creative and learn how to structure deals creatively because when we started, we use banks for everything. You know, we were just like lending tree, everybody was throwing money at us and we had great credit, good income, jobs, all the stuff that banks love and we quickly realized how little control we had over our business, the bank's control their business and when the bank stopped lending, we were dead in the water. So it took a few years but fast forwarding on we learned how to get creative and more than that, I learned how to talk to people, because I didn't hide from our problems. Like many I didn't join all these class action lawsuits, blaming everybody for everything that went wrong. There certainly were people that did us wrong. But at the end of the day, we take responsibility for our own actions and I want it to be able to, you know, approach the banks, and especially our local community banks, that we have been doing business with, and they wrote it out with us. I mean, I had a couple of community banks, who didn't get their doors locked, that ultimately, you know, hung on with us and rewrote those notes and you know, the stuff in Wisconsin was cash flowing. It was the stuff in Florida that was burying us and you know, we made it through. But as we've transitioned forward and met my current business partner about 10 years ago, he had never used a bank ever to do any kind of real estate and he started one or two years after I did so we've both been in the business since the early 2000s and he had always raised private capital to fund all of his deals and so combination of raising private capital for the cash deals and structuring terms on the creative deals. That's how we've grown our business to this day. Right now we our goal is to buy two or three real estate acquisitions a month, but our bread and butter actually transitioned into the lending space because we got really good at raising money to fund our own deals to the degree we had more money than we had deals.

Michael:

Wow, you never hear that…

Derek:

Yeah, so we had a lot of friends and I think this is important, Michael. The first eight years of my business I was a closet investor. I didn't go around trying to build a network, I didn't really tell a whole lot of people what I did, I had a full time job and I, I built my real estate, you know, on the side with my wife. After that, we realize it's a team sport and I had to go out and find people to work with, and, you know, people to collaborate with when I needed help. So that's actually how I met Jeff, my business partner, he was running the real estate investor Association in Green Bay, Wisconsin, which is about an hour and 20 minutes from where I live and, you know, I started to see the importance of having a network growing a network and since then, that's where we found all of our borrowers we had, and that's where we found a lot of our private money as well.

So we had the reputation of being reputable, we knew what we were doing on the real estate side, our investors had money to place, our friends needed the money for their own deals, and we started playing monkey in the middle, and getting paid to, you know, put the deals together, that parlayed into what is now about an average of 20 to 25 loans a month, going out the door, and, you know, several million dollars a month in in loans and it's we're still 100% privately funded, we don't take on institutional money, I won't sit here and say it'll never happen, but we have no intentions of it because part of the cool thing, Michael is what I do with mom and pop investors, I get to help them, right, a lot of our investors were getting, you know, 1% 2% 3% return on their money, and they're getting nine, secured by real estate, like it's changed a lot of their lives, and a lot of their retirement accounts and things like that. So it's been really, really fun. I honestly don't know where it's gonna lead to I mean, the, the opportunities are presenting themselves and, and we're, we're open to growth, as long as it's controlled growth and you and I talked a little bit before we jumped on camera here, about our, our lifestyles, and I really like to be able to travel with my, with my family, and work remotely and that's something that the lending business affords us versus managing flips, or even rental properties. We still do that, and we have staff, but if I'm going to scale a business, I want to scale the lending business versus the land lording business.

Michael:

That makes sense. Yeah, it makes total sense. So Derek, I'd love if we could dive into something that you mentioned and that's about structuring deals creatively. Since I think it's something that people talk a lot about. A lot of our listeners have probably heard the term creative financing or creative deal structuring but let's talk about and unpack what does that really mean? So give us a little bit of insight when you say that you structure your deals creatively, what like, what does that mean?

Derek:

So I think I want to clarify what people title creative deal structuring. So you've heard of purchasing a property subject to its mortgage, you've heard of leases, you've heard of options. You've heard of land contracts, or contract for deed, seller financing, using notes and mortgages. Those to me are all individually, they're all strategies. When you stack those strategies together in any 1234, you know, different strategies all together, I consider that deal structuring. Okay… That's, that's my definition for it. So when I get a seller, I do the majority of my negotiating over the phone only because we operate in a fairly rural area and we operate in a 200 mile diameter. So, yeah, and I don't want to jump in the car. Even though gas is cheap, I don't want to jump in the car and drive 100 miles to a house, if there was never a chance that I was actually going to put a deal together on that house. So I got really good at it being able to talk to people over the phone, and getting them to open up about what their goals are in it. It's to me, it's super important. solving their problem. I don't even need to mention what my goals are because I know them internally. I'm not going to do the deal if I don't hit my goals. So I'm only working towards their goals. I'm only talking about their goals and through those conversations, you know, a lot of negotiation books and gurus and people at Teach sales really try to tell you just ask questions, ask questions, ask questions, and that's not incorrect.

But I really feel it's important how you ask those questions. What the tone in your voice is what the response and the tone in their voice is the body language even if you can't see them. You can hear it and very much on that. that type of stuff. So I just did a presentation last week. So I'll probably use a couple of the same case studies but I did a presentation down in Milwaukee, Wisconsin, on this very topic and people are like, well, how do you get somebody to tell you what they really want? How do you get somebody to tell you what they owe on their loan? How do you get them to do all these things and I feel like number one, I'm just really blunt. It not in a rude way. But I don't hold anything back. I have no problem. If somebody is going through a foreclosure for example, I have no problem saying, Michael, I, I've been through several foreclosures myself, I lost everything. I know how you feel and they know if I'm bullshitting them or not, right, especially if they can see me if we're at a kitchen table tonight and I'm able to do that they can see the my face. But yeah, you know, I've lost family members, I've lost my father. So we've dealt with the grief and the probate and everything that you go through, if you're dealing with somebody that's selling an estate. So I have no problem opening up about that being vulnerable, letting them know, I am clearly here to help and I am going to profit and I'm not going to hide that fact, I'm going to profit if I'm able to help them, but I'm helping them. So the first thing I do within the first two minutes of any phone conversation, or in person, but typically it's on the phone, is I have a little elevator pitch and so Michael, I'm just gonna you use you as the seller, right?

Michael:

Please…

Derek:

Michael, I just want you to know that we buy houses in several different ways, all cash is not a problem. But that's typically going to be our lowest offer. If that doesn't solve your needs or doesn't meet your needs, we can look at taking over your payments, if you still have debt. If you don't have debt, we can make payments to you over time and in some cases, we actually just lease your property and put a document in place called an option and we purchased it in the future that really works really well. If we're dealing with a landlord who's trying to offset some capital gains taxes for right now. Just tell you all this, Michael, so you understand. I'm going to ask you some questions that most people probably would never ask you. But I'm really trying to give you a solution for your problem today. Is that fair?

And finished...

You can tell I've said that right? A couple 1000 times or more. One, what that does, is that sets up any question I asked moving forward, they now know why I'm asking it. I'm asking it to, you know, when I say Michael, do you have any debt left on your property and that's important, too, like the way I just said it? I don't say, Michael, what's your mortgage or Michael, do you know? What's your loan payment? I don't say those institutional words. I come across soft and subtle and, Michael, do you have any debt left on your property in a tone, right and people just…

Michael:

It feels so different. Even just as we're having this conversation…

Derek:

People open up and that's the tone of the entire conversation. And I don't care if it takes 15 minutes or an hour. As long as it's going in the right direction and I'm leading them. I'm leading them to a pre preconceived conclusion that I already have. But I'm not doing it maliciously, or trying to take advantage of their bad situation, right. It's kind of like, Have you ever gone to whitewater rafting?

Michael:

Yeah, it's great.

Derek:

So you have a guide, when you go whitewater rafting, and they know that they're going to take you through a class four rapids, and it's going to be a possible shit show. But they also know that the joy and the excitement that it's going to bring you when you get to the to the, you know, the soft water at the bottom of that, and everybody's high fiving and they're excited, they got the adrenaline rush, they already know what was best for you, I do the same thing. I know what I can do for a property owner, I know I'm gonna have to get him through some class three or class four rapids and they're gonna have to, you know, take faith that I know what I'm doing to get to the end when we're all high five, and then the problem is solved. So I don't want to manipulate them through the class three in class four rapids, but sometimes, you might have to just, you know, throw them into the class three and class four rapids. No one, we're going to be okay.

Michael:

Yeah that’s a great analogy.

Derek:

Yeah, so that's what we do.

Michael:

Derek, I'd love if you could walk us through what a case study looks like your example looks like that that you've seen, because I think you threw out a bunch of really great strategies, but hearing how they all start to piece together and fit together and be really helpful.

Derek:

Yeah, for sure. So I want you to know the case studies I talked about have all been done in the last couple of years during the hottest selling market we've ever had, because I don't I'm not going to give your listeners old information.

Michael:

From 1979 a deal that was done…

Derek:

For sure but I had a ranch house on five acres of land and Central Wisconsin, to give you an idea, our median price points here are 150 to $250,000 houses in most cities and you get rural, it can be a little bit, you know, plus or minus depending on acreage. But I, you know, this was a three bedroom, two bath ranch built in the 70s had some additional outbuildings sat on five acres land, and in a nice condition that would have been worth about $225,000. Now this was about a year and a half ago. Okay, so today's market, it would have been up another 20-30 grand. But Randy had two mortgages on his property and the if you wanted to do a full renovation on the property, it needed a $50,000 renovation. It had some dated stuff in it, part of it had been updated but Randy was a bachelor there was not a lot of wear and tear on the property. But he had some foundation issues, we had some leakage going into the basement, a lot of those things can be easily solved, which I'll mention in a second. He was retiring, and apparently had met a woman from out of state and he literally wants to retire and move within a week and go move to South Dakota where she lived.

He did not want to deal with a realtor or showings or having to do anything to the house to make it pass a home inspection, anything like that. His two mortgages were totaling $132,000 and my cash offer to him was 124 and he said I can't take 124 for some obvious reasons and some other reasons he just didn't want to write. So we talked about potentially doing a joint venture where it's Randy, I could come in, I could stick the time and money into the property and we could you know, I want to get my money back hit a certain profit margin, we could split any extra proceeds. I don't like doing that with civilians. I don't mind doing that with other investors. But I'm not a fan of doing it with civilians and ultimately, he didn't like it either because how do I trust you? How do you trust me and I said, okay, well, what do you want to get in your pocket? And he said, I really want $150,000. If I got 150,000, I walk away, I've got a little bit of money to start over with and I said, well, you know, if you listen to this with a realtor, you could sell it for more than 150 and he said, Yeah, I know but for the same reasons I already mentioned, he didn't want to deal with it. I said, how long would you typically list your property with a realtor for and he said six months…

Again we know the answer already. But I'm still asking the question. I said, okay, Randy, what if I had six months on an option to purchase your property for $150,000 and I stick whatever I feel necessary into the property to sell it. In the next six months, whatever I sell it for over and above the 150 is my profit and he's yeah, I'm okay with that and I said, okay, I also want to lease so I have the legal right to use the property, and I'm not going to use it to live in, I'm going to use it so that I can fix it up and he said, that's great. I said, What do you think is a fair price for rent? Now remember, I'm going to be paying the utilities and I'm going to take care of this was the fall of the year. So there's leaves falling and there's yard maintenance and some landscaping, which a realtor is never going to do, right? Yeah, potentially there could be snowfall during the six months. So I'm gonna have snow plowing and all these other expenses and he said, well, I don't really need anything for rent. I will tell you, he backpedaled before we signed the documents, he ended up chiseling me for the taxes, the real estate taxes monthly, so I ended up paying $220 a month for rent, which, you know, I gave it on that one. So, so I had use of this building for six months for $220 a month plus utilities. Okay, I am now going to go in there and only do the renovations to it that I feel necessary to get it to pass a home inspection, and an FHA loan or any government backed financing, because conventional would already qualify, but I want to make sure it's gonna qualify for all these other programs. That meant taking care of the water problem in the basement and ultimately, we painted everything the basement walls, we freshened everything up, did a deep clean on the property did some landscaping, five days’ time, and $2,000 out of my pocket in labor and material, and we put that property on the market.

We had when I listed it with my real estate broker friend who already had a buyer in her pocket, but we did it legal and we marketed it. Her showing was the first showing we had 14 showings scheduled within the first 24 hours and I ultimately accepted the original offer which was my full asking price to $100,000. They had no inspections, they had good financing conventional financing, they were able to close in about 26 days. I never owned the property, Michael, I controlled it with an option and a lease, our net was $36,000, so…

Michael:

For five days working to raise…

Derek:

For five days working to raise work. So what's the what's the return on investment annualized? Who cares enough, right? It's enough. But it gets important on how you structure this because we talked about strategies and structuring, right. So initially, I had an option, and I had a lease and that was great but I want to protect myself and this is something you probably won't hear anywhere else, because very few people talk about it. You have the right to record an option on public record, right. So that Randy, Randy can't go and sell it to somebody else or, I mean, Randy could see oh, my gosh, he put this on a market for 200,000, which actually we talked about because I'm again, I'm opening blocked, I told him what my intentions were, he was totally fine with it and spoiler alert, he actually knew the kids that I sold it to they, his their parents were friends of his they just didn't never knew his house was for sale. So he was happy with who ended up with the house. But what I do in that scenario is I secure my option with a mortgage. A mortgage is nothing more than a security instrument, which typically is going to tie a property to a promissory note alone, right. But a mortgage or a deed of trust, depending on what state you're in, can secure an option it can secure lease, it can secure any agreement, because all it's doing is pledging the property as collateral in the event that the agreement is breached or defaulted. Okay, so why is that so important? Why don't I just record the option? Well, let's say that Randy decides he does not want to close, I do all this work, I find a buyer he doesn't want to sell to me because he, you know, he's seeing dollar signs, and he wants to backdoor the deal and go sell to somebody else. options have gotten missed in title searches. I mean, they're not as common as a mortgage and everybody's taught to look for mortgages or deeds of trust, if the option got missed, and that property actually closed, and Randy sold it to somebody else, what's my recourse, as the option holder?

Michael:

Probably pretty limited.

Derek:

I could file a lawsuit, I'm never going to get that sale reversed ever because it's done. It was sold to a third party, it'll never happen. But I'm sitting in front of a judge arguing contract law, which is gray at best and the judge has the ability to have an opinion on what he thought we meant. In this option agreement. If I record a mortgage instead of the option, number one, I don't want the public seeing what the terms of my option are and if they're public record, they get to see what my purchase price is. And they get to see how long I have to purchase it and everything else that's in there. So I could file what's called a memorandum of option. But I don't want to do that either because again, it could get missed now if I file a mortgage. How often do mortgages get missed, almost never but even if it got missed, I still have a lien against that property that's in senior position to who just bought it. Title insurance is going to kick in, there's going to be a bunch of stress, but I can start a foreclosure action, take the property back or if Randy refuses to sell to me, I can say, okay, Randy, thank you for being an asshole and not living up to what we agreed to. Now I have to turn this over to my attorney and foreclose and take the property away from you. In which case, you're likely gonna get zero instead of the cash he would have gotten, because he pledged the property as collateral to secure our agreement.

Now I would be in this particular deal I would be foreclosing subject to the senior liens, I would still have to pay off his bank loans… which is totally fine, because that's the way it should be anyways. And then here's the final piece. I always have power of attorney on the properties from Randy. So when I went to list the property, if I was going to sell it to anybody using government financing like FHA, any loan program that still has seasoning issues or title seasoning requirements, I should say I could not buy the property from Randy and then double close it 10 minutes later and sell it to you because there will be a title issue with seasoning of title because I had power of attorney from Randy. I listed the property as Randy's POA and I actually signed the closing documents on behalf of Randy to the end buyer and I got paid as a mortgage payoff on the closing statement. So it doesn't trip up any FHA underwriting or any other loan underwriting because they're doing a title search. They're seeing Randy's name is on title, right? I'm Randy's POA makes total sense

Michael:

Oh my gosh…

Derek:

and my payoff is just going to be a mortgage payoff which looks normal to any lender. Right? So we stack a couple of different tools there and that's creative deal structuring.

Michael:

That is what for anyone who's watching this, you'll see my mouth is a game for anyone listening to SAT, take my word for it, my jaw just dropped to the floor. That's wild Derek, how did you figure this stuff out man?

Derek:

I have a PhD of public high school diploma and I have I have a network. I mentioned earlier, it's all about your network, I have friends that I you know, most of them are, you know, in their 60s and 70s. I'm in my 40s but these guys have been there done that. So when I have a deal that comes up, I'm able to pick up the phone and talk it through with my friends and over the years now people are calling me to get the advice that I learned from them, right. But it's all about the network. It really is because you can read it, you can hear it, you can look at it in a book or a seminar until you're actually on the streets, work in the real deals, most of the time doesn't sink in. It doesn't for me, at least, you know, I gotta be, right. So I mean, that's one deal, which was actually pretty basic. In my world, I didn't stack a whole lot strategies there, it was really just a lease option but they get more intense, and they get more layers, depending on what we're trying to solve. I won't probably have time to give you the details but I'll tell you, we bought a house, subject to a first mortgage of roughly $65,000. I don't have in front of me. So I'm going to kind of round up the numbers, right?

Michael:

Yeah…

Derek:

The seller wanted 105,000 and so first mortgage subject to 65,000, she needed $10,000 cash and she was willing to carry the remainder of the purchase price on a second mortgage with payments of $200 a month until paid in full at 0% interest I needed about $20,000 tend to give her into cash and tend to stick into the property to do some paint and carpet and cleanup and I was going to lease option it to a tenant, future buyer. So I approached the financial friend who has a small IRA, how do I know they have a small IRA because I communicate with all my financial friends as small IRA, I said, hey, Dan, I need $20,000 I'll give you 6% interest only quarterly and I'll give you 25% of the equity in the property someday when we sell it. He said okay, cool and that's in his IRA. So that's growing tax free for him. Right. So I'm in the deal with nothing out of my pocket. We ended up about a little over two, two and a half years later, it sold, you know, to a lease option buyer and everybody got paid off. Dan got his portion, she got the remainder of her second mortgage, you know, the bank got their money, everybody got paid. I can't remember what the ROI was. But it was pretty sick because I had nothing into it, and, but that we stacked a lot of strategies in that deal structure.

Michael:

This is wild, Derek, we got to do like five episodes with you, man just talking to all this. This is mind blowing but we're gonna wrap up here in a minute. But you said a couple things that I want to come back to and make sure that people really hurt and it sank in and one of which is that you said you're trying to solve these folks problems before mentioning what your goals are right? Not even maybe mentioning what your goals are, which I think is so important because so often in these in just sales in general real estate transaction, It's you versus me, us versus them type of mentality but what you're talking about is coming, hey, you know, putting armor on the person we're on the same team. Let's figure out how to get you out of hot water, which I think is so critical.

Derek:

It is and it's a lost art in the United States and that lost art is sad because people don't care about people anymore, right. Many people don't even know their neighbors names. I live in the middle of nowhere. So for me, I got 40 acres and some horses and my family and I know all my neighbors around me I've been in the same area my whole life. But I go to these cities and I buy these houses and the first thing I do literally is I go on every house on either side of me across the street and behind me and I shake their hands, I give them my business card. I let them know what our intentions are with the property. Now I have a built in security system, because they're all watching the house for me and they all have my cell phone number and they're also seeing the improvements we're making to their neighborhood. So when they have a friend or somebody else they know that's trying to sell a property, they call, right like, but that's just a lost art that nobody everyone just wants to hide or they're the other way they want to put everything on social media and brag, that's a whole another thing…

Michael:

We could do a whole episode about that.

Derek:

Yeah but that's, I mean, what I do is nothing magical. I just truly care. And if I solve enough people's real estate problems, I'll make a healthy living and raise my family. That's really what it comes down to.

Michael:

I love it, I love it. Derek, we're gonna get you out of here in just a minute but before we hit record, you were telling me about some pretty cool side projects that you're working on and I think you mentioned that you're writing and also coauthoring a book. Is that right?

Derek:

Yeah. So I'm authoring my own book, which is not titled yet, because we're in the process of it and I'm coauthoring a collaboration book with a bunch of other really cool authors and they're both gonna be out towards the end of the year. So I can't give anything today, I just would have to have people reach out via email and let me know how I can get it to them later. But I'd love to give your audience the free version of both of those books and then…

Michael:

Amazing…

Derek:

Yeah, so I mean, simply my email address is my first name: Derek spelled the shortwave, because my mom probably thought I was gonna be smart enough to spell it the long way, I'm not sure. But it's so derek@bestreifunding.com shoot me an email, tell me you heard me on Michaels podcast and put you on the list for the for the free books and when they get, you know, released, I'll have my assistant just email blast them out to everybody. So that's the first thing, I'd just love to do that.

Michael:

Thank you.

Derek:

The other thing, Michael, I host the conference once a year and we actually, this, this was handed down to us from all of my peers that I learned all this cool stuff from, we just became very close friends, they used to run a conference on a cruise ship and they it, you know, they aged out and so we don't do this anymore. So we took it over. It's called the generations of wealth. It's going to be in Cancun, in February, late February 2023. So, what I'm super proud of Michael is we have non selling speakers. So this isn't a pitch fest. We have a five day conference, we have people speak from nine in the morning until one in the afternoon. On advanced strategies, this is not really for brand new people. I mean, you still get something out of it but it's advanced stuff, what we're just talking about for last 25 minutes. But then the whole afternoon is spent just networking hanging out at the pool, having a an adult beverage, if you're you know, have like that kind of thing or if you're from Wisconsin having 12, adult beverages, whatever and then people are out to dinner together, people are hanging out by the pool, whatever. Then in the evening, we have these townhall sessions which are totally optional. I mean, you can come and do as much or as little as you want but those are more interactive discussions.

But what I really love about it is we encourage people to bring their kids, especially ages 10 and up, we don't charge you to bring them they can sit in on every session at free of charge. Last season or last February, when we had it, we had about 18 kids there and about a dozen of them sat through every lecture regardless of the fact that didn't have a clue what was being talked about. Other than my 15 year old daughter did a presentation on how to get your kids involved in your business, which made me super proud. But I want our kids to build a network of people in their teenage years and early 20s across the nation who have parents who are freaks like us, who just don't conform to a lot of the stuff that's being taught in school systems and if they never enter the real estate world totally fine but they know that there's other people out there. I mean, literally my daughter has friends in about seven different states and they communicate daily, weekly. It's unbelievable. So generations of wealth. The website is: G O W https://gowvoyage.com/ -G O W voyage.com. It's literally just being opened up to the public as we're recording this and which is it's not going to be this huge 400 person conference so there will get potentially a point where we're gonna have to shut it off because I've only got so much room blocked off at this all-inclusive resort, but it's going to be awesome.

Michael:

I love it. We'll definitely go check that out everyone listening or watching Derek what's the best way for people to get in touch with you if they have more questions want to follow up? Is it your email that you gave earlier is there another way?

Derek:

Yeah and that's my personal email guys. I actually check that and I'm more than happy to talk to anybody about, you know, whether they're private lenders or deal structuring or whatever. Yeah, reach out to me, I'd love it

Michael:

Right on. Well, Derek, thank you again so much for coming on and sharing so much wisdom. This was really incredible. Definitely, we'll be in touch soon, man.

Derek:

Awesome. Thank you so much, Michael, ever have a blessed day.

Michael:

All right, everyone. That was our episode, Derek a big thank you to him for coming on and sharing some really interesting insights into creative ways to purchase properties. As always, if you liked the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing the next one. Happy investing…

How to succeed in the vacation rental investment market Aug 16, 2022

Shawn Moore was selling high-end resort properties back in 2008. He was making big money, living lavishly, and about to close on a new mansion in Newport Beach. When, out of nowhere, the owner of the resort they were selling for got indicted on securities charges. Feds came in and shut everything down overnight, including their paychecks.

In this episode, discover how Shawn came out of this huge loss and turned around to excell in a related sector. Shawn shares his strategies for growing and scaling a short-term vacation rental portfolio. Learn from Shawn's 20 years of ups and downs as an investor.

Episode Link:

https://vodyssey.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Shawn Moore, who's the founder of VITC, a short term and vacation rental education program and he's gonna be talking to us today about what we need to be aware of as we get involved in the space as investors. So let's get into it.

Shawn Moore, what's going on, man, thanks so much for hanging out with me. I appreciate you.

Shawn:

Awesome, Michael. Thanks for having me, man. I really, really excited to chat with you.

Michael:

Now, likewise, likewise. So it's gonna be a lot of fun. We're gonna be talking all things short term vacation rental today. But I want to give our listeners a little bit of background into who you are, where you come from, and what is it you're doing real estate today?

Shawn:

Yeah, awesome. Well, first, thanks for thanks for having me and, yeah, we've been around the real estate game for a little while now. I've been a full time real estate investor for 22 years, if you can believe it. I feel like I've been around the block a time or two and really started my journey into real estate in the fix and flip game for a long time, I was just doing mostly fixing flip houses I wholesaled. One deal, it's what got me into the into the game back in 2000 and then realized I wanted to wanted to start doing the actual rehab on the properties and did that for a good bit of time and I remember going back in the day to a real estate investment club, local real estate investment club meeting, kind of sticking my chest out and acting like I was a big shot and telling everybody how awesome I was at I think I was about 23 at the time and felt like I'd had I had arrived, right and I remember this old guy named George, he came to me and put his arm around me and just said, Hey, Shawn, you I know you think you're pretty, pretty big deal around here. But you're really not a real estate investor, you need to quit referring to yourself as an investor, you have a job fixing up houses and at the time I really shot my ego, right? I was like, man, this this kind of sucks. I mean, he's like, if you can't be an investor, if you don't have any passive income and that was that was back in the you know, I was a couple of years into real estate in what I thought was investing, which a lot of people a lot of us have done fix and flips and but he was right, you know, really I was, I'd buy a house, I'd have to fix it up and I'd sell it and I have to keep doing over and over and over again and really that's what I had, I had a job of fixing up houses and selling.

So it opened my eyes back then that conversation to the idea of passive investments and passive income in real estate and, you know, there's lots of avenues, lots of lanes that you can run down in real estate and the natural lane that I ran down at that time was single family rentals, and just buying some single family properties over the over a couple year period. Back this was back in the early 2000s and if you could fog a mirror, you could get a mortgage and so we were able to get a lot of mortgages really quick. We got about 52 properties in a period of a couple of years. All single family homes, we had one four plex everything else was single family or duplexes. But I and so we started building that passive income up, it just wasn't exciting for me, it didn't. It was one of the biggest mistakes in 2005 we sold them all and I always tell people I at the time I acted like I was a genius because we sold them course right before the crash. But kind of the top of the market, they're close to the top of the market that it was, I mean, obviously, we were making like I think out of that entire portfolio, I was making about $3,000 a month in passive income. But on each of my flips, I was making you know, 30 to $50,000, depending on the flip that we had and I was like man, this I can make, you know, making a year's income with one flip is versus having this whole portfolio that I was managing myself and it's just kind of a pain, and really didn't figure the game out as far as how to how to actually make them passive and so we ended up selling them all. I had, you know, again, those probably the biggest mistake we ever made, because then we went back to not having any passive income, right, I had this portfolio that people were paying for. I was making money, not a lot of money, but I was making money every month and ended up having to get out of that game.

But at that time when we sold them. We started getting into the high end resort properties. We started really diving into resort properties and second homes and I'm talking like really high end private ski Golf Resort properties like in the 20 to $30 million range and so not what we do now, and it was this really exclusive resort but it introduced me to this new world of the hospitality world the second home world the resort type style properties vacation home properties, right and, and at that time I had bought a, we bought a cabin, my wife and I bought a cabin in 2006. And that was our first vacation rental that we ever bought. Well, in 2008, we started doing this in 2005 2006. Well, in 2008, late of 2008, the FBI came in and shut down this resort that we were selling properties for these really high end resorts, the owners got indicted on securities charges and so like we literally just overnight, computers are gone with the resort, we've gotten the word that we're involved in and selling properties that all of a sudden get shut down and we're like what is going on, right? We, we stopped our fix and flip business. I didn't have any passive investments at the time because I sold them all and I had this one property, this one vacation rental, I sat on my hands for about six months and threw myself a six month pity party and started to realize nobody was coming to save us. We didn't know what to do. This is in 2009 at this time, and the markets were tanking every day that the you know, the news is there's more foreclosures than there are you know, every single day, there's just worse and worse news. We're in the middle of the great recession and I started selling real estate I started I had a real estate license, I had never done that in my life. As far as actual an actual residential sales Asia, we started doing that I started working with investors to help them build portfolios of again, because I understood that I understood investors, I had been one but I didn't have any money to invest at this stage and really started getting back into selling real estate and kind of hustling to pay the bills and during this whole time, as I was throwing my six month pity party, we lost our house, I lost my vehicles we started, we literally lost everything because I sat there and blamed everybody and everything on my situation rather than doing something about it and I had this one asset, this one property that during this entire slide was it was producing and it was a vacation rental and at the time that was before they were really popular, right that was, you know, they weren't mainstream.

They were obviously Airbnb was around and VRBO was around, but they weren't as mainstream as they are right now and I started to, I started to at least those seeds were planted in my head that this might be a viable asset class to, to pay some bills, make some passive income, even during a pretty rough time of real estate, right, even during the that eight 9, 10 that slide that were in the middle of and so as I started to build back up and get back involved in investing and developing properties, again, I had a we ended up my wife and I ended up having some kids and we ended up having twins in 2011 and that kind of changes your perspective on everything, you instead of this really cocky freewheeling, like, you know, okay, I can just make money whenever I want and do whatever I want. I, my perspective on everything started to change, I started to ask different questions I wanted it to be you start to say, okay, what kind of an example can I be? What am I really building? What am I really doing things for? So you ask those different questions and as they started growing up, I started to say, you know, I love real estate. I remember walking on the beach with my son, and he was they were four, we were in Hawaii, we always go to Hawaii for their birthday and I was frustrated. I was working on a deal. We were doing development deals at the time and I was working on a deal and I got off and he could tell us frustrated and he's just a little kid and he's like, Dad, you should just do real estate in Hawaii, it's way fun.

Like, like Dallas, all my problems, right? Like we're hearing, why might Why don't you just sell real estate here and do stuff here because it's you won't be frustrated on your phone calls, right? That's the perspective of a four year old but what really got me thinking was, what do I love about real estate and one I loved investment properties. I loved the idea of building passive investments and passive income from real estate and I loved that resort style, that vacation style world that we were introduced to, even though it all came crashing down and I had this one property and I really started at that time, forming this idea of what we do now with odyssey of really taking vacation rentals as a vehicle to build financial independence and wealth and financial and lifestyle freedom and that's really when it started back in 2000. That was back in 2015 and then we fast forward to where we're at right now and we've got Odyssey is the number one vacation rental education company in the world now and it's just been a lot of fun and a wild ride. So Long's longer winded answer there for you, Michael. That's kind of what brought us to where we're at.

Michael:

I love it Shawn. Well, as you mentioned, it seems that vacation rentals are the new thing. Everyone's talking about them. You hear about them all the time. So curious without giving away the farm. What do people need to do? How do people knock it out of the park with vacation rentals and then conversely, I want to ask how do people really screw it up?

Shawn:

Yeah, great question and really, there's really three phases that we focus on that I think are critical for people to get and it's the acquisition phase. So really understanding the underwriting, really understanding, there's a lot that goes into a good property and a good area, and really understanding and they're harder to underwrite, than what we're used to underwriting with a long term rental, like, you know, because you've got nightly rates that are fluctuating all the time, you've got occupancy that's fluctuating all the time, most of these areas are very seasonal and so you have to take in all of these factors that are moving targets, and figure out how to compile that data to actually run the numbers because you'll have really good properties and really bad properties in every area, even the best areas you're going to have not every property works even in the best areas and so there's a lot that goes into that first phase of acquisition and really underwriting and in I would say, in the beginning, that's where most people screw up. Most people think, hey, this is a great, this is a great market. It's a vacation real market that I like there's the you know, let's say Destin, Florida, everybody's down in Destin or Orlando, right, the kind of the home base for vacation rentals, that must be a good market, because everybody's down there, and I'm gonna go buy down there that doesn't, that's not how you underwrite these deals and so the very first part is, is really where people mess up is not understanding how to run the numbers and it's not rocket science, it's just much different than what people are used to and so that's the first phase that that you really want to focus on and dial in, you've got to be able to underwrite and find the best markets, and the best properties and it's not always about finding the top vacation rental market, some of the most, some of the like, the I call them backyard resort, communities that maybe are unknown, outside of a regional area can be some of the most productive, you know, markets to invest in, we've got one of our members who's a traveling nurse, and he builds a portfolio around major medical centers.

So there's all kinds of different markets that can work for short term rentals and it's not always these Class A resort towns that everybody thinks about. So really understanding how do you analyze a market? How do you analyze properties within that market and what works, and that's that very first stage of that acquisition, and then the next stage is the setup and management phase and where a lot of people dive into short term rentals, and they say, well, I'm gonna, I'm gonna manage this property my on my own and like, I can tell you like I have a portfolio, I don't manage any of my own properties, I know how to manage properties. But it can be a full time job to manage your own properties and unless you want a big side hustle, and you have the time for a side hustle, which a lot of investors that's not what they're looking for, right? We're looking for passive investments and so you really have to walk into it with your eyes wide open of what the management side looks like, and how do you build a management team so that it can become passive, and one, how much you're going to pay for it, because it's going to be your largest expense and so really diving into that second phase of that setup and management to really get the property set up correctly and then that third is the marketing and that the marketing side is how are you going to stand out in these crowded markets, right? A lot of these markets, like you talked about vacation rentals are kind of the thing. They're the they're kind of the trending vacate, or the trending real estate investment, if you will, for a lot of people, they because they think it's, you know, you know, the Wild West is, you know, you make way more money on short term rental versus a long term.

Well, that's not always the case, again, going back to the underwriting of it, but when you dive into these markets, how are you going to get your unfair share of business? How are you going to stand out because these markets are crowded? These markets are getting very, very saturated and I always tell people do. I really like saturated markets, because it shows there's huge demand, but you better know how to stand out in a crowd, right and so, and it's not always what people think and it's more how you set that property up. We always talk about delivering a unique experience, like right, a lot of people who are in real estate, because we're dealing with real estate, they'll have I always give an example of if you have a Zillow listing, and you have an Airbnb listing, they should look completely different and a lot of people a lot of times they look the same, they'll use the same photos like right, they're selling the architecture, and the property and the house on Airbnb, and that's not what you sell. You've got to sell the experience, you've got to sell what it's going to be like to use that property and so that's what we really dive into and that's one of the that's by far and away the biggest mistake once people own properties of what they're doing and what they're how they're how they go about this business is not understanding how to articulate what they have to offer outside of just pictures of a house. Does that make sense?

Michael:

Yeah, it makes total sense. And something that I always joke about, Shawn, I always say you got to you got to have a high Instagram ability factor and your short term rental listing.

Shawn:

Yeah and it's selling the experience right. It's not like it, we like Instagram because we can dive into people's worlds and we can see what they're doing and we have to have that same thing with the properties. It's not just having property photos, you better be able to, I should be able to look at your listing, and put myself in, in like, mentally put myself in that setting and say, This is what it's going to be like to stay in Michael's home because it's, you know, it's always in, I talked about delivering the fairytale having, you know, unique story, given that property, a soul, when you're really trying to articulate that to your prospective guests, that's looking online, where, and it's actually if you get that right, now, all of a sudden, you're playing in a category of one, and you're really standing out in a marketplace, because nobody takes the time to do that. Everybody just goes and hires professional real estate photographers to take pictures of their property, but they're not doing anything to articulate the experience.

Michael:

Right, right. So Shawn, question for you, for everyone listening out there that's raising their hand, it's like, that's not me, I don't have that vision, I don't have that creativity. What should they be doing or should they not even be playing in the short term rental space? Does that mean that it's not a good fit for him?

Shawn:

It's a great question now. One, you can definitely still play in the game. I think people think, because you can do a really good job of being it doesn't have to be this in your face, like creative theme that you're that you're putting together. But you do have to be able to put together an experience and so you may it may not be the right fit, right? If you're just like, I talk to investors all the time, that will say, hey, I just want to buy a short term rental because it has better returns. I don't care where it's at, I don't care what it's doing. I just want the returns and I always tell those investors, that's you're probably getting into the wrong game because that's not what short term rentals that's not how should you succeed with short term rentals. So there is an element there, Michael, where you do have to say, I do want to provide a really fun, unique experience for somebody, I really do want somebody to come experience this area, like I experienced it and I always tell people you should buy in areas or around properties that that will attract that you're attracted to you should be part of your target audience because if you're not, you're going to fall flat. When you're delivering that experience. When you're setting up an experience. I have a property that is a fly fishing property and it's up by Yellowstone National Park and we I said I love to fly fish and so it's very easy to for me to articulate what a great fly fishing experience is because I understand that group, right? It would be very difficult for me to put together a wellness yoga studio for somebody because I don't I don't, I'm not in that group, right. But we have some of our members that do these amazing wellness retreats, that are these I mean, these beautiful properties, and they have these yoga studios, and they do all this stuff, because but they know how to articulate to that group and so there is definitely an element to that and so if somebody says, you know, I'm not, I'm not that creative, I challenge people to say you probably are you want to set something up that you're attracted to and if you're absolutely not attracted to anything, and you're like I really don't care, then it's probably not the game you want to play because you're going to struggle when it comes to really maximizing the asset.

Michael:

Yeah, that makes a ton of sense. That makes a ton of sense and Shawn, you said something that I want to come back to and it was with regard to the underwriting kind of that first phase that you mentioned, in the long term rental world, we have the 1% rule. So if something rents for about 1% of the purchase price, it'll probably cash flow with a mortgage and we have the 50% rule, which says take roughly 50% of the income throughout the window, the operating expenses, what's leftover is to pay the mortgage in your cash flow. Do you have those similar types of rules, I'm gonna say in quotes to help people underwrite at a 30,000 foot level.

Shawn:

Yeah, and so the easiest. So I usually use the 10% rule of so you want to have about 10% of your acquisition price in gross annual income. So if you buy a $500,000 property, your breakeven amount for the end your annual breakeven amount, you need to generate about $50,000 in revenue. So it's and…

Michael:

Is that with debt that?

Shawn:

Yes, that's with debt and with management and so that that gives you that'll give you about your breakeven amount. Expenses are going to vary based because you got one big variable expense and management and your management's can vary anywhere from roughly about 20 to 35% and so that's a big, that's a big of your gross revenue, right? So that's a big, that's going to be your largest expense by far and so usually your expenses to cover debt service and management is going to be somewhere around. It's usually around that 65 ish 60 - 65%. So it's a little bit higher than like what you would find on long term rental, but your breakeven mark is easier to get It's an easier number to come up with because if you've got, because usually what the way we underwrite these, Michael is we're looking for annual gross revenue, because your 1% rule is on a monthly basis on long term rentals, right? The 1% rule, our monthly, our monthly income is inconsistent on these properties. So we have to look at an annual basis, a lot of these areas, you'll make 70 or 80% of your gross revenue in a three month span, right. So you're going to make it during the peak summer season, for example, in some areas and so that 1% rule, you might be negative cashflow for six months out of the year, but you can be really profitable at the end of the year, because your peak season made up made way more up for like than what you had to on those months that you were losing. So the one is close to the 1% rule, that 10% rule is close to the 1% rule, but you have to annualize it, because your the way that we run the numbers is going to be on an annual basis because your monthly numbers are going to be fluctuating so much.

Michael:

Makes total sense and then you said about 65% on the expense ratio side of things.

Shawn:

Yeah, yeah. Yeah and so and the biggest, the biggest jump in that is your management because your your fixed expenses are going to be very similar to long term rental, right? You got your your principal interest, taxes, insurance, you're gonna have higher utilities, typically, because you're paying the utilities on the short term rental side. So you're, you're gonna pay, you're gonna pay more of your utilities, and you're going to have a higher management costs than what you would on the long term rental, everything else is going to be pretty consistent as far as the other. So that's why it's a little bit higher.

Michael:

Okay, that makes total sense and should you be factoring in this? Is your personal opinion, for cleaning fees? Is that part of your gross revenue or is that same dollar insane dollar out? So we're not even gonna count it?

Shawn:

Yeah, it's a say it's $1. In dollar out, it's a pass through expense. So we don't even count it. Now you can, there are people that will run the numbers, they count it, and then they count. So they'll count it as revenue, but then they have it as an expense, we just we just cancel it out because it's passed through, we don't make money on cleaning. Some people do and so if it's a revenue generator for you could add it in that way. So that it's, you know, you know, $1 in or $2 in and dollar 50 out, right, so you've got a little bit of a buffer there. I just, it's anything that's a pastor expense, we don't we just don't factor it in.

Michael:

Okay and that makes sense. Shawn, I'm seeing I'm curious to get your thoughts if you're seeing the same thing. But these vacation rentals and short term rentals as they're being sold and marketed. They're being marketed like a business and they're saying, hey, based on the NOI performance, this is the value of the property but as you and I know, to go get a single family rental, or a single family mortgage, it's gonna be based on the appraised value. So how are folks squaring those two things?

Shawn:

Yeah, it's a great question and I think that I think it's going to be a little while before people, I think that you've got a lot of sellers that are trying to value properties based on performance and base like a business, but you're not able to get lending that way, right. They're still from a for all intensive purposes, most of the lenders out there, you're still buying and getting residential, regular mortgages, second home, vacation, home investment, property mortgages, it's going to be based on the property appraisal. Now, we're sellers have been getting away with it a little bit, because it's so competitive, and most things are selling over appraisal. So people are paying an appraisal gap, right? We're seeing that even outside of the vacation rental space, right? People are paying over and paying that appraisal gap. So sellers on vacation rentals, that's how they're starting, or they had been pricing properties and that's we're still we've been used to multiple offers, we've been used to cover an appraisal gaps. As things start to soften a little bit, I think that sellers are going to struggle to continue to price properties that way. I think that you there's a definitely a good argument. But you still have to get the right buyer that's willing to still cover that gap and say, yeah, I'm willing to buy it based on performance, because you're still not going to get lending based on performance. It's not it's going to be few and far between as far as lenders, even our DSCR lenders, even the asset based type lenders that are tackling more commercial type loans, they're still there. They're looking at revenue that the property is generating, but they're looking at they're still looking at average, they're not looking at individual property revenue. For example, if I have a really high performing property, they're not going to give lends you more money on my property, they're going to look at the market average and so it's still difficult, I think, to prop to price properties that way and we're where we see people trying to price it is it is about that 10% rule. It seems like okay, if a property's generating $100,000 or say, okay, we're going to, we're going to sell this for a million, it still has to be dang close to the property value though. At the end of the day it comes down to the what the property is valued at and what it appraises for. Ultimately, it's got to be somewhere close to that or we just don't we seem fallen flat if people are stretching too much.

Michael:

Okay and that makes total sense. Shawn, you brought up an interesting point that I want to come back to and that's around revenue projections. I think most owners, short term rental owners will tell you that the last two years have been banner years for them and so how do we square what has been with what will be kind of given today's market?

Shawn:

Yeah, great question. So one of the things that, that I think that the reason it's been banner years is because occupancies have been so high, right, we've had that we've had two years of basically never ending summer, right, we have we have seasonality has gone out the tube, it's been, it's been really high occupancy across the board. So we've been talking about I talked about this, you know, all even the very beginning of this year is kind of our projections is we're going to see occupancy, in short term rentals, come back down to the normal seasonal type levels, when we underwrite our deals. I never underwrite based on that, that top percentage of occupancy, like there are people that will say you should, you know, you can get 80 90% occupancy and short term rentals, we don't do that. I don't believe that that's a long term. I mean, short term rentals are short term for a reason, your occupancy is going to be somewhere 70 to 80%, in some of the best markets, where we've seen the last couple of years, some of those best markets are 80- 90% occupancy, that's not sustainable. In the short term real game, if you have a short term rental, and you've been tried to have 90% occupancy for an entire year, it's really, really difficult because you have these odd days that are there in between days anyways, that throw that occupancy, it's, it's just hard to do, right and so you have to say, okay, look back.

So when we underwrite we underwrite back to 2019 18, 17 levels with our occupancy, we look at that occupancy in those years, when we're doing our underwriting. So that helps us bring that overall revenue down a bit now that the flip side of that is, revenue numbers have been consistently going up, they didn't revenue didn't spike average nightly rates didn't spike like occupancy did. So the overall gross revenues had this huge spike in these banner years, but it was it was driven by occupancy. Now rates are a different story rates have been consistently going up. But they didn't have these big spikes they've been in where you will find in short term rentals, which is interesting is there's a gap in the market, you've got, you've got the you know, the bottom of the market, you got the middle of the market, you've got the top of the market and so when we underwrite these deals, we're very conservative on our occupancy and then we want to look at the range, we want to look and say, okay, given this given occupancy on this area that we're underwriting, I want to look at the bottom of the market, as far as average nightly rates, I want to look at the middle of the market for you know, three bedroom homes and the average hourly rates here and then I want to look at the top of the market, that will give me a revenue range that we're looking at, then what we want to do is say, okay, based on this property, I'm looking at where do I think it's going to fit in this market.

If I'm in a beach market, and I'm not on the beach, I'm probably not going to get that top revenue range, because most of those top revenue properties are on the beach, for example. So I have to take these, I have to start to now take make this logical analysis on this range of revenue. But you want to wait the way that I know, the original question is how do we how do we say, okay, the last two years have been an anomaly. It's an anomaly based on the occupancy for sure and then you've got to start to look at those nightly rates, and then take a more conservative approach back in 17, 18, 19, as far as occupancy, and that's how we underwrite the deals now, because we just don't think that occupancy is going to continue now, what we saw was, we saw another spike in occupancy this summer, again, really high, where we started to see kind of normal occupancy come in the spring, and then we just saw that a big spike again, this year, but I just don't think it's going to last and so we take a very conservative approach as far as occupancy goes.

Michael:

Okay and that makes total sense and, Shawn, my last question for you is with regard to expenses. You mentioned in the kind of the long term space, your PITI your property management fee, we could throw in there and then in the short term realm, we've got your cleaning expenses and the utilities. What else should people be expecting to have on their line item for expenses for the short term rental?

Shawn:

Yeah, so you're so you're, again, your fixed expenses are really pretty similar, right? Yeah. PITI, you've got the on your fixed expenses, what's going to be different than a long term rental or other types of properties are going to be your utility costs, right? You're going to be paying internet cable, you know, your electrical all that stuff is going to be that's going to be as part of your fixed expenses. So that's going to jump your expenses. As up, the variable expenses are what a lot of people miss calculate and variable expenses when you start to add in your and these are, these are based on the number of stays and they're going to be based on the gross revenue, your management company is going to take a percentage of your gross revenue, your booking your booking sites like Airbnb VRBO, they're going to take a percentage of your gross revenue, right. So when you get a booking, they're going to take a percentage of that those, those fees are what's going to eat into your overall profits and so a lot of times be like, Well, man, I'm making three or four times what I would make on a long term rental and a short term rental doing this nightly. But by the time you add in, you know, 30%, and management fees, all those different things start to add up. Now, you're not making three or four times the profit typically. So the biggest expense that people mess up is the management and I always tell people, there's, there's a couple of approaches you can take with management, even if you self-manage, and you put your properties on Airbnb VRBO, you're going to still run an average of about eight to 15% of basically a management fee, that's going to go to those booking sites, where you're booking your property, if there's a hybrid approach, where there's companies like evolve, and some of those companies that will do a 10%. But they're going to be 10% plus that eight or 10%, right from the booking fee. So you're going to be a total of about 20% and management, if you have that hybrid approach where you do some of it, they do some of it. If you go the full service route, which I suggest most people take that route and that's what it's going to be different than what most of the other coaches out there are ever going to tell you to do because it because it doesn't look good on the front end on the numbers, right?

It is but I just believe most people are not set up to manage short term rentals at a high level, you're better off getting a full service management committee to help you and that's going to cost you 30 to 35% of your gross revenue. That's a huge line item, right? That's a huge expense and so you have to make sure one that you get the right fit, because they're going to be your largest expense, you want to make sure they're doing a good job and I always tell people good management company is worth their weight in gold, a bad one is really a nightmare. So you want to make sure that you've got the right fit there. But it's a that's a big a big expense that a lot of people don't think about and I have on every one of my properties, I use full service management on every one of my properties for a reason, right? It because it's what makes these properties allow us to be passive investments and I want something that is a passive investment. I'm not looking I'm not looking for another job to manage these properties and so those are the biggest ones, the management and then your fixture your utility costs that you normally wouldn't have to pay for.

Michael:

Okay, that's great. That's great. Shawn, this has been a ton of fun, man, I want to be very respectful of your time. If people want to learn more about you, or more about VODYSSEY where's the best way? How can I reach out?

Shawn:

Yeah, awesome. I appreciate that, Michael, so they can just go to https://vodyssey.com/ . It's VODYSSEY, you can go check out our stuff. I've got a book there. It's called: What the hell is lifestyle acids number one bestseller on Amazon. So you can go check that out talks about our whole process, taking you through that acquisition phase, that setup and management phase and ultimately the marketing phase and then you know, you we've got a ton of I've got our podcasts on there. We've got a YouTube channel, we've got tons of free stuff that people can dive into if you just go to https://vodyssey.com/ and learn a little bit more about us and our view of the vacation rental world and then yeah, that's a great place to start right there.

Michael:

Right on. Well, Shawn, thank you again for coming on and sharing some wisdom with our listeners really appreciate it and I'm sure we'll chat soon.

Shawn:

Awesome. Thanks for having me, Michael.

Michael:

Okay, everyone, that was our show a big thank you to Shawn for coming on super eye opening, really informative to learn about the vacation rental space from his perspective. As always, if you enjoyed the episode, please feel free to leave us a rating or review wherever it is get your podcasts and we look forward to seeing you on the next one. Happy investing…

A data scientist’s process for success in multi-family real estate Aug 13, 2022

Neal Bawa is a technologist who is universally known in the real estate circles as the Mad Scientist of Multifamily. Besides being one of the most in-demand speakers in commercial real estate, Neal is a data guru, a process freak, and an outsourcing expert. Neal treats his $947 million-dollar portfolio as an ongoing experiment in efficiency and optimization. The Mad Scientist lives by two mantras. His first mantra is that "We can only manage what we can measure". His second mantra is that, "Data beats gut feel by a million miles". These mantras and a dozen other disruptive beliefs drive profit for his 700+ investors.

In today's episode, Neal shares insights about his strategy for multifamily investing, some interesting market statistics, and what he expects the future of the real estate market to look like.

Episode Link:

https://multifamilyu.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my very special guest, Neal Bawa and he's talking to us about multifamily investing syndications and some really, really interesting market statistics about looking forward into what the real estate market future holds for all of us. So let's get into it.

Hey Neal, thanks so much for taking the time to come on the show with me today. I really appreciate you coming on and sharing some wisdom with me.

Neal:

Well, it's exciting to be here, especially because I am a fan of your company and until five minutes ago, I didn't know that I was doing a podcast with Roofstock. So super excited to be here.

Michael:

Awesome. Well, surprises always tend to keep people on their feet. So I'm really excited to chat with you today. So I know a little bit about your background and who you are but for anyone listening, who might not be familiar if you can give us the quick and dirty who you are, where you come from, and what is it you're doing in real estate today?

Neal:

Absolutely. I'm a geek, a nerd, a maverick, I come from Silicon Valley. I live in Silicon Valley, I'm a data scientist by profession with a computer science degree. I've had a successful tech career, which, after 17 years ended in the sale of my technology company. I got into real estate because I live in Texas Fornia and I was paying 53.7% of my gross income in taxes and so you know, I looked around and looked at lots of different avenues to save money, looked at solar panels looked at oil, and came to the conclusion that none of those were anywhere close to real estate in terms of the incredible taxation benefits. I tell people, real estate is America's number one legitimate tax mafia. That's really what it is. I mean, no other area has the astonishing, the shocking tax benefits that real estate has. So I started doing real estate for that and started sharing a lot of my data science, you know, thought processes and ideas and it sort of just exploded from there. The first time I shared my insights on data science, I had four people in front of me. A week ago, I had 1100 listening.

Michael:

Oh my gosh, that is really, really cool. So I love chatting with data scientists with geeks and nerds as the self-proclaimed title that you gave yourself, because I think it puts a process. They come from very process oriented backgrounds, and it allows them to apply the same processes to real estate, which I'm sure we're gonna get into in a little bit. But you're doing some pretty amazing things in the multifamily space if I'm wrong, mistaken, right.

Neal:

I am, I am and I'm a huge fan by the way of the single family space and often direct people to single family, but multifamily is where I've been simply because of its amazing scale. So I started off in single family and I have now moved over to multifamily. So currently have about 750 million in construction and various multifamily spaces such as built around and apartments have about 250 million that I'm managing that I purchased that are existing buildings, and then I dabble in other areas as well as multifamily is kind of the core foundation of my business, but I dabble in self-storage, industrial townhomes for construction and student housing as well. So I love all kinds. I love all kinds of different asset classes at different times. But I always come back to the Foundation, which is which is multifamily.

Michael:

Okay, now, you said a lot of amazing things with a lot of big numbers and I want to come back to that in just a minute. But I'm just curious on a personal note, can you share with our listeners, what's the best compliment you've ever received?

Neal:

I think that the compliment had and I actually use it now you already heard it today was a person that walked in and said, This is the geekiest and nerdiest presentation I've ever heard that was still very entertaining. So that second part was like, okay, so I can I can get geeky I can get nerdy but I can still kind of get it down to the level where people enjoy it and are not snoring, you know, five minutes into the presentation. So I love that comment because it's hard to be a geek and be a nerd and still, you know have these aha moments for my audience. So I've worked really hard on that.

Michael:

I love it and clearly you're doing it well because people 1100 people are coming to listen so my hat off to you. So let's talk about what excites you about multifamily because I think that there's an argument to be made that the fundamentals but you talking about going back to the basics is single family. So why do you think that it's multifamily? Why do you make that argument?

Neal:

Because of single family? The short answer is this single family is why I'm excited about multifamily. Okay. So, you know, you hear a few numbers all over and over again, people say these numbers that don't quite explain the meaning of this, right. So we say in this home, the you hear this all the time, we have a shortage of single family homes in the US 5 million, the actual shortage is 5.1 4 million. You also hear we have a shortage of multifamily or apartments in this, you know, in the US and the actual shortage today is 600,000 units. So you notice most of the shortage is actually on the single family side, right? 5.2 million there 600,000 on the apartment side and for both of those, the vast majority of the shortage, not all of it, but the vast majority came from the fact that the US actually didn't really build anything single family or multifamily between 2011 in 2015. So we used to build, you know, I don't know, eight 700,000 800,000 a million units and then all of a sudden, 1112 1314 15, we built less than half of that creating this massive supply demand gap. It was enormous and that's why that has led to rental growth being you know, to AX what it used to be in the previous 30 years, we've also seen massive growth in prices on the multifamily side where, you know, we used to buy, you know, properties at, you know, $40,000 a door, and now we're buying the same properties at $250,000 adoor. So it's just an incredible, massive increase there in Parador prices, a lot of it really comes back down to the fact that we are absolutely unable and I haven't seen any evidence to the contrary, we are absolutely unable to build starter homes in the United States, we actually don't have a shortage of single family. It's a very common misconception. We don't have a shortage of single family, we have a shortage of starter homes and when I talk about starter homes, I mean anything that in a reasonably reasonable Metro, I'm not talking about San Francisco Bay area, but let's say something in Phoenix, right? Being able to build a nice three to four bedroom home that's brand new for about $275,000 that has become categorically impossible today. Okay, for I'll give you an example of this, as you know, multifamily scales a lot better because when you're building 100 units, you get all these economies of scale, blah, blah, blah, okay, my cost of construction in New Braunfels, which, by the way, is not a major metro, you've probably never even heard of it. It's in the corridor between Austin and San Antonio and so you one could say Austin and San Antonio are both, you know, secondary markets, not primary like San Francisco or Los Angeles and in so and this, so this market must be like a tertiary market because it's in between my cost of construction for townhomes, not single family is well over 300,000 units. That's what my cost as a builder is, right.

So you understand what's happened since March 2020. Construction costs in the US have gone up by 34%. That's basically about 27 or 28 months, they're up 34% and the problem was there before COVID. So before COVID, even in the face of outstanding and insane amounts of demand. We were only able to build enough single family enough multifamily housing just to keep up with demand. So remember what I said 11, 12, 13, 14,15 those five years, we under built massively, and then 1617 1819 20, those five years we built okay, we did find we stayed up with demand. But we didn't make any dent in the single family shortage. We didn't make any dent in the multifamily shortage, those numbers stayed the same, because we were just building enough. And that was before this once in a century 34% increase in construction cost. That was before that increase. Today, construction cost has gone up. So but people who think that home prices will drop 20% simply have no understanding of the fact that there is it's impossible to supply a product. If home prices dropped by to even 10 or 15%. Most builders will either go out of business or simply pivot to build the rent. So they'll stop building anything for the market and what that will do is make the shortage worse, which means that there's even worse it's going to make it much worse, right? Because we absolutely have to build 500,000 units a year just to keep up with this year's demand. Forget about the shortage from before, right, we still want to keep up with the demand for this particular year. So we can keep the shortage from getting worse.

You know, otherwise, that number that 5.2 million number will go to 5.5 million and 6 million and 7 million so we'll keep getting worse and every time it gets worse rents rise prices right? So there's a cushion under home prices and most people wonder mentally failed to understand the mathematics here. If your cost of construction goes up 34% how are you going to deal with prices going down and if developers don't make enough homes, the only homes available in the market are the existing homes, right? So will competition on them will increase and haven't you been reading already in the last three months that permits in the US have dropped to 30% because as the US economy goes closer into a recession, so it's inevitable at this point that we'll go into recession, builders are very skittish, their construction costs are at an all-time high and so they're backing off. They're saying, You know what, I'm not going to take the risk of building 10,000 homes, I'll build five. So if everybody drops their permits by 30, or 40%, you're digging now a new hole for the construction that would have afforded for the delivery that would have happened next year and the year after. So now we're digging a hole in 2023, deliveries and 2024 deliveries. How do you reconcile that with a 20% drop in prices? The mathematics, the fact that people actually keep saying this with a straight face is mind boggling to a data scientist.

Michael:

Yeah, I love that because you like everything you just said, I don't know, if you're watching the video, you saw my jaw on the floor, I'm gonna have to pick it back up here. But it just people feel like it feels because prices are so high and toppling, then interest rates are so high, but everything you've just said, I mean, factually, and mathematically makes so much sense and so how should people be listening? How should our listeners be thinking and reconciling? Okay, well, interest rates have gone so high, so fast. So the purchasing power has been drastically reduced. How should you be thinking about like, what's going to happen next?

Neal:

So the first thing you should do is study the past, because the past gives you some wonderful examples of what happens when these sorts of things happen, right? So I'm gonna give you some benchmarks that will really blow you away, right? So in 1982, the Federal Reserve raised interest rates so fast, and so many times that mortgage rates went to 18%. As we're recording this, mortgage rates are at 5.3%. So when I say this in front of a an audience, I was teaching in Seattle, there were 500 people listening. So just, you know, for shits and giggles, I basically went down to the stage and I stuck the mic in people's faces and I said, So if interest rates were at 18%, would you buy a single family home? No. Okay. Do you think anybody else bought a single family home? No. What do you think prices went down? Why the answers were 20 to 50%? Well, history tells us that in 1982, when interest rates to buy new homes were 18%. Home prices declined by 10% for one quarter, bounced up by 10%, the following quarter, and actually ended the 1982 recession higher than the beginning of the recession. study history. It tells you how sticky real estate is. Now, everyone, the biggest reason why people feel that prices are about to fall off a cliff is 2008. There's no other reason because if you look at the data from the last 61 years, all you notice is home prices are extraordinarily sticky when interest rates go up, because interest rates haven't gone up once or twice, or three times. Nine times in the last 61 years, the Federal Reserve has hiked rates to kill inflation, nine times, right? Eight times the economy went into a recession, how many times you'd be have real estate prices go down? Once 2008 because 2008 was not a recession. 2008 was the largest single evidence of large scale fraud in American history. Millions of brokers and 1000s of bank banks committed large scale fraud on about 20 million Americans. That's what caused those home prices to fall. I see no evidence of fraud at this point. If I if anything, underwriting standards are pretty darn robust. The people have trouble…

Michael:

getting a mortgage is such a pain.

Neal:

Right? So when you look at this, and you say, so every everything that you're doing is based on what you saw in 2008. But you're not comparing the US economy today to 2008, right. So let's go back to looking at 2007 and comparing it to today's economy. So you want home prices to drop by 20%? Okay, fine. Question is, have you looked at how many jobs the economy was creating in 2007 and have you compared that to today's jobs, right? So in the last three months, and people are saying we're in a recession, and maybe we can talk about that, in the last three months, the US created 500,000 400,400 1000 jobs. That's 1.3 million jobs in the last three months, we actually struggled to create that many jobs in most regular years. So in three months, we created 1.3 million jobs and of course, before you know anybody says, hey, the quality of the jobs is very low. They're part time no, they're not. Please go back and look at a a shockingly high percentage of those are full time jobs and then people are like, Yeah, but people are not getting paid enough.

These are standard objections, right because people are not studying the radar. No wage inflation is very high in the US right now in work have the upper hand. Wait, inflation is at 5.1%. Most years, it's one and a half percent. What that what does that mean? People are good people who have existing jobs are getting big raises and then there's 11 million open jobs in the United States. This is the first time in US history that we've been at 3.5% unemployment and still have 11 million jobs open. So the economy is producing jobs at two and a half times. It usually does in a normal marketplace. How do you factor that in with home prices falling 20%? It's the it's a highly desired asset that people want. Now, it's absolutely likely that home prices will fall. But the big question is, will they fall on a nationwide basis and the answer is that there is no data to support that. markets that are red, hot, white hot, some of those markets that I invest in Phoenix, Boise, Las Vegas, Austin, these are markets that are at risk of a 10% correction, maybe some markets might even get a 15% correction. But the US is combined of 330 markets. When you look at those 330 markets, the chances that we will see a 1% overall price reduction is still low and most people are talking about 10 to 20% based on what data?

Michael:

Ah, I love it. I love it. Neal, this is this is super, super insightful. So kind of thinking about the feel part of the emotional part and the people talking about the 20% correction. There are those who have said that the Zillow or the kind of red fins that give estimates of value or rentability. It's almost a self-fulfilling prophecy if I'm an investor and I go on Zillow and see hey, this was only valued at 100k by Zillow, but it listed at 120 I just wanna be paying 100k. Is there some risk of that with public sentiment that prices should be falling with the Zillow effect that's not trademarked?

Neal:

Let's call it the Zillow effect and actually, it's a very important thing to talk about because if you know, the question really is, is there a risk of that the there's a 100% chance that the Zillow effect will drag home prices down? Here's the catch, though. The Zillow effect is both ways, right? So we've also seen the Zillow effect when prices go up. So you're gonna see a short term curve downwards as the market adjusts and then when it adjusts, a whole bunch of people are like, home prices are 10% down, this is my chance to get in and it's not just, it's not just the individual investors anymore. America is fundamentally different in 2022, than it was in 2008. There one single company called BlackRock, I think is Blackrock or Blackstone, maybe I'm confused about that, it has now launched a $50 billion fund, just to buy homes during a dip and their definition of a dip is 7%. So the moment they see home prices falling 7%, they're gonna come in, and there aren't, it's not a billion dollar fund. It's not a $2 billion fund, it's $50 billion, just Google it, right. So just Google $50 billion home buying fund. Now, that's one company, but there's at least two dozen of them. So real estate now is an institutional asset class that rival stock markets, and people who invest at a big scale in the stock market, their dip is 5% 7% 10%. So you'll get that dip and they'll come in and they'll, you know, scoop up a bunch of these properties and then at some point, people will realize this market isn't going to crash 10%, they're going to be like, Yeah, but it's seven or 8%, or 12%, down in my area. Let me grab some properties and then you're going to see that correction and now all of a sudden, your backup as before you know it, this is normal, right? The market that we've had for the last 10 years where prices only go up. That's bizarre, that's abnormal. That's never happened before in US history. What we've seen before is prices go up. But they don't always go up in a straight line, they go up, they're just a little bit, they go down for three or four months, then they go back up, and the overall direction is upward. in markets like this. The Zillow effect is necessary, right?

I'm telling people number one, a dip in market prices is incredibly healthy. I've got my fingers and toes crossed that it happens. I've got my fingers and toes crossed that the US economy goes into a recession and most people would beat me up for that. It's like, why would you have your fingers and toes crossed for that? Short answer is when we have this much money floating around. If we do not occasionally adjust the economic cycle, we always end up in a bubble and bubbles when they burst of this size, create trillions of dollars in losses and can drag us into a 2008 type recession but if you look at the history, and again, I keep going back to this, the Fed has raised and income interest rates nine times and eight of those the US economy went into a recession, right? Only one of those eight was a destructive event 2008. All other seven events were in economic cycle, reset or adjustment and when you actually look at the effect of that recession over a three year timeframe, the net effect was zero, the cyclically adjusted, some of the bad companies fell out some of the bad developers fell out some of the bad money in the marketplace fell out and in the if you look at the long term trend, that that bumped down that six month recession had no real impact on the economy 2008 I can't say that, right. So once again, there's one time when we've seen total destruction happen, and that was because we perpetrated large scale fraud on American millions of Americans and using that as our benchmark to make all decisions in the future simply means we're ignoring 61 years of history.

Michael:

Which seemingly is easy to do for a lot of people.

Neal:

But for most people, it seems right. So I'm kind of looking at this going, this doesn't make any sense. Do you not realize that we just produced 1.3 million jobs in the last three months and isn't that the best way for company, companies are saying we're worried about recession, they're issuing earnings, you know, forward looking, and they're saying your earnings might reduce, and then they go off and hire 500,000 people in a month, right. So I mean, it's lip service for the stock market, it's lip service, for their for their, you know, phone calls with their investors. But they're not doing what they're saying they're going to do, which is reduce hiring, reduce hiring is half a million. Now normal months tend to be about 200,000 reduce hiring should be 100,000 new people being hired or 50,000, not 500,000.

Michael:

Yeah, yeah. It's so interesting, Neal. So how do you take the data and use it when you're investing?

Neal:

So one of the things that I do, and I'll kind of give you a little story on this on how I got started, so right, so I'm a data scientist. So right around 2009. I am, you know, looking at the real estate market, and everything looks incredible for me, of course, everyone else is telling me this is the worst real estate market of all time. So I go and tell my family, we should be buying all kinds of real estate today. Just buy everything in the marketplace, you know, with every last dime you have and then my family basically decides that I'm so stupid that they don't want me attending family events in case I infect other people with my horrible ideas. So I'm excommunicated from the family because, they like this guy is going to infect other people and we're going to lose millions dollars. So I'm like, okay, I'm gonna prove these people wrong. So I go and get gathered the best of my data science information and I mined the Zillow website, I mined the Bureau of Labor Statistics website, along with a Ukrainian hacker was pretty good at mining. So we, you know, gather all this data together, we put it in a statistical software called R and we look at every city in America and up at the top is an unknown city, a town called Madera, California, mid era, it's 20 minutes from Fresno, right?

Nobody's ever heard of Madera, California. I know Madera, right and so Michael, what my data is telling me is, Madera, California is by far fallen way more than it should have, because from Peak 2005, it had already fallen in 2009 by 73%. So prices had fallen by 73%. But most markets fell by 30 and 40%. You know, some markets didn't even fall that much like Dallas only fell by 11%. So I'm looking at this falling 73%. I'm like, statistically speaking, this is the greatest market of all time. So I drive a jump into my car, I drive 144 miles to Madera, and I go there, and I see all these very beautiful Kaufman and Broad homes. They're like, gorgeous, like, they're brand new, right? Nobody's clearly nobody's ever lived in them. So I go to a broker in Madera, and I say, hey, what's happening here? I mean, these homes are gorgeous, right? Why doesn't anybody want to buy them and the answer is, well, Kaufman and Broad basically sold these two farmworkers, none of them had documented income. They've all left, so half the city's empty and I'm like, so. So what does it cost to make these beautiful five bedroom homes today? So it's like, yeah, if you were doing new construction would cost 250,000? So I'm like, but I'm, what are they available for? Oh, you can buy these for 90,000 any day, you know, they're all available for 90,000. You can buy as many as you like and I'm like, why in God's name? Would I not buy these for 90,000? He says, Neal only for one reason, one reason only one reason. You can't rent them. There's too many empty homes in Madera, so you can't rent them.

So you basically would have to buy these homes and then keep paying your mortgage in the hope that the market comes back someday. I'm like, I have to find a solution to this. There has to be a solution. So I jumped in my car again, I drive another 20 miles to Fresno, which is the big city, right and I go there, and I talked to a broker and I say, I want you to sell me an ugly property. He's like, Neal, no, no, no, no, I'll send you a brand new one. I've got plenty of them. None. I said no, I want a 30 year old ugly property in Fresno and he says, okay, well, these, you know, sells me a property. I buy it in cash. It's $110,000 on Summerfield, right? I take that property, I put pictures up on the web, and I go to my Ukrainian team and I say I want to In an avalanche of leads, rental leads for this one property and they're like, why? I mean, it's a pretty decent rental market in Fresno. Why do you want that many leads, I'm like, trust me, just give me like 5000 leads for this one property and they're like, okay, so the guy is sort of goes to back to his Hacking Team, and he hacks a bunch of sites, and he writes a bunch of scripts, and all of a sudden that property is like on the web 300 times in 26 different places and so is just listing it continuously using his engine and before I know it, the phone's just ringing off the hook, I'm, you know, my mailbox is filling up with leads. So I hired a person in the Philippines, this lady on a full time basis, and I say, call every one of these people and tell them this property is rented. But I have nine brand new properties 20 miles away in Madera and I will give you $50 amazon gift cards, if you just drive there and attend an open house $50, no questions asked. We'll just give you an Amazon or gas card and so she starts making phone calls. She was pretty good at her job. She'd been in a call center and you know, half the people swore at her because they would they were like, yeah, but this is not press No, this is Madera and it's like, well, this property is rented, I, you know, I've got these options and she would keep sending pictures to them by text, right, because people weren't reading, reading their emails, she would keep texting pictures of these beautiful properties and before I knew it, people were attending those open houses, I already had to deal with the banks where the moment I got a rent contract signed, I would pay cash for the property the next morning. Well, before I knew it, 11 properties were rented and then I turned around and repeated my success with my family and all of a sudden, I was making massive amounts of cash flow on these brand new homes, that now of course, they're all you know, $400,000 each.

But even back then, I was making so much money every single day on properties that I knew had to come back. It's all about the cost of construction. You don't hear about this on podcast, if it costs $250,000 to build something, and it's available for $100,000. Buy it because construction costs have never gone down in human history. They've only gone up and they've gone shockingly, up in the last two years. But even before that they've never really gone down. Nobody was able to reduce construction cost during the 2009 downturn. They simply didn't build anything, right. But did anybody get a reduction in construction costs? That's not possible. Most of our construction material doesn't even come from the US or I mean, our steel comes from places like China, right? You can't get a discount simply because your economy is in a recession. So it's all about construction costs. So once I had proven this algorithm, I decided I'm going to tell the world about it. But that's another story. So that's really how I got started in in single family and then I wrote algorithms, again and again, published them. As I said, the first time I had people that were for people listening to me last week, I had 1100 people listening to me, it's really about those algorithms. The only thing that's changed and this is the answer to your question, sorry, long winded but the answer to your question is, what I found was, when I spend this, use the same algorithm for single family that it has everything that I can possibly imagine except scale, I can never grow to a billion dollar portfolio, I can maybe grow to 10 million or 50 million, and a lot of people have. But if I apply the exact same data with multifamily, I have an 18 month crystal ball and I'll explain what that means and I was getting the same exact results. But because I was buying 200 units or building 300 units at a time, I was able to hit my goal of a billion dollar portfolio and I did it in I don't know that from 2014 to 2021, right. So seven years, I was able to hit a billion dollars. You just can't do that in the single family side. Otherwise, single family pretty awesome.

Michael:

Neal, I love it. I absolutely love it. What happens and then I want to hear about your 18 month crystal ball. But what happens when things switch where the cost of new construction is cheaper than buying something that's existing?

Neal:

My business is in trouble. We're all in trouble. But and so I obsess over that greatly. I go to all the conferences where I see new real estate technology coming out. I go to the modular conferences, I go to the 3d printing conferences. I look at what Amazon is selling online in terms of you know, kits I look at. I look at everything and I can tell you with complete confidence that in the next five to seven years, there is no technology that will drop cost of construction in the US. The first technology that I think will make an impact right around the 2030 timeframe is 3d printing. Modular is a laughable technology in the US. less than point 1% of homes in the US are made through modular and the total volume of modular factories in the US is under 5000 units. We need a million. So unless Congress decides to put $150 billion towards building ala carte factories, there's no volume and because of a company called KATERA, a very famous company K A T E R A going out and losing $2 billion of investor money. Nobody in the right white mind wants to build a modular factory modular completely, you know, not useful. 3d printing, yes. But remember, 3d printing only works in edge case scenarios, because the property looks odd because of all that concrete that you have to basically put on. So I think it'll work in subsidized housing for the first 10 years. So let's say 2030 to 2040. It'll be in subsidized housing by the end of 2040. I think 3d printing will completely change all math around construction and we'll do a full reset of real estate. So luckily, I'll be gone long before them.

Michael:

I would say, well, hopefully this podcast is still in existence, we'll have to have you back on in 2040. To talk about it. Yep, so give us give us some insight into your 18 month crystal ball because that's something I've never heard before.

Neal:

Yeah. So I love you know, again, going back to Statistics, right? So when we're crunching numbers or big data with our teams, one of the things we realized is when a market starts to see home prices going upwards. Okay, so it's home prices are screaming upwards, right in a certain market. What we noticed was between 12 and 18 months later rents in that market explode. Okay, between 12 and 18 months later, but not immediately and you might say, why not? Well, the short answer is, what happens is that there's a bunch of people in that market that are looking at home prices going up, and everybody wants to be on that train when it's going upwards. So they jump in, they buy these homes, and then that makes more people want to jump in and buy those homes, because they're friends, you know, their homes are worth a lot more and so you see this upward momentum and then finally, the market hits a critical point where most people that are looking to buy a new home in that marketplace, their income doesn't allow them to qualify, not most substantial portion of those people, right, so you get to maybe a quarter of all the people in market X can no longer qualify based on their income, right and the moment that happens, those people, they realize that their dream of homeownership is gone forever and then they don't want to go live in an apartment, what they'd want to do basically is they either wanted to go live in a class A apartments, so it's amenitized, with pools and gyms, and all those kinds of things or they want to go live in a built to rent community, which I'm building lots of, which essentially is the same as a single family home, but it's for rent.

But it's better than a single family home, because you've still got the pool and the jacuzzi and, and the dog park and the park, right, because it's 200 single family homes in one community, it's just that you're renting that home instead of buying it. So now you have a massive increase in demand for those kinds of assets because people realize I simply cannot buy any more unless I get a huge salary increase. I'm going to be renting, then those people they want to rent the best property they can find. At the very high end, they're going to be doing built around a single family rentals below that they're going to be doing built around. Below that they're going to be doing class a multifamily below that they're going to be doing Class B and Class C multifamily. So all of these rental markets see a massive boost. So this crystal ball works for every market, we've never actually found an exception to this rule with some weirdo exceptions in in rent control markets where rents simply can't rise. So as long as the market is not rent controlled, we have never seen an exception, the crystal ball works. The only part of it that is a little fuzzy is sometimes we see rents going up as soon as 12 months after the explosive growth of home prices and sometimes it takes 18 months.

So that crystal ball makes my life so much simpler because crystal balls are so hard to find actual crystal balls and reliably work are so hard to find. So I just look at these markets that are seeing these massive increases in home prices and I go buy a multifamily there, I have a business plan to rehab that multifamily and do value ads with it and do or maybe I'm doing new construction. So either way, I have a business plan. But that's my plan A but what I've found so far is in every instance that I've done this plan B has worked better, which is simply the market just went exp has explosive rent growth. So I didn't actually ended up implementing my business plan. I simply ended up selling my property in 18 to 24 months and making my investors a lot of money. I mean, I don't know of anybody else in the US that uses Core Data Science, not just numbers, but core data science to do what we do. We've had 37% IRR 47% annualized returns for our investors by simply using the crystal ball over and over again, over and over again. I mean, and I can tell you what those cities local like today, and I guarantee you've not heard of many of those cities.

Michael:

Neal, I love it. What would you say have seen massive price appreciation? What is that mean because I think massive could mean different things to different people. So is there a percentage that you say, hey, you know what we crossed this threshold, that's the city that I want to invest in?

Neal:

Oh, absolutely. The short answer is with multifamily. It's only about 25- 30% increase in prices. So one of the things that most people don't understand is, you don't need prices to double to double your profits, because you use leverage. So let's say somebody buys a $10 million building, and $3 million of that is equity, right or down payment, and 7 million of that is a loan. Now, let's say this building goes from $10 million to $13 million, right? So you've it's only gone up 30%. So if you sell it for 13%, and you return that $3 million in equity, right, there's $3 million in profit, plus all the rents you got for two years while you were holding it. So you've doubled people's money in two years or three years, right, even though the property's only gone up 30%. So that's very important to realize, 25 to 30% increase, usually doubled investor money in during the whole time and recently, those hold times have been very short, two years, two and a half years. So essentially, that means 45-50%, annualized returns. Now in normal times, it takes about five years to get to that point. So you're, you're doubling investor equity in five years, but that's still 20% annualized returns and I think that's pretty awesome because the investors are doing nothing, they attend a quarterly webinar, and they read a monthly update and if they, if they like you, they don't even do that. They just sort of delete your emails when they come to cash flow, right. As long as their cash flow checks are coming in. They're not reading anything you're sending them.

Michael:

They're not complaining. That's it, that's it. Neal, this has been so much fun. Where can people learn more about you continue the conversation, and what's the best way for them to get in touch?

Neal:

So I'm lucky enough that I'm the only Neal Bawa on the World Wide Web. So simply typing in any URL, and bawl and hitting enter into Google. There's a couple 100 podcasts that I've been on. They're geeky and nerdy, like this one too. But and if you're interested in my metrics, if you want to figure out what is that next unknown city that is going to have explosive growth, type in Neal space Bawa space, location, magic into the web, and you will see a 45 minute course that walks you through that process. So you can find those cities yourself. Or you can simply be lazy and go to my website multifamilyyou.com and find location magic they are sometimes we call it real estate secrets, same webinar, go in there and there's a list there's a list of those cities. You know, and I believe a lot of them are tertiary markets, but a lot of them are actually 35 minutes away from some kind of primary or secondary market, I find that the primary market secondary markets are really too expensive and are at much greater risk today of price drops. So like I wouldn't go out and in buy a property in Austin. But I've surrounded Austin with seven different properties because I find it to be the hottest city in America for the next 10 years. I'm just not interested in paying what I have to pay what I would have to pay in Austin. So I've literally surrounded Austin in all four directions with my portfolio.

Michael:

Super clever. I can't wait to see how that works out. Neal, thank you so much for taking the time and coming on sharing with us. Really appreciate it and I'm sure we'll be chatting again soon.

Neal:

Thanks for having me on the show.

Michael:

Okay, everyone, that was our show a big thank you to Neal for coming on. Tons and tons and tons and tons and tons of meat and potatoes there to go digest and really think about because Neal kind of flipped the script on what a lot of people have been saying for a long time. So as always, if you enjoyed the episode, definitely we would love to hear ratings, feedbacks review from all of you, and we look forward to seeing the next one. Happy investing…

How to weed out the good from bad in real estate syndications Aug 03, 2022

Taylor Loht is the founder of NT Capital and host of the Passive Wealth Strategies podcast. He teaches busy professionals how they can invest in real estate without dealing with tenants, toilets, and termites. He lives in Richmond, Virginia, where he started and runs the monthly Richmond Multifamily Investors Meetup, trains Brazilian Jiu-Jitsu, and actively contributes to Bigger Pockets.

Intrigued with real estate investing but concerned about picking up a second job and more headaches, Taylor Loht searched for new investing strategies. As a busy professional himself, he understood the importance of learning passive investing strategies and sharing those insights with others. In today’s episode, Taylor provides us with some insights on passive & active investing and real estate syndications.

Episode Link:

https://www.passivewealthstrategy.com/join-the-investor-club/?source=investwithtaylor

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Taylor Loht, founder of NT capital and Taylor is going to be talking to us today about syndications and how to spot some of the not so great actors out there and who syndications may and may not be for as an investor goes. So let's get into it.

Taylor, what's going on, man? Thanks so much for coming on and hanging out with me today. I really appreciate you.

Taylor:

Thank you for having me today. I'm really excited to talk with you.

Michael:

No, likewise, likewise. So I know a little bit about your background and kind of what you're doing but for those of our audience members that don't know who you are, give us a quick and dirty who you are. Where do you come from and what is it, you're doing real estate today?

Taylor:

Sure, absolutely. I'm a real estate investor based in Richmond, Virginia, I decided to make the switch to real estate investing. A number of years ago, I don't even honestly remember exactly when but had been investing in Wall Street, you know, typical things. For a few years. You know, at the time, it was kind of hard to pick and miss on Wall Street because it was right in the wake of the great recession. But I just saw real estate as a better opportunity to create passive income and then, you know, here we are.

Michael:

Awesome and now today, you got a company and T capital. Talk to us a little bit about what it is that you all do.

Taylor:

Sure, absolutely. So it's part of my real estate syndication investing. So basically, I help people passively invest in real estate syndications. Got the securities licenses and everything to do that and help sponsors raise capital in a compliant manner, of course, and, you know, help people, as I say, on my podcast, escape the Wall Street casino and build wealth on Main Street by investing in real estate.

Michael:

Love it and what is your podcast called for anyone that wants to go check it out?

Taylor:

Sure. Thank you for the opportunity. It's the passive wealth strategy show available every Monday, Tuesday and Thursday, new episodes interviews, just like this one,

Michael:

Right on. So it's a common debate that we have passive versus active real estate investing. So I love for you to wear your passive hat because you've done both right? You've been on the active side, and now you're on the passive side. So why did you end up there?

Taylor:

So, that's an interesting question. So I'm a little bit in a in a hybrid state right now, to be honest with you. But, you know, I think most people when they start real estate investing honestly, myself included in this, our familiarity with real estate kind of is limited to flips, which we see on HGTV, and buying single family rentals, and you know, the one up the street and rent it out. There's nothing inherently wrong with either one of those. But the reality is that both of those strategies take a lot more work than we really think they do from the outside. Now, if you buy a single family rental and put it use a property manager, you can turn that into passive income over time, if you kind of do it the right way and buy at the right price and all those kinds of things. Flipping itself is a very active business and after learning about both of those and most of the other real estate, investing strategies.

When I was kind of getting started, I just really gravitated toward commercial real estate larger properties. I honestly don't know what it is. Maybe it's aesthetic. Maybe I just I like to think big, just get really excited about big things. But when you're buying you want to buy a $15 million property. Well, you know, I don't want to say too much about myself here, but I don't have all the money for that down payment. I can't put all that money down and I never could write when I was just a guy at college trying to figure out my way in real estate. So eventually I found this path through real estate syndication. I had money saved up from investing in Wall Street and you know, I didn't did alright in that. But wanted to make this shift and started passively investing in real estate syndications, with my eye on getting on the more active side of things, and now I do both and you know, I'm more than happy to have this be my investing strategy, I love it.

Michael:

I love it. Well give us some insights into who real estate syndication investing is for and who's maybe not a great candidate to be an investor in a syndication?

Taylor:

Sure, absolutely. So, my mind first goes to and this is most of my investors are high earning busy professionals who maybe have a family they have a job that they work 40-60 plus hours a week, make a lot of money. and maybe have some leisure activities, just want to earn some passive income but don't want to build their own real estate investing business on the side, they want to maybe like I said, say as a lot of harp on this, get out of the Wall Street casino, and invest in real estate, then that may be a good fit because if you're somebody who earns a couple of $100,000 a year, then you have to, I think you should think about what your time is worth in terms of dollars per hour and where you can best allocate your time because time is our most finite resource and I was kind of debating whether I was gonna say this, but today we're recording today is my 33rd birthday and I'm always thinking about the shortness of life, I guess, if you will, and I think, from your investing standpoint, you should think about that we all only have 24 hours in the day, if you do really well in your career, then bear that in mind, when you're considering an investing strategy, that could kind of be another job like, like maybe flipping as often another job for folks more active investors, again, you know, I love active investing, you need to be ready to put the work in, it's, it's a lot of work to invest in real estate, find deals and do deals, especially today when interest rates are going up and prices are at all-time highs and we're seeing some softening in the retail market in particular, which, you know, we have to kind of, we have to work with the market that we're given and we find ourselves in. So you know, if you're willing to put the work in, I say go for it. You know, there's absolutely nothing wrong with that. I like putting the work in on my deals and everything. But really just think about your time how you want to spend your time and what your time is worth for you both in terms of what you want it to be worth, but also what it is actually worth, if you're working. What are you getting paid now and think about that for your real estate investing…

Michael:

Yeah, I think that makes a ton of sense. I think it's a really great way to be thinking about things. Well, first and foremost, Taylor, happy birthday. Thanks for taking the time on your birthday day to hang out with me, this is awesome.

Taylor:

It is my favorite thing to do. So no problem…

Michael:

Well give us a little bit of insight into how you coach your investors or how you coach folks that think about the returns and the return on their time because I think that makes a ton of sense and thinking about, okay, how much is your time worth. But I can pretty clearly calculate, okay, if I buy this property as an active owner, this is what my return is going to be this was my cash on cash is going to be this is what my hopeful eventual exit price might look like versus about up to a syndicator like it's in your hands and if they screw up, well, then that that's a bummer for me.

But I don't have control over that. So are the returns going to be stronger as with this indicator? Are they going to be not as enticing, but I have to do as much work kind of give us an insight into how people I should be thinking about that?

Taylor:

Sure, of course, I want to be careful what I say in this regards and you know, every deal is different and past results are not an indication of, you know, future performance and all those kinds of things. You know, in my experience, both in an active real estate investment if you're doing your own deals or investing in real estate syndication, either those strategies can do very well and either while either one of them can lose a lot of money, I think it's a, it's a matter of weighing pros and cons and to kind of get back to the question about if somebody is considering if passive versus active makes sense to them. If you're somebody who can't imagine giving control of your money or your investment over to a syndicator, no matter how experienced they are, maybe they have several 1000 units under their belt and several billion dollars in assets under management. But still, you can't get past it. Well, hey, that's a sign you know, and that's your priority. That's your decision to make it's your money as your financial future. Go for it. You know, I think that this spectrum when we're talking in a general sense about the returns that you can make, you know, it's a little tough to be specific about that. Either type of deal can make money either type of deal can lose money, I think some of the other things to consider is if you're going in buying a single family up the street, getting the data in your own name and those kinds of things. Well, you're on the hook for the debt as the investor and if you're willing to do that, hey, great, no problem.

Most real estate syndications, however, which use that, set it up and the lender set it up so that the passive investors are not personally guaranteeing the debt. So their risk of loss is limited to their initial investment, their equity that they invested in the deal. So your potential downside is your investment can absolutely go to zero. Of course, we always want to be cognizant of that and the risk in our investments but if you're not on the hook for the debt, then hey, you're not on the hook for the debt. Now somebody is on the hook for the debt and that's what you want and one of many things you want to look into. In a real estate syndication, who's guaranteeing the debt? How are our interests aligned that hey, we all want this deal to perform and if it goes wrong, it's going to be worse for say the general partners who are guaranteeing the debt. Those are things we want to think about but again, debt is a big factor in real estate investments, and it's one of the risks so that as a passive investor in the syndication, you can kind of take off the table for yourself and the general partner or key principal or somebody else will guarantee the debt.

Michael:

That's a really interesting point that I want to come back to but since you were describing the person that really can't give up control, I think that's me in a lot of instances, I'm a recovering engineer and so I like to engineer the crap out of things but I'm just curious, have you come across people that like really want that high degree of control, but also invest in the stock market?

Taylor:

That's an interesting question and I think, yes, I think we, maybe we've been kind of trained or programmed or maybe it's the way that media talks are something that we think that when we're buying a portfolio of stocks, hey, I have the control, because I get to hit the buy and sell button, which is true, you do get to do that. But there are many other factors that are outside of your control and when I was really heavily investing in the stock market, I got, I got my props here, my books. This is the first book I read about investing the Intelligent Investor, it's incredibly thick, I only read it once.

It looks like a dictionary, which is a ginormous book but you know, it kind of drove me toward index investing, because I learned through this book, Benjamin Graham and its Warren Buffett strategy as well that I can't pick stocks and I honestly, I tried a couple times, and I always lost out on I'm no good as a stock picker but I think that having that buy and sell button really gives us the feeling that we do have a lot of control and you do get that amount of control, you can buy and sell but you can't control the fluctuations of the market, you can't control the positive or negative decisions that the executives might make, or you know, kind of anything.

Michael:

Right, right. It always cracks me up when people talk about yeah, I got so much control and it's like, like, stop kidding yourself. Alright, so let's talk about leverage for a minute because I think you bring up a really good point and it's interesting to know that the general partner is usually going to be on the hook for the leverage for the debt rather, and that it stops with limited partner. But talk to me a little bit about how people think about debt to invest. So what I mean by that is, if I want to go buy $100,000, single family home, I can go bring 20 grand to the table and get $80,000 mortgage. Now I control $100,000, an asset and the appreciation I see is going to be that $100,000 number versus if I want to go to a syndication, can I go get a loan from that same bank and say, hey, I want to put $100,000 into the syndication.

Taylor:

No, and frankly, if the if I were, you know, the general partner seat in that case, and I found out that somebody was taking a taking out a loan to invest in the equity portion, it may or may not be technically legal for me to accept that money, but it would not be wise for me to accept that money because if things aren't going to plan, which can happen in a real estate deal of any kind, then you're going to be in a personally difficult position and that's going to flow to me, and it's going to be still going to be my problem and I'm just gonna have to deal with that. So it wouldn't be wise for the general partner or the limited partner to do that and I think I should clarify, what I previously said, Is there are multiple types of real estate debt.

At a high level, there's recourse and non-recourse where recourse means you're personally on the hook for the money. A lot of syndication deals and commercial real estate deals will use non-recourse debt where the general partner while they're kind of they're putting up guarantees, and they're agreeing to behave well. We're not technically on the hook to repay the debt, but there are so many carve outs to that. So in the sense that if the general partner misbehaves or doesn't act in a certain manner, then the bank, you know, just reverts, and it becomes recourse debt anyway. So those are important things to consider but I wanted to make sure to clarify that point.

Michael:

That's a great point to clarify. So talk to us Taylor about this specific scenario. You got a landlord, they own five single family homes, and they did the active investing, and they're kind of done, they're tired but because of what's happened over the last couple years, they've seen their equity go through the roof and they're thinking, you know, what, I will kind of want to get into this whole passive thing. I heard Taylor and Michael's podcast would love to get into one of those deals. So they cash out refi on some of those properties. So they take on new debt, now they've got a ton of cash. Are you thinking that that's not a great time to go invest that into a syndication deal, because it's technically borrowed, or when you say, take on debt is not a wise investment to go put into a syndication deal? Talk to us a little bit about that.

Taylor:

That is a good point and that is an interesting way to reframe that question. I suppose in my mind, the previous question, I kind of interpreted that as, say, I'm Taylor, I'm going to go passively invest in this deal. I call my buddy Michael, I say hey, man, loan me x $10,000 $50,000. I'm gonna go invest in this deal, and I'm gonna pay you y percent over a certain amount of time. Well, that would not be wise but say if somebody's pulling debt out of properties, or applying a new mortgage to cash out refi buying properties that they already own. I think you can make a good case for that. I think it's really so one of the things where it If you're in that situation, you need to consider or you should consider all the available options. So interest rates are going up right now but historically, they're still at pretty much all-time lows and values are at all-time highs and single families. We're seeing some softening going on. But it's not like we're currently in the midst of a crash. Now, I may, I might be wrong about that but something to consider, the way I would look at that is what I want to continue owning these properties, say for another 10 years or so technically, think the average mortgages refight at seven years but how long? How much longer? Do I really want to own these properties?

You know, what's my potential here? Do I still want to mess with them? What rate am I going to get on this debt? I would consider, really all those factors are so many other options that you can technically get 10, 31 exchange into a single syndication if you do it properly. Now, a lot of times, it may not make sense, if there are fairly inexpensive properties, you're not bringing a lot of equity to the table, then it's a little more difficult to 10, 31 but I just think you have to consider all the possibilities and again, it's all about the individual making decisions that are right for them. If you still want to own those single families and continue to rent them out, then that is a valid way to do so and you still have real property there and hopefully, when you do that cash out refi you're still earning strong cash flow in the future, because you still need to support that new debt that you took on.

Michael:

Great, great and Taylor give us some insights into what folks should be doing to screen syndicators because they're, you know, kind of like realtors, they're a dime a dozen, you see syndicators all over the place, doing all kinds of deals, talking about their deals are amazing. So what are what are some kind of BS meters or red flags that people can help raise on some of these folks?

Taylor:

That's a great question. I mean, honestly, one of my favorite things to suggest that people do is go find other passive investors and ask them, who have you invested with what's gone positively or negatively? It's a little different than going to a syndicator and saying, hey, give me a couple of references because what kind of knuckleheads gonna give you a negative reference, right? You're gonna tailor it properly, right but if you're in that position…

Michael:

Was that a play on words you're gonna take tailor right now…?

Taylor:

In a way… But I would, you know, it's always you do get that question and I, you know, give people references if things have gone well, but for anybody out there in that position, there are so many groups out there that are focused on passive real estate investing leftfield, investors are great. Go there and talk with those folks and ask them, who have you invested with, it's gone? Well, there are a lot of other things you can do along the lines of background checks, heck, take the person's name and Google them. I mean, it's shocking how many people won't just punch a name into Google and you know, see what comes up, sometimes and this, this does happen. I know of at least one case where this happens. There, somebody out there who has a relatively common name, and if you google them, somebody else's prior court case comes up. So if there's any point of clarification, there's no harm in asking. But if you're, you know, if you're already out to let you know, make that judgment call on your own, if you want to ask them, hey, what happened here? Is this you or if you don't, then that's fine. That's up to you. Those are definitely things that that I would consider, I would dig into there. Also forums like bigger pockets you can go to you can post Hey, has anybody here invested with so and so, you know, DM me, and let's talk about search on bigger pockets as well.

There are many threads about positive and negative experiences with syndicators. Now, there's always an important factor to bear in mind that past performance is not an indicator of future results but I think learning about people learning about experiences can help illuminate things like scammers and fraudsters because those people are out there and you need to know how to look for them. I think as you if you're new in real estate syndication and passive investing, really try not to feel FOMO you can go out, get on people's deal lists and look at deals for a while you don't need to invest in the first deal that you ever see come across your desk, if they're good, and they're experienced indicators and they know what they're doing. They're gonna do plenty of deals right and you will get diversity, a diverse selection of deals in terms of asset classes, markets, you know, the what their maybe target returns are everything so that you can see get a picture a broad picture of how folks are doing deals and I think that really is illuminating and just taking a pause reminding yourself not to feel FOMO can really help prevent a lot of a lot of mistakes and I did put out a seven day course on red flags and passive real estate investing recently that people can get that's totally free. Not everything that can go wrong in a real estate deal because that would be an Encyclopedia upon Encyclopedia of right of information, but their high level things that if you spend enough years in this business, you'll see kind of recurring themes of things that go wrong in these types of deals.

Michael:

Okay, that makes a ton of sense and those are all really great resources and tips. Thanks for that. curious to get your personal thoughts. There's the expression get rich in your niche or niche down and get laser focused and so from the standpoint of syndication, if someone has 100 grand to invest, are you thinking it makes sense to go all in on a particular deal because you love the deal and believe in that deal, and that syndicator are you going wide with kind of spray and pray across multiple deals?

Taylor:

So for me, so just taking a step back, most of the time, in real estate syndication, you'll find that a typical minimum investment is $50,000. There are a lot of reasons behind that if you're accredited, that means it gets into the weeds but most real estate syndications can accept an unlimited number of accredited investors but find a 506 b syndications can only accept up to 35 non accredited investors. So they want to allocate those spots to people who are able to invest additional capital and where I'm going with that is they say a $50,000 minimum but you're not quite ready for that and you're accredited. It doesn't hurt to ask, say, Hey, would you take 25, would you take 35? Can we go a little lower? Because I'm trying to spread this out. But if I was in that position, having $100,000 I wanted to invest in real estate syndications. I would like to diversify it as much as I could because I think that's the wise decision. I was speaking with somebody recently about this. I don't want to say too much. But this person had almost a million dollars to invest. This was about a quarter of their portfolio. They had invested in Wall Street type of stuff for years and years and did very well and high income earner. Very great for them just getting into real estate syndication, asking about hey, how should I allocate this? What would you think about they were looking at their second real estate syndication investments are just getting started in the space and their consideration was I'm gonna go 500 out of this, this portfolio that I've chosen to invest in these deals and my thought on that is, that's probably too much. I think if you're really getting into it, it makes sense to not just dive in, right, kind of walk into the water kind of slowly so you can get getting diversified across markets and asset classes and operators and all those kinds of things and get your feet wet rather than just cannonball on into the waters.

Michael:

Yeah, and find out later that it's two inches deep.

Taylor:

By very possibly. I mean, you know, I've counted myself lucky to have I feel as though I've stayed away in my real estate investing career successfully from people who you might consider scammers and fraudsters, that doesn't mean you don't meet them, but you kind of find out who they are, and avoid them and don't do business with them but I think the more patient you are kind of helps you have a better a better batting average, if you will, maybe that's not the best way to put it. But I think diving in is the wrong, you know, wrong way to go, especially in a time when the market is, you know, maybe come volatile in the future.

Michael:

Taylor, I'm curious, kind of in that similar vein, do you think personal tailors personal hot takes that having invested on the active side makes someone a better or more difficult, passive investor or does it not matter? I mean, if I'm thinking about getting started, I'm thinking, you know, I'm not sure maybe which one I'm thinking maybe as an active investor, I can learn the business and not have the wool pulled over my eyes as much or maybe I just go straight to the passive route without having to learn all of the stuff that comes along with going the active route.

Taylor:

That's an interesting question. I'm not sure I'm honestly not sure how big of a I haven't noticed a difference, I suppose is what I'd probably say. I mean, I would say that though, regarding that one point, being a passive investor doesn't absolve you from learning how the business works. I think it's very wise to pay attention to what the industry is saying what at what active syndicators are saying to each other, what they're out there talking about and where they learn, right because you're going to learn the most about how deals work by say, reading the same books as them or attending webinars or maybe going to conferences. Some people are some passive investors are willing to make that investment many aren't. Some of those can be very expensive but just as a general comment, being a passive investor doesn't get you out of learning. You still got to learn.

Michael:

Okay, no, I love that. I've always been preaching that that you got to learn the fundamentals from the get go, because who knows, you might learn that real estate investing isn't a great place for you and I think that's important to be cognizant of too. So kind of again, thinking similarly through that thought exercise, if we go back to our prior example of this, I'm the active owner. I own five single families looking to get involved in the passive side, and I'm looking at a pro forma from a syndicator and all I know is the single family space, right? I've purchased homes, I've done renovations on homes, capex, that sort of thing and I see a line item, big apartment building 15 million, like you mentioned, and their capex reserve is 250 a door and I'm like, no fricking way I've been in his business 250 is not going to cut it, you know, doesn't get you a stove. So how much should I be kind of nitpicking, this indication of what I know, to be true for my business, versus how much of the syndication world is just so above my head, and playing in a different Echelon that I don't really need to be spending time picking things apart?

Taylor:

So I think if you're in a situation where a number doesn't make sense to you, then my opinion is you can either ask a question about it, you know, clarify, maybe run your own underwriting model, if you're so bold, not everybody wants to do that. But at a certain point, when the math doesn't make sense to you, the assumptions don't make sense to you, then just walk away and look for the next one because, you know, I, I hate to sound like an old dog. You know, 33, I've been investing in this business for a few years now but I've seen syndicators make math mistakes that lead made a pretty significant difference in the deals, and sometimes those are identified early on, sometimes they're a little, you know, higher profile but if a number like a Capex budget per unit or something like that doesn't make sense to you. You can ask question about it but use your own logic, I mean, you're at the end of the day, you're going to bear the benefit or the cost of your decision more than anybody else.

So, you know, ultimately, I think the at the individual investor level, kind of the buck stops with us, right, and we should walk away. If something like the math doesn't make sense, I've and I could go to the math errors, I've seen them blow up in a higher profile manner that I don't want to get into and I've caught them from others indicators and sometimes the ones I caught were not huge, but there was enough. Just seeing that is enough for me to say, okay, I'm done because.... Where are the other problem? Where are the mistakes? I'm not going to dig through this enough to find them, but, again, that's that feeling of FOMO, right? Really try not to feel it and if you bear that in mind, I think that helps make fewer mistakes, or kind of helps you, when you find that the capex budget doesn't make sense. It'll help you say, no problem moving on.

Michael:

Yep. So is it is it fair to say to folks listening, don't go invest into a syndication until you get warm and fuzzy…

Taylor:

Potentially, I think this again, gets to the individual investor level is that we all have different bars of warm and fuzzy, I'm at the point now where I get pretty warm and fuzzy with the deals that I invest in, and I don't invest in everything I see for sure. But I feel my opinion is that my warm and fuzzy is pretty well calibrated at this point, and also pretty heavily data driven. If you're brand new: Think about how is your warm and fuzzy, calibrated correctly. Maybe it is maybe it's not but you know, I'm, I'm not a pushy person in this regard and I think on the individual investor level, if you're not ready, you're not ready and that's okay. There's no harm in continuing to look at deals and, quote, sit on the sidelines but as long as in my mind, as long as you're looking at deals and you're evaluating them, then you're not quite sitting on the sidelines, you're still taking action, and you'll most likely step up eventually, or you'll decide, hey, this isn't for me at all, and you won't do it. But in that sense, you know, consider whether your warm and fuzzy is calibrated correctly. Maybe it's not, maybe you're a little too cautious or maybe you're actually being a little overly trusting, if you will, maybe you're mis calibrated in the other direction.

Michael:

Yeah, I think that makes a ton of sense. Taylor, man, this has been a super fun interview. Where can people learn more about you reach out to you invest alongside you if they're interested in doing so?

Taylor:

Sure. Absolutely, so I already mentioned my podcast the passive wealth strategy show available you know where you're listening to us right now I'm sure. My company NT capital, you can find out more at investwithtaylor.com or I mentioned the free seven day video course I put out on red flags and passive real estate investing that's available at passiverealestatecourse.com.

Michael:

Awesome. But hey, man, thanks again for coming on. I really appreciate you taking the time and I'm sure we'll chat soon.

Taylor:

Thank you.

Michael:

Okay, well bye…

Okay, everyone. That was our episode a big thank you to Taylor for coming on really insightful. Again. I love some of those questions that you can ask syndicators to get an idea of whether or not it makes sense to invest alongside them or with them as oh, If you liked the show, or even if you didn't like the show, we'd love to still hear from you. Leave us a rating or review wherever you get your podcasts, and we look forward to seeing on the next one. Happy investing…

How to set yourself up as an attractive borrower and generate strong cash-flow Jul 26, 2022

Kenny Simpson and Krystle Moore are real estate investors, and Kenny's expertise is residential lending while Krystle's is in commercial lending. They have helped over 1000 clients on their path to creating generational wealth. 2019 has been about focusing on growing our business through marketing for them. Until this point, their business was solely from referrals. They started a podcast – Value Add with K&K – and have focused on using their influence on social media to educate their clients, potential clients and followers. They talk a lot about real estate and building wealth on the podcast but also about health, fitness, mental health and other areas where they feel they can add value.

In this episode, Krystle and Kenny talk about how they got started in buying multifamily properties and what they did to leverage that to buy more properties. Additionally, they talk about what borrowers should do to be well equipped, as well as things to look out for as your purchase different property types.

Episode Link:

https://getinthecashflowgame.com/

Michael:

Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Krystle Moore and Kenny Simpson, a real estate power couple in the lending space, Kenny in the residential side and Krystle on the commercial side and they're gonna be talking to us today about things that we need to know about each space, what we can do as borrowers to be well equipped, as well as things to look out for as we're purchasing each type of property. So let's get into it everyone.

Just a quick shout out before we get into the episode, definitely want encourage everyone to go check out roofstockacademy.com It is a one stop education shop for both new and seasoned investors comes with tons of access to on demand lectures, potentially one on one coaching with me or some of the other coaches we have at the academy as well as marketplace, cashback credits for you to use on the restock marketplace as you're making a purchase. So come check us out roofstockacademy.com, look forward to seeing you there.

Krystle and Kenny, what is going on. Thanks so much for taking the time to hang out with me today. I appreciate you.

Krystle:

Thanks so much for having us.

Kenny:

Yeah, thank you excited to be here.

Michael:

Oh my gosh, I am, I'm super, super excited. We are going to be chatting today about all things real estate financing related. So give us a quick and dirty insight into the two of you. who you are where you both come from and what is it you're doing real estate today?

Kenny:

Sure, who we are well, people for short, if you want to cheat they call us K and K, because we both have K surname. So our background is in financing commercial for Krystle residential. For Kenny, we've been doing it for about 18 years here in San Diego and we've you know, we invest as well, too, primarily in multifamily. Gosh, how did we get here, you know, basically just jumped into the business and then kind of built our businesses up and then at some point in our career, we decided to get real crazy and start a property manager company and that grew way too big, way too fast and we said, how are we going to have you ever have kids in a life and do anything else because we can't work 80 100 hours a week. So we sold the company to start up and kind of took that time continue to work on building our brands starting our podcast doing a lot of content while doing our main businesses that finance and you know, and we just are active investors. So that's kind of the short story.

Michael:

Right on, so you both kind of tag team in the residential side of lending, and then also the commercial side but it sounds like you're investing mostly on the commercial side.

Krystle:

Yeah, so we invest primarily in multifamily and I think, you know, they kind of call us the one stop shop in terms of financing just because there's a lot of crossover between the residential and the commercial. So in Kenny's gotten really experienced at dealing with complicated real estate investors and people who own you know, several properties, I mean, things like we always say that those clients are like an underwriters nightmare but Kenny knows how to walk them through the income and how to do all that kind of stuff and then a lot of times they want to cross over into buying apartments. So it's a good partnership for us and it works out well for our clients.

Michael:

Perfect and I feel like so many of our listeners as well kind of go through the single family organic progression, start with single family then maybe a duplex triplex quad up and therefore. So where have you seen from your experiences, like people do really well, in the commercial space, as opposed to sticking in the residential space at one to four unit, like when's the appropriate time for someone to graduate, if you will, or make that leap from one to four into five plus?

Krystle:

Honestly, I mean, at least for us in Southern California, or probably any major metro, your biggest issue is going to be qualifying for the loan amount. So I think when you're trying to make that transition from residential to commercial people come to me and they say, well, what LTV can I get and I'm like, well, I need to underwrite the property because it's not like that just because we can go to 75 or even 80%. LTV, it doesn't mean that the property is going to qualify. So in San Diego, at least for Southern California, where we're at, we're usually debt service constrained, so cashflow and I like to tell people the lower the cap rate, the bigger the down payment.

So obviously, cap rates have been super compressed recently and then now with rates going up, that means people are having to put more money down so the best time to make that transition is when you have the cash to make it I tell people I always recommend the more units you can buy, the better because you know if you have a four unit building and one person vacates, you have a 25% vacancy, maybe you'll break even on that property but if you have a 10 unit building and one person vacates, you have 90% occupancy still. So you're likely still cash flowing even with one person vacating. So you really want to get to that point, but you might have to, like, you know, I the BRR method, or those kinds of things to trade up but the biggest thing is just making sure you have the down payment, I think people should always be underwriting because that transition from four units, let's say to like a five, or a six unit building, you know, you've got to kind of like look at four to six units, just to make sure that you can get the down payment before you take that step.

Michael:

Okay, that makes a ton of sense and let's maybe even take a step back for anyone that's not familiar with either the lending space as a whole or what commercial financing is. So I'd love to hear from both your perspectives. What do you look for on the residential side, like what pieces of information you're looking for and then on the commercial side, because I think it's a little bit different, what pieces of information are you looking for and how do you treat those two different types of loans?

Kenny:

Yeah, so the residential um, I don't want to say it's very straightforward, because we do have we have more options, and probably Krystle and the reason why is because with Krystle like she says, if you just do not have the down payment, then you might just not qualify with us, the property could like not cashflow and you could put 25% down and still, if you qualify with your income, you could still get it but we also have full doc programs, maybe bank statement or debt coverage service ratio programs. So we have multiple, so really, what we're looking for probably is, depending on what if you're buying a four unit, most of the time, you're going to be looking at least 25% down, like I said, the property does not necessarily have to cashflow on a DSCR program that might be a little different.

But we have people buying an example for unit, it's way under rented, they're going to buy it, they're going to kick people out, they're going to raise the rent, and it's going to eventually cashflow. So that's number one, obviously, number two, you're looking at credit, can you go full dock, and kind of the traditional stuff of everything else, so but when you're looking at a two to four unit property as an investment, you're definitely gonna have to put like, at least 25% down and some people are putting more because rates are higher, and they just want to make sure if they buy it that it's cash flowing, too. So that's probably like the general quick, like overview with wonderful like two to four, for example on investments.

Krystle:

I think that's the issue like for me, when I look talk to people who are buying four unit properties, the biggest thing I want to make sure of is, like Kenny said, a residential lender will give you a loan even if the property is cashflow negative, but the purpose of buying investment properties is to be cashflow positive. So, you know, you kind of have to do more of your own due diligence upfront, when you're buying a four unit versus apartments, I mean, I like to say like a bank is never gonna let you really fail, because they're not going to give you like a loan that's higher than what the property can support and they're going to put a lot of like cushion in there, too. We have replacement reserves, if you're self-managing, we're still going to use a management fee, we use a vacancy factor, we have all these kinds of things to kind of set you up for success, as an owner, I always say like with apartments, you can you can like you basically have to ignore your property and not pay attention to it and completely neglected in order to run in the ground, like apartments are very forgiving.

So when it comes to the four unit space, I tell people like you should be underwriting your four unit, just like you underwrite an apartment building, because probably the agents not going to do that. I think that there's a little bit of a hole in the realtor space where, you know, people that sell homes are also selling two to four unit investment properties, but they don't even know how to underwrite an investment property. So you just want to make sure of that and underwrite it like an investor. Like I always tell people marketing is marketing, right? So you want to look at it as an investment through an investor's eyes? What, what's that really going to cost you not the pretty package, if everything goes 100%- perfect. You want to like kind of factor in, you know, additional expenses that are unforeseen, because these are properties, and especially in southern California, you've got a lot of older properties. So you're probably dealing with plumbing or electrical, you're gonna have more maintenance than what's probably in the marketing package.

Michael:

So is it fair to semis for a residential, you're more interested in the borrower itself and on the commercial side, you're more interested in the property itself?

Krystle:

Yes, so we're definitely more interested in the property but I people say that to me, they'll call me and I'll go like, I doesn't matter about what I have. It just matters about probably well, no, we also want to make sure that you have decent credit, we look at what we call global debt service. So we are going to make sure that you can afford your monthly bills and things like that. So you definitely need to qualify, but it's not as strongly looked at as you would on residential. Like for example, if I'm going to do a commercial loan, and I'm getting copies of your bank statements, I'm not going to ask you to source your $1,000 cash deposit.

It's painful. So we I like to say that we have common sense. So we allow, you know, cash from business accounts, we allow personal accounts, we're not going to question you about all these things. So yes, we're a little bit more easygoing. because we look at you, as a sophisticated business investor, you're coming to me for a business loan, that means you're a savvy investor, not an unknowing, you know, potential homeowner. So we do look at it a little bit differently, you do need to qualify personally, but we do put most of the weight on the property.

Kenny:

And you do, but you guys do require, like, if you are getting into bigger loan amounts, like some people, like, hey, I want to go out and buy this 30 unit building, and there is a net worth requirements like that. So the bigger you go with the buildings and the loan amounts, I would say, it's like, they're gonna look at you not just like, you know, net worth but you know, probably like a lot of people like talking about that, like, it's for me, it's going for a bigger building, I'd like to, you can look a little bit more.

Krystle:

So the big things that you need to pay attention to, because when if you go to a commercial lender, or you want to buy an apartment building, they're not going to give you a pre-approval, they're not going to get you pre qual, if you ask for that, they're going to immediately know that you're a rookie, and you've never done this before, what we look at as your personal financial statement or real estate schedule, and what we're looking at specifically is that your net worth is at least equal to or greater than the loan amount and then we also want you to have 10 to 15% of the loan amount and post close liquidity. So that means after your down payment, after paying out all your closing costs, so let's say you're gonna get a million dollar loan, we want to see that you have 100 to $150,000 of cash or cash equivalents, most of the time retirement doesn't work, that's not going to unless you're close to the age of being able to access it. So and then credit score, it's like, you know, we're kind of like 680 score, I mean, some big owners have like things on their credit. So, you know, that are like maybe a tenant eviction, or like, you know, they've got little things on their credit. So we're not really paying attention to that as long as you look your credit worthy, you don't have a bunch of mortgage lates and you didn't file bankruptcy last year, you know, like, those are the kinds of things that we're looking for, but net worth and liquidity are the two big things that we require looking for experience to a certain level, there is they do want you to have experience, but if you don't, then they want you to hire a professional property manager.

Michael:

Okay, and yeah, Kenny, you me to the question the words right out of my mouth. So when you do send, because that's like, I've got a mortgage package that I send all the commercial lenders that's got my PFS my schedule, real estate, but for anyone that's just getting started, like if they want to go buy a five unit building as their first one, is that going to be an obstacle for them from a lending perspective?

Krystle:

Not typically, they might they, they'll more than likely want you to have a professional property manager. That's what most lenders are looking for and quite frankly, though, I've been telling my lenders this more recently, and I feel like believe it or not of all the things, especially with where we're at in the world, and everything in the economy, that I feel like lenders have led up on is the experience because I tell my lenders, you know, it's really funny that anybody can go buy a two to four unit property and again, negative cash flow, here you go, here's a loan, you're gonna be negative $1,000 a month. But now you want somebody have all this experience for apartments, like, if you can survive owning two to four unit properties, and as an investor, then you can definitely own five plus units. I think that's sufficient experience. So we've been getting around that but yeah, some lenders are still going to want it, I still definitely stand by my argument, though, that if you can own a four unit, that you can definitely own it, you know, a 10 unit, it's not like you're gonna go from four to 400. You know, if you go from four to six or seven or 10 units, that's pretty comparable but some lenders might require a signed Property Management Agreement.

Michael:

Okay and from both your experiences on the owning and operational side of things, I mean, what are some of the big differences that you see and obviously, we talked about lending, but like, just between like a two to four, and then a five plus, like, what are the differences that people should be aware of?

Kenny:

Yeah, so two to four? Well, one of the things is, especially here in San Diego, a lot of people on the four units, they're, they're moving into them, right. So you're probably how you can have an owner user, if it's an investment, you could live in it, and you have the tenants there helping to pay your mortgage, the other thing is on for units, a lot of times the trash, you might come with the property tax, you don't have to have a dumpster on the property and paying that additional, a lot of times the tenants are paying their own water, electricity and things like that. So the cost of running, it could be cheaper, just from that standpoint and then otherwise, like the for unit, I mean, if you're managing it, you're going to manage it pretty much the same. I mean, Krystle can kind of get in when you're getting bigger, but when you're getting bigger, you know, five to 15 or 16 probably the same when you get over 16 the difference really is you're gonna have that onsite manager by law but then you know, as you get bigger and bigger, if you've got 100 unit, then you're gonna have staff and this so it's really like Chris says, as you scale and size. It's it makes more sense because you know, if you have 100 homes compared to 100 unit property, you know, it's a lot more work 100 homes driving around 100, roughs, 100, things like that. So, you know, I don't know what else you have on a larger scale.

Krystle:

Yeah, I would say the management of like a four unit to like a 15 unit building is roughly the same. Besides the fact that you have economies of scale, like Kenny, you mentioned, it's like you have all these roofs to take care of all these walls to take care of things like that that are going to be, you know, cut down, the larger the building is so and then once you get 16 plus you have the onsite manager but honestly, I think the psyche of the person owns a four unit is the biggest difference, because like I said, I mean, it's stressful, you bought this property as an investment, you saved a bunch of money for it, if you have to come out of pocket for that investment, that's an extra expense that you didn't anticipate if you have vacancy, or if you know, you've got to evict someone, or things like that. So I just, what I've noticed is that the real estate investors who own like the single family home to the four unit have a lot more stress when they have vacancy or someone that doesn't pay because they're going to be negative. Whenever you own a larger apartment building, you have a little bit more comfort, because you have a little bit more margin for error there. So I think the biggest thing is just the psyche of the person that owns the four unit versus owning the larger building and of course, there's like this kind of break through transition that you have to have to feel have the confidence to make that step. But I tell people, it's 100% going to be easier, the more units you own, like you're just going to feel more safe, more confident, you're going to have a cashflow. No worries, you're not going to be negative, you're not going to be putting money into your investment property.

Kenny:

Yeah and when we managed, we managed from homes to one point that was over 100 units. The single families would do great until somebody wouldn't pay rent or they'd move out and they had to do a unit turnover and they cost more than the deposit and then it would sit there for maybe a month or two sometimes because they're trying to get this high rent and they didn't listen to couldn't get it and you're losing money and the other thing is, is we know guys that like flip properties, for example, like they flip houses and then you come to environment like now where it's sitting maybe you know could sit 30, 60, 90 days, they're getting zero cash flow and then when the guys started saying, well, I could just flip apartment buildings, and maybe they're going to even hold them for a year or two. In exchange, they started realizing why I'm sitting here on the market. I'm actually making money I'm getting paid, I'm not sitting there going, I need to get all my books, it's cost me money, that private money. So it there's you know, like the bigger the better. So when we manage it all we realize, like, if you really own a house, it's like man, it's almost has to be free and clear to like really make sense. Otherwise, we always thought like, gosh, it's tough, you know? So that's just from our experience here, just managing and then on the bigger when you're more like when you do those little rent raises, right? Yeah, but small rent raise across 3040 50 100 units. That adds up, you don't think so? You're like, oh, 100 bucks a month times 100? Holy crap. That's a lot of money. You know? Yeah. 10 grand, so…

Michael:

Totally. Okay, that makes a lot of sense and Krystle, you mentioned it before, but I just want to come back to it from the underwriting perspective. What do you do with seller provided pro formas? Do you think there's any value in those?

Krystle:

Totally, I primarily just pay attention to like utility cost and yeah, like trash and stuff like that. So I pay attention to like, the things that aren't going to change for a new owner and I pad those even a little bit because obviously utility costs have been rising. So those are the biggest things that I pay attention to and then I also want to look at, like I usually ask for the GL, like the general ledger from a seller to because I want to see what repairs they've been making and see look for any kind of patterns. Okay, this property has a lot of plumbing issues, like we need to focus in on that. Maybe we look at replumbing. Maybe we need to get the camera, you know, camera, the lines like we need to look at this. What capex have they done, like I want to know what kind of capital improvements they've done on the property. So I can kind of get an idea of what the condition is. So I definitely do pay attention to sellers, pro formas but I build my own and they usually like for example, brokers here we'll use like a 3% vacancy factor. I use five lenders use five, they'll use like $200 a unit for replacement reserves, we use 250 or even 300. You know, so there's just little things like that where I am going to be more conservative, but certainly actuals are very, very helpful. So if nothing else for the utility costs.

Michael:

Yep, I was hoping you would say something to that effect. I always say that. They're good for lining your garbage can… like in place rent 400 market rent 1200 It's like, then you get it to 1200. Yeah, you know.

Krystle:

And you know what, I've seen it both ways. I've seen it where sellers are under estimating what the building's worth. So that's why it's so important for you to do your due diligence because they can be too aggressive. They cannot be aggressive enough. I mean, the whole like, value and finding real estate as an investor is where you can find value where other people aren't, like I've heard so many people say, you know, LoopNet is the worst place to find apartments. Well, I found really good deals on there because I was able to get it in a way that nobody else did. I was able to see value and you know, adding creating additional income or reducing expenses, like there's deals everywhere to be had. It's just are you going to do the work and investigation to find where the little like pops of income and you know value ads are.

Michael:

Krystle didn't mean it LoopNet is a terrible place. No one should go on and look at it ever. We should all stay off it.

Krystle:

All right, no, I'll get more deals.

Michael:

That's exactly right. That's exactly it. Like, I love that it has that stigma because I think it does turn a lot of people off and I like you have found some amazing deals from there. So it's like, awesome, keep thinking that it's like surfing sucks. Don't start, you know, I let people think that…

Krystle:

People in the water…

Michael:

Yeah, that’s it so from a borrower perspective, and this is I kind of want to give you to the soapbox and the podium to sing it from the rooftops? What are some things that borrowers can do to be better borrowers, both on the residential side, and on the commercial side, like if you could describe your wish list your ideal borrower, what things do they have and what is their kind of their picture look like so to speak?

Kenny:

And it's kind of funny because I, I'm forbidden to even work on my own loans because I'm not a good borrowers.

Michael:

Really?

Kenny:

Yeah, it's funny, right? I'm not a good borrower, I'm impatient but I will tell you, it's very simple. If somebody sends you a list of 10 things, and you actually have those 10 things we actually need them. Not like it's nine out of 10 out of maybe another 10. Yeah, so I always tell I joke, but always tell borrowers this. I said, I'm like your doctor and your attorney. They're like, huh, I said, so if you lie to me, I can't discover the cancer and eventually, we'll probably find the cancer but it will be like, when we're three weeks and underwriting and somebody pulls some report, and something pops up and they go, what's this, you're like, oh, I didn't think you'd find that. So I'm like, whatever you think we're not going to find, just tell me now and so I can tell you, let's deal with it now, and not three weeks down the road. So you know, filling out a full application. Letting us know if there's anything else we should know going on with income with job changing with changing bank accounts with maybe recently purchased property, that you're just not going to tell us that you think we're not going to find, you know, the skeletons in the closet, right, especially for us, because that's really what they're doing.

They want to give you a loan, but they also need to go like, what is it that you're not telling us and we pull reports and the reports they pull, they can find things. So for me, it's just being transparent. I mean, the list is pretty easy to follow. I would say one of the things is also a lot of people think I'm self-employed, I don't really show the income or this or that and I can't get a loan, that's really not true. There's many alternative solutions for self-employed. There's solutions for people that might just have you on property rich, I got some cash in the bank, and I you know, I got equity, there's options that don't think because you're not this cookie cutter person, there's not an option, you should talk to somebody and you'll explore it and see and really beat a dead horse and really make sure that there isn't.

Michael:

Fantastic and what about on the commercial space?

Krystle:

I again, we're so much easier. I just found that people go like, what do I need to get called and I'm like, send me your personal financial statement or real estate schedule. They're like, okay, what else do you need? I'm like, I'm pretty good. You know, I can tell you. I still want your tax returns and your bank statements and all that. So I think for me, just obviously getting stuff in a timely manner. I, you know, we have those clients that take forever to send you something and then the second they send it to you, you're like, they're like, okay, what are we doing now, like, or have you? Are you done yet? Are you close and you're like, you know, I can I also need time. So I think just having somebody that sends you the information that you need, again, someone like Kenny said, someone that's upfront with you about things, like the other thing that I find is like people are just so like, they don't want conflict, right? So if they're shopping you like they don't want to tell you and I'm like, I've lived my entire life, 18 years doing this business competing, like I'm aware, but you have to be upfront, because if a banker finds out like, you know, if they hear the deal for me, and then they hear it from three other people, like that doesn't look good on you as a borrower.

So you want to be upfront with whoever you're working with, hey, look, I'm getting quotes from a few other people. Okay, well, do you know who they're shopping because I just won't go there. Like, that's, that's fine. I don't want to screw the deal up for you. So there's little things like that, where reputation and commercial is so important and this is a small, small business, we all know each other, we all talk to each other. My bankers call me sometimes they go hey, so I just saw this deal from another, another broker, like do you know who's gonna you know, and it's a problem because if I dissected the information, like I don't just take information and throw it at the lender, I dissect it all i breakout capex, I say, okay, I got my insurance, quote, I it's lower than what's projected here. I get a lot of things. So what I submit might be different one than what the other guy is going to submit and so I think, you know, just making sure that you're upfront with people and what you're doing then I can strategize with you like I'm not gonna get upset or work on your deal any less because you know, you're shopping me so I think just being upfront with people is gonna get you the best deal ultimately in the end.

Kenny:

Yeah, I will say funny to piggyback on that. I might even end Krystle’s business. but I know they're really good at what they do. They just do it and they know what they want the bankers, but bankers will say like, if I'm out there like, oh, Krystle limits are so good. I go, well, what's alternative they go You wouldn't believe how many like commercial mortgage brokers just take the stuff from the seller or whatever just send it to us go, hey, what do you think we can do and they're like, did you look through this? No, you do it and you're like, that's the person that's taking your loan and getting a loan, and Krystle, that's what happens. They could submit that to the lender and lenders like, hey, we already saw this, like, that's not right. I know about, we can't just throw it out the window. So who takes your information, how they present it can literally, like cost you a deal at a good lender and it has. So that's one thing to make sure you work with the right people.

Michael:

Yeah, I mean, to that point, Kenny, what questions should people be asking, of their lending professionals are working with and how do they spot some red flags?

Kenny:

Well, number one, I would say, you know, if you're working with like, I know Krystal or myself, because I know as you're let's say you're buying an investment property, if your first one, you're probably going to have a, you know, conversation up front, and we're gonna ask you a bunch of questions. So we're going to kind of interview you and we get your stuff. You know, you should be leery when somebody's like, yeah, they took my stuff and I haven't really heard from them. Like, they haven't really asked me anything. I'm like, nothing. They're like, no, I'm like, so did they talk to you about the loan or no and I'm like, so you've had it over there for two weeks? So they mentioned rates? No, I'm like, so when I call somebody to ask them five questions, they can't answer. One, they've been working with somebody, I'm like, what have you talked about that, like, I don't really know. So you should feel very, very informed by the person you're working with and you should feel like, they're getting a lot out of you and they're also even if you're not asking me the questions, I'm kind of like telling you like the things you should know, you should be asking, because, like, so that way, if you do shop, you're like, This conversation was way different with Kenny than then. So and I know you're shopping, I want to be like on your guy, you know.

Krystle:

You want to feel like the person like advising you and I don't think it's super common really to find that. For me, I think a big thing that's important is if I'm working with somebody, even a broker, like if I want to go work with a broker to buy properties, they should own properties to like, you should be drinking the Kool Aid, like you're selling it, so you should drink it too. You know, so I think you know, somebody who also is an investor, because I think they're going to understand and look at things as an owner and as an investor themselves. Like, when I look at a deal, I'm looking at it as if I was buying it as if I owned it. So a lot of our clients call us and say, What do you think about this deal? You know, and they get, they get our advice, and they want to get like, you know, their brokers advice. So you can listen to a couple of different people, because we all have a little bit different perspective but especially if you're getting into this, you want somebody who can kind of guide you through this and walk you through the process.

So I think, you know, if you're interviewing people, or you're wanting to like work with a broker or lender, you should ask them, hey, what's the loan process? Can you walk me through it, and how much that person says is going to be really telling, I think you want to work with somebody you like, you know, you just have to like them as a person and then secondly, ask them about the process and see what they say. I mean, either they're going to say something, you know, a few short sentences, or they're actually going to walk you through and let you know what to expect. I think that's the biggest thing is for us, we're advisors, but we also need to manage expectations and so you're going to find out real quick if that person will manage your expectations or not by you know, just understanding what the process is and how they how they answer that question.

Michael:

I just want to come back and double click on what you said about liking the person. I can't tell you how many lenders I've worked with that it feels like such a combative relationship, whenever they call, I'm like, oh, god, like so and so is calling, like, kill me now. So versus I've worked with people that I love answering their phone calls, and I've paid more in rate, because I like them and because it was a partnering relationship, as opposed to this, you know, U-verse me type of thing. So I think that that's huge.

Krystle:

For sure. I mean, it's somebody you're gonna be working with a lot and like, this is like getting like a physical, you know, like, stripped down, look at your…

Michael:

Full cavity search.

Krystle:

Yeah, all of it. So, uh, you definitely want to like that person and you want to have like, a sense of trust and I think we only trust people we like, you know, so if you don't really like someone, you know, or they're not getting back to you or they're not really communicating, you're gonna have like, these these, like, you're gonna feel really insecure the whole process and I mean, even as people who do loans, like Kenny says, I'm a bad borrower. Like, yeah, he is because he's always like micromanaging the situation and like, you know, freaking out that there's like, some weird thing that's gonna pop up out of nowhere. So it's like, you want somebody to kind of walk you through that process and manage it. If people who do loans for a living are already stressed out getting loans, like we can guarantee that borrowers who don't do this for a living are probably having a lot of insecurity.

Kenny:

Yeah, and one more thing I'll say is, this is a good this is good to know, is like I'll get a complicated real estate investor with a lot of stuff. There are certain lenders you go to and there's certain lenders you do not go to and the problem is they're like I was is that this lender that and I get a lot of people that like I went down the road this guy and couldn't get it done. How do you know you can get it done? I'm like, Well, I don't know where he went but this is definitely a doable fall but I can tell you, there's a lot of lenders, I wouldn't take this, why am I because this is just not what they want. They're not good at this, you know, this is not what they do and Krystle is the same way and I think it's like so some people that are not doing you know, the investment stuff that often they just don't know that they just throw it against the wall, hope it sticks, and they come back to sorry, I know you're we're in escrow, we're not going to get it done. You got to we got to start over again. You're like what I'm supposed to close. So, you know, like, like, goes back to like, and trust is good, but also work with somebody that just has it, like, have they closed these loans? Have they done many of them, you know?

Michael:

Yeah, no, that's great. Y'all, this has been super, super fun. The last thing that I want to touch on, which I'm sure is on everybody's mind, I would love for you all to get out your crystal ball and no, that wasn't a play on words, legitimately. Where do you think rates are going?

Krystle:

So yeah, I wish we all had a crystal ball for that I've had I have certain clients who think the sky is falling and rates are going to be at 10% by the end of the year and then I have other people who are like, you know, I think you know, because of the amount of debt that we have, we've never had so much debt ever. Real estate inventory is still down, there's still a lack of housing. So in terms of real estate and interest rates, I think rates are gonna go up a little bit more of most of our lenders are predicting another point to a point and a half by the end of the year. But I think after that they're gonna have to start bringing scaling back because this last Fed rate hike, like definitely caused a lot of panic in the market. That was like a rough week for us, just everybody calling is everything, okay and what's happening lenders just raising rates, like multiple times a day, which does not happen in commercial. So things like that.

So I definitely saw the scare the next Fed rate hike, I think they will raise the rates again, I think we'll be looking at another half to three quarters hike. So I think we're in like a little low right here, right now I really like okay, treasuries have come back down and finished my summer vacation, you know, but the winter is going to be a cold road, you know, like, I think that things are gonna slow down a little bit, and people are just going to wait and see what happens and rates will be up maybe another point or so and then I think we're gonna have to start heading the other direction, because corporate debt, like there's a lot of debt, besides just our home loans and our apartment loans, there's all the corporate debt, there's government debt, all this stuff, and that's all tied to prime. So if the country can't pay their bills, you know, like, they're gonna have to keep, they're gonna have to keep rates low. Like, we can't keep going like this. So that's, that's my opinion.

Michael:

There's no such thing as a cold winter in San Diego, come on.

Krystle:

I mean, 16 degrees is cold.

Kenny:

Yeah, I think I mean, like Krystle said, you know, piggyback off that, I think at the end of the day, we have to understand why the rates were raised and it's simply we've learned, it's like, yes, Jerome Powell, we got you loud and clear that until inflation, not just stops, but we see it progressively go low, and it stays there, they're gonna keep doing what they only know to do is to I look at it this way and I keep saying this over and over is, the more I studied this stuff, is where they want the economy to boom, they just put liquidity in, they either give it to people, they give you gas credits, give you money, don't pay, well pay your rent, you know, let's lower rates, let's you know, it's all that's monetary coming in, when they want to slow it down and hit the brakes. They just pull the liquidity out and they're pulling tons and tons and tons of liquidity out of the system. It's parked on the sidelines, they don't talk about it, but it's a massive, massive number that's sitting there and so on top of pulling liquidity out, which actually is the bigger issue, right? They are obviously in pushing rates up, so they're gonna hike and then we all know that even if they stopped hiking now and they started doing QE, we probably still have some type of recession, you know, so they're gonna put, we're going to have some pain. I mean, unfortunately, the party went on too long, they spied the Punchbowl and they left it out too long and we are going to have a massive hangover and we're all going to feel it and then they're going to put us to pain right there. We're going to be held down, we're gonna get to two, three wave hold down and then the Jetsons gonna come along and grab you and pull you back out and then when they do that, they'll probably do the same type of thing. So you know, lower rates, no, no one knows the Krystle ball, like how long this is gonna go but I just tell people, you just have to listen to the Fed and they mean business now ad there and when we start feeling pain, but I think like Krystle said is I think we're already starting to hear little this and that, you know, from people we know that owns jewelry stores or people that have you're starting to hear things that in the last couple of months, things have slowed down and you're starting to hear that. It's in one way, it's like not good, but one way it's good because if we don't slow down, they're just going to keep raising rates and we're going to have more probably Oops but I feel like the next hike is definitely going to do. I feel like that's going to be it. That's going to be like the nail in the coffin nail.

Yeah, I feel and I think they're going to let that run and then I think like Krystle says, come after summer, I think a lot of people are going to be like, you know, we're gonna start pulling back and I'm already hearing it, I'm hearing it from people, we're gonna do a addition on their house. Now they're not people, we're gonna go buy this or do this. Now, they're not people, you know, you're hearing talks of people and it's not that they don't have the money. They're like, I should probably not do that right. Now, that doesn't make sense but that's because what the Feds doing is working. So once this all happens, of course, we'll be back to QE, lower rates. My prediction is, we probably see start seeing some lower rates definitely by like early next year, q1, q2 starting to see rates come down and look, we might be shocked, depending on how much pain is in the market itself, they might have to really like COVID really hit the hammer on him and drop rates for a small period of time. So I think a refi boom, and the pent up demand that's going to come on the backside of this is going to be pretty insane. The amount of commercial guys that are big syndicators that aren't doing deals. They're just chomping at the bit there waiting. Where's the bottom? So everybody's sitting here going, we're kind of waiting for this recession. Where's the bottom? Where do I enter, right and it's just as unknown and it's kind of weird that we're just sitting here. Usually we get blindsided by it.

Michael:

Yeah, interesting. Well, we will definitely have to have you both back on and q1 q2 of 23. And see how the predictions panned out.

Krystle:

If we were right or wrong.

Michael:

Yeah, well, we'll either be celebrating you are nailing you both up to this…

Kenny:

But this is but it's funny, because we do we do month over month. I do month over month, a webinar on the housing market and in January, not I mean, you couldn't find one person that we looked at our study that they thought by q4 of this year, the worst highest rate prediction was 4% of this year. We were there like the first month. Yeah, everybody that thought we were gonna go this fast. Nobody predicted that sort of like, I thought this is like we're just kind of like in this. Like, they didn't think that you know, so we're just sitting here going, wow, nobody predicted this. They all thought we'd be raised to be at least a point or two lower, which is crazy…

Michael:

Oops… Yeah…. Okay. Well, you too, this has been so much fun, really, really, really informative. Thank you so much. If people want to reach out to you both directly, where's the best place for them to do that?

Krystle:

You can go to https://getinthecashflowgame.com/ and that links to both Kenny and I’s, separate sites for financing, whether it's commercial or residential and then we're on Instagram and all the things so I'm Krystle Moore, and he's Kenny Simpson, the opposite the two best places.

Kenny:

Yeah, appreciate you having us on. This has been fun.

Michael:

Awesome. No, totally, totally my pleasure and definitely looking forward to chatting with your again soon.

Krystle:

Absolutely, thank you so much.

Michael:

Take care you two!

Okay, everyone, that was our episode a big thank you to Krystle and Kenny for coming on a lot of fun, super insightful, and especially if you're thinking about making that transition that leap from residential two to four units up to commercial family, this was a good one to listen, definitely keep it in your back pocket and as they mentioned, have some of those documents at the ready and you'll be really well prepared for getting into some of those commercial mortgages. As always, if you liked the episode, please leave us a rating or review wherever you get your podcasts and we look forward to seeing the next one. Happy investing…

A step-by-step guide to setting up your real estate LLC Jul 23, 2022

Using an LLC is a powerful way to protect yourself from the liabilities inherent in owning rental property. We have had the discussion of whether you should use an LLC or an umbrella policy on the show before so we will dive into the details of setting one up. Today, Emil asks Michael about the process of creating and managing LLCs in regard to real estate investing.

Emil:

Hey, everyone, welcome back for another episode of the Remote Real Estate Investor. My name is Emil Shour and today I'm joined by…

Michael:

Michael Albaum

Emil:

and on this episode, I'm going to be putting Michael in the hot seat and asking him questions about putting his properties in an LLC. We'll quickly cover why he did it and then I'm just going to ask him how he did it, what he learned what tips he can offer you. So that if it's something you've been interested in, you have a step by step guide on how to do it. So let's hop into this episode.

Before we hop into it, what's up, man? It's been it's been a while since we recorded up so…

Michael:

I do I know it's been a minute I'm doing well, thanks. Trying to get some financing lined up on these three multifamily that I got the rug pulled out from under me on so still working through that but construction project, the rehab projects almost done, which I've been told is almost done for a while now. So I'm not really holding my breath but really I think this time for real is almost done. So let's get to you Emil, how about yourself?

Emil:

I think you when we started this show like two years ago, you told me it was almost done. So I don't know if that's true.

Michael:

That’s true, I believe it…

Emil:

I hope, I hope it finishes soon.

Michael:

Thank you me too.

Emil:

Good. My update with me, we are still selling the Jacksonville property. We just got it under contract but a week and a half ago, I want to say we did inspect the buyer scheduled inspection on Thursdays so I should probably be hearing back from my agent like today or tomorrow on I'm sure you know what, what they want to knock the price down based on seeing the inside, which I knew going into it like, once the inspection is on the inside, you know, we've had a tenant there for five years there. They're definitely gonna want some. They're gonna ask for something. So I'm expecting it. We'll see how that goes.

Michael:

Okay, cool. Well, keep me posted, let me know how it all shakes out.

Emil:

Yeah, man. Absolutely, so this episode, you know, a lot of people think in in a previous episode we covered what should you do an LLC? Should you put your properties just get umbrella coverage. In this episode, we're going to really just focus on like the steps that you personally took on setting up an LLC getting your properties in things, you learned mistakes, you made all that stuff but before we hop into like the how can you briefly give us the why, like, why did you decide to set up an LLC and put your properties in it?

Michael:

Yeah, totally. So I grew up in the insurance world. Next question. So like, it's, it was something that I grew up around, like segregating assets, and like, understanding what risk is and how to mitigate risk and so that's really, from my perspective, what an LLC is used for, you put things into an LLC, that's bucketed and so that's kind of the limit of your exposure and so I used to work as a fire protection engineer and the commercial property insurance industry and that's also kind of on the physical side of things, what we would do, we would say, okay, how bad can a fire get and can we physically build a building and put systems in place that will contain that fire, so it doesn't spread to the rest of the stuff because if you have a small fire, it's usually not a big deal. If it's contained, it's not necessarily the end of the world versus if you burn, burn the whole plant down, that can be very problematic. So same kind of thinking can be applied to asset protection from the real estate investing side of things.

So it just made sense to me to bucket things in their own bucket, and keep them totally separate from my own assets. So therefore, if I did have a fire, quote, unquote, metaphorically speaking, or physical one, as any listeners of the pod know, that I've had to, it doesn't affect the rest of my building, so to speak, the rest of my net worth or my nest egg. So just keeping things separate made sense to me and so there's financial burdens that go along with that in order to have own and maintain an LLC. There's a cost associated with that. That overhead was worth it to me to mitigate that risk exposure.

Emil:

Yep, makes sense. So did you did you set up an LLC before you bought your first property? Did you buy a property and then like quitclaim it in? What was what was your timeline for LC?

Michael:

Yeah, so my very first two properties were Southern California single family homes, and so they didn't cashflow very much. If you live in California, the LLC has to be registered in California from everything I've been told and heard, if someone has a way around that I've been asking for years, let me know, I would love to not have to give California State Government 800 bucks a year per LLC. So those first two investments, I just had my personal name, I had high liability limits on the insurance policies themselves, like on the dwelling itself and then I also got an umbrella that sat on top of that, because that just made me comfortable on an umbrella for anyone who doesn't know what it is. It's basically a liability only policy that will sit on top of your existing policies and give you have limits across the entire portfolio and so the dwelling policy itself has a liability limit attached to it and so for me, I think I had like $2 million of coverage, or maybe 1 million on the dwelling and then I had an additional, I think, one or 2 million as an umbrella and so that can be applied across multiple properties but that dollar limit is like all that the insurance company would pay out in in any given occurrence and they also have an annual limit that they'll pay out in any given year.

Emil:

Right, that's my current setup, I never LLC seed, I wanted to at some point, but…

Michael:

Oh, good verb.

Emil:

What LLC seed?

Michael:

Yeah, you heard it here first folks, see new, new real estate investing verb…

Emil:

Yeah, don't trust the words that make up. So I wanted to, but decided to just, I had an umbrella policy from the beginning on top of, you know, regular rental property insurance. So that's still my setup.

Michael:

I think it makes sense for a lot of people and so you have to like understand what is entailed and what are the risks and benefits of having an LLC versus not having an LLC and just weigh the pros and cons? I definitely don't think it's you, like, thou shalt have an l like, no, you don't, I don't think you need one, necessarily. You just have to make sure that you understand again, what are the pros and cons for your situation and so it wasn't until I bought my third property and that was out of state that the cash flow cumulatively between all three was enough to support the 100 bucks a year payment. So that's when I did the whole LLC thing.

Emil:

Yeah. Yep, that makes sense. I probably say, this is just my opinion, not legal advice, or anything. I probably say, once you're, when I did it, my net worth wasn't very big. I didn't feel like I had a lot to lose. I feel like when you start having more to lose, right, you're like, someone could personally come after more, probably a very, very good idea to make sure you have an LLC. So at the bare minimum, that's, you know, my opinion.

Michael:

Yeah, totally and I mean, talk to like, talk to a legal expert, and get an understanding because they can really give you the breakdown, hey, this is this is what's exposed, or this is what's protected with an LLC, because the one thing I really hate to see as someone open an LLC, especially themselves think that they're totally protected, and then get totally shafted, you know, in a lawsuit or that sort of thing. So you really want to understand because you're setting up this system to protect yourself and your family and the assets, like spend the extra couple 100 bucks, whatever it is to do it right, and make sure that truly you have an understanding and a grasp of what is this doing and what are its limitations?

Emil:

For sure, so that's a good segue. So at what point did you decide to LLC you, about the SoCal properties, didn't have an LLC.

Michael:

So it was after that third, the third property that I purchased at a state, the cashflow was then enough on that, and then the other two, cumulatively to support that 800 bucks a year LLC payment to California. So at that point, I said, okay, let's move everything, put it into the LLC and now that'll kind of be its own standalone thing and so that that just made sense at the time and so I kept a very similar insurance policies structure, where I had the same liability limits on the property itself and then I also had the umbrella for the LLC that sat over those three properties.

Emil:

Got it, okay…

Michael:

Because I'm neurotic.

Emil:

So, I think you're just being smart. So walk us through that you because now that you have properties, you have to do what's called a quitclaim of the deed, right from your name into the LLC. So we'll get to that but what did you do? Did you hire a lawyer? Did you just go on, like Rocket Lawyer or one of those online? How did you do it?

Michael:

Yep. So I did it myself. I went on, like I think was like LegalZoom, or one of those type situations where you can set up your own LLC. In hindsight, I probably wish I had used an attorney, just because it was totally brand new and I was worried about making the wrong choice or selecting the right things. So in hindsight, I wish I would have spent the extra money just to have it done, right but for the quit claiming process, I use an attorney and we've had her on the podcast before Kelly Chrisman. She's amazing, she's awesome, really well versed and all this sort of stuff. So for the two properties I owned, I quit claimed those into the LLC and for this third property, I knew I wanted to basically start an LLC to take property ownership and so I actually did that concurrently, while I was in escrow and got the LLC opened before the property closed. So that actually took title directly from the seller into the name of the LLC.

Because the more you can keep your name off the chain of title, apparently that's more beneficial. So I was like, okay, like, I'll just do that because I wanted to do it anyhow. So instead of closing in my personal name, and quit claiming, I just went straight to the LLC and it was a private lending note. So that was no problem to close from the lending perspective in the name of the LLC

Emil:

God, okay, so that's, that was gonna be my next question is like, what are the differences in, like the process, when you buy in your personal name, I think you've highlighted on the first one, you can get a loan based on you, you as the individual, when you get in an LLC, it's a little bit different, right?

Michael:

Right, so my understanding and definitely chat with your lending partners professionals out there, but my understanding is that like the government subsidized conventional loans, the Fannie Freddie type products cannot be titled in the name of the LLC, they're not going to lend to the LLC, they're going to lend to Emile Shour, or Michael Albaum, or Pierre Carrillo as individuals, not as entities can, commercial mortgages, totally different space, different ballgame, we actually just recorded a podcast with a commercial lender and a conventional lender, their husband and wife team and so that was really interesting to kind of get both sides of that coin but if you're going to get a non-conventional mortgage, you can likely get one in the name of your LLC, or some sort of business entity and so I would just simply ask your lender, hey, this is what I'm trying to do. This is the goal I'm trying to accomplish. What's the best way to do this and if they say, well, you need to close in the name, or your personal name and you eventually want to get it to the LLC, ask them oh, hey, can I transfer to the LLC after the fact? Some lenders will say, no, you may not. Others might tell you, yeah, the loans closed, do whatever you want, we don't care. So that might affect your lending decision of who you ultimately get financing through because if someone tells you no, don't do that, do you really want to go get that loan from that lender might kind of make you take pause and think twice about it.

So again, be super forthcoming with all the information, give them the goals, the strategies, the hopes, the wants to dreams, so that they can really help structure what loan product makes sense for you because if we just give them the transaction piece of it, and we're going to do something different down the road, it just, they're not giving you the best advice, because they don't have the whole picture.

Emil:

Got it, okay and so, if I have a brand new LLC, and I decide to get a loan, in the name of the LLC, if it's a brand new LLC, like how do lenders usually look at that brand new LLC, like, how do they deem it worthy of, of lending?

Michael:

Yeah, so they'll in that instance, likely look to you as the borrower, and just be like, do you have enough money to do this and we're gonna make you sign a personal guarantee. So you're still I mean, even if a meal shore LLC 123, doesn't can't pay the debt, like a middle shore, can we're coming after you directly and so new businesses new LLC, is are started all the time to take over property ownership or to receive property ownership, essentially and so I think that's something that they're used to, if they balk, and say, oh, you need two years of like business tax returns, like, obviously, new businesses won't have that and so ask them: Hey, how do we work around this? Can I give you a personal guarantee? What do you need from me to make this happen?

Emil:

Got it, okay. Good to know. Let's see what else we want to ask you. What other parts of the transaction are different? So financing can be some that you need to ask your lender might, you know could be different. What else was different about buying a property through an LLC versus in your personal name.

Michael:

The one of the main differences from a process standpoint, really nothing that the two are equivalent, you still get an inspection, you still negotiate with the seller. One thing I would definitely recommend people do is if they are considering purchasing in an LLC that might not be in existence yet. As you put your name on the purchase and sale agreement, put your name or assignee, and that basically allows you to assign the contract to someone else and so it's something that wholesalers might do and if someone asks about it, just say like, no, I'm just not sure it's either gonna be B, or my LLC. I'm just not sure yet. I haven't created it yet and that way, you can assuage any fears that oh, someone's trying to wholesale this deal on me but that makes it super easy for once you open your LLC, you can now say, okay, it's not Michael Albaum, it's Michael Albaum, LLC, 123, whatever, whatever that entity is.

And then the other thing to keep in mind is like the money flow, for how you physically need to purchase the property. So if you do purchase and close in the LLC, the money needs to come to escrow to the title company, from the LLC and so in your example in the like, you were asking, what if it's a brand new LLC, so if you're buying $100,000 property, and the bank's giving you a loan for 80, you're bringing 20, you Emil would transfer that 20 grand into the LLC bank accounts, which then that's where you're going to wire the money from to close the deal over to the escrow company as opposed to wiring it from Emil Shour checking account over to the escrow company. So you want to be able to show very clearly that this is the LLC is asset. This isn't a meal shores asset.

Emil:

Got it, I'm glad you gave us that note about either your name or assignee because you're right, a lot of wholesalers use that and it's funny, you bring that up, because on the Jacksonville property, we got a couple offers, and they had that language and we didn't choose some because we're like, you know, wholesaler like those deals can fall out, they have to go find a buyer and you know, not as strong as someone who's just coming to buy it. So like, if you mention, you know, if you're you have your agent mentioned to the selling agent, or whatever, that I'm putting that in, because it's going to be my LLC, it's gonna get looked at differently. So good thing to clarify when you write that offer.

Okay, I think that was most of the questions I had for you. Any big lessons you had from the process? I think you mentioned a couple but if you could do it all over again, what you did differently?

Michael:

Yeah, I think I would just have an attorney do it from the start draft up the LLC documents. It's also super important to keep in mind of if you don't live in the same state as where the property is owned in the LLC. Like, what is the registration process look like and so I've done it both ways. I formed a California entity, and then registered as a foreign entity in the state where the property is owned. So for me that was like Kentucky, or Alaska or Ohio. I've also done it the opposite, where I formed the LLC in Ohio, and then registered as a foreign entity here in California and so again, not legal advice, definitely chat with a legal professional.

But from my experience, the LLC needs to be registered in both locations in California, because that's where I live and in the state in which the property is owned as well and there are certain things, taxes forms filings that I have to maintain for both states, which are separate and distinct and so making sure that you're in compliance with the local state, governing rules and regulations around LLCs. You also need to have a Registered Agent. If you're not living in the same state in which the LLC is owning the property. You might even need a registered agent if you do live in that same state but basically what a Registered Agent is, is someone or some company that can receive court papers on your behalf really is what typically is getting served.

Like, is there, like where do we send the mail to and so that's what a Registered Agent is. So there's businesses and services out there that can do that for you. I just use like a service provider that handles all that I've also used like my CPA or my property manager, that can also work but you just want to check and understand the local rules and regulations around who can and can't be a registered agent for you.

Emil:

Yep, illegal zoom all those internet you know, LLC providers, they usually have that as like an add on option as well. So if you're like how do I do that? They make it super easy, like very, very common thing and make it super easy for you.

Michael:

Yep…

Emil:

You know, if you do want to talk to a lawyer, your accountant a good accountant can be very helpful here as well. They don't bill you for a 30 minute consult, so accountant can be helpful here as you're trying to figure this stuff out as well.

Michael:

Absolutely, absolutely.

Emil:

Cool, man. I don't have anything else. I think that's probably a good spot. This was this was actually enlightening for me because I haven't gone I mean, I have an LLC for my business but not for a rental property. So this was this is good for me as well.

Michael:

Yeah, right, alright man. It got us all helpful.

Emil:

Thank you everyone for tuning in. Please, please, please leave us a comment. Let us know what you liked what you want to hear in future episodes, wherever you're listening to this and we will catch you on the next episode. Happy investing.

Michael:

Happy investing.

Leveling up your real estate business with Mike Simmons Jul 19, 2022

Mike Simmons, a real estate investor, author of the book Level Jumping (linked below), has shared the stage with some of the greats like Gary V. Has made over $1 million in profits in 12 months!! He knew he wanted to invest in 2003, and bought his first flip in 2008....why did it take so long? Like a lot of people starting out Mike was afraid to tell his spouse because of the difficult conversation. It wasn't until he finally decided he was tired of allowing fear to be his excuse that he dove in.

Today, Mike shares his inspiring story of how he left his job, entered the real estate world professionally to begin wholesaling and flipping houses.

Episode Links:

https://www.mikesimmons.com/

Level Jumping

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I'm joined by Mike Simmons, author, CEO, business coach speaker, and we're gonna be talking about Mike's business, wholesaling and flipping houses, and what we should be aware of if you're going to get into either of those businesses. So let's get into it.

Mike Simmons, what's going on, man? Welcome to the real estate investor.

Mike:

Thanks for having me, I appreciate it.

Michael:

Oh, my gosh, no, the pleasure is all mine. Super excited to have you on and really excited for our conversation today. So Mike, I know a little bit about your background and a little bit about what you do but for all of our listeners who are not familiar with you, give us a quick and dirty who you are, where you come from, and what is it that you do in real estate today?

Mike:

Yeah, no problem. So, you know, I always say that my background is probably the least remarkable. I didn't sell baseball cards, I didn't go around the neighborhood looking for lawns to mow or things to do. I was a normal kid, probably on the lazy side. You know, and my parents were, we're in the automotive industry, and we're very blue collar Michigan, right. So the life that was displayed before me through example, and through explicit, you know, direction from my parents, and the Blueprint was, you got you finish high school, you go to college, or just as maybe even more preferable, you get into a union factory type of environment and it's very secure and you work there for 30 to 35 years, and you retire and you hopefully save some money and you scrimp buy and that's how you that's how life goes. That's just life. That's what people do, that's normal. Yeah, there wasn't one single person in my family or anybody on the horizon that was doing anything remotely entrepreneurial. So I did that I went to school, I went, I finished high school, I got a job with UPS, Teamsters, my parents could not have been happier with me being in the Teamsters and I went down that path, and I got married young, and I was working at UPS and like, unfortunately, UPS is a great company.

But there are injuries that happen because people you know, lift wrong and all that and at 25 years old, 24 years old, actually, I couldn't get out of bed in the morning without going to the chiropractor three times a week as a 24 year old, otherwise healthy man, oh my gosh and I knew I couldn't retire from there, because I was already almost too hurt and crippled to do the job I had to do at that time and I was in my early 20s and so I got another job in the automotive industry. It was a desk job and I started working there and this was, we were the mid to late 90s at this point and the automotive industry, like most industries, were starting to decline starting to have some problems. We were heading toward 2000 where a lot of bad things happen and in, you know, people think about tech and what happened if tech the big boom that happened. But the same thing happened in the automotive industry, essentially, we went from, you know, booming industry to many, many suppliers, going out of business struggling, it was really bad for a while and so I had to look around and ask myself, and I'm one thing I'm good about one thing I one of my superpowers is I'm a very honest, and I can I can very objective about myself and part of that is because it can be a tough thing to do. It's most people I don't think are, are objective about themselves and I'm not saying this to brag, I'm gonna tell you why I'm objective, and it's gonna kind of be like a poor, poor guy. My dad was a Marine, and, and he made it real clear what our shortcomings were on a daily basis as kids and so I have no problem. being real, honest, in a way that say, these this is what I'm not good at.

This is what's not great about me, like I'm very aware, I'm very easy for me to for me to figure that stuff out and so I asked myself at this point in the automotive industry, and things were declining, I didn't have a college education. I would I hire me if I were without a job and I was in the position of HR and I was, you know, somebody like me was across the table. What is there anything about me, that makes me more hirable than the 1000s of people who've been laid off over the last few years and it was easy. There was nothing about me that was remarkable. I had no college experience and I had very little practical experience. So why hire me when there's so many really, really talented people that were being laid off because of the industry. So went back to college, got a degree and I was working I'm kind of fast forwarding a lot, but I got my degree and I doubled my income. Like the minute I retire, graduated, the minute I graduated, I got a job, which literally was twice the annual salary and I was like, here we go, baby. There's no stopping and so just to kind of illustrate how that went, so I went into a company, it was automotive and I was working there for about six, seven years and at one point, it's seven o'clock at night and it's everyone had gone except my team. Everyone had gone home for the night, obviously, it was a five o'clock, most people were gone. It was seven 30 and I'm in at work and there are our client is there too, because there was something going wrong with our program that we are working on and he's there and in we're discussing the problem, and the guy gets really agitated the client, I'm not going to say which automotive company I'm talking about, but it rhymes with board.

Break company, I have an F 150. But he gets in my face and basically start screaming at me like dressing me down, like very much, really like when I was a kid like my dad did write down. Yeah and he was and it was seven o'clock at night. We're all working overtime. We're all clearly busting our butts to solve the problem and he gets in my face. They're screaming at me and he's the client, right? He's a big client and I can't really say anything back, except I'm really sorry. We're working on it and after he walked away, I went to my manager who was there too and I said, what are we doing here? What is happening right now? Why are we here? I'm getting screamed at we're doing our best, like there are issues I get it but nobody, nobody was negligent. We just have we have things that have happened, and we're working through but why are we still here? We should be at home and he said to me, I'll never forget, you need to get your priorities straight and I thought you are correct. I absolutely do, I have young children at home, I have a wife at home. I've been working overtime all week on this project. I didn't say this but in my mind, I'm thinking, you are correct, my priorities are wrong and from that point, I decided to take my side hustle that I was doing, which was real estate, flipping houses not doing a particularly great job at it, but just kind of stumbling through it and I said that is going to become my career priority. My priorities need to get dialed back to my family and make sure I'm at home and I'm spending the evening with them. I'm eating dinner, putting my kids to bed but from a career standpoint, that now becomes my focus and I will get my priorities straight and so he essentially put me on the right track. Inadvertently, he obviously was referring to work priorities but it worked the other way and so I from that day, I started making my side hustle, my main focus and I will say I a year later quit my job and the first year that I was in business and real estate full time that listen to this, this is true and I did this math, the first year that I was in business full time for myself as a real estate investor, my company's gross profits were equal to the total sum of my salary for the previous 25 years that I was working for somebody else, year one, which was a million dollars, I made over a million dollars in my real estate and over the years, like I'm talking going back to 18. When I started working right, I was making very little money and in the middle, I wasn't making a ton toward the end, I was making more but if you just take the average, which is about $40,000 for me, and you times that by 25 and is $1 million. My company grows that in in one year.

Michael:

That’s crazy, Mike! So where did you take it from there? I mean, are you still flipping houses today where you focus exclusively on that? Give us give us the insider scoop?

Mike:

Yep… Yeah, good question. So I was flipping houses. When I was working full time, my wife and I were flipping houses and like I said, we weren't doing a particularly great job of it because she worked full time as a teacher, I was working full time plus as an automotive person and we were getting flips done. But we weren't particularly profitable, like we should have been. We didn't have any processes in place. My wife is extremely risk averse and so I kept trying to do more and do it faster. And she was slowing like brakes, brakes, brakes, right because she was nervous that we were getting ahead of ourselves and she probably saved me from really screwing up bad in the beginning. But at some point, she said, You know what? This is great and you clearly love it. I don't love it as much as you do. In fact, this is making it hard for me to sleep and it's making me hard for me to focus on my day job with the kids and I'm a teacher and that's what I do and I love you, I love the I love real estate but it's the roller coaster, the mental roller coaster is too much and I really would rather you go on without me and let me pull back and I'll just cheer for you from the sidelines and I totally support you and this isn't a negative this is actually a positive I just trust you to do it better without me and I did in and that's when things started taking off because I started doing way more activity like before we would get a house under contract. We would get it quoted out, you know, we would renovate it, we would put up for sale, we'd go through the wholesale process closed, check in the bank, before we started looking for the next day and that's not really a that's not how you scale anything, right?

So when she backed out, I was like, okay and I started putting offers in on multiple houses a day, like I was putting offers on everything and I started getting multiple deals at one time and so I had to learn how to raise money and I had to learn how to manage groups and what a forced me to do was, it forced me to come up with a process in a system that was repeatable and could handle scale. Before that, nothing we did was scalable, is all very manual, we'd go to Home Depot, we'd pick new colors for the walls, we'd pick out different cabinets, different flooring, like everything was custom to the house that we were working on and what I realized was really, really good house flippers who do it at scale, okay, and I'm not talking boutique flippers, who go into a town and they buy a $3 million, you know, historical home, and they like, put it back together with love. It's I'm not talking about that I'm talking about the people that are flipping 20-30 at 100 200 deals, they are not falling in love with every single house and going in there and making it the route, right, it's turning burn a little bit and so I learned how to turn and burn a little bit more in my business and scale it in a in a way that had systems and processes. But I still hadn't hired anybody. It was still just me, what changed the game for me and that changed the game for me in terms of, you know, a racing analogy, but, and again, this is not like I said all this in front of my wife as early as like the last month I've said all of this and she 100% agrees but she was like the governor in a race car, right? They put the restrictor on there. So you can only go so fast. Once that got pulled off. I pushed the gas all the way down to the floor, and I never stopped like, and so things just go faster when you're doing that much volume and back then, you know, now we're talking about 2014 ish timeframe. It was easier to get deals, I'll be honest, like, as someone who coaches people in real estate, I'm not gonna lie. It's harder now than it was back in 2014.

Still possible now, but it was easy back then. So I was getting deals off the MLS and it was going pretty fast. Fast forward another year or so and it started to get harder to get deals off the MLS and I was struggling a little bit and so I had to do some research and figure out and I was I was going to all the meetup groups and I was asking all the other house flippers like, where are you guys finding deals like what's happening? Where are you guys getting your volume from and they were all like, man, it's hard, like we're not getting deals like we're struggling and I'm like, Well, where are you looking? Where are you trying to find deals and everybody said the MLS everybody. I only knew one wholesaler in my market and I reached out to him. I'm like, Dude, I know you're not buying off the MLS. So where are you finding deals? He's like direct mail, I'm going direct to sellers and I'm like, what do you mean, go direct to sellers? How do you do that and so I took him out to lunch. He gave me the down and dirty playbook for how to do direct mail is what I was doing at the time and I started doing that and the deal flow started happening again and I started building and what I realized was and there's a whole story behind it that we don't necessarily have to get into but I changed my model from house flipping to wholesaling and it wasn't because of that guy. To finish in a nutshell, I was overly dependent and this is a huge mistake that new investors make all the time. I was overly dependent on one contractor and one realtor, they were everything the realtors, he found all the deals for me and they ran the numbers and they told me what was a good deal and my contractor was my only contractor and he basically made her are broke my rehab and on the same project as chance would have it. The realtor missed the numbers pretty badly and my contractor started flaking.

Now if you flip houses or renovate houses, or you have rentals, and I say my contractor flake, you probably don't need more information than that you go I'm with you, my contractors flaked too, right. But essentially, he stopped showing up he started charging me for things that he wasn't doing. He started making up half truths about stuff that he did do and so I was forced it and by the way, I was getting deal flow because I was direct mail, right. I had to let both these individuals off my team, to say the least and I had no backup plan and so as these deals were coming in, I reached back out to my wholesaling friend, I'm like, What do I do? I don't know how to wholesale. Can you just tell me what that even means? Like, what do you guys do and he again, gave me the down and dirty playbook and I called a house flipper friend of mine who I had recently talked to and he's like, I can't find anything and I said, Hey, man, I got this deal under contract. Do you want it for 110,000 at the time, that was the price 110,000 he's like, let me take let me look at let me look at the numbers coming back in 10 minutes. He's like I'll take it, I got it under contract for 95,000. I made $15,000 in like 10 minutes and In Michigan at that time, a normal flip 15 to 20,000 is a good flip number. Right, profit. Yeah and I was like I made almost the entire profit with a phone call. That was cool and probably a lot easier sold.

So much easier to do. No, by the way, no contract, right? No realtors. So I got another deal under contract. Ironically, it was also a contract for $95,000 and it was in a similar neighborhood. I called the exact same guy and I told him the exact same thing. I've got a deal for 110,000 It's yours. He said, give me five minutes. Call me back, he said, I'll take it. This all happened within four weeks to deal. I was like, I felt literally talked about love at first sight. I was in love with the model of wholesaling and so I switched my model over to wholesaling and I started, I started scaling it up and what really changed everything for me though, because although I was scaling up and I was starting to have some success, I still wasn't really running it like a true business I was I was a little bit scattered, I was a little bit unfocused and I joined a mastermind, a friend of mine at the time who lived in California, he had a podcast, and I knew him just through podcasting, and I was listening to his podcast one day, and at the end, he signed off, thanked his guest signed off, and I was doing dishes actually, at the time in my house and I saw I let it go, it was it's just kept going because I wasn't able to turn it off. My hands were wet and if it was over, he goes, Hey, if you're still there, I want to let you know about this very exclusive opportunity. I am pulling together some of the best real estate investors from around the country. We're going to form a mastermind, we're going to share ideas, we're going to help each other it's going to be awesome. If you want to get involved, you know, send me an email, whatever.

So I did $25,000 mastermind. Well, I $25,000 bazillion dollars to me at the time, but I was I was doing wholesale deals, right and at the time $25 was like two wholesale deals because I was averaging around 12 $13,000 per deal and I thought, I mean, if I surround myself with these people, will I do two more deals as a result of the relationships and the knowledge that will be exchanged. It seemed reasonable that I would and so I joined and I met someone their mentor, more than one person, but one person in particular, who laid out his company, he just laid it out. This is how I run my company is exactly what I do is what I did right and wrong over the last decade and he had the company I wanted and I said to him, his name's Andy, I said, if I if I see what you did, and I see what you're telling me, I should do and I totally agree with you. But you took you 10 years if I knew everything that you know now, and I apply it proactively. Couldn't I condense that timeframe? Like could I do any year and he said, I don't see why not? That's exactly what I did and I sort of came up with this term that, that I didn't think about a much until I've said it on podcast, and people resonate with it but I think the most powerful thing you can do in business is to use other people who are successful use their hindsight, which is 2020, as they say, right, as your foresight and so I used Andy's hindsight, all the things he did right and wrong, as my foresight going forward and I was able, that's what I was telling you that first year that I was doing the full time because I applied all of Andy's principals and I went from doing a couple of deals here and there to 10 to 15 deals per month and scaled up to a million dollars in that first year.

Michael:

That is amazing and so right now your business is focused exclusively on wholesales, are you still doing flips?

Mike:

Historically, it's always been wholesales but recently, and I have a business partner to its which is a whole story in itself kind of interesting about hiring and identifying talent. But so my partner and I have started strategically buying properties outright and then doing in Michigan, what we call them land contract, or we basically play the bank, we own the property, and we sell it to them and we hold the note as a company. So we started doing a lot of that. So we do like 100 deals a year, but half of those or more, but at least half would make fantastic land contract deals for us and so, and because of you know, COVID kind of showed us this a little bit and over the last several years that we've been in business, every business has ups and downs every industry has, you know, markets go up and down, right. So revenue kind of fluctuates and we thought how do we level that out a little bit? How do we make the valleys much higher, you know, so they don't go down and so we're doing a lot of this land contract stuff because it's every it's like you know, monthly recurring revenue and so we make the valleys much shallower and the peaks are still there. So we're probably wholesaling half of our deals and the other half we're buying inland contracting out…

Michael:

Okay, let's dig into land contracts live because it's just not something I know very much about and we always joke on the podcast that we get to ask self-serving questions of our guests... So walk our listeners through asking for a friend walk us through like how land contract works and why it's so wide, so interesting.

Mike:

Yeah, it's pretty straightforward but the concept and I'll kind of give you a peek, like a little bit behind the curtain here, right? The real like mechanics or the real like logic behind it. Me and my partner both as of a year ago, I had about 25 rentals, okay, which I have sold recently and I did it for a couple of reasons. Now, because rentals aren't great, they're great and actually, the rents are higher now than even when I sold them. So rent rents are going up, which is awesome. But for me, I bought them really, and I bought them like 2015, most of them and so the equity in them was very tempting to tap into and I recently have started doing lending on a grander scale, like I've scaled up my lending company, and I wanted to put that equity, that money into my lending company, it's just more of my focus now. But so what we're doing with land contracts, and why one of the reasons why we love them is unlike a rental, we are not responsible for any maintenance, any vacancies like we are, what the bank is to your mortgage, we get the mortgage payment, regardless of whether or not they have a leaky roof or whatever has to happen, right, we don't have to deal with any of that stuff and what we're able to do at least in Michigan, this doesn't work necessarily everywhere, the same way, because the rents aren't high enough in the house prices aren't low enough for to work in a lot of areas.

But for us, if you take someone who's living in a neighborhood, and they're renting, and let's just say they're paying for the sake of round numbers, they're paying $1,000 in rent, okay and they're renting a certain level house in that neighborhood, I can buy a house in that neighborhood that maybe is a little bit in distress that I can go in and buy it inexpensively and put some work into it and if someone were to buy that house with a traditional mortgage, especially a year or two ago, when rates were like high twos, low threes, they could buy that house and their mortgage payment might be $600, right, right. But they can't get approved for a mortgage for whatever reason, right? They have bad credit, or whatever it is, right? But I can buy that house, I can renovate it, and I can sell it to someone and really the pitch to them is listen, you want to own a home, and you're not currently in a position to get approved for a mortgage through a traditional mortgage company. But what if you could have homeownership, and you would pay no more than you were paying when you were renting, right still give me $1,000 give or take. But you own the home and you can build equity and in three to five years you can refinance out at a lower rate and you can own the home and probably drop your payments a little bit. Is it important enough to a person to own the home? If they're if all things being equal rent 1000 I have to pay this company 1000 for the house, but I own the house. That's what we do we buy the houses now, the reality is the interest rates are a lot higher than what you might get at a mortgage company, right. But we're also taking a bit of a risk. These are folks that have defaulted on things in the past and their interest and their credit scores are not great, but they have homeownership at this point and if so they if they have a down payment, and they want to own a home, we can get them into a home for no more than they would pay to rent a home in that neighborhood and three to five years, the goal for them is to fix things in their life and be able to refinance out at a lower rate and move on forever and then. So we're typically an average deal for us might be, you know, we buy it for 50. The ARV is 100, we put 20 into it. So now we're into it for 70 and we sell it for 85, right, we're still a little undervalued. So they're getting some instant equity, they have home ownership but when they go to refi in three, five years, we're getting a $15,000 check or whatever it is at that point, right. So in there's no calls from tenants, and there's no vacancies and none of that stuff. So that that's the that's the allure for US interest…

Michael:

Interesting, I mean, isn't that similar, like rent to own or is it different?

Mike:

It's similar, but they're not renting, right? a rent to own it, depending on how it's structured. Obviously, you can have some portion of the rent go toward whatever, but you still own the house, right? You still own the house as the person who's having that rent down. We don't own the house, necessarily. We own it, just the way the bank owns your house when you have a mortgage, right. But we're never getting calls from the city for law for Tallgrass. We're not getting calls about the maintenance issues or whatever. We don't have to worry that they didn't, you know, they left and they didn't finish their contract like it's a mortgage and if they if they don't pay their if they don't pay their mortgage, then we will foreclose we can foreclose on them.

Michael:

Yep, interesting and so that like when you place these tenants into the home, there's a recorded sale that happens and so you're literally just playing bank, interesting…

Mike:

Yep, just playing bank. Yeah, because we both had rentals, both of us and like I said, rental they're awesome but there's just a different level of responsibility for us playing the bank than then playing landlord and that's just what we're choosing to do. We both of us have rentals and it's, it's awesome. I rentals have been fantastic for me. It's just, it's not what we're doing now and we were just like, gonna get rid of the rentals and just wholesale. That's it but then this model presented itself, somebody we mutually knew in the industry is kind of like, hey, I'm doing this and they're doing it in Texas and it works down there too. I don't know that it would work in Los Angeles or San Diego or I don't know that it would probably not as well because the house prices but if you have house prices that you can get a house in a nice in these are like safe blue county collar neighborhoods, we're not talking about like war zones, but by any means I wouldn't buy a house there but in a nice blue collar brick ranch neighborhood, if you can get a house between 50 and 150,000. It could work when they start getting up to a half a quarter of a million, it just doesn't work as well anymore. You can't, the numbers don't work out.

Michael:

Okay, okay. Good to know and just out of curiosity, I mean, how many folks end up refinancing out of your mortgage and then truly then own the house versus how many what percentage defaults or you have to go through that?

Mike:

Really good question. We started doing this, like, eight months ago. So okay, I don't know, we don't have a loop. Yeah, but the friend of ours who kind of introduced this concept to us. He said about half of them refi out. Very few defaults, very few defaults because it's home, you know, people it's their home, right? They don't default, like they do necessarily on a lease, because it's not as transient. So according to him very few defaults. But we also screen people pretty well to like you would with a rental, like we're not just letting anybody in there, right? If they clearly have a pattern of defaulting on everything they've ever done, we could expect to default to we're not special but people have certain circumstances where their credit cut takes a pretty good hit but it's you know, it's something that is understandable, or it has a you know, story behind it. That makes sense. So I'm not expecting a lot of defaults, how many people will refi out? You know, our plan is to be a little bit more proactive with helping them with credit repair right now, we're not really getting involved in that but I suspect as we do get more involved with helping with that, that the number of people who actually refi out will probably go up, you know, so I don't really know right now how that's gonna go down. We'll see, we'll see how that goes. I don't know. Sure…

Michael:

Okay, we'll have to have you back in 24 months to see. See what that looks like…

Mike:

For sure, for sure.

Michael:

Awesome. Well, Mike, let's shift gears here just for a moment and talk about wholesaling because, I mean, like you were mentioning a bit ago, it's no surprise that deals are a bit tougher to come by today. I think in the industry as a whole it's probably no surprise that wholesalers don't have the best reputation out there. Yeah, so I mean, I have I'm going to share kind of my thoughts on I think what makes you different but curious to get your thoughts and share with our listeners, me what makes you different as a wholesaling company and then what are some things that people can do to protect themselves from the not so great actors out there who are wholesalers?

Mike:

The problem with wholesaling and the reason why it can get a bad name Is it is it is advertised and when I say advertised, I mean if you go out on the internet and say how do you become a wholesaler? Should I be a wholesaler? It's billed to people as this no money, no experience and that's how you get started in the industry…

Michael:

And no risk…

Mike:

Yeah, no risk. You get this, like, this mentality of this person who thinks they're just gonna roll out of bed open up their eyes, and money's gonna pour through the windows of their house if they're a wholesaler and it's not true, obviously. So you asked me what I do that makes me different. Here's what anyone can do to make their business different, but it doesn't it's not, you know, just for wholesaling but you have to run it like a business and a lot of wholesalers are very transactional in their thinking. They only care about the cheque they're getting next they don't care about future checks. They don't care about consistency, or predictability of their of their business and so they treat wholesaling, like this little dirty act they have to do before the real serious business comes along and in the reason why a lot of wholesalers get this bad reputation also is because there's something called daisy chaining in real estate, and most real, most wholesalers I'm doing air quotes if you guys aren't watching.

The reason most wholesalers or a lot of wholesalers have this reputation is they're not really wholesalers as much as they are what's called daisy chains and a daisy chain er is okay I'm a wholesaler I market to sellers I go into a seller's home. I create rapport and trust and in understanding of what's happening. I get a purchase agreement with them and I take that purchase agreement and I market it out to the other real estate investors in my community and some person who sees this takes the pictures, they take the text, and they mark up the price and then they send it out to a bunch of people, a lot of times a lot of the same people at a higher price and it's like called them and so you call them and you say, hey, I'll take it because you didn't see my marketing, you saw their marketing for whatever reason, you say, I'll take it. They don't even know me and I don't know them. But they're representing that they have this this deal under contract and meanwhile, I'm working with my buyers and I come to an agreement with a buyer and then this person calls me who's was also marketing up my contract and says, hey, I want to buy that house and I go, I've already sold it. Well, he's already told his buyer that they can have it for that price. But I already sold it because I have it under contract. Now he has to go back to the buyer and say, sorry, we have to back out of this deal, right and so it looks like a wholesaler is a really bad business person, bad guy, dishonest, whatever, misrepresenting himself, but he never had the deal and so that happens that's runs rampant. That's a real epidemic in the wholesaling world. So you also asked me, How do you tell the difference or how do you how do you avoid the bad ones?

The first question is that because I get people who send me deals, and frankly, I'll look at them if some other wholesaler finds a deal, and they were they offer it out at a price that my company might be able to land contract that house and we want to buy it, we'll do it. So the first question I asked them is, do you have this under contract yourself or are you representing somebody else and a lot of times they do and sometimes they don't? Sometimes they say they do and I say good. Then before I would buy this, I would need to see the agreement between you and the seller, your company in the seller, what's the name of your company, and I verify this stuff because if they don't have it under contract, I don't even care if they say, yeah, it's not me. But the guy who has under contracts a good friend of mine, and he gave me exclusive rights. I want to talk to who has entered a contract always deal with the person who has an order contract with the seller, with the seller, right? All right, that's, that's key. That's huge and we don't, we don't allow daisy chaining, we don't ever allow people to market out our deals, we only market them out and so all of our buyers know, we've told them several times, if someone if we're marketing a house and you see the same house being marketed by someone else, believe me when I tell you, they're not authorized to do that, they will never be able to sell it to you. So and as a wholesaler, I always make sure that I'm dealing with the end buyer, not a middle person, right? So if someone comes to us, though, and says, hey, I've got a buyer, and they're gonna, they'll pay you this much money and it makes sense for us. We'll give them a check like, well, we'll compensate them for bringing that buyer. But we're not going to we're not going to be what's going to be all transparent, we're going to let everyone know what's happening and so transparency in the wholesale process is important between us as the wholesalers and the buyers total transparency. Now, I'll say something that your audience may not love. There is not total transparency between us and the seller and does that mean that we're lying to them? No, it's not it doesn't. But here's what I always tell people to illustrate my point. Nobody loves or trusts me more than my mother, nobody.

My mom has heard me explain what I do as a wholesaler 1000 times and she has been all ears like she's could not be more dialed in to hurts her baby boy and what he does, and she's so proud and so happy and she's listening intently. But if you call my mom and put her on the air right now and said, Could you please explain to me what your son does? How he does it? She wouldn't know she might even tell you. I'm a realtor. She just doesn't know. It doesn't make sense to her. It's just it's too obscure. Right? So when we're in a seller's home, we don't say to them, Mr. Mrs. Seller, I know you're under a lot of duress. You have to move maybe there was a death or divorce or whatever there was right? Something happened in your life is spiraling. Here's the deal. I want to sign a contract, saying that I'm gonna buy your house, but I'm not buying it. I don't even know who's gonna buy it. I don't know where the money is coming from. I don't know who's gonna show up at closing. I'm not even sure if I'm gonna be able to close. Can we sign the deal now? It nobody would say yes. Okay and that's an a character characterization of what a wholesaler does. But on some level, it's facetious, but it's sort of true, right? I'm signing a contract. I don't exactly know who's going to buy it. In my case as a wholesaler and what I think makes what I do ethical is I have the financial backing to buy any house that I put under contract. If worst comes to worst, I can buy it right and that's not that doesn't come in the beginning. new investors don't always have that luxury. But what you can do as an investor and where you can be transparent and you should be transparent is do not sign a contract and imply or explicitly state that you will for sure be closing on the house without exception, you can't say that in most cases.

So what I say is some version of this, Mister seller, when I came here I was prepared to offer you $100,000 for your house, that was the highest number that I was authorized to offer you, you cannot go below 110,000 That is your lowest, that's the number. That's the gap, right… You want 110 minimum, and I was maximum allowed to offer you 100 but here's what I would like to suggest. Let's sign the contract for 110. Okay, I'm gonna go back to my investors and people who make decisions and help me buy these houses and I am going to see if there is interest at that price, I anticipate that there is not going to be but there very well could be but at the very least, if you can give me two weeks to talk to my investors and go to bat for you, and try to make them understand now that I'm here, I see this house is very nice. I didn't know is this nice but it is a very nice house. I think I can get this done but give me two weeks and I will come back to you in two weeks or less by the way and I'll tell you one of two things either, we can't pay 110 and so we need to rip this contract up and just part as friends, because we all knew that that was a possibility or we're going to move forward at this price and everything is good and I guarantee you will close. Okay, can if you couldn't give me two weeks. Now, if you don't want to do that, I totally get it. If you go to a realtor, they're going to want you to sign it like a three month contract where they get three months to market your house. I just want two weeks and if it takes me two days, I'll come back in two days. Either way, I'll be totally honest with you and it will be up to you what we do from that point we rip up the contract or not. It's totally up to you. Is that? Is that something that you can live with just for a week or two and nine times out of 10? They say yes. Now, when I when I go out now I am going out to my buyers and I'm saying hey, I got this this opportunity who's interested, right? If I get crickets and it's like, nope, nope, nope.

Then usually we'll try to figure out what our buyers would pay, right? That's the next question. Okay, you don't want it? It's fine. But what would you pay for this and we start getting that feedback and so we can go back to the seller and say, listen, I was right. 100,000 is the best we can do but I'm totally willing to rip up this contract because you want 110 or we can talk about a reduction or, or the or we get buyers that are like, yeah, I'll do it for that price. That's great, right and it's a little better than we thought and we go back and tell the seller, hey, if we go out to our buyers, and we find out that 110 is a really good price for us still, we'll still make the money we thought we were going to make we always go back and say we'll honor the 110 because I think that's the question I would be thinking in my mind if I'm listening to this interview? Well, what happens if they get really great offers? Do they still always go back and try to get that lower number? No, we don't. If we can make what we thought we would make or pretty close to it, we'll pay a higher price, right? We're, my goal here is to get to heaven not to make an extra $5,000, right. So I'm not trying to be a bad guy. But the key is the ethical wholesalers versus not the ethical ones, prepare the seller for the potential for a renegotiate or a cancellation up front and so when we go back, how often are they irate because we come back and say, hey, we can't do the 110. Almost never, because we very thoroughly explain what we're doing and we prepare them that we may have to come back and discuss the reduction or cancellation. The people honestly, they just want clarity.

They just want to know what's going to happen. What people get mad about are surprises. So when you say oh, great 110 done deal. I can't wait to close with you in a few weeks. This is so exciting and then you come back in three days and say we have to cancel the contract. They're mad 100% of the time, because they weren't you're not clear on what was happening. You surprise them with bad news and nobody likes being surprised with bad news but when you come back and say, hey, remember when we talked a week ago and I said this? Well, we can't do the 110. You know, we tried nine times out of 10 they're totally fine and honestly, seven times out of 10. They say well, what can you do and then we have that discussion. So, man, it's all about setting expectations.

Michael:

Yes, 1000 times yes, as funny as you were going through kind of your pitch. I was like, Oh yeah, like that makes sense. That's such a different, like feeling that I got as you were giving as you were giving that Spiel than what I was expecting or than what I've experienced with wholesaler. So I mean, kudos to you and your team. It's clearly it's clearly working for you, so keep up keep up the great work.

Mike:

Well, honestly, we have gotten deals, where and I know that sounds cliche, but I swear to you, this happens all the time and it we only know that when people tell us right so my guess is it happens more than we even know but we get deals where they got a higher offer from another wholesaler. But because we come in and we are professional, and we do address their concerns, but we wholesaling is not really about buying houses. It's about solving problems and again, sounds cliche, totally true. You can figure out what their pain point is and you can focus on that the sale of the house is secondary and I know that because we've had sellers tell us listen, we had somebody come along and offer us more than you guys, but we're not going to sell to them, we're going to sell to you because we believe you, we believe what you're saying and we like working with you. So professionalism matters and just to illustrate that point, underline it real quickly, one of our reps went into a house one time, and he was talking to a seller and they were going through the whole thing, it was like halfway through the meeting, and then knock on the door, and the seller says, oh, I forgot.

There's another investor or another, whatever. They call them coming in another person who wants to look at my house and my rep was like, oh, okay, and he kind of stood aside and a guy came in, my rep looked outside, and he saw the guy was driving a Mercedes, nothing wrong with that Mercedes fine but he left it running. He was wearing a suit, he came into the house, briefly said hello, and started walking around, pointing out all the flaws in the house, this is all this has to be replaced. That's no good. Nobody wants that and he shot a number at her with what he would pay and said, think about it and he got in his car and left. Like, everything that guy said, that wasn't verbal screamed, you are not that important to me. I'm way too big of a deal for you and I don't even have time to turn my car off. That's how little I think about what is your situation. I'm just telling you what I need and what I want and what I'll give you and I'm out of here, right and understandably, the seller was floored. She's like, that was the rudest thing I've ever seen, like, that was awful. I feel so like, offended by that. Yeah and of course, my rep was like, yeah, I would be offended too, right. Like, I agree with you. They're horrible. We're great. Let's get back to talking about how great we are. So it matters, like paying attention to their pain points, and not being all about the number. If you start talking about price right off the bat, you can almost guarantee you're not gonna buy the house. Yeah, if you start by listening, and addressing their problems, and let the sale be last. It'll work out for you much, much better.

Michael:

I love it, I love it, I love it. Mike, we could go on, I think probably for days talking about this stuff but I want to be very respectful of your time and get you out here. For anyone that wants to learn more about you, your processes your business, where's the best place for them to do that?

Mike:

Yeah, thank you for that by the way, I appreciate it. The best place to get a hold of me would be at my on my website, https://www.mikesimmons.com/ . If you go on mikesimmons.com, you can find anything about me and also my podcasts. I have a podcast called just out real estate. You can find the link to that on my on my website as well.

Michael:

Right on…

Mike:

Which you were on right, you were my guest.

Michael:

We had a lot of fun.

Mike:

Yeah, we did.

Michael:

Well, Mike, thank you again for coming on and sharing so much wisdom with our listeners really appreciate it and I'm sure we'll chat soon, man. I look forward to it.

Mike:

Absolutely. Thank you for having me. It was a pleasure.

Michael:

Likewise, talk soon.

All right, everyone. That was our show a big thank you to Mike for coming on. Super, super insightful stuff. I learned a ton about the wholesaling business and wholesalers in general, and some really great questions that we as investors can be asking wholesalers to protect ourselves from the downside. So as always, if you liked the episode, feel free to leave us a rating or review wherever it is you get your episodes, and we look forward to seeing the next one. Happy investing…

Kathy Fettke’s perspective on the direction of the housing market Jul 12, 2022

With a passion for researching and sharing the most important facts on real estate and economics, Kathy Fettke is a frequent guest expert on such media as CNN, CNBC, Fox News, NPR, CBS MarketWatch and the Wall Street Journal. She is the author of the #1 best-seller, Retire Rich with Rentals, and host of two long-running RealWealth podcasts – “The Real Wealth Show” and “Real Estate News for Investors.” You’ll also find her on the recently launched BiggerPockets “On the Market” podcast as one of several co-hosts. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV, and ABC-7. She’s the past president of American Women in Radio & Television.

She is passionate about learning and sharing that information with the members of RealWealth and her podcast listeners. In today’s show, Kathy shares her investment journey, her predictions on where we've been, and where the market is headed.

Episode Link:

https://realwealth.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Kathy Fettke, who is the co-founder of Real wealth and she's going to be talking to us today about her predictions around where the market is headed, and where we've been. So let's get into it.

Kathy Fettke, how are you? Thanks so much for taking the time.

Kathy:

I am doing wonderful, thanks for having me here.

Michael:

Oh my gosh, I'm so excited. So we had your husband Rich on a while ago on our podcast and we were asking him about market conditions and forecasting and he goes timeout you got to have my wife on. So for anyone who didn't catch that episode, give us a quick, quick intro background, who you are, where you come from and what it is you're doing in real estate.

Kathy:

Yeah, well, Rich, and I founded real wealth, which we really did by accident. It was back in 2003 when he was really more in the motivational world. He was a speaker and had come out with a book called extreme success. He was doing this national book tour, we didn't know anything about real estate, but we house hacked, which wasn't really a term then. But basically, we bought a house it was way too expensive for us. So we rented out rooms and that's how we afford to live there. That's how you summarize that. But other than that, that was our only landlord experience and we didn't we didn't think that we could buy real estate until we were rich. You know, that's oftentimes what people think like, I gotta wait till I am a multimillionaire before I can do that, so he you know, he was building his coaching business, I was a stay at home mom. It was on that. On one of his when he came home from his tour, his media tour, and he noticed a freckle. As you probably saw, he's a redhead. So there's a lot of freckles on that guy but he noticed he was like this one's weird.

So he checked it out and the doctor looked at it did more tests, thought he basically told rich, he had probably six months to live because melanoma was extremely deadly than it probably still is. But they have better things today. But back then it was just like, here's your diagnosis, you got six months. So obviously a massive shocker. Both of us being motivational speakers and coaches were like, no, no, no, I'm not buying this. But I had to figure out the finances and I wanted to take over so that he could you know, if the doctor was right so that he could really enjoy himself for those six months. But really, we both were like No, don't even go there just get better. So that's when I had a weekend radio show in San Francisco that I just did for fun. It was kind of a coaching show is helping people go after their dreams in a in like a 90 day period and, and really create the things that they always wanted, but were afraid to do and all of a sudden, I'm like, I gotta change the show to me figuring out how to make money in 90 days, you know and how do I do that? So I completely changed the focus to wealth building and because it was the San Francisco show, I could interview really high level people like Robert Kiyosaki and that's how I learned real estate investing and that's over time, we built real wealth and we've been helping people, you know, educate people and educate ourselves ever since on how to build wealth through real estate.

Michael:

I love that. So you're telling us that you learned real estate investing via hosting your own podcast and interviewing folks that had done it?

Kathy:

Oh, yeah and I was such a dummy. I mean, like, literally knew nothing. Nothing. I mean, we were renting out rooms in our home on Craigslist. So like, we understood the dark side of what's doing, right, because of stories there. But no, it wasn't until I just thought I got it. I gotta figure this thing out. I've heard that there's a thing called passive income. I don't know what it is but let's find out and I just started interviewing people but I was lucky enough that because I was so desperate to create money, and I've been a stay at home mom for years. I I'd been in broadcasting and that was my degree. But I didn't want to chase fires and murderers when I was raising young children. So I, I basically was not doing that anymore and, and so and bless. They had strikes all the time where I'd have to march for hours in the middle of the night like that. Anyway, I hadn't been working and I didn't It's hard for women when you're out of the workforce for even a few months, but let alone a few years, kind of don't know how to get back in. So that was the focus is like how do I do this? But one thing I thought, well, I could maybe sell sponsorships. So I just started listening to everybody who was advertising at the time. It was like, oh, wow, there's a lot of people, but advertising mortgages.

So because you know, this was 2003 and that was what it was everybody was wanting a mortgage? Because they were ridiculous. So I went down the phonebook which existed at the time, and called all these one by one and finally I got someone. Well, I finally got someone to agree only because I was so tired of hearing no, I called finally the last person on the list. I was like, I got an offer you can't refuse. I'm looking for a co-host, instead of like an advertiser, and the guy's like, yeah, sounds good. So that's how I got my sponsor, but it ended up being a mortgage broker who I made a co-host and I came home and rich started laughing. He's like, oh, now you have a mortgage show. Like, that's gonna be funny, because you don't even like going to our fight you skip every financial planning meeting we ever have. And because I just really wasn't into it. But this mortgage broker who became my co-host, I thought, you know, how am I going to make this interesting, so rich, and I thought, well, you know, interview his clients, find out what they're doing with these loans. And that's, that was the game changer and again, like, I had no idea what I was talking about but I think that's what made the show interesting is, I would I was in such awe of the things that, that these people were doing, that all my audience was like, also learning along with me, and they were in awe. Because I was interviewing these 30 year old who were retired, you know, it was like, I'm 40 and I'm not retired. So what are you doing and I learned about flipping and I learned about buying hold, and I learned tax benefits and, and, you know, just all the strategies that Pete that at the time, were kind of secret because podcasts didn't exist back then. I'm so aging myself, but you couldn't you couldn't get the information. It was like late night TV or $10,000 boot camps, infomercials. Yeah, so it was like I was opening this secret world of real estate investment and making it public and I'm happy to say I was one of the first it changed my life and it changed the life of 1000s of people who got to listen.

Michael:

I love it, I love it a little bit. Kathy, I want to shift gears here in just a minute. But before we do, I mean, you had such an interesting purview into this world of real estate investing. So having interviewed all those folks, and having taught numerous people how to do this, is there a red thread, or kind of key takeaway that you think should be thought should be spoken to would be investors or newer investors as they're just getting started?

Kathy:

100%, I can tell you, for me, I, I had a completely new mindset, because people like me who aren't born wealthy, you know, and, and have parents who work for money, you know, whoever, you know, they, if they're not working, they're not making money that you know, they don't understand investing and assets and cash flow and stuff like that, which is most of the world, right? So if you don't come from that, you don't have it, you don't have the mindset. So interviewing these people who were so different than what I thought rich people were like, and so you can even see it today, people who are angry at those who have there, they're just they feel it's unfair, that that's, that's the mindset I was in and then to actually talk to these people and find out there the most generous people, they have a different way of thinking, they look for opportunity, they look for ways that they can make a difference and making a difference is, you know, you're not going to be in business very long if you're not making a difference. And if you're not helping people, that's the bottom line, you're gonna be out of business unless you're government funded, and you get paid no matter what.

But, you know, but you know, in a, in a free market society, it's like, if you're not making a difference in helping people, you're, no one's gonna buy your stuff. So I just really learned that, that these, there was a different mindset. So it had to start there and the way that my mindset changed was just being around people and you hear that a lot you hear, like, if you want to change your mindset, get around people that you want to be like, don't hang around the people you don't want to be like, you know, you become who you hang out with. So for me, just even being on the radio, with these people was enough for me to be exposed to a different way of being so it really begins with mindset,

Michael:

Love it and kind of taking that a step further, what's your best advice, or the best way that you've seen people get around some different people that have the things or have accomplished what it is I'm looking to accomplish?

Kathy:

You know, today, it's so much easier. There's so many more opportunities. You have podcasts that are free. Again, this didn't exist. There weren't radio shows that talked about, you know, how to build wealth through real estate, you know, and if it was it was probably someone who was trying to sell you something. So today, you have access to so many different podcasts like right now. You have books that are $20 You know, my book retire rich with rentals is 20 bucks, and it's my experience all summed up. There's so many books like that. out there that are cheap. So, you know, learning from those who really technically have nothing to sell you, you know, except a $20 book, you know, that's, that's okay do that real estate conferences Rheas. There are local Rheas everywhere and you have to be careful, because RIAs still have sharks. Even when I started real wealth, I couldn't believe the number of sharks that were out there and I ran into all of them. I'm telling you, like I couldn't. This is the other thing that new investors don't realize is that not everybody's nice and not everybody's telling you the truth. When you're a truth teller, you just assume other people tell you the truth and I can tell you when it comes to financial services, it's like, you know, there's so many people that can lie to your face and I met all of them here as well as smile, and they're so happy and they would come to my real estate group groups, they would come to me, assuming I was naughty, like they were and be like, hey, I got some properties to offload. You know, I'll pay like 10 grand, you know, we're getting them.

This was when the when everything fell apart. He's like, we're buying these things for like, $2,000 in Kansas City, and you can resell them for 20. Like, that's not fair, that like, these are tear downs, you know, but so, and they thought that I would be down for that. So there's, there's still RIAs where there's sharks who got out. So I guess the next step is when it comes to mindset, you've got a next step, educate, educate, educate, because then you can't be ripped off as easily. It's kind of like, I like to describe it, like when I took my family to Costa Rica, and I forgot to do my due diligence in the sense of, I forgot to find out what the exchange rate was and I had my $20 and I wanted an empanada and we were hungry and I handed the $20 and I got some change back and I looked at it, and I didn't know what it was and we walked out and I heard the people laughing. I'm like, oh, I just got ripped off but I don't even know how I don't know. You know, so that's how it is in real estate, if you haven't done your homework, and you haven't read those books and listen to those podcasts and you have learned that it's pretty easy to get ripped off.

Michael:

Yep, I love that, I love that. Let's shift gears here, Kathy, because what you're doing right now, in this space is super, super interesting and talking about market trends and forecasts. So give us a little bit of insight, give us a little preview into your world of what that looks like and how you're doing it.

Kathy:

Sure, well, it was in 2005. I'll just kind of go back again, where I was able to get people like Robert Kiyosaki on my show and he was the first one who was counterintuitive and that taught me so much because he was saying things that nobody else was saying, and no headline was saying, at the time, like what oh, like at the time, the, the main economist for the National Association of realtors had just come out with a book in 2006. That said, you know, I can't even remember it. But it was basically like, why this is why there's no housing bubble and why home prices will continue to go up for the rest of the decade and it was like this was the National Association of realtors Chief Economist. So you get Kiyosaki coming on and going, no, no, that's like, the loans are going to reset and they're starting now and by 2007 2008, people won't be able to pay the payment, because it's all adjusting and it was so obvious once I could see the data and that oh, you know, I ended up joining my co-host and becoming a mortgage broker. So I knew how bad the industry was and I knew how full of lies it was I my first loan that I turned in. They the bank came back and said, oh, your client doesn't make enough money and I was like, well, that's too bad. I'll let him know. He doesn't qualify and they said, no, no, we changed his income he qualifies now and I came home and I was like, pocket, I go rich. Is that legal and he goes, no, honey, that's fraud. Don't put your name on that. So I was one of the few mortgage brokers that Dec was didn't want to deal with the consequences of fraud. So I would turn down people and they would just go to the mortgage broker next door. They were Nina loans, no income, no assets. I didn't need anything. Anything, I didn't need to know anything about you and I could give you a $5 million loan. It was crazy. So I knew something was wrong. But so did everybody else but it was it was nobody could see it. So Kiyosaki is going, you know, this isn't going to end well and like yeah, da. So he was explaining that all the markets that really benefited from easy loans and easy lending were California, Nevada, the San states, Arizona, Florida and he said, but there are certain places that haven't abused these loans and Texas was one of those places. Texas wouldn't allow 105% cash out refinance.

Do you know what that is? That's where you would do a refi and get more money back than the value of the house. It's bright, steady. So Texas didn't do that because they'd been through the SNL crisis in the 80s. They weren't going to do that again. So, he was Kiyosaki was explaining in 2005 2006 I've sold everything in California and all the San states and I'm buying in Texas, I'm exchanging everything in Texas, because the fundamentals are there. The jobs are there, the population is growing. But the but the property's cash flow and that was something. As a California girl, I didn't even know the word. I didn't know what cash flow was, except for negative cash flow, that was a thing. I was curious, like, if you invest in California with negative and that was like common. So it was like all positive cash flow. Okay, so rich, and I jumped on a plane, we went to Texas in 2005, we came back with five properties, because back then you could buy as unlimited amount of investment properties, no money down. That's the kind of lending that existed, and no paperwork. So you know, sign on the dotted line. So we came back with five, but we bought, right, we bought, where the growth was headed, where the jobs were, where the freeways were going, and I talked about it on the show.

Next thing, you know, everybody wanted to do what we were doing. So that's, again, how real well start is just helping people buy and these markets. So I knew back then that you have to does like don't pay attention to the headlines pay attention to fundamentals and that's the same thing I'm doing today and this same thing exists today, where the headlines are, are not following data and people are basing their investment on these false headlines. Like even today, I had a little Facebook fight with some people saying, you know, everybody's like housing crash housing crash, and I'm like, where, like, where? Just show me the data…Yeah, I'm really curious to know where this housing crashes and I get crickets, you know, nothing. But that's what people are thinking and I'm okay with that. If, if my competition leaves the market, I'm okay with that. I would love less competition. Go, go away. Let me buy the stuff, you know.

Michael:

Yeah, totally, totally. So I mean, I'm hearing the same chatter and seeing the same headlines doom and gloom, bubble housing crash. Talk to us about what you're seeing from a data driven perspective and what kind of your perspective and projections are

Kathy:

Sure, well, let's look at the American home owner versus the American homeowner before the last crash, before the last crash, there was no money down. In fact, you got cash back for buying, you could buy as many as you want. No, no, no paperwork required, right. It was just right. You know, today, it's a very different situation thanks to Dodd Frank changes it you have to put money down. I mean, not necessarily the first time homebuyer can put 3% down, but they still have to qualify with open books. And we all know how hard it is to get a loan and it has been for the past 12 years, so…

Michael:

Full cavity search… as your neighbor's mailman, like…

Kathy:

It's crazy awful. I'm doing one right now and I hate it. But you know, this is what it's been for 12 years is difficult. So you've got people for the last 12 years that had to qualify, you have the highest FICO is these are people who have proven a history of paying their bills, that was not the case back then it was subprime at, you can have a history of not paying your bills and still get a loan 100% financing, not the case today, you have to show that you pay your bills, and that you put money down and that your income supports the payment and not just that, but that debt to income that you can't have so much debt that you can't pay your home. So, you know, it's not been easy. The people who own homes today qualified, they're locked into low rates. They have the lowest housing cost in history. I might be wrong on that but they have very low housing cost the people who own homes.

So because they're locked into 3% rates, and they qualified and since then their wages have increased. I'm talking about homeowners only now this is not the case for renters. Renters are in a horrible place today. Horror, I've my heart bleeds for renters today because they they're spending most of their paycheck just trying to have a roof above their heads. It's a difficult time. That's why I've been on a mission to tell people buy a house because you can lock in your payment for 30 years and not worry about rent. But unfortunately, there's a lot of people who are unable to do that and that's the story. It's the renters and hopefully, you know, hopefully landlords will be able to provide affordable housing but it's hard you know, it's hard today because we're trying to build affordable housing and how can we do it when lumber went up? 100% or whatever like it's not easy, eight right la Los Angeles. I live in Southern California. I don't know you know that what happened here but la tried to build affordable housing with a grant you know, free government money. Do you know that that the homeless housing that they built cost 800,000 a unit for I kid you not the oh my gosh, housing 800,000 because it's Well, first of all, governments don't tend to know leave it to the efficient sector. Yeah but it's not easy.

So, you know, when you've got a situation now where the Federal Reserve stimulated the housing market when they shouldn't have, they misread even our Federal Reserve that is supposed to be controlling the economy wasn't because they were thinking that during COVID, there would be a slowdown. But of course, when you print 40% of the money that's circulating in two years, there's probably going to be an impact and of course, that impact is inflation and add to it that the Federal Reserve was buying mortgage backed securities to keep interest rates low. So and all this happened when you had the largest demographic ever, of first time homebuyers hitting the market, the millennials, age 28 to 34 biggest, biggest generation ever hitting the homebuyer age and they're very well educated, well paid people, low interest rates, and then add COVID where they could live anywhere. So a recipe for disaster that drove prices up. People think they're going to come crashing down. Tell me why. Tell me why people who are highly paid, qualified for the loan or locked into 3% loans are going to suddenly go, oh, no, rates are up. I'm going it's kind of like that scene and you know, where the roller machine is coming at? Oh, awesome. Yeah, there's no, it's not. That's not happening.

Michael:

Yeah, well, that's such a good point because I think I would be remiss if we didn't talk about interest rates going up. But that's so much of one side of the equation we're hearing about, in order for people to buy properties at these higher interest rates, there needs to be inventory to sell. So talk to us about kind of that side of the equation as well.

Kathy:

Yeah, no, it's a great point, you know, it kind of economics comes down to supply and demand, always, always, you know, you can, you can have 2% interest rates, but if nobody wants, whatever it is, that's out there, it doesn't matter and that was kind of what happened in in 2010-2011 and 12. You know, interest rates went so low, but no one was buying housing, because they were scared and there was a lot on the market. So a lot of lot of supply, not enough demand, it didn't matter that rates were low, of course, that that turned around, eventually. But here we are, you know, fast forward, this massive demographic of young people that are trying to just have a place to live. You know, this isn't stocks where you just invest, this is like your life. People want shelter. They don't necessarily want to live with mom and dad. They don't want to live in small apartments downtown as they're forming families and there was this crazy headline that millennials weren't going to form families. Well, not at 21 but they're their family forming age now, you know, like, right, right, right, who's gonna buy a house and have babies at 21… I don't know maybe in the Midwest, but not generally, today. So there was just a lot of misinformation. Again, don't trust the headlines, it's be careful about headlines and look at the data. Today we have a situation where building has been difficult and in 2008, 2000 2008 builders got absolutely wiped out and they were in no mood to get started and many couldn't and there wasn't financing for builders.

That's how I got started in syndications because builders came to me and they're like, I can buy land for almost nothing. I can't get money, can you? Can you raise money? I'm like, I don't know. Maybe it turns out I could and so we were able to buy land for almost nothing and you know, buy 4200 lots in Tampa for like 10 cents on the dollar was crazy. It was crazy. But there was no money. So builders just and there was no demand. So why would builders built and that didn't mean that that's applied and really thin out until like 20 I don't know 14 Maybe. So okay, and then being a builder now being someone that boy tough business. You know, that land that we bought in Tampa, we're just now finishing, you know, selling those lots because it takes so long to get infrastructure in place took 10 years to get the roads in and the utilities and stuff. It's not quick, and that's even in Florida and in our other subdivisions. They're all two or three years delayed and that's just us, you know, so think of all the builders out there that either don't have the appetite to do spec housing, they'll build to order basically but and now you know new homes tend to get hit the hardest when rates go up. So builders really aren't in the mood to to build at a time when it's so desperately needed and then add the supply chain issues and the you know, just the blame issues, it's hard to hire anyone and then during COVID, we had to shut down our site, the cities were shut down, we couldn't get permits, we couldn't get approvals and, and then you know, one person gets sick on the job site and you're shut down for two weeks, you come back to work and one other person gets, I mean, it's been hard to bring on new supply at a time when it's so desperately needed. So here we are higher home prices, higher, higher rates, less people able to buy homes, more people forced to rent, and the inventory is not there.

Michael:

So you think that there is enough kind of demand pent up there with not nearly enough inventory now or on the horizon, that that demand is going to push through those elevated home prices and interest rates?

Kathy:

You know, again, it just depends on the market. The mistake, I think in the headlines is that they keep treating it like it's a national housing market and you and I both know, that's just not the case. It's so market specific. So there are some areas that really boomed because people from the San Francisco Bay area or from New York, got the heck out of town because they could live anywhere and cities are not so exciting when everything shut down. So you have places like Boise that just bubble up but is it a bubble when it's California money moving to a cheap area. For them it's no bubble, you know and it's not like these Californians are gonna go, oh, you know, gosh, prices are stalling. Maybe I should sell it a loss. No, they bought a house in Boise because they want to live there, you know, they want a second home or whatever and it was cheap for them. So but do I see that continuing? Probably not. I think I'm guessing prices have kind of maxed out at Boise but I also don't see a crash. You know, same for Austin, these aren't places I wouldn't necessarily invest. I don't like investing in places that saw 40% growth year after year. You know, like I, I doubt that's going to continue. I want to be in areas where that hasn't happened yet. It's about to happen.

Michael:

And so you that's perfect segue into my next question is how do you find the next Boise or the next Austin? What are you looking for and what should our listeners be looking for?

Kathy:

Yeah, I mean, it's definitely a changing market and, again, that doesn't mean people aren't going to still be moving to Austin and Austin still looks really cheap for people from New York and San Francisco. So some of these areas where, where there's tech growth and job growth and jobs of the future kind of growth. It's going to continue. I mean, look at Miami, if you asked me if Miami would see the kind of growth it's had, I would have said no way. You know, everybody's afraid. It's got to be underwater. No one seems to care. Miami was the hottest market ever last year in the year that everybody's talking about climate change, I don't get that.

But you know, what you have? Is the financial sector moving there from New York. So, you know, do you want to live in New York City where it's cold and windy in the winter or do you want to live in Miami, like one? That's right, you're moving? Easy, so I wouldn't, I wouldn't buy there but what that tells me is people that are that lived in Miami who are getting priced out, they're gonna move kind of to other parts of Florida, that are cheaper and companies that you know, maybe are concerned about climate change, you're gonna move to parts of Florida, that aren't as risky. Texas, you know, look at Elon Musk, you see, he's part of a trend that's been going on for 10 years of, hey, there's two places that stayed open during the pandemic, Texas and Florida, maybe South Dakota, but no one wants to live there. So it's really Texas in Florida. If you want to have a business that stays open, you're gonna go there, so the businesses are going there and people are following.

Michael:

Yeah, that makes total sense and Kathy, where do you go to get your information and to get your data, the raw data, not the politicized headlines, but these are the numbers, I want to use them to then interpret and come to conclusions? Where do you get those from?

Kathy:

I just I really just interview people all the time that are in that are either longtime experienced investors and have been through cycles and, and understand fundamentals versus hype and I'm not saying not to be cautious. This is a time to be cautious, because we're in a changing market and we don't know how aggressive the Fed is going to be and we don't we don't know what's hot, what's coming. But the fundamentals work no matter what. So I listen to longtime investors who have been through cycles. I follow the I follow closely the federal reserve and what they're doing. I follow the Treasury, the 10 year treasury and this is you know, this tells me when there's all this concern that interest rates are continued going to continue to rise, the 10 year treasuries retreating and the Fed follows the market and the market is saying, we don't, you know, we don't see that inflation is going to continue forever, or that the markets gonna boom forever and if the markets not booming and there's not rampant inflation forever, you're not going to see interest rates continue to rise. You know, if the 10 year treasury is retreating, that tells you rates are going to come back at some point to, again, my opinion. Right. So, those are some of the things I follow. I follow Housing Wire Logan Mota Shami, I love what he says you see could be controversial, but he's to me, he's been he makes sense and just data I mean, it you just look, all you have to do is search mortgage payments on the Fred I look at that's the Federal Reserve and historical, you know, mortgage payments to income, and its lowest it's been, and then look at jobs. We're still at what 3.6% or something on unemployment, so super lawyers the recession… I usually you don't have a recession when you got jobs like that and continued job growth. You know, we've got job numbers coming out, and we're seeing growth. So I don't know, they got two jobs for every one American who wants them. So how is that a recession?

Michael:

Right, right. Yeah, no, I'm with you 100% and Kathy quickly for investors, because we've talked a lot about and focus a lot about homeowners and owner occupants. But for investors who are just getting started, you know, looking at their fellow investors or hearing podcasts, everyone talks about double digit returns for long term buy and hold for cash flowing properties. Should people be adjusting their expectations now, if they're just getting into the game, because prices are higher and because interest rates have also gone up pr do you think rents have kept up with them over time…

Kathy:

For us, and I don't know what you guys are seeing, we're seeing cap rates look pretty pathetic honestly, it doesn't look great. So that's a bummer but there's still parts of the country that where you can get pretty good cash flow. They're just not areas that excite me. There, there will always be linear markets, markets that kind of just are there, and you can cash flow in those markets, but you probably won't see appreciation and they haven't even appreciated in this crazy bull run that we've had. So yeah, if something goes wrong, you know, your roof to change your roof, or you know, and I own these kind of properties. You have a plumbing issue, man, there goes your yours cashflow. So, you know, I like cash flow, but I would rather be in areas that are experiencing growth and in those markets, the cashflow is just not great. So I've been telling people, if you're you know, if you're it depends on what you're trying to do and if you're trying to create a retirement for yourself, and you're not needing the cash flow right now, don't worry about it, think about the future and ask yourself, where do I think this property will be 10 years from now, maybe 20 years from now…You know, that's what matters more, because you can make cash flow today, you know, if you're young get a get a job, you know, that should be your cash flow. You're here to give your gift to the world.

We don't have an economy if people aren't working and contributing, you know, you were not really meant to come here and retire at 30. I don't think you know, right. So if your job your cash flow and have that job is something that you're great at and you love to do and contributes to society, and have your real estate be what happens when you're you don't want to work anymore and maybe that's 40, maybe that's 50, it shouldn't be 30 if it is good for you. But you know, I look at it, like buy something that is going to hold up in the long run and be in an area where there's growth. Because my experience has been that's where the big bucks are made. We had a single family rental fund that we just closed out. I know you guys, you do lots of funds and what we found in our fund, we bought properties and growth markets and then we bought some cash flow markets to kind of offset and that's how we've always promoted things is like hey get your cash flow properties and get your not so cashflow but growth properties and you know, balances. What we found is that the cash flow properties ended up with like a 8% return or so and the growth properties were like 40% like there was no comparison between the two. So for the long term, you know, get into the hot markets where people want to live and where the where the demographics are moving to and don't worry so much. I mean, obviously the cash flow should cover your expenses. But it's the returns have definitely gone down but that's not preventing me from buying in those areas because you're right, what was it was such a limited supply of inventory. When you're in markets where people are moving to, you're going to see rents go up over time. So never judge a property on the first year of the performer. Don't do that have a five year or a 10 year or a 20 year pro forma, because the first year is always going to be the worst and you know, because you're paying closing costs and, and your rents are, you know what they are that year…

Michael:

But you're finding stuff you missed in the inspection and…

Kathy:

All of that… So, but year two, year three or four, just like with apartments, you don't buy an apartment based on your first year. You know, you buy it based on what it's going to do for you. You know, if you're gonna buy an old car, you're gonna you're getting an old car, if you're gonna buy a new car. I mean, I, you shouldn't really compare real estate to cars but I gotta tell you this time, it kind of make sense, rich, and I both own Tesla's that we bought Rich's early adopter. So he bought the first ones. They're worth, like $10,000, more than we paid years ago, the value has gone up on our tests, as I think that's funny, you know, usually, values go down, because of lack of supply, they can't get batteries and who wouldn't want a battery operated car?

Michael:

You know, it's like 615...

Kathy:

Yeah, that's right… So that's driving prices up. It's the same thing with real estate. You know, people want a place to live, and they want to lock in their rate, and they're going to lock it in and anyway, it's the same and it's the same as an investor, you're buying in an area where people are moving to you are locking into a rate if there's not enough supply, for all the people moving in, you're gonna see rents go up over time.

Michael:

That makes total sense. Kathy, this has been so eye opening, super, super fun. If people want to learn more about you reach out to you learn more about your fund, where's the best place to do that?

Kathy:

You can go to realwealth.com and join it's free and you get access to lots of free information and data and then the real wealth show is my podcast and I interviewed lots of economists there. So that's helpful in trying to sort out what's really going on out there.

Michael:

Amazing, amazing. Well, thank you again for coming on. Definitely look forward to being in touch and we'll talk soon.

Kathy:

Awesome, thanks for having me.

Michael:

Thanks!

All right, everyone. That was our episode a big big, big thank you to Kathy for coming on. Super insightful, really, really informative and I love that way to be data driven and not get swept away by the headlines. As always, if you'd like the episode, we'd love to hear from you with a rating or review wherever it is you get your podcasts and we look forward to the next one. Happy investing…

How much time and money can an investment mentor save you? Jun 30, 2022

Rich Fettke has a passion for helping people improve their businesses, grow their wealth, and live more fulfilling lives. He is the author of The Wise Investor, Extreme Success, and the audio program Momentum. Rich is also a co-founder of RealWealth®. Since 2003, the company has helped over 60,000 members improve their financial intelligence and acquire cash-flowing income properties — so they can live life on their own terms. As a licensed real estate broker and an active investor, Rich was selected as a Rich Dad Author for his expertise as a Wealth Mindset Expert.

The real estate industry is not easy for everyone to jump into. If you have just gotten your real estate license and feel you need extra support before getting your feet wet, or if you are an experienced agent looking to take it to the next level, you may decide to get a real estate coach.

Rich who is a coaching mentor and investor will discuss the value of having a coach and mentor and what you can expect to find in his new book.

Episode Links:

https://realwealth.com/

https://realwealth.com/the-wise-investor-book/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Rich Fettke, who is an author, investor, coaching mentor, surfer, among many other things, and Rich is going to be talking to us today about some of the mistakes he seen investors make the value of having a coach and mentor as well as what you can expect to find in his book, which is soon to be released. So let's get into it.

Rich, what's going on, man? Welcome to the Remote Real Estate Investor. Thanks for hanging out with me.

Rich:

Good to be here. Great hanging out with you.

Michael:

Super excited. So before we hit record here, you and I were chatting a little bit about some sports where you both share in common, but I would love if you could give our listeners a little bit of insight into who you are, where you come from and what it is that you're doing in real estate today.

Rich:

Sure, absolutely. My name is Rich Fettke and yeah, interesting. The way we got into real estate investing, I'm an I'm an investor and my wife and I also have a company that helps investors but that was what really got us into it was despair. It was about it was exactly 20 years ago, I was on top of my game, I had a book deal, just signed with Simon and Schuster. I was a business and personal coach had a thriving coaching practice, I was giving keynote speeches all over the country. It was like I was just crushing it and I felt so good. I was 37 years old and then I was diagnosed with melanoma, which is an advanced skin cancer but that's not the biggest deal is that they thought it spread to my liver.

So they had me do a CT scan and ultrasound and it kept showing these masses on my liver and so I met with an oncologist and he said, you know, it looks like you got about six months to live and we had a 10 year old daughter. Yeah, it just rocked my world, I had a 10 year old daughter, a three year old daughter. My wife is amazing but she was a stay at home mom and so she was freaking in the sense of what am I going to do financially if Rich dies and so she started to she had a as a coach, we were doing things together, she was also a trained coach and so she had this small radio station in San Francisco that she used to do a radio show on about all areas of life being your best self and personal development and all and she said I gotta figure this out. So she started to help people on that were financially successful, and was interviewing them about how do they create wealth and how do they create financial success and most of them turned out to be real estate investors. No surprise, so she came home all excited. One of them was a mortgage broker and he said, if you get your license, you can come become a mortgage broker. This is about 2003. So you know, things were still the mortgage world is pretty easy back then. So she went and did that. In the meantime, we figured out I had a PET scan, which is the most advanced scan for cancer, and it showed me cancer free. So it was just it was a false diagnosis. It was just hemangiomas little clusters of blood vessels on my liver but that was enough for me to go for those three months of not knowing if I was going to be alive, it was enough to give us the kick in the butt to get out and, and make things happen. So Kathy, and I see after that after I was healed, we started to invest together. We bought a bunch of properties in the Dallas, Texas area and it just took off from there and then Kathy started to help other investors with their mortgages. We had a bunch of friends and family saying, tell us how are you doing this? We you know, how are you doing this out of state investing and so we started we formed a group that we thought would be just a small group of family and friends and people that listen to the radio show. We thought it'd be a couple 100 people and today it's over 64,000 members now at real wealth that we're helping invest.

Michael:

It's pretty amazing. Richard, good for you guys, so I I'm curious in your coaching business before you got diagnosed, did you ever come across real estate investors?

Rich:

That I coached?

Yes. Yeah and my mindset was, I want to invest in real estate someday when I have enough money and so and I was thinking I needed, you know, several $100,000 you know, to buy that first rental property or first investment, not realizing the power of leverage and how much banks love to lend money on real estate and so that was that was the eye opener for us.

Michael:

Okay, I love it and what made you go remote? I mean, you're in California and your wife live in in San Francisco. Why did you pick to invest outside California?

Rich:

Actually Robert Kiyosaki. It was she because Kathy was on the San Francisco radio station she was and it got bigger and bigger or she was able to attract some pretty big names and then this guy who had just written a book called Rich Dad, Poor Dad, not long before that, and he had this cashflow game that he was promoting and we had a friend who was his distributor for crypto cash flow game back in the day and so he was on the radio show, and he warned Kathy's listeners to sell their overpriced California properties and to invest in Texas and so we took his advice. Not we didn't sell all our expensive property, sadly, because 2008 crushed us with our California properties but it was, you know, he just saying for cash flow and what's going to happen, he was currently kind of calling out what was going to happen in 2008-2007. That's what sent us out of state.

Michael:

Love it. So you also recently have written a book, haven't you?

Rich:

Yeah, I just finished my second book. 20 years later, well, I have an audio program back then, too but yeah, it took me 20 years to write my second book and it's called the wise investor and it's a lot different than my first book that was mostly coaching focused. It was a nonfiction, basically a personal development book and this book is a modern parable. So it's story forum, and it tells a story of creating financial freedom and but also living your best life.

Michael:

That's awesome and why did you decide to write it?

Rich:

Interesting process, you know, I've had my own coach, to walk the talk to over the last 25 years now, I started coaching 25 years ago, and this coach that I that I still talk to every week, or every other week, now, he kept kind of he had read my first book, so he's always kind of knocking on me saying, when are you going to write your next book? When are you going to write your next book and I was like, I'm too busy running this company, you know, we have 27 employees and but then what we did is we applied story branding to our company. Are you familiar with that story branding?

It's a guy named Don Miller. He wrote a book called Building a story brand and it's all about basically telling the hero's journey, Joseph Campbell's work, using the hero's journey, just like great movies, do great books do weaving a story where your customer is the hero, and you are the guide. So the company is the guide, you help your customers and so we changed everything on our marketing around that, and how we served our members as being the heroes and I just got into this whole storytelling thing. I'm like, this is fascinating the structure of how to write a story, a compelling story that engages people that elicits an emotional change all that and so one day when in a coaching session, I said, you know, if I was going to write a book, I'd probably tell a story and then he heard that and you just like, What do you mean, tell me more and then that was the spark. So then then I get obsessed with it and I'm like, I could write a parable about what I've learned over the last 20 years as an investor, what I've learned in the last 25 years as a coach, yeah, and kind of weave them together into a story.

Michael:

How cool and without giving away too much of the book. I mean, what could people what should people expect to find when they when they get a copy?

Rich:

Basically, it's about this family, man, his name is Ryan Brooks and he's like a hard worker. He's got a wife, he's got a couple kids, and he's making a decent six figure income maxing out his 401k but he has no time for his wife or his kids or even his life and he's not investing. He's basically what we call today, Henry, right? A high earner, not rich yet. So he's…

Michael:

I love it.

Rich:

Yeah, they're out there does a lot of people you know, especially in California, where I'm based, and that make a lot of money, make a good income, but they're not rich, they're not wealthy, and they're not investing their money. They're spending it on things and so this guy is, is in that same trap. So he just starts to learn from he meets this new friend and mentor, who takes him out on adventures. Of course, it takes him out climbing takes him out mountain biking in in the sessions, when they're having fun together. He teaches him about investing about how wealthy people think, how rich people operate, and how and how poor people operate and think and he really goes over the difference between, you know, truly wealthy people, and people with a lot of money. He even says, you know, I know some people who are so poor, all they have is money and I see that in Malibu, you know, where I live there's a lot of has a lot of money and some of the people are really stoked and really happy and getting the most out of life and investing their money at some of the people are grumpy and miserable and, you know, that's rich in money but not in life.

So there's a lot of lessons about helping Ryan Brooks and his mentor walks them through this on how to invest how to how to really look at life through a different lens. One of my favorite things a mentor says to his mentor is about assets and he just kind of puts it in a different frame. He's like, you know, assets is are anything that will provide you income, or better health or happiness or two time and liability is anything that detracts from your income, or your health or your happiness or your time. So it's kind of a cool that type of perspective is this mentor is like, he's the me I hope to be in the future. He's that in that wise investor who's you know, he's got it all together, he's got this sage advice. He's very stoic, but he shares these lessons. So it covers the journey of five years of when they first met, and Ryan Brooks is struggling and just doesn't know what to do and it shows five years later, what happens and how he becomes wealthy in more ways than just money. I love it in money, too.

Michael:

I love it. I love it enrich. Where can people find the book?

Rich:

It's on Amazon, all major booksellers, published through Rich Dad advisors. So Robert Kiyosaki wrote the foreword for me, which I'm very grateful for… Come full, full circle, right.

Michael:

Totally.

Rich:

Yeah. So it's on Amazon. It's called the wise investor. Subtitle is a modern parable about creating financial freedom and living your best life. I got the cover right here. So it's out on eBook. This is what the cover looks like. Perfect. So it's out on eBook. But the printed version, the hardcover and the audio book won't be out until August and it's because of just like real estate supply chain issues. There's not enough paper at the printers, so it's a long wait six, seven months now to get a book printed.

Michael:

Holy smokes…

Rich:

Isn't it wild?

Michael:

Yeah, okay. Well, I'm interested, get your order in now, because it might be a while.

Rich:

Right, yeah. So hopefully it all comes out in August. Hopefully it comes out earlier in August but yeah, and the audio book was, that was a fun challenge for me. Big goal, because, you know, it's a story and there's 10 different characters, females, older people, young kids, so I had to become, I had to learn some voice acting skills over the period of a couple of months and really practice it. Oh, how can I think I pulled it off, we'll see how the reviews are.

Michael:

Right on. That's great. Well, Rich, I'm curious to get your opinion on something because you're a coach, I will also work as a coach and there are folks out there that say you can take the horse to water, but you can't make him drink and so thinking about kind of the Henry's out there, and I think a lot of our listeners might find themselves in this boat, too. They have friends, family, folks around them that don't get real estate investing, right? I have a six figure job, I got a great job, why would I bother investing, I can make more money at my job. So what do you say to all those people and really, how do you position investing in general or real estate investing specifically to the people that think they haven't really good as things stand?

Rich:

Yeah, I mean, first of all, you know, as a coach, I'm going to help point out what is good first, you know, this is the way I coach, the gratefulness piece and, you know, it's like, well, you know, be stoked on that six figure job, or whatever it is and it's about creating freedom and so many people don't have that freedom and that's what the Henry's don't have. If they have a short runway, if they stopped if they lost their job, which we've seen happen, they don't have many months left of cash flow, to be able to live their lifestyle, or any type of lifestyle. So that's the biggest thing would be that, do you want to create freedom for yourself, and not have the stress of losing your job, or wanting to move to a different job, if you're not loving what you're doing, a lot of people stay trapped, struggling, just trapped in their jobs, because it's like, this is my income, this is the way this is what I need to make ends meet. So that's the biggest thing, it's really about having your money, make money, so you can create freedom in the future freedom of time and everything. I think that's the biggest one and then so then flipping on the other side, there's something too about America, in the world that we are preprogrammed.

When we think invest, we think stock market and you know, I have nothing against it and Kathy and I are and my wife and I are invested in the stock market, but our major focus and the big aha, back through that story is, you know, we were doing that we were contributing to our IRAs and, you know, doing everything we were supposed to do investing in the stock market. But when we learned about leverage the power of leverage and how you can like 5x your money, just through the power of leverage. I mean, that's a standout and that's one of the lessons the mentor goes over in the book. He, he has Ryan compared to say, say you have $200,000 to invest and you invest 200,000, and gold, you put 200,000 and you buy, you buy maybe 400,000 in the stock market on that, you just leverage it and then you invest that same amount into real estate and then he kind of plays it out over five years, and over 10 years, sorry. So he's like 10 years later, and he said, so how much would the gold be worth at the same appreciation that's gold has been at and they look at that outcome and he said, oh, now let's look at your stocks and he looks at that. It's like good, he's got a decent return. Another investment, you know, he's got home and he's like, almost tripled his money but then the real estate, he looks at it, and he's 5x his money and more and then he's like, and that doesn't include the cash flow. It doesn't appreciate all the depreciation write offs and the tax benefits. So it's kind of like an eye opener to be like, oh, wait a minute. Now I see the, you know that the angels sing about investing in real estate and all those amazing, amazing benefits.

Michael:

Totally, totally. Yeah, that makes that makes complete sense and curious, rich to get your thoughts on when looking for a coach because I think that that's something that some people have trouble wrapping their head around, it's like, oh, I you know, I don't have a coach in life and so I would never be inclined to go get a coach or pay for coaching and so if people are inclined to do so if people are okay, accepting that, what are some things they should be looking for when selecting a coach, or a mentor or whatever, you'd have someone to help walk them through their journey?

Rich:

Yeah and that's a great question. It's like, I'd actually like to start step back a little bit, because you said what if they want to coach I would even go as far as there's a lot of people that I meet who say, Why do I need a coach, you know, I can hold myself accountable. I, I know how to set goals. I know how to go after what I want and everything in so why would I…

Yeah, like you said, Why would I even pay someone or do anything like that and it's, you know, it's that age old metaphor or an analogy of an Olympic athlete, right? Did they get to the Olympics without a coach? No, you need someone to point things out. So for me, I know the power of coaching has been incredibly amazing because I have a coach to basically hold up the mirror to ask me the questions that I'm not asking myself, to help me look at myself and be like, you know, asking those tough questions. How are you operating? Are you being your best self? Are you, where are you getting in your own way? What's that inner Gremlin in your head saying to you? What's your limiting beliefs and what are you going to do here, what and look at new perspectives, new ideas. So there's a power in that, that it's called, I'm certified in CO active coaching, which is two people, you know, when you come together, you come up with ideas that you neither would have thought about their own? So that's another powerful piece of coaching. So that's, that's the first part of my answer and then the second part is, when you're looking for a coach, I think it's really what you're looking for.

So are you looking for a mentor, which is I think, different than a coach, a mentor has kind of been there, done that, just like the mentor, and in the book I wrote, he's been there and done that. So he can say, if you just do what I did, you will be where I am, which is awesome, and very valuable and that's a mentor and I think some people are looking for training and consulting, where they sign up for a coaching program. But it's more about teaching to learn a specific skill and that's very valuable to so and then the third one would be looking for a coach who's more like that coactive approach where it's someone who I first shared, and what I've gotten from coaching is someone to ask the most powerful questions, someone who's intuitive, someone who can really help you shift your mindset and be your best self and operate at your best self. So that would be a another type of coach or a peer coach in my eyes and sometimes it comes together, you know, I'll say to my clients, do you mind if I throw on my consulting hat right now or my mentoring hat? So they know that I'm stepping out of that coat peer coaching role and be like, you know, I've invested in real estate for a while I can give you some advice here, I'm not going to have you, you know, go and search it and try to learn it elsewhere when I've got it right here, and I can share it with you. So I think that's it, it's like looking for what is it that you want? What are you looking for and that would be the first thing and when I was interviewing for a coach and looking for I've had several coaches over the past 25 years, when I interview a coach, I'm always coming from the place of like, what's the vibe? What's it feel like to be coached by this person?

Do they? Do they ask powerful questions? Are they really hearing me and are they into my vision? You know, I think the biggest thing would be connecting with that coach, and really, really noticing, like, is this coach, really seeing my vision? Do they really get me who I am and what I want what's going to help me be fulfilled in my life, and in my career, and it's just a sense thing. So you can get that sometimes you you're talking to a coach, it's like, oh, this guy's or gals just coaching for the money, you know, just looking for another client. Sometimes you talk to a coach, it's like, wow, this person is really like, wants to coach me on their ideal client and so you can sense that

Michael:

Interesting and how should people be thinking about it for themselves? If maybe they're not sure if someone is just getting started out in this journey, they know they want to invest in real estate, that's the goal but they don't know how to approach it to the to coaching and mentoring a consultant. I mean, what are some questions that they could be asking or things they could be thinking about, as they're starting?

Rich:

That process gets great, I mean, experience, I would ask for experience and you know, I think it's great, you can find you can definitely find a coach, you know, or whatever they call themselves. They might call themselves a mentor, but it's like asking those questions. and talking to that person, just you know. So here are some of my goals. I know that you invest in real estate, can you tell me about your real estate background? What's your investment, investment philosophy? What have you invested in and I would even ask the coach, you know, what's been your biggest challenge your biggest failure as a real estate investor, you know, get see how vulnerable and real they are and if they're willing to, you know, to share that, and what's been your biggest, you know, what's been your biggest win as a real estate investor and what's your greatest strength? So I would ask some of those questions of a coach and then also like, what's, where do you I mean, real estate investing so broad, right and so it's like, what do you specialize in? What do you know best? When it comes to real estate investing?

Michael:

Yeah, I love that. You mentioned tell me your biggest failure, biggest flop. I had a mentor back in the day, and he said, I don't trust anybody without a limp. Yeah, because like the people that have only had successes don't know how to do save no right to ship when things go sideways, and they will go sideways.

Rich:

They will, they will. Yeah, I know that people who got into real estate in 2010-2015, who are just, you know, knock it out of the park, and they think they're, you know, superheroes. Sometimes I'm like, oh, careful, careful

Michael:

We are all superheroes in this, you know, the last decade.

Rich:

Exactly. Yeah, yeah.

Michael:

So Rich, talk to us a little bit about what you've seen. Some of your coaching students or mentees get right and what have they gotten wrong because you really we have the beauty of hindsight now…

Rich:

When it comes to investing, specifically?

Michael:

When it comes to investing specifically…

Rich:

Yeah, wrong and it's the same mistakes that Kathy and I made too. And it's that you try to talk people out of it and it's like buying an overpriced property in a non-landlord friendly state that is maybe slightly negative cashflow, or just breakeven, and they're looking at and say, but look at how this is appreciating in five years, it's going to be worth this much and it's like, no, so honestly, that's the biggest mistake I can see and I can see it in single family all the way up to multifamily. You know, just speaking at these conferences and meeting with a lot of people are doing multifamily. They think they're superheroes. They're doing this short term, short term lending short term loans, and bridge loans and really dangerous stuff at this time in the market because it's what's worked in the past and they think that they just like, Well, yeah, it's like, I know, this is a I know, it's only a you know, 2% cap rate, but that's okay because, yeah, just a one in three years… Yeah, exactly, so there's something there's something about, there's something about that. Yeah, it's just it's fundamentals, I think that's what it is, is comes down to investing fundamentals and that's what we preach at our company. It's how we help our investors, it's just really coming back to the fundamentals. Make sure you're doing it right.

Michael:

Yeah, that makes sense and what about the other side of that coin for the folks that you've really just seen knock it out of the park? What are they doing and you can't say the fundamentals, you have to pick a different answer go?

Rich:

That's great. I love that. Agreed, yeah, what value is that? Really, it's the people who, what I've seen, it's the people who take the long term game plan to the boring investors, the ones who are not trying to do this rapid growth, and trying to 10x their portfolio or 20, exit, or whatever it is. So it's keeping that long term perspective and just, you know, making sure that you can control the properties through any type of downturn and so the lessons learned that that, you know, being going through the whole recession, the Great Recession, and the whole mortgage meltdown, and all that big lessons came from that and so that it's the people who take out long term, continuously reinvesting to so it's like, you start this small, small portfolio, whether it's passive or active, and then you just start expanding and expanding and expanding it and I would say, it's the people who focus on the overall cash flow, not just I mean, brink weaving into appreciation, but looking at it, like five years from now, this is what my portfolio will most likely be doing based on everything, even if there's a recession, or whatever and then looking out 10 years and looking at it 15 years.

So it's that big picture and then reinvesting. The opposite of that would be someone who's I have some friends who were only flipping, so very transactional, and they had to find the properties either flip it and that's where their income was coming through into constantly flipping it and they adjusted the wise ones and the smart ones adjusted and switch to the bur stead strategy and so they started to find these properties, fix them up, but then they would hold them and rent them out and now they're the ones that have amassed a good amount of wealth, whereas the other people who are flipping are still in the transaction game.

Michael:

Yeah. Ah, that makes sense, that makes sense. Okay. We've had a pretty good debate on the show over episodes about something called an alligator, which I don't know if you know Michael Zuber at all he's an author of one rental at a time. He's a good friend of the podcast, but in his definition alligators any property, that's negative cashflow, you have to feed it every month to keep continue owning it. So as you're talking about big picture, are you okay? If you say for instance, take out a cash out refinance a property to make that property a go negative, but to buy property B and now your global cumulative cash flow is greater than that a property a alone.

Rich:

I'm in the camp of no, don't, do not no, no negative cashflow and negative cash flow and I'll be completely honest and transparent that the house at Kathy and I were in in Malibu before this, we bought it, we fix it up, we bought it for $747,000 in Malibu, which is rare, hard to find, it's like unheard of. Yeah, it was like it was a one bedroom, one bath built in 1927 and we had to completely gutted it and rehab and we put about 300,000 into it and then we didn't get permits. So we got busted in that process and now there's still a lien on title from LA county building department and so we can't sell that place and we can't even get a refi until we get those liens off title and get it all permanent everything which is a, that's a whole different stories…

Michael:

Trying to get us to do an entire podcast series…

Rich:

Coastal Commission and all that stuff. So oh my gosh, so we have a tenant in there and it's slightly cash negative cash flow. So that's like 150 to 200 a month negative cash flow.

So being completely honest, we do have a negative cash flow, it drives me crazy and that house has gone up probably $400,000 over the last couple of years in value. So we could look at it that way. But we can beyond that everything that we hold is positive cash flow, even if it's just like $100 a month positive. That's fine and if we're going to do a cash out refi we make sure that it's appreciated enough where we can do that cash out refi and not have the loan payment, PTI go over what we're gonna get for rental income.

Michael:

Yeah, makes sense. Well, I appreciate you sharing the misstep and the vulnerability here on the show but it wasn't intentional, that was just a series of consequences. That hadn't be negative. You wouldn't you would intentionally do that.

Rich:

Yeah, we did bring it on ourselves and but yeah, wasn't intentional. We didn't want to get caught.

Michael:

I've played that game before, too. It's a risky one.

Rich:

It is. Yeah, so you're always looking out the window and yeah…

Michael:

Who is coming in, roday gonna be the day get caught o maybe tomorrow?

Rich:

Exactly. When we were almost done. We were building the final deck in the back and all of a sudden, this building inspector shows I'm investigating you because one of your neighbors called…

Michael:

I was gonna say but it's probably one of your neighbors.

Rich:

Yeah, because it would make the cut and concrete and it was so loud or for the whole week. I think it just drove this neighbor crazy and so it is what it is.

Michael:

As soon as a quick aside one of the other hosts on the show with me, Tom he, one of his neighbors called on him he was adding an offer a small prefab office in the backyard of his property. neighbor called he gets in trouble. Same thing didn't pull permits. So now he's going through that whole rigmarole. But the funny part is the neighbor that called Tom found out that their fence is on Tom's property, it's on the wrong side of the property. He's like, thanks for calling and alerting me to that little fact.

Michael:

Unbelievable.

Rich:

So he's, he's playing that game. How do I how do I want to you know, play my next hand?

Rich:

The revenge game…

Michael:

That's it, that’s it, best served cold on ice. Okay, Rich. Let's wrap up here. I'm curious to get your thoughts. We are in this very unique time in our economy in our market in this country and I'm just curious to kind of get your thoughts on what are you doing, personally as an investor and what are you doing in your business and what are you telling your students to do, as well?

Rich:

Absolutely, yeah. I have the benefit of being married to Kathy Fettke, who has been around for a while she's on the on the market podcast on Bigger Pockets and so she's constantly doing her market updates every year, she does predictions and has done that for the last 15 years and then at the every quarter, she doesn't investor update and at the end of the year, she puts herself on the line says okay, here's what I predicted back in January. Let's see how accurate I am and yeah, and she's been really good. She's like almost 95% on her predictions, which is awesome. So I just listened to her. You know, she's always interviewing experts and she's connected with like John Chang from Marcus and Millichap and so many just, you know, experts, as I said, with Kiyosaki and all that. So what she's saying I'll just speak, you know, because I get to hear through her office door when she's doing all her interviews and everything she think He said interest rates are not going to go up that much more, maybe even dip a tiny bit for mortgages, and then maybe level off.

But even though the Feds gonna keep raising the rate, the lender and great mortgage rates can't kind of withstand that going up too much. So she thinks mortgage rates are going to hold around where they are and then there's such a glut in such a need for properties and not enough inventory. It's like a whole different world than 2008-2009. So yeah, I think we're, it's estimates are between three and 5 million homes shy right now, for housing units. So inventory still low and also, there's that whole thing where people are locked into these amazing interest rates, so they don't want to sell. So they just, it doesn't make sense to sell something and when you got a 3% mortgage or lower and go into a higher mortgage, so the real estate is gonna hold strong is what she's predicting, it's even going to increase a little bit rents are even going to increase a little bit surprisingly, even with, with the economy and inflation, rents are still gonna go up a little bit, that's her prediction and then a recession will hit well, most likely, sometime around late 2023, early 2024 but it will be a mild one, just kind of more of a correction that that's needed.

Michael:

Okay. Okay and does either her or you think that there will be any kind of pullback in demand as folks go back into the office or are we going to be seeing remote work kind of indefinitely, which I think was a big driver of that single family rental demand?

Rich:

Yeah, that's a big one. Yeah and the cool thing is like, we have teams that are like the boots on the ground. So there's different 15 different property teams in our company that find properties and so and we just did a mastermind with them in Tampa, Florida and we spent two days and we really talked about all this exact same stuff. So it's, it's something around not like a big hit on it. There still will be some availability, but not much different than if you look at today's current market right now is not going to be a lot different than that over the next year and a half.

Michael:

So for instance, we don't expect there to be much pullback in terms of demand. Dude, because we're expecting people to continue remote working basically…

Rich:

There's definitely a return to the office. There's there are definitely companies that are saying no, it's time to come back now that we want to look over your shoulder, we want to hold you accountable and all that stuff. It's so funny, because it's like the surfing lineups are getting a little bit lighter thinning. So funny. Go Oh, it's like why are so many people surfing? Oh, they're supposed to be orange. They think they're working. Their bosses think they're at work right now. Yeah. So I'm seeing a pullback there. So that's my gauge.

Michael:

So funny.

Rich:

Yeah, but not as much. There's definitely, with so many people how they've learned to use Zoom and GoTo Meeting and being remote and all that stuff. It's we're in a new world, there's no doubt about it. So I think there's going to be a slight pullback on buyers and transactions and all that. As far as the rate, but it's still not going to it's not going to drop to like dismal levels.

Michael:

Okay, sweet. Well, we will definitely have to stay in touch and see how you do how you and your wife do on those percentages. Rich, this has been so much fun, man. Thank you again, if people want to learn more about you want to learn more about real wealth, where can they do that?

Rich:

For the book? Like I said, it's on Amazon or if people want to learn more, before they buy it, just go to https://realwealth.com/the-wise-investor-book/ and then our website is just simple, real wealth: https://realwealth.com/

Michael:

Perfect. Alright, thank you again and I'm sure we'll be chatting soon.

Rich:

All right, man. Thank you, it was fun.

Michael:

All right, everyone a big thank you to Rich for coming on. Super, super insightful. I know I learned a ton as a coach myself in what to look for in a coach and mentor going forward as well. So as always, thank you so much for listening, and we look forward to seeing the next one. Happy investing…

Are current market conditions an opportunity for real estate investors? Jun 29, 2022

Dana Dunford is the CEO of Hemlane Property Management and a real estate investor. In today’s episode we discuss market conditions, interest rates, what is happening in the stock market, and what the current moment means for real estate investors. If you are wondering if it is the right time to purchase an investment property, you will want to listen to this episode.

Links:

Hemlane.com

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Dana Dunford, co founder and CEO of Hemlane Property Management. And today Dana is gonna be talking to us about the state of the economy and some things that investors should be aware of and thinking about as we move forward in today's market. So let's get into it.

Dana Dunford, welcome back again to The Remote Real Estate Investor. Thanks for coming on and hanging out with me.

Dana:

Great. Thanks for having me. Again, Michael.

Michael:

Oh, my gosh, it is such a pleasure. You are great friend of the pod. Great friend of Roofstock. For those who might not be familiar with you give us the Quick, quick and dirty background of who you are. And background on yourself.

Dana:

Yeah, so I'm Dana Dunford. I'm here in San Francisco. So just right across the bridge from rootstock. I have been in technology for gosh, now we're going on 18 years. So I'm a tech veteran, which we'll be talking about tonight, today, which I'm excited about. And on top of that, I'm in property management. So we're a tech platform for property management, and partner of Roofstock’s. And we've seen what has been going on since q1, the market softening things changing in technology. So I think this is going to be a great call, because both Roofstock and Hemlane have seen it firsthand. And hopefully this gives some insight into what, what the upcoming year is going to look like for all real estate investors out there.

Michael:

Totally. And just to give some people, some additional color, you are CEO, co founder of Hemlane, and you just did your series A, what was it q3 of 2021 or q4 of 2021?

Dana:

Q4, so we raised at the perfect timing, those who are not in venture and the tech world of Silicon Valley. We couldn't have timed it better. You know, right now, and we'll talk about this today. Right now, the market is really softening. There's just less capital going into startups. We can't say this was people were already predicting this. So back in q3, and q4 venture capitalists were already saying, Ooh, there's a lot of money pouring into this valuations are really high. And some had already started pulling back. But it wasn't until what happened in the public markets, where you know, trillions of dollars were taken out of these Sass companies, valuations are overall the market cap, that suddenly the venture world that trickled down and people really started to pull back capital. So yeah, we raised back then roofstock, when was your guys's last raise? Because you guys are at a later stage. And so obviously, also impacted by this and quite, potentially, more significantly than us.

Michael:

I think we got our term sheet squared away in in q4, as well. So right around that same perfect timing with money getting wired in coming in and in q1.

Dana:

Yeah, perfect. So you guys will be able to weather the storm with that what we're going to be talking about soon here.

Michael:

Yep, absolutely. I'm thinking so. Okay, so let's talk about how, like, how did we get here, because you're mentioning that trillions of dollars have been essentially taken off the table in terms of market cap. But for those people that aren't familiar with the space that haven't maybe been following along as closely, what like, where are we today? And can you give us some insight and background as to how you think we got here?

Dana:

Yeah, so first of all, I believe most people on this podcast today listening are real estate investors. And so all of you hopefully got in when interest rates were super low, just artificially low, right? We never seen interest rates below 3% for so long. And one that was fantastic for real estate, right? You could get a rental properties at afford a higher price because your interest rate is much lower your loan. And then for startups and for companies money was much more free it was much more flowing. What we ended up seeing happen which most people predicted this would happen. But no one knew when or at least I haven't heard of any economists who knew this was going to happen exactly. We're in March, but we started seeing the inflation go through the roof, you know, 8.6%. And it's been consistent where we have seen the inflation rate really, really high.

And so the only way for the Fed to essentially combat that was obviously, to increase interest rates, which we are all seeing now are all seen in our real estate itself, doesn't mean there aren't great deals out there. So Mike, like, do you want us to talk about that, because I still think there's great deals out there that you guys have on the platform, and now could be a really good time to buy. So don't let that taint your decision of whether or not you should go into real estate.

But with that, as you know, when the Fed raises interest rates, consumer spending just goes down, that will probably people will spend less, and also things are more expensive. And so once you have that happen, the stock market's inversely correlated to interest rates. And so once interest rates went up, there was a correction in the stock market. Why it affects us on the private company side so much is Roofstock and Hemlane are both considered growth companies.

And what happened was essentially, in the public markets, so any public company, there's basically two different types, there's growth, just like us, companies like Roofstock, that have gone public. And then there are value companies and the value companies are much more stable. They're based on their cash flow. They're typically larger, older companies, and their price is based on their sales. So their price is relatively low relative to sales, in companies like that, or like Bank of America, if you think about it, and RG like gas companies like very stable, steady businesses, where you're not going to see

Michael:

Blue chip companies.

Dana:

Yeah, your blue chip companies where you're not going to see, you know, 500% growth year over year. But what ends up happening is when the interest rates go up like that, and stocks go down, the ones that get devalued, the most are the growth stage companies. And the growth stage companies are companies like Roofstock, and heavily that are public. And so what we basically saw happen was this huge, huge cut in market cap in the public markets. And so for SAS company software as a service where you go, you pay a subscription every month to use a service, the market cap cap got cut by $1 trillion dollars from November of 2021. Until today, and so what that did was essentially, these companies thought they were worth a lot more.

And you know, some of them, like the stripes of the world, in the snowflakes had these really high revenue multiples, and suddenly, those just deteriorated. And the multiple based of what their valuation is versus their, their revenue went down. And that essentially trickled down to private companies like us as well. And so now when a company goes out to raise capital in q1, q2, primarily, now it's even, it's even worse. And what we're foreseeing in q3 is that you might have had a 10x, revenue multiple, so your valuation, it's 10x, what your revenue is, that's how it used to be.

Now you go out to a venture capitalist, and they're like, great, you're worth 3x, or 5x. So much lower valuation. And so what they're, they're expecting is a lot of down rounds, a lot of startup saying, If I can, let me just hold on to my cash, let me cut my bird, let me try to raise later and better times. And all of this impacts the economy, because it was the public markets that were hit. And now it's also the private companies where we are in Silicon Valley. And I do think this, this trickles a bit to real estate. It's it's a different type of market correction that we saw in 2008. In 2008, it was housing right and the mortgage crisis today, I think this is a lot more like the.com bubble. This is very similar to the.com bubble of these really high tech valuations that need to be corrected. And so when you think about purchasing real estate, I actually think that's why Roofstock is such a fantastic place to go. Because you're getting out of the tech scene, you're going to other markets and purchasing there.

Michael:

It's so interesting. But then so I'm curious, we talk so often about in real estate that the price is only a factor, or it's only important if you're doing something with the property if you're buying selling refinancing, because otherwise you're just having a cash flow, and that often is independent of what the value is of the company, or excuse me, the property. So why does that matter? or for companies like the fact that there's the company is now worth less, unless they're trying to do something buy, sell, or refinance or raise, raise, raise capital, like, why does that matter?

Dana:

So it doesn't matter for Roofstock. And it doesn't matter for Hemlane, because we just raised, we have enough capital to weather this storm. But imagine a company that raised and they had a, let's just give the case of like the stripes of the world 100x Multiple. And let's just say it's a private company, with 100x, multiple, and now they're going back out, and they're now getting a 10x. Multiple, they could have what we call a down round, where suddenly they are worth less than they were before. And that gives a lot less confidence. One the company itself, right? The amount that you're giving up as a founder, as an employee, as an existing investor, it's a lot more just to get in the same amount of capital you wanted to historically, in so what you're seeing is these companies really, really tighten the ship, and just say, Okay, we're going to stop hiring as many people, we're really going to look at our expenses. And that means there's not more money pouring into, you know, hiring 100 people every week, they're suddenly going back and thinking about who are the strategic hires, we really need? Should we be letting go? You've seen the massive tech layoffs where it's, you know, 20% of the workforce. And now suddenly, they're really tightening their books, because cash is king right? Now, you want to hold on to that cash? Because the last thing you want to do is go out and have a lower valuation.

Michael:

Yeah. Okay. Well, that makes sense. And so talk to us a little bit about why this is affecting real estate investors or why real estate investors should even care about this that's going on?

Dana:

Yeah. So I always think there's a huge opportunity when there's like the Warren Buffett, quote, right? be fearful when others are greedy and be greedy when others are fearful. I think right now everyone's scared. And there's a lot of real estate investors, like we actually just did a survey at Hemlane, where majority were saying we're not going to purchase in the next 12 months, because interest rates have gone up we should have gotten any year ago. Well, you know, the best time to get into real estate was 10 years ago, and the next best time is today, I think there's going to be a lot of great deals out there. I think that while others are tightening up, other investors are scared, this is a time for you to be really aggressive. I mean, still looking at your pro forma and and follow your numbers. But you'll be able to find some some great deals out there.

Michael:

I've heard a lot of sentiment around, you can always change your interest rate, but you can never change your purchase price. So if someone is getting into a deal today, at an interest rate that's a little bit higher than they're comfortable with. But they anticipate interest rates to come down at some point down the road. What are your thoughts there?

Dana:

Yeah, you can always refinance. I mean, don't do a deal hoping that interest rates go down, and you can refinance it or fudge the numbers on your spreadsheet. This is why

Michael:

I was hoping that's what you were gonna say.

Dana:

Yeah, like this is I mean, this is why I'm, I'm more conservative than most in every property purchases had a fixed rate. I don't do adjustable. But I can refinance, right? So I can always refinance. But I want to know what I'm getting into. So when you do your pro forma, do it with whatever the interest rate is now and consider it a huge advantage and just like increased cash flow, if you can refinance in the future, will interest rates go back to this like artificially low rate that we saw over the past five years, maybe not. But I don't think that is a reason not to purchase now. You do your numbers, and you look at it just because you might say property values are really high interest rates are going up, now's not a good time to buy. That's just laziness. Like, honestly, that's just you being lazy and not wanting to do the work.

There's always great deals out there. You just have to do the work, find them look at the numbers and say even with this increased interest rate, it's still a great deal. I'm still cash flowing and I've got a great cap rate, and you can go ahead and purchase. So I don't think of this as the time really to, to change your decisions on real estate. And part of that has to do with I think, you know, some markets will soften. Some markets may remain flat for a while but that doesn't mean that you're not getting the cash flow and having a great investment that by the way, with inflation where it is If it continues, having an asset where the value goes up with inflation, so I still think now's a great time to purchase real estate. And you might be able to get some fantastic deals as other investors are pulling out, you can really, really go in and get those great deals.

Michael;

Love it. And Dana, I'm curious if because we've seen prices go through the roof, and interest rates have also gone up significantly, there might be a bit of a lead lag measure until we see prices come down. So in in terms of looking for different markets, I mean, are you targeting markets that are continuing to grow? Are you targeting markets that maybe are seeing some of that softening in terms of pricing?

Dana:

So for us, we go where the real estate investors are. So if there's a real estate investor there, right, we're going to do the property management for them. I think when you're when you're thinking about the lag, that is definitely true. I've heard this with other real estate investors, I've seen it myself, where you see a price. And with interest rates up, the seller puts one price out there, because that's what it was two weeks ago. And suddenly, it's not worth that much. It's worth like 10% 20%. Last, but it's actually really good to put yourself into the position of the seller, and of the real estate agent, because you can actually get some really, really good deals off of that.

And what I mean by it is real estate investors have always told historically, have told their buyers in the past couple of years. If your mark, if your property is on market for over two weeks, people might think there's something wrong with that. And so, you know, we're going to ask for offers on X date, right, like X date and two weeks, or maybe we'll do one week, we're going to ask for offers. Well, if they've missed priced the property, you might be able to go in and you don't know this, but you might be the only offer because they priced it way too high, because we priced it from a purchase price from two weeks ago. And now that has suddenly changed like the market changes every two weeks, it really is. And you could go in and get a great deal. And so I think from from that perspective, there are still fantastic deals out there. But you have to be patient. And some of it will be that luck, where you get the right deal, though what else has gone into, and you can go ahead and purchase that.

So if you put yourself in the other shoes, you might see that you also see a lot of people you know why I don't think it's like 2008 and 2009 is people have a lot more equity in their properties because one value values have gone up. And then two, the interest rates were really low, people could afford more put more money in the market was booming. And so what we're seeing is that more people have equity in them. And at some point, it's emotional for someone, they're like, I just want to get rid of this asset, because I'm gonna go buy another one, or I just really want to move out of the city and move somewhere else. And, you know, to them, maybe 20 To 50 to $70,000 is not a lot depending on what it is. But that is a lot to you. And that changes, changes the numbers on your spreadsheet significantly.

And so I mean, with that purchase price, obviously that matters. But just because the price is out on the market for a property doesn't mean that the price is going to sell for. And so it would be a really good time to go out and experiment with that you will know your market better than anyone else, whatever market you're in, because it will take you bidding on like five properties. And maybe people will laugh at you like your first one, you go like 20% under and they laugh at you. But maybe you get lucky on the fifth one, and you'll get a great deal. But yeah, just follow the numbers in your spreadsheet don't have a purchase price, that doesn't make sense and you're not cash flowing. Or don't change the interest rate hoping that it will go down to that to that amount.

Michael:

Yeah, that makes total sense. And speaking of spreadsheet numbers, are you seeing a lot of your investor clients that you work with adjusting their expectations around cash on cash returns? Now that prices and interest rates are up?

Dana:

So not really I think most investors like most of the savvy ones we work with, we work with his sort of two different types of of customers, those who had properties just handed to them. And they actually never did the analysis like pan downs from parents and things like that. And then others

Michael:

Accidental landlords.

Dana:

Accidental Yes. And then others who are very strategic real estate investors and what we have found with them as they have the capital and they might not be they might be with inflation to your point Michael being like, Oh, maybe I should just go buy something because the dollar today is worth less On tomorrow, but no, I actually think most real estate investors are still saying, this is the deal that I got, historically, I want to get something like that. And so they're not changing those expectations on cash on cash return, but they might be going somewhere else. So they go to Roofstock, and they say, Okay, I, you know, couldn't find this property, you know, in my backyard, but on Roofstock, they do have the cash on cash return that I that I that I targeting. And so I do think they're not changing their expectations. But they are going out and finding alternative ways to get the numbers they need.

There's one case, Michael, where I find people change their expectations. And it's first time real estate investors to just get their foot in the door. And I'm actually okay with that. I think that there's too many people who, and for anyone who's listening to this, who doesn't have a real estate investment, you kind of sit there and you kind of fantasize about getting one and then you put so much like anxiety into getting your first property. And once you have your first you're like, oh, okay, that's what I got, here's what it is. And it makes it easier, where then you can go and purchase more properties and more properties. And you know, what you're looking for, and you know what the return was, and you have this process set up.

But the first one is really difficult to get into. So I find that those people today are changing their expectations, for certain metrics just to get into the market, before it's too late. Interest rates go up more, or you know, they're kind of kicking themselves that they didn't get in, you know, four years ago, five years ago. So I only think it's first time real estate investors where that's happening. And I'm actually okay with that. Because I think if you can get more people into real estate investing, and more people to just get their foot in the door, you're going to learn so much off of that first property, that then you're going to say, Okay, this was my cap rate for my first property. My next one, I have to at least have that or better and you kind of improve, you know, it's kind of like dating, you never like you don't date someone who's great. And then like the next person is like a downgrade, you kind of have the standard. And you're like, I can only go up from there. It's the same exact thing with real estate investing. So I really think it's only first time homebuyers where that happens are real estate investors for rental properties?

Michael:

Yep, I think and I think that makes tons of sense. It's something that I hear all the time. It's Michael, I'm trying to get my first deal done and has to be amazing. And you know, it has to be a Grand Slam? Like? Don't worry about the grand slams, let's practice getting on base first. And then you'll know how to swing for

Dana:

Exactly, exactly. And it makes it a lot easier when you have one property in that area. You know your market a bit more, and then you can kind of purchase some more around at.

Michael:

Yep. Yeah, I think it makes him think that's totally right. And so Dana, we're kind of at this like crossroads where we're talking about, some investors are pressing pause on their acquisitions. And then this whole other cohort of investors are like, Oh, crap, I gotta get into the market before interest rates go up further before prices go up further. So it does feel like there's this pressure to buy or there's frenzy to buy, on the one hand, and then there's this whole other group, that's again, kind of taking a step back and saying, let's, let's wait and see what happens. How do you square those two?

Dana:

Well, to me, I'm like a pretty unemotional real estate investor. And I feel like for anyone, whatever segment you fall into, you still have to go back to the numbers and see what makes sense. And so I mean, is there a right way to go? I think one people who are not going out, and they're using this as an excuse not to purchase properties, or just being lazy, honestly. And for those who are out there saying, I gotta get in and get my next deal. I think they're almost too emotional. Where they might go in and change the numbers to your point of saying, like, oh, it's not, you know, my last deal was was better than this, but I just need to get my foot in the door. Maybe that's not the right approach to have, it's, Hey, there's gonna be a deal out there. I might have to be a little bit more patient during this the for the next three to six months, I have to be patient, I have to understand what's going on.

But yeah, I just kind of go back to the numbers. I think in both cases, they're they're taking emotion and what's happening in the market and using that, like the macro for the micro. And instead of saying, You know what, I know what is a good deal, here's what it looks like on paper. Let me continue to go search until I find that and it might take you a little bit longer to find it. Or you might find a process like oh, wow, I can, you know, go 20% under and get lucky on a deal off of this, whatever the home price is, I could, you know, undercut them and give them an offer and maybe they'll take it to get that great deal.

Um, But I don't I think both categories are bad. I think someone who says I have to get my foot in the door. Before interest rates go up is emotional. I think someone who says there are no great deals out there are just lazy. And so I kind of fall somewhere in between of saying, yeah, just be financially prudent as you always should be with your real estate investment investments, know your market, know what numbers numbers you need, and make sure you're a little bit more conservative. Like, I know, a couple investors with adjustable rate mortgages that did them, you know, back when interest rates were really low. And I bet they feel pretty stupid right now. So

Michael:

we won't name names,

Dana:

Won’t name names here.

Michael:

Well, I'd be very interested to meet the the emotionally lazy person, because it sounds like those are two opposite ends of the spectrum. Yeah, I have to see. Okay. And last thing that I want to ask you about is around expectations. If someone is newer to the investment space, they may be looking to get their first deal done. Everyone around them, their sister, their brother, aunts, uncles in this market are making 10% cash on cash. Yeah, pick a number. Nice round number 10%. And they're like their expectation was was 15%. Right, for whatever reason, that's what makes them tick. That's what gets them excited about an investment. Everyone around them is making 10%. So how the how should investors be thinking about not looking at other people, and just focusing on what's good for them, but also not being blind and naive to what a market is really able to produce? In terms of In other words, like, they I want someone to be excited about the returns that they're getting, but I also want them to be realistic. How do you kind of how do you?

Dana:

So the biggest thing I would say to throttle that is, most likely you've sort of selected a market because you've looked at, okay, where is and I mean, Roofstock does this for you, and you guys, I think have some great shows from like every single market of why why you guys are looking at a certain market. So that helps. But you as a real estate investor are gonna say worse population growth? And why like, is more industry going there? Like maybe an Amazon facility was just put into place? Does it have fed, ed's and meds? Like, is it stable, even recession proof, especially now? So you kind of go through and figure out why am I excited about this market? And you just start there? And like, don't forget about your, I mean, 15% cash on cash return? Like, let's just forget about all of that and just go through? What looking at macro, and now we're kind of going to micro to like city level?

Why do I think this is going to be a lot a good market in five to 10 years, because you're going to hold on to these properties and purchase more, right? Do that first, then you say, Okay, this is my market, then what you're going to do is for two to three months, you're going to look at all the deals there, go on Roofstock, I think you could set up alerts because I have those that go to my email that essentially like tell you here's a new property in that market, great purchase. Um, you're gonna go through and you might the first couple of properties, say you know what? Those, those don't really hit my cash on cash return expectations, but now you're starting to know your market and you're gonna see a trend, are they going up? Are they going down? And you can look at that over time to make an unemotional decision that is based on data.

I think that is the most important thing to do. When someone gets in this frenzy of I need this cash on cash return shoot, I'm not going to get it. So I'm just going to slash it. And I'm going to say now I need, you know, seven or 8% I and you're just becoming emotional. But if you go through look at the numbers and you say okay, great, I wanted 15% You know, my friends are getting 10% I'm and you're you change those expectations. And suddenly you say, Okay, I made this decision, and here's my cash on cash return. But I knew at that time, that was the best I could do. Because I looked at the data, then suddenly you never go back and wish you had done it differently. Because you have something that is non non emotional to back you up. And don't compare yourself to other real estate investors. I've seen real estate investors in the past four to five years who've been super successful, who are super stupid.

And the reason they were successful and I hate to say that but like there's so many people out there because basically it was free money like there was so much investment it was there was so much easy money from investors that I saw way too many people also going into real estate. A lot of actually on the fix and flip side that just got lucky because yeah, money was basically free to do a fix and flip and a The home prices were going up astronomically. And they feel like they're the smartest people in the room.

Well, maybe they were at that time, but like, give it two to three months, maybe six months, and the story might change. And so that's why I think it's hard at like one point in time, if you're just getting started to compare yourself to those around you, I don't think you should do that. I think you should just be financially prudent, and make sure that you're not overextending yourself. And you know, your market. And you know why you made the decision, you see you did, and it's all based off those numbers. And it's based off the numbers, but also you need to know the market, like you need to know you guys have neighborhood scores and ratings, that kind of stuff of like, here's why I only invest in neighborhoods that have three stars, or greater, or whatever it may be like it, write all of this stuff out, and take a really methodical approach to your assets, your real estate investing, and I don't think you'll regret it. Like, I don't think you're gonna go back and say, Oh, I really wish I would have gotten that 15% I targeted?

Michael;

I think that is like spot on. Thank you so much. And if you missed it, if you missed any part of that, go back, rewind the last three minutes, and listen to that again, cuz I think that's a lot of gold in there. Then this was super fun. As always, if people want to reach out more, find out more about you or hemline. Where's the best place for them to do that?

Dana:

Yeah, you can go on to Roofstock when you purchase a property, how many will be listed as a property manager? So go go ahead and do that. You can also go to Hemlane.com. And my email is dana@hemlane.com. So I love hearing from people.

Michael:

Awesome. Well, thank you again, and very much looking forward to having you on. Again, I'm sure take care of we'll chat soon.

Dana:

Great. Yeah, I'm excited in six months for us to see if we were if we stand corrected on what's going on in the market.

Michael:

I know it'd be very interesting. Well keep close tabs on it.

Dana:

Great. Thanks so much for having me.

Michael:

You got it, take care.

Okay, everyone, and that was our episode A big thank you to Dana for coming on as always big friend of the pod as we were saying at the beginning of the show. As always, if you liked the episode, we'd love to hear from you all with a rating and review and we look forward to seeing the next one. Happy investing

How to find off-market properties in today’s market Jun 21, 2022

Anson Young is a real estate agent and the owner of Anson Property Group, which is based in Denver, CO, and specializes in distressed property purchases. As a full-time real estate investor for the past ten years, he has completed more than 120 wholesale deals and 95 flips. Anson and his team specialize in marketing directly to sellers for off-market deals, using many of the methods that can be found in his book Finding & Funding Great Deals.

A common talking point today is that supply is low, demand is high, and cash-flowing deals are hard to come by. Anson pushes back on this by focusing on finding off-market deals. These off-market properties, otherwise known as pocket listings, are a great source of leads for those that know how to find them. By using some old-fashioned elbow grease, Anson is able to find cash-flowing deals in competitive markets. Today, Anson shares his insights on how he finds off-market deals in today's market.

Episode links:

https://www.instagram.com/younganson/?hl=en

https://www.biggerpockets.com/users/anson

https://www.youtube.com/c/ansonyoung

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Transcripts

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Anson Young, who is an investor, agent, wholesaler out in the Denver, Colorado area and he's gonna be talking to us today about how do you find off market deals in today's market environment. So let's get into it.

Hey, everyone, before jumping into the episode today, I would just like to encourage everyone to leave us a rating or review wherever it is you listen to your podcasts, they are super, super helpful for us in getting out there to a wider audience. So if you'd like the content we're producing, or even if you don't like the content we're producing, we'd love to hear from you. Let us know how we can improve and do better, so thanks so much and well let's get into the episode, Anson Young, what's going on, man, thanks so much for hanging out with me today, appreciate you.

Anson:

Yeah, thanks for having me. It is awesome.

Michael:

Now, I'm super excited. So I know a little bit about your background. But I would love if you could share with our listeners who might not be familiar with you, who you are, where you come from, and what is your doing in real estate.

Anson:

Yeah, so I come from Denver and we were just talking about how there's not many natives left. But I was born and raised here and what I do is for since 2006-2005, I've done investment, real estate fix and flips wholesale. Wholesale are just now getting into kind of burr buying holds looking more into short term market and I've been licensed since about 2007. So I've been licensed almost as long as I've been investing.

Michael:

So right on we actually like just before this episode, we're recording with another guy who is a broker, licensed broker agent as well, as an investor we were talking about, does it make sense for investors to go get their license and kind of vice versa and so that was a really interesting discussion. Has it helped you in your investing being a licensed agent?

Anson:

Yeah, I don't know honestly, how people do without it, because I can't stand waiting for waiting on other people. So if I had to wait for somebody to send me comps, or if I had to wait for somebody to submit an offer, I would probably go insane. So being able just to do that myself, is huge. So but besides that there's a lot of advantages for sure. I have never regretted it. There are a couple of like very niche, creative real estate things that I can't do because I'm licensed, but it's never affected me. I don't do like sandwich wrap, lease options, whatever, I don't do any of that. So it doesn't affect me at all.

Michael:

It's not applicable. Wow, love the hot take, man. This is perfect timing, right on and so okay, so you just also spoke at the recent Bigger Pockets Conference, which if anybody was there, they hopefully heard tell us what that was all about.

Anson:

Yeah. So that was their first rookie conference, so they have a rookie podcast, hosted by Ashley and Tony and they, and they decided, You know what, they've been doing a rookie boot camp. That's a like a 12 week virtual boot camp and they decided, hey, why not do like a two day live event and so they did and so they put all their power behind it and it was geared completely towards rookies. I did like an informal poll, when I did my, my speaking of you know, who's done zero deals, who's done, you know, 12,35,10 deals and there was like one guy who did 10 deals, and I was like, why are you here? But for the most part, wrong conference, I was like, whoa, hey, doors over there. Could be a good guy. But no, like, I think that everybody there has done zero to one, maybe two deals and they were just looking to have guidance on how to do more how to finance them, how to find them, how to structure their business, how to implement systems, you know, basically just how to scale and how to grow. What to do next. So yeah, it was it was a really good vibe, I've, I spoke at the, you know, the big BP conference and the rookie conference, and the rookie was smaller, and more intimate and definitely, everybody's there just to learn, you know, as much as they can, so it's awesome environment.

Michael:

That's so, so cool and so you were speaking specifically about off market deals, right?

Anson:

I was yep how to like how to find deals at any market.

Michael:

Yeah, okay, awesome, which I think is so important for this market and kind of where we find ourselves. So give us just a little bit of insight, so you know what people who are at the conference got to hear about.

Anson:

So I do say, like any market, because I learned really quick, like if I'm in Denver, and I just do Denver things, and then somebody comes to me, and they're like, Hey, I bought, you know, 100 properties last year, and they're all $20,000 and I sent out yellow letters, and they're like, in Chattanooga, Tennessee, or something like those things, you know, that like the things that he's doing there might not work in my kind of a plus capital city market and so being from, you know, being working here in this market, and then now I'm also working in smaller markets, I feel like I can speak a little bit more to like finding deals in any market, because it's, you know, I'm kind of working from the top down, I'm working from what works and like, the highest competitive, insane market and when I implement that strategy down into a less competitive market, it still works really well and so whereas I think the reverse isn't always true, where they're like, you know, I've talked to guys who have done exactly that they're still selling, sending yellow letters to, you know, just basic, generic lists and they're still getting, you know, a dozen deals a month or something like that. It's like, that just does not work here. Whereas my methods definitely work there. So I feel like, you know, I feel like a little bit of elitist there. But no, but, you know, we definitely, we definitely talked about, you know, I wanted to implement, you know, hey, here's what's working today, here's what's working, not just in my market, but in multiple markets, and also kind of how to how to do like a fast start. So like what you should do when you get home. Here's kind of a fast start guide, based on the things that I talked about. So we talked about some different strategies that we talked about, like, hey, this is exactly what I would do. If I was starting today, in almost any market, it would be applicable. So that's kind of what we went over.

Michael:

Awesome. Can you give us a little bit of insight into like, what that starter guide looks like? I mean, what would you do starting today.

Anson:

My favorite, like, like, so, you got to look at like your lists of who you're targeting, especially when you're going off market, your list of who you're targeting, and then how you're targeting them. So what you're sending them how you're contacting them and so my who is definitely my favorite list, if I'm a rookie, and I don't have a lot of money, but I might have more time than money, I'm gonna go driving for dollars, I think it's still, it's still my favorite list, it's still, you know, the least amount of competition on any of our lists, it's almost like nobody wants to just jump in their car, put in the work to, you know, write down the addresses of, you know, the 10 worst properties in a neighborhood or whatever that looks like so. So for us, you know, we're all we're almost like one of one or one of two people who are contacting these, these homeowners, because they may not be in foreclosure divorce, they may not be dead. The only thing wrong is that their house looks terrible and there's no list for that and so unless you go and you and you put eyeballs directly on to those properties, and so.

So if I was just starting out, I would start there and then again, if I had more time than money, I would cold call that list, that's going to be the most aggressive, direct way to get a hold of those homeowners to figure out if they do need to sell if this is something that that might work for them and so, you know, and everything depends on goals and if you're looking for 100 properties this year, versus like two rentals, your entire strategy is going to be totally different. But, you know, in general, if I'm a rookie, I'm going to start there. I'm going to network with agents in the area, see if they have any upcoming listings that are maybe pocket listings, or, you know, if they ever come across a hoarder house, or if they ever come across something that's just so far outside their wheelhouse, like, I'm their solution, right? I'm the guy that can come and help save the day and then I'm going to go network with wholesalers as well and so, between those three activities, you know, you should be able to kick start, you know, finding deals in pretty much any market because now you're in front of two, two gatekeepers, you have wholesalers and agents who are in front of deals, and you're going out and you're looking for deals yourself and contacting homeowners directly.

Michael:

I love it. Dude, that's such a cool like three pronged approach. So when it comes to finding lists or scraping lists, I mean, I hear it all the time. What are some actionable like programs or sites that people can go to and use to come up with these lists or get access to these lists?

Anson:

Yeah, if you look at kind of ease of use, you know, something that you can go in 15 minutes later pop out a list, you know, something like a prop stream type product is going to be just, I mean, it's designed to be easy that way, right? So you can go in there, sign up for an account, I think they have like a 14 day free trial or something like that. Go in there, say I want all of the pre foreclosures in these zip codes and boom, it'll, it'll give that to you, you might have to pay extra for it, for exporting it or something like that. But, but that's like, you know, five button clicks, and you should have some sort of lists, you know, high equity absentee, you know, they have different metrics in there that you can kind of just click a couple buttons and have a list in your hands. If you want a little bit more hands on, you could go to List source, which is kind of kind of the gold standard of just backbone lists that almost everybody goes in. But there's like a million different options inside of there. So I can understand that it'd be confusing to kind of find exactly what you're looking for because there's, there's so many different options inside of there and then you could export a list that just does you pay for, and it doesn't make sense, because you just clicked one wrong button or something like that.

So I understand like ease of use, it's not the easiest thing to use but if you look at title companies, they they'll use lists, sources, their backbone for all of their, their data, like land title, uses them as a backbone, my MLS, for being an agent, and our tax system is all based on the same company that owns list source and so all that core logic data, it's, it's, you know that there's hundreds of MLS systems that use the core logic, list source backbone. So it's kind of an industry standard for title companies, agents, and where that data lives. So I like to go directly to where the data lives because I don't know where prop stream gets their data. It seems to be okay but I kind of I like going directly to the source but I understand it's hard to use.

Michael:

Yeah, no, that makes a ton of sense and that's a really good tip and then, so when it comes to agents and wholesalers, so from the agent side of things, talking about pocket listings, or off market deals, I think a lot of investors struggle, especially newer investors struggle, because they haven't built a name for themselves. They're having trouble getting access to those types of deals. So what is something an investor can do, especially when he's just starting out to position themselves to be able to take advantage of or get access to some of these popular things or off market deals?

Anson:

Yeah, so for, you know, for agents, agents do get hit up by investors pretty often. I mean, I probably get a couple texts a week from investors that are kind of saying the same thing, like, hey, we're looking for more projects, if you have any, you know, listings that that are just outside of your wheelhouse, let us know, we'll come in, we'll pay cash we'll do you know, they'll do all the investor things. The whole nine yards. Yeah, so I get that it is kind of competitive, I think it comes down to like rapport, you know, building up a relate an actual relationship with agents and not just kind of a transactional, like, hey, I'm going to be nice to you. So you can give me deals or something like that, like, I think people can, can see through some of that. So if you want to actually like form a strategic partnership with people, you know, sit down, buy them coffee, you know, talk to them about what they're doing and if there's any way that you can help them because if you're an investor, and you don't have your license, you will come across sellers who want to just list their house and so having a resource as an investor of like, hey, you know, my, my friend, James, is an agent and he can take care of you and so if you're, if you're kind of reciprocating, and giving, you know, to an agent or a few agents, they're going to be more, you know, much more willing to give you a deal when it comes across their desk, like hey, this you know, hoarder House came across in my brokerage. Everybody's like pointing and going, like, what the heck do we do with this thing and, you know, this could be a good opportunity for you to take a look at, but yeah, being in front of the gatekeepers is, is very powerful. So whatever you can do to get in there, I suggest being nice and building rapport, but whatever you could do, get in there.

Michael:

Yeah, that makes total sense. I mean, it kind of goes to drive home. The point something that I've been preaching for years is like relationships, like real estate's relationship business. It's not an asset business. It's not a sit, you know, physical bit like I think it's all about relationships and this goes to really drive that point home, so I think it makes a ton of sense.

Anson:

Yeah, 100% a relational, absolutely.

Michael:

Moving on to wholesalers because I think a lot of people have a view opinion preconceived notion about what wholesalers are, you know who they are, the kind of people they are and the things that they do. So there are good ones kind of like everything in life, and then there are less good ones. So how do you develop a relationship with wholesalers and like, especially as a new person? How do you know that they're just not pulling the wool over your eyes?

Anson:

Yeah, that's a like, that's so prevalent, like that. Just everybody knows that most wholesalers aren't great. I said, you know, I said it from stage, I was like, finding, finding wholesalers is easy. Finding a good wholesaler is different, like, that's the hard part.

Michael:

Right, right. Right, right.

Anson:

So it's gonna come down to like weeding, you know, weeding through it, you're going to, you know, if you meet 10 wholesalers, maybe one or two of them are doing good deals that are, that makes sense and so you won't know that until, you know, you might talk to them and get a feel, you know, feel for them. But a lot of people, it's kind of hard to tell if they're, you know, if they're legit there, but you might just start having to see their deals, get on their list, start getting deals across your desk, and analyzing them and you're gonna have to analyze them anyways. So, right, and it's good practice. I mean, if you're like, if you're a rookie, or if you're somebody just starting out, like, I tell, I tell investors and agents and whoever I can, like, look, get these, get these, get this input, and then evaluate it. You don't have to be ready to buy, you don't have to be ready but you're putting in the work of figuring out what these properties are worth estimating repairs. plugging in numbers into your formulas of what works for your business, does this work as a rental? Does this work as a short term? Does this work as a flip, you're putting in those reps and so if you're putting in the reps anyways, and you're getting, you know, 10 wholesalers worth of deals across your desk, you know, analyzing those and really figuring out like, oh, these two are actually having, you know, consistent deal flow with numbers that makes sense for my business and then you might, you know, you might just kind of unsubscribe for some of the other the other ones or, occasionally, the worst wholesalers come across good deals, and they just don't know it and so sometimes, you know, sometimes you'll find a diamond in the rough from somebody who you might write off, so I don't, I don't subscribe because sometimes they just don't know, maybe the deal, or maybe the values in the land, or maybe the values in a pop top or maybe the value is in a rezoning play and they're trying to push it as a flip. That doesn't make sense. Right, so, you know, don't there'll be some diamonds in the rough there, but you're going to be analyzing deals and double checking the work anyways. So, so that's going to be a good way to weed out the good ones from the bad ones, for sure.

Michael:

Yeah, that makes a ton of sense. All the wholesalers that I see they give you a deal. So this is the purchase price, this is the rehab cost, this is the ARV. I mean, what are some resources for people to get accurate at validating those numbers for themselves because I don't think anyone should take anything at face value you want to trust but verify it. So how do I figure out like, what is the ARV and what is the rehab cost, if I'm just getting started?

Anson:

Yeah, those are, those are huge questions because those are those are definitely the two blind spots that most new investors have. So they're, you know. It's not just finding a deal and then financing it, but now it's like, now I have to evaluate it and then we have to figure out rehab costs and it's very daunting. I would say like, the easiest way to do some of that is to lean on others for their expertise. So if you have network with, with agents, you know, see if they can run some comps or you know, teach you how to run a couple comps, you know, in that or watch some YouTube videos on you know what, what are comparables? What does that look like? Can I find them on Zillow? Can I find them on Redfin? A lot of investors they will just lean on the expertise of an agent to pull the CMA or pull the ARV for them and then, you know, basically trust that number but based on a little bit more expertise than the wholesaler, okay, but learning to do it yourself will always it'll always benefit you, you know, whether you have to teach somebody on your team later on. Whether you know, become an agent yourself or something and have to do it in the long run.

Go at being able to figure out what comparables look like and then where to go find them. There are you know realtor.com Zillow, Redfin, there are places where you can go find comparables, and then really just try to compare them apples to apples and then for rehab, it's kind of the same thing because if you don't, like, I don't know anything about rehab, especially when I was starting off and so being able to lean on a general contractor, or somebody who has that experience was huge, because otherwise I wouldn't have even gotten into my first flip. Like, I have no idea what these things cost and what labor costs and right time, timelines look like, even if you have to pay for that contractors time, it's always worth it, it's always worth the education. So if you're like, hey, I'll pay you like, $50 an hour to go walk this property and if they have an extra, you know, a couple hours or a little bit of downtime. You know, say I just need a line item bid, and I want you to walk through the property with me and that 100 or $150, for them to walk through the property is that education is priceless and if you can get, you know, if you can get two or three other newbies to pitch in to, I mean, you could you could potentially offer a contractor, you know, hey, four hours of your time, for you know, 567 $100, everybody just pitches in, like $75, or something like that and the contractor slow walks you through a property that education is priceless and if, you know, barring that, if you want to get two or three contractors to go and give you bids on our on a property and then you can compare those bids kind of side by side, like this contractor is charging this for paint. This one's charging this for paint. This one's charging this for paint like what's, what's the real number, I just average it out, like this guy's way high. This guy's way low. This guy in the middle looks, looks good. You know, there's a couple of different ways to kind of get a gauge and an idea of what rehab costs are. But I mean, I mean, there's a rehab book on costs, but the minute the book comes out, it's already out of date, right…

It's like two months later it you know, you could almost just burn it, and it wouldn't matter because sorry, Jay Scott but yeah, like, like if you, you know, you go through a pandemic, and all of a sudden labor and wood prices are just off the charts. A normal person wouldn't know that but if you're in the business every day, you know that those things are going up and so relying on somebody who's in the business every day is usually the way to go.

Michael:

Yeah, that's such a good point. That's such a good point Anson, and curious, get your thoughts on like just the physical, like nuts and bolts of doing a transaction via a wholesaler, as opposed to going with an agent or a more traditional route? What are some things that people should be aware of and like, can they go get an agent to represent them as a buyer's agent sell on a wholesale deal?

Anson:

Most, most good wholesalers will let you do that they don't care. What they will do is they'll ask you to roll your agent costs on top of the price. So if it was, you know, $200,000 is their price. They might say whatever your agent wants to get paid, it's gonna go on top of 200. It's not coming out of my pocket. And so they'll so yeah, so the big wholesalers here in town, including my, I wouldn't say I'm a big wholesaler, but I have had buyers who bring their agent, and you know, they can get paid just fine. It's not a big deal. Now the, the transaction is a little different depending on how the wholesalers are doing it. If they're doing an assignment, it's going to look a bit different than if they're doing like a double close and so as a as an investor, you just have to know the difference between those two and what that looks like. You know, a lot of times the earnest money is nonrefundable.

So know that once you put the money down on that deal, you might not get it back. Most of them are nonrefundable. It's like $7,500 nonrefundable and that kind of covers the wholesaler costs if you don't close like they're like, my earnest money is covered on my end, plus maybe a little bit of extra money for them for their time or something like that. But so no, you know, in a normal real estate transaction, you have outs in the contract to get your earnest money back in a wholesale deal. It's pretty much hard from day one, it's just gone. So you buy so you're either closing or you're losing your money. You know, and everything else besides that it's pretty sort of normal. They might give you an inspection window. They might just say as is like, do your own due diligence, but they're not going to budge on price. They're not going to you know if you find uncover a structural issue or something like that, they still might not let you out with the earnest money because it went, you know, it went hard on day one and so they're like, either close it or, you know, walk away, like those are kind of your options. So, yeah, on a normal real estate deal, you might have more contingencies for your inspection and stuff like that and then most wholesalers are looking for either hard money, cash or something that closes fast without any headaches or issues. If you come in with an FHA, you know, offer, and you're trying to buy a wholesale, I don't know if the wholesaler is going to take your, you know, take your offer, because there's still an appraisal, there's still like all these other hoops to kind of jump through. So you might just have to go get a hard money loan for that deal.

Michael:

So Anson, I'm curious to get your thoughts because the like the ins and outs and kind of the some of the risks, I would say, associated with a wholesale deal tend to be or sound to be a bit higher than a traditional MLS deal or just a traditional transaction. So for that reason, do you think that wholesale deals lend themselves just by nature, by virtue of the deal to more experienced investors or have you seen newer investors utilize wholesalers and break into the market?

Anson:

I'd love to see both, I would say as long as you know, you know what's going on when you go into it. All the things that I just talked about, like earnest money, being hard and having to have fast funding and all that stuff. I have seen brand new investors who have who haven't done any deals, you know, they'll buy like a triplex from a wholesaler, you know, as their first deal. So it happens all the time, the hoops are just a little bit more to jump through and to figure out like, hey, if it is an assignment, that's what this looks like, if it's a double close, that's what this looks like. So just knowing those things going into it, I think any new investor can utilize wholesalers as a resource for sure. Yeah, shouldn't be a problem.

Michael:

Okay, great to know and so this has been like super fun super eye opening man if people want to reach out to you learn more about you ask you some follow up questions where's the best place for them to do so?

Anson:

Yeah, you can you can find me on Bigger Pockets. Just type in my name it'll it should come up with my profile, send me a message there. Find me on Instagram @younganson or find me on YouTube Anson Young and either one of those reach out say hi, if you have questions or need anything just hit me up.

Michael:

Right on, well, thank you again man for coming on, this has been a lot of fun and I'm sure we'll chat soon.

Anson:

Awesome, sounds good. Thank you so much.

Michael:

Hey, you got it, take care Anson.

Alright everyone that was our episode with Anson, a big thank you to him for coming on the show and sharing some really actionable takeaways for folks to do, whether you're a seasoned investor or just getting started in how to go secure some off market deals, so you're not fighting with everybody on the MLS. As always, we look forward to seeing you on the next one and happy investing…

How to acquire rental properties remotely with Kori Covrigaru Jun 16, 2022

Kori Covrigaru is the Co-Founder and CEO of PlanOmatic. PlanOmatic provides quality photos, floor plans, and 3D to the single-family rental industry with speed and at scale, nationwide. With an unwavering determination for client success, he has created a team that thrives on the core value of together we win. With a national network of 200+ contractors and more than 40 employees, Kori has met the moment with the unique value proposition PlanOmatic offers through technology combined with data to support their clients’ goals.

Today, Kori shares what he's doing as a remote investor in the single-family rental space with a fund that he started with some of his colleagues.

Episode Link:

https://www.linkedin.com/in/koric/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Kori Covrigaru with planOmatic and he's returning to the podcast not talking about planOmatic, but actually to talk about what he's doing as a remote investor in the single family rental space with his fund that he started with some buddies. So let's get into it.

Kori, what's going on, man? Welcome back to the podcast, thanks for taking the time to hang out with me.

Kori:

Always, always excited, Michael.

Michael:

This is gonna be a lot of fun. So the last time we had you on we were talking about your company planOmatic and for anyone who missed the episode, give us the quick and dirty, what is it that you all do and how you're disrupting the industry?

Kori:

We helped at the beginning of this industry. So back in 2012, we started out with the SFR industry but we've been playing thematic creates professional photos for plans in 3D for the single family industry at speed and scale nationwide. So that's what we do plain and simple, we are the boots on the ground that go out, take professional photos, do 3D scans, export floor plans from that, and then deliver that media to our customers. We try to do it under two and a half days and we're pretty damn close to it. So that's what we've been doing, we help these REITs institutional investors in smaller companies scale from 5000 properties all the way up to hundreds of 1000s. That's our business, that's what we're here for.

Michael:

Amazing and today, you and I are here to talk about something a little bit different kind of related. Yeah, but really, it's about your journey in the SFR space as a remote investor.

Kori:

Yes, sir. So, you know, just being in this industry for so long. I'm surprised it took me so long to decide to get involved on a higher level. But yeah, I've been just watching, you know, myself and some people that I work with here and some family and friends outside of here have been watching this SFR industry grow to the level that it has and never really gotten involved on the investor side. I mean, I had rentals on my own. I've had a rental, you know, my first rental I bought with my business partners. I want to say it was 2006 I think it was October 2006 or 2005 and we bought a rental out in Grand Rapids, Michigan. Since then we exited that then I had a couple rentals here in Denver, but nothing remote and nothing to the level of what we're building right now with SFR Emo, that's the name of the partnership, the group that we've established with 13 partners, and we all threw in some cash and have been acquiring homes, single family homes, for, you know, residents to live in and Alabama, of all places Birmingham, Alabama. So that's what we've been doing, yeah.

Michael:

Interesting. So you've done the local investing local with you in Colorado, so what I mean, what did you eat? What did you drink that decided, hey, I'm gonna go do this crazy thing and invest where I don't live.

Kori:

I ate and drank reports for where our customers are buying real estate and where it made sense and just reading articles. I mean, there's so many great content distributors, you guys included in terms of what markets make the most sense what to look for in a market and so I had been immersed in all of this data and all of this information for so long, that I finally pulled the trigger and said, hey, time to form a partnership. You know, we started out with five partners, that was the deal was gonna be five partners no more and then, you know, I don't know if you've ever been involved swings. But what happens is you start getting phone calls from random people saying, hey, I want this thing going on, like I want and why didn't you invite me? It's like, well, hold on a second, like, first of all, I don't I don't know how you found out within second. Like, it's this really small thing we're doing and so it went from like five partners to 13 and we had to like, we had to cut the investor pool out at that point and build with what we've had what we have right now, because we still haven't, you know, deployed all the capital. So it started, I'm starting to understand why we see billions of dollars come into the industry committed to buying SFR is, but it's very slow to deploy and so we're experiencing that right now. I mean, we're not slow to deploy, but it takes some time and so that's kind of how the idea started. Yeah, just get involved eat your own dog food, as they say, I think right, that's the term.

Michael:

That's it, that's it. So Kori, I mean, you just went through, I think what so many newer investors really struggle with, and that's picking a market and talk to us how I mean, what are these reports showing? What were they telling you and also like, how did you settle on Birmingham because I'm sure the reports show that there were really a lot of other great markets to invest in, too, yeah.

Kori:

Yeah. I mean, we landed on a cut to the chase, then I'll kind of backtrack a little bit but we went with Birmingham because this is a small partnership, and we really didn't want to have to continue to put money in so we wanted to pick a market that could cash flow. We wanted to pick a market that was cashflow positive, had great cap rates, relatively speaking hearing coverage are being compressed everywhere right now as we know, cost of capital is going up, prices of homes are going up, that's actually going to reverse here pretty soon, in my opinion, we can get into that later. But so we picked Birmingham, there was a lot of economic opportunity being created there, jobs being created there but also, we knew we were going to be cashflow positive with the cap rates, and there was a room for appreciation. Plus, we found a really great property management company partner that we work with down there that can not only serve us in that market, but we can also expand to other markets, you know, with their with their support. So that those are the reasons the main reasons why I mean, we apply nomadic had the advantage, we have a critical mass of single family rentals that come in through our pipeline to shoot photos, create floor plans, you know, 3D and so we kind of have like this, this holistic view and indicator of what markets might pop off next and, you know, we use that data to make decisions for us farm on where to invest, it's a bit of an advantage that not most have, but I'll tell you what, all that data is public, I mean, we can go out there and see and look at county records and see where all the institutional landlords are the professionally managed properties are being bought and so if you dig data or like to, you know, you can always go on Upwork or Fiverr, and say, hey, please go find me this set of data, those are kind of hacks that you can do to figure out where companies are buying. Now, just because professionally managed companies are buying there doesn't necessarily mean it's a homerun, you have to do your own research, figure out what your goals are with your portfolio where you want to start. So that's kind of been our trajectory on the direction and where, where to own and operate for us.

Michael:

Yeah and that makes a ton of sense and I love that you said that to like, go find someone else who can kind of help aggregate the data or figure out the data for you because like, you can, like you don't have to be the person to do all of the due diligence, you don't have to be the person to do all of like the research and also you can leverage other companies paid employees, like you were just mentioning, if an Amazon fulfillment center is going in there, or like Whole Foods is setting up a new headquarters there. They've done the research, so of course, don't reinvent yourself. The wheel, right… Yeah, it's, I love it.

Kori:

It's out there.

Michael:

Okay, so Birmingham was the target. Yeah. What did you all do next? I mean, how are you executing there? I know, you said you had a great property manager, but like, yeah, the, from the physical like property acquisition to due diligence. There's so much more involved before you even own the property. How did you get that accomplished?

Kori:

Yeah, so we this idea came about at some point in 2020, when, you know, shit hit the fan and COVID was on the way and in my mind, and I've always been fairly wrong, when it comes to trying to predict the market. The only thing that's, that's, ya know, I mean, the only thing that's going to be successful is that there is no bad time to buy, that's just my mentality. Like, there is no bad time to buy, it's just a matter of how you go about finding those properties and what you do during negotiation, and due diligence. But um, you know, back in 2020, you said, oh, the real estate buyer is going to absolutely flop right now, everybody's, nobody's got jobs, unemployment is gonna be crazy, we're headed into this, you know, doom and gloom period, which is, of course, very wrong and we said, you know, it's a good time to buy single family rentals, rentals, they perform, regardless of economic conditions, typically, in recessionary periods, they still grow not as fast, but they do grow, that's a hedge against inflation, so on so forth and so we decided to form the entity again, went from five to 13 very quickly. But between, you know, between mid-2020, and mid-2021, I don't think we purchased a single property and so you know, we had to go through all kinds of processes, right, you have to have a good operating agreement, you have to establish a an EIN number, you have to select a property management company, you have to make sure you're finding the right tax forms, you need to find a broker, you need to do research and figure out where you want to go. I mean, that was a big chunk of our time was we didn't know in 2020, exactly where we wanted to go. So we had to do that research, we had to have, you know, make sure that everybody all the partners were kind of on board and then at some point in time, we decided to, hey, these three partners or five partners are actually gonna make the decisions. Okay, now we have to amend the operating agreement that requires lawyers again, I mean, we kind of did a lot of stuff makeshift but, but there's a there's a lot to do, and a lot of time to be had between the moment where you decide, hey, I'm gonna get into this, especially if you're remote and we just closed on our first property, right. So it's, you know, it's, it's more than you expect, but doing it right is the most important thing and I think we've done it right. So far we learned a lot along the way. But we're on the right track. I mean, we're almost at will be at 28 single family homes and that's only that's the course of a year right. So from 20, mid 2020 to 21. We didn't purchase a single home in the last 12 months we've purchased approximately 28-20 single family homes.

Michael:

Wow, that's so killer. So Kori I mean, I'm curious to know too. Why did you not just do this alone, a lot of people would argue well, wow, 30 people like that's way too many cooks in the kitchen or five people making decisions like it can get very convoluted very quickly are very quickly. Wouldn't a single operator be more lean and be able to move quicker?

Kori:

Yes, yes. I mean, well, so the short answer that is, I can't really do anything. I have a lot of really good ideas but I can't do much. So that's why I didn't go at it. Yeah, I'm the idea guy, right, and the people around me to do things. So, but no, I mean, you know, what, one big reason why we went with more just to have more capital, to be able to diversify more, you know, it's, it's risky as an individual to go out and buy one or two rentals. But if you go out with a group and buy, you know, our goal is to hit 60. That's a pretty diverse portfolio and minimizes risk and there are a lot of great minds in our partnership. I mean, we have a finance guy, right, we have a data guy, we have consultant who's seen many different organizations, we have myself, who's kind of like, overall, seeing the organization from a high level and helping with the financing part of things.

So I think it helps to have different people plus, this is all you know, passive for us, right? Everybody's got a full time job and so, you know, if, if I were to do this alone, this would be a full time job, no doubt, but spreading it across having the right property management company, but this person doing, you know, diligence in this person negotiating offers in this person, making sure our bookkeeping and finances and taxes are all in line, it just helps kind of spread that out…. It's fun, man. It's more fun to succeed with partners, like I, you know, I have two business partners here at planOmatic and I couldn't imagine being a sole proprietor, it just doesn't seem as fun to me. Like, for us, it's always been the game in the chase and like winning the game, and it's, if you're by yourself winning and celebrating, that's not fun and the same goes with, you know, the lows. I mean, 2020 was a tough year right and so having a supportive business partners help. So I just think it's more fun.

Michael:

Yeah, that makes a ton of sense. That makes a ton of sense. I'm curious, quite, how did you figure out like, who does what, and when you were picking your partners and picking your team? What was the process that you went through to do that because I think a lot of people like, oh, my best friend, we're so uh, like, we're so similar. We think the same, we should be partners, we should be business partners. Was that kind of the case for you?

Kori:

You know, for me, I mean, I kind of surround myself with people that are like minded and sort of see things, you know, in a certain lens when it comes to opportunity, right? So it was actually it was pretty simple. It was more like who do we, who do we not tell, you know, and ask versus who, because a lot of people came to us a lot of really good friends. So it was just who's willing to take an opportunity who trust I think trust is the number one thing when it comes to partnerships is like, is there trust, we had to make sure there was trust there and then, and then different specialties from different people, again, like I said, like one guy is a full time controller, you know, big company, that's really helpful. Another guy is an operations guy who's operating, you know, we're shooting five to 700 listings a day, right. So like that, that really helps play into one of our guys, Tim Rose, he heads Planet Labs and we analyze and optimize workflows and analyze and optimize reports and data just based on what's coming in and so having him on board to help us decide which market to go with, or what cap rates to focus on, I mean, that was helpful. So it kind of this one all came together and then the people that wanted to be involved, they kind of like stepped forward said, hey, I'd like to be more involved those that didn't, are just passive for this particular partnership. I mean, one of the, I don't want to call them mistake, but it was a rookie move was like 13 partners all equally invested right and so that creates challenges for two things. One, every time we close a loan or refinance, we have to get 13 signatures and that's like, probably the biggest pain in the ass that we've got as a group. The other is like, we're putting in a lot of work on the side, especially, there's one person in particular in the partnership that puts a significant amount of work in, and his return is the same as everybody else's and so this was really like a search and destroy mission for us. Let's figure it out, figure this out, figure out a proof of concept, see if it can work and then in the next round, we're a little more educated, we'll structure the company a little bit differently, make things happen and move a little bit quicker. So yeah, that's kind of where we're at today.

Michael:

Okay, like with regard to that signature, and then the equity piece where what else? What else would you do differently for anyone listening? It's like, I want to do this, like, what should they be thinking about?

Kori:

When owning and operating and SFR funds, you want to separate out the management company from the fund that owns the properties and we didn't do that it's all one thing. So when you've got one entity that manage manages the portfolio, you know, that's where all the work is. Capital, putting in capital to buy homes is simple. You read a check and then there's typically somebody at the fund but the management company, you know, in today's world, and so far, they're helping acquire the properties on behalf of the fund and so creating an entity for the fun with limited partners, and then a property management company or management company that owns an app rates the portfolio separately, it just makes a whole lot more sense and that's really, you know, shame on me, like I've seen this, I know this, but we just wanted to get going and again, at first it was five, right. So we weren't going to separate those two out as simple as like, we can get five signatures. But when it grew with 13, it became challenging and so we'll look at that a little bit differently.

Michael:

Okay and have a separate management company, even though you all are leveraging a local property manager.

Kori:

Yeah, because there's much more that you have to communicate with the management company, you have to go through the process of buying the homes and through due diligence, and you have to make offers, and you have to make sure your books are in order, you have to file taxes, and you have to sometimes raise more capital, you have to open up a line of credit, so you can buy in cash and turn on refinance, we can talk about that, that as well. But there are a number of things hidden, hidden chores, let's call them that have to happen when you manage a portfolio, even if you have a property management coming up property management companies can help you place tenants and make sure your tenants are happy and having residents are having a positive experience. Outside of that, they're not doing a whole lot. They might help you find homes, they might help you negotiate, they might help you with renovation, but everything around organizing the company there, that's just you know, that's one vendor that you have as a part of the organization, you have your CPA, you have a bunch of different things that are you have your banker that you have to manage property manager company is not going to deal with your banker, it's not going to happen, they're not going to go find a line of credit for you like that doesn't work that way. So there are a lot of hidden chores that are in there that I strongly recommend, like thinking ahead, because it doesn't take very many homes, very many investments to need to put a significant amount of time even if it's distributed amongst partners into the operation. It doesn't it's not a set it and forget it. This is not George Foreman grill, this is like there's a lot there's a lot going on.

Michael:

I don't think I've heard a George Foreman grill reference.

Kori:

Now you have or maybe it wasn't George Foreman, maybe it was. What was that? No, it was a different one. It was an infomercial, set it and set it and forget it.

Michael:

Oh, that's too funny. Well, Kori talk about like the strategy because you mentioned it just briefly about like line of credit, purchasing and cash and then going turning around and doing a cash out refi. So how are you purchasing properties and how are you structuring your deals?

Kori:

So up until now, and oh, boy, are we headed for some news on Mays real estate market, like people aren't going to believe what they what they read in terms of percentage swings. But up until now, it's been a very competitive market for buyers. I mean, like, you know, you had to show up with cash you had to show up with, with no contingencies, waive the inspection, right. All of these things that everybody in a healthy market will tell you don't ever, ever do this you had to do over the last two years to buy real estate in some markets, you've had to do that since 2011, or 12. I mean, in Denver, for example, you know, and this is one of the reasons why we didn't we didn't come to Denver, but in 2012, we went my wife and I visited a home and we had to put an offer in same day and we thought we were crazy, right and we ended up closing about houses, it's now a rental above, you know, closing at 332 is it's probably worth 900,000 and there's a reason why because Denver has been nuts, right. So the markets been like that since then. So what we decided to do is utilize a lot of the cash that the partners put in to buy the homes in cash, make cash offers, you know, promise a quick close, because we had to win the properties and then we would turn around and take the portfolio, once it got to a certain size and refinance it with a bank, we have a great banking partner down in the southeast, and they've been fantastic. But we've always historically bought in cash and around refi pull the money out. Oftentimes, it'll appraise much higher than, you know, we initially bought it for and I'm scared to say this because it sounds so 2009. But the bank is paying us at this point to buy these homes because we're able to leverage 85% and so if they've appreciated more than 15%, right? They're like giving us cash to close on these homes that we bought in cash. Again, sort of scary to say but in terms of rentals, like we're not in danger, like they've performed fine and as long as you as long as you cash flow through ups and downs in the market and interest rates, ups and downs, it's you know, you'll end up on top, but like Denver is a crazy market.

I mean, I remember I was talking about getting a single family home to rent like separately outside of SFR I think it was like two months ago, maybe a month and a half ago and I took my kids to the open house and I showed up about 10 minutes early because I had to be like a birthday party or some bullshit like that and I get there 10 minutes before and there are already eight like, like a groups touring and I'm just like, still really like in in this neighborhood frankly, like, really and so I it took me one open house so you know, I'm out of this market. I mean, I know this right and a lot of the advantage that that people will have is they'll understand the local market and understand the neighborhoods understand where are they putting, you know, new light rail estate in where's their economic opportunity. But Denver was just too competitive, you know, to stick around for. So, yeah, yeah, it's been amazing. So we buying cash, turn around refi, pull cash out, rinse and repeat sort of deal and as long as properties are appreciating, you know, it's a, it's a pretty good model, especially when it comes to rentals, you know, fix and flip, I'm not a big fan, I think, you know, someone gets caught with their hand, that cookie jar at the end of the day of fixing flips, but as long as you're keeping in cash flowing, I think you're fine. And that's, that's kind of been that's been our model and we're able to now take out a line of credit. That's, that's, you know, securitized by our portfolio. So even better, we're able to use cash and a line of credit, make sure that there's good cash flow, turn around the bank, you know, refi it, pull the cash out, and rinse and repeat and that's, that's sort of what we've been up to and you can keep doing this, depending on how the market performs and how interest rates look. I mean, you can keep doing this for a while, right. Our goal, we're at 28. Now, our goal is 60. But depending if, if things continue to appreciate, then we could be even higher than 60, depending on how much the bank will pay us to buy these homes, basically, I'm afraid to say that, should I be saying that?

Michael:

It sounds it sounds terrifying. But that's what I wanted to ask you. So you say they're financing 85% loan to value?

Kori:

Yeah, yeah…

Michael:

That's, like, unheard of in the investment property space it.

Kori:

You know, usually, here's 7525, we find a bank, that's pretty aggressive. I mean, it's not like a small lender, it's a bank, it's a legitimate bank and they've been, they've been a great partner for us, and they see the opportunity, and they're a little bit of a risk taker. You know, they're keeping these loans or not, obviously, not selling them to Fannie and Freddie, I don't think, but we've also got so many partners to fall back on, like, it's, it's not risky for them, you know what I mean, when you have, yeah, that much that much wealth behind the partnership, and I'm not talking about the individual employment as a group, like you've got 13 households, where if something goes wrong, for some reason, with the majority of the portfolio, like, they'll be fine, you know. So I think that's also potentially why they're able to leverage so much. But they also are bullish on the rental market and SFR and they understand, you know, as far as you go to a bank, let's say up in upstate New York, they just haven't been around so far, very long. So they might not be as accommodating and as flexible. But boy in the Sunbelt, I mean, banks are trying to try to monetize this just like every other individual investor and so finding the right banking partner has been, you know, really great for us and strongly recommended. I mean, that's, you know, one of the most important things, we've gone through two banks. Now, we were with the credit union before, they didn't really see the vision that we had, but now with private bank, and it makes a lot more sense.

Michael:

Okay. Well, that's great to know and I'm curious, when you started putting this all together on paper that was 2020-2021 and the interest rates were at three, four, maybe sometimes even in the twos. Now they're up in the five, six sevens. Has that changed your model much or really changed the performance of what you were expecting return wise?

Kori:

Well, yes, of course, right. Cost of capital is it's real, it's real thing for individual investors who are buying their primary home, it's a real thing for smaller investors, family office all the way up to up to the REITs and the institutional landlords. So everybody's feeling a squeeze with those interest rates, cost of capital, obviously, going up, cap rates being compressed. I think what we'll see and what we've seen, historically, is that rents keep up with interest rates, right? So we'll see, you know, rents have gone up, I think, year over year 16%, I believe, and so far, we'll see those continued fact check that before you post it, but I think I saw it in the Wall Street Journal and so rents kind of keep up and so that's, you know, we have that to look forward to in terms of paying more for capital. But also, you know, the goal is to cash flow through the periods through the ups and downs, right through the different markets and so foreign investors, you'll see, you know, we borrow at five and seven year, seven year loans, right, so we're not in it for the 30 year fixed and so that should take us through any sort of period, right? We should be able to refinance within the next seven years, again, hearing things from 2008, kind of reverberate in my head.

But that's the idea is that if as long as you can cash flow through interest rate periods, you should be fine and as long as rents hold up, which we don't see any reason why they shouldn't. I mean, we're again, four and a half million homes short of supply right now supply is not going away. Now, home values have gotten to a point now where buyers have said I've we've had enough, we're not we're not doing this anymore. Besides the fact that we can't afford it, right. Like between the interest rate hikes and the appreciation of home values over the last two years, we're seeing about a 43% increase in cost to pay a mortgage. Okay, like that's insane, so…

Michael:

Compared to when?

Kori:

Two years ago, that's compared to like beginning of 2020. I mean, between the appreciation and the interest rate increase, going from like three on average to five whatever and a half, one would be 43% more expensive to make mortgage payments today. Now, the good thing for SFR and for rentals is people are still there's a high demand for spacious, professionally managed homes, right single family rentals, and that demand isn't going away. So when people can't necessarily afford today to buy a home, or maybe say, hey, I'm going to sit on the sidelines for a couple of years, because this is batshit crazy, they're going to rent, right and so the demands keeps up, the rents keep up inflation continues to go up and hopefully we'll see that slow down here, due to the increase in interest rates. But you know, cash flow is important, I think it's been proven over time and history that rents will keep us cash flowing and that's why the industry is so attractive and so, you know, so new still, we're only a decade into this being professionally managed, right landlord has been around for before we can remember.

But there's an appetite for professionally managed properties, so that the experience that I'm gonna have, as a renter as a resident is on par with if I own my own home, and was able to do whatever I wanted to do to my home. Now I can have that luxury of having that home, but having it professionally managed. So if things go bad, I can just call someone, they'll be here soon to fix it right or if I want to move, it's not it's not that big of a deal on my lease ends, I go find another lease, right. So that demand isn't going away and that's what's keeping us so strong as an industry and I was just at the National rental home Council conference in DC and that's kind of the theme is that, you know, everybody's cautiously optimistic, because it's a weird time. There's a lot of uncertainty right now in the economy. But there isn't a whole lot when it comes to our industry and so I think, you know, again, when is it a good time to buy, in my opinion, always. So what's happening right now is interest rates are going up, prices are still like going up. We are seeing I think a Redfin report came out today that prices are starting to come down, actually and so there's a huge opportunity for investors to get into the market right now and buy, and investors don't have to buy at this price. Like it's been only a month, but the whole thing has been flipped upside down. So what I'm telling my acquisitions team, right, my expositions team, is, this is a time where, frankly, you go in and you offer 15 to 20%, less than what it's listed for, and you offer on volume all of a sudden, and then those that are willing to get out with a cash offer today, those are the deals to be had and yes, you are paying a higher interest rate right now for that. But you know, what, if you get the deals, and I'm not saying you'll get them at 20 or 15% discount, but you'll get them, you don't have to pay this price today, because the market just hasn't adjusted down to the interest rates that we're at. There are some steals out there and so it's a volume game, right? It's like, it's like going to a bar and meeting men or women, right. The more the more you ask, the better chance you're gonna have to succeed and it's the same with real estate today, like the more offers you throw out there that might be less than what they're wanting or hoping for a price. Some are in a situation where they need to exit or want to exit and so there are opportunities out there more right now than ever so far, which is crazy to think about.

Michael:

That is crazy to think about and so you mentioned there's some big news coming out was that was that the Redfin report about where you think prices are going for the May report?

Kori:

No, well, I mean, there was there was some information out but we're still they're still reporting on April, my mind, this is just, you know, my prediction is crystal ball, my crystal ball tells me based on very, you know, various different data points that may will be the biggest drop in transactions we've ever seen the biggest drop, the biggest drop in transactions month over month that we've ever seen, I'm predicting, I'm putting it for…

Michael:

May 2020.

Kori:

To May over April and may year over year, also that will be the biggest drop in in housing starts as a percentage and let's say close transactions will be in May, that'll continue into June because there's always a lag housing starts we get at the beginning contracts to buy new construction, we get the beginning. So that's always an indicator, a leading indicator of where the markets headed. But we'll see that as built, you know, are already built on existing home sales. They're just going to plummet right now and that's because there's pretty much gonna be a standoff between buyers and sellers right now. I mean, when do you remember seeing homes drop in price in Denver like, right, I don't remember when that happened. Yeah, you know, so I think that I think the buyers are fed up. I think that affordability has gone through the roof and I think that the Fed is going to succeed and installing the economy and stalling you know, the housing market, which has a trickledown effect to the rest of the economy, right. I mean, think about movers, Comcast, right, any sort of cable television, Home Depot and Lowe's, right, all these all these companies that we don't really think about. or Amazon people buy stuff for their new home like the Fed wants to slow the economy down, they're definitely going to succeed. We're going to see some job loss from it. But at the same point in time, this is an OK, adjustment to the overall market and the housing market. We know that this is not sustainable. We said that a year ago, a year into this crazy Rock chip ride. So we'll see a slowdown and it's healthy, it's okay and that also creates these deals that I think are definitely still out there. You know, there are still motivated people that need to sell for one reason or another. Maybe they have to move, maybe they are they're adjustable rate mortgages off, right, maybe they set it seven years ago, and all of a sudden, they're having to refinance and it doesn't make sense. Maybe they just feel like they want to cash out and it's time and so, you know, those who went under contract, let's say a month ago, kind of probably hit the top. But for the short term, but there's still a lot of opportunity out there to get some good deals right now.

Michael:

You heard it here first, folks. That's awesome, that's awesome. All right. Well, Kori, we got to get you out of here, man. Thank you so much for coming on again. For people that want to reach out to you connect with you learn more about planOmatic where's the best place for them to do that?

Kori:

LinkedIn is great. Although my name is hard to find K O R I C O V R I G A R U, I'm sure it's in the in the post, LinkedIn is great. My email kori@planomatic.com, I'm always fielding emails. So send me an email and otherwise I'm not I'm not really on Facebook or Instagram or any of those, so email and LinkedIn is probably best for me.

Michael:

Right on that'll have to do. Well, Kori thanks so much, man. Appreciate you coming on again. We'll chat soon, all right.

Kori:

Thanks, Michael. Great to be here.

Michael:

All right, everyone. That was our episode, a big thank you to Kori for coming on and sharing with us what he's been doing in the space. As always, if you'd liked the episode, please feel free to leave us a rating or review wherever they as you get your podcasts, and we look forward to seeing on the next one. Happy investing…

Billy Keels on investing in real estate internationally Jun 14, 2022

Before becoming a real estate entrepreneur, KeePon Cashflow’s founder Billy Keels worked in the corporate world. In fact, he was one of the best “corporate soldiers” you’d ever want to meet. Billy says that he was happy enough in his J.O.B., but something was missing. An emptiness and longing for a different life chewed on him, pulling him to what he knew he wanted to do more than anything else. Billy wanted to be an entrepreneur who brought two worlds together. So he took steps and kept on the path to his goals. Today Billy is an international real estate entrepreneur, problem-solver, author, coach and mentor. He sees opportunities where others often don’t in real estate.

No “overnight success,” Billy continues to work toward his vision and goals. Topmost on his list? Building a bridge between investors and buyers in Europe with sellers in the U.S. Today, he talks about his transition story, how he became a real estate business owner, and how long-distance real estate business works for him.

Episode Link:

https://www.firstgencp.com/

https://www.firstgencp.com/paylesstax

https://www.linkedin.com/in/billykeels/?originalSubdomain=es

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Transcript

Michael:

Hey, everyone, welcome to another episode of Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Billy Keels, who is an entrepreneur, Ninja remote investor who actually lives over in Europe, but invest here in the States among many other things. So let's hear from Billy the renaissance man about what it is he's doing in real estate today. Let's get into it.

Billy Keels what's going on, man, so good to see you again. Thanks for taking the time to hang out with me.

Billy:

Michael, I am just like super excited about being able to spend more time with you have a conversation. Although I have to admit, man, there's like a lot of people going to be listening and watching us, so I'll be on my best behavior, don’t worry.

Michael:

I am, it makes two of us, alright good. Well, I obviously know who you are we we've become very fast friends over the short time we've known each other. But for anyone who might not be familiar with you, who are you, where do you come from and what is it you're doing in real estate today?

Billy:

Yeah, so who am I, would you mind if I ask just one thing really quickly before I answer that?

Michael:

Go for it!

Billy:

So as a fellow podcaster, I just wanted to ask one thing. So I know just got here. But if you haven't had a chance already to leave an honest written review, as well as a rating. The guys do an amazing show here, Michael, I know you put a lot of time and energy into this and it will be great because that way ultimately, they're going to be able to help get you even better guests that are going to help you move forward faster. So with that as a background, Billy Keels I'll give you this fastest version as I can. Originally born in Columbus, Ohio. From there, probably by the time I was 12, I lived in three different states brother and sister were born in Colorado. I come from a family with two parents who were both working two jobs most of the time very blue collar, I watched them struggle a lot with money, making tough decisions, sometimes at the end of the month, do we buy this or do we pay this bill or do we pay the other bill, they had a lot of focus on education because they didn't think that they had formal education. So ended up being in a lot of different school districts, usually in the really good school districts and I saw I was exposed to a lot of things that my parents couldn't actually afford for me and my brother and sister. So that was kind of nice, but also kind of frustrating. But what it did is it taught me the work ethic, like you have to work really hard to get the things that you want. I wasn't A student, sometimes I still suffer from that A student and like today, I call myself a recovering perfectionist. Because the thing is Michael, like I used to do what I was told, because when I did what I was told, like study for the exam, I got really good grades, they came back and that was like the whole positive reinforcement, like I got good grades, study more, got good grades, got the dopamine hits, and all that kind of stuff.

So ended up through college, I went to college, southwest of Ohio, then in a town or in a university called Miami of Ohio, got two degrees there was really set to get my dream job and got rejected not once but twice. But the thing is, is through that rejection and it was like really, really difficult for me because I like set my whole college career up to work as a project manager in marketing for Procter and Gamble, and I didn't work out for me. But through that, I learned that it's okay to be rejected, like you can be rejected and still things will be okay because after that the most amazing job I ever had was working for a company that allowed me to travel to five or two in five years, it allowed me to travel to 58 different countries, Michael and it just completely changed my entire view of the world because I'm from Columbus, Ohio, like I just thought I was gonna be in the Midwest most of my life. After that didn't see myself doing a normal nine to five I got accepted into university and Paris was going to do a one year sabbatical and just to kind of make things really fast, that one year sabbatical that started in September of 2001, has since turned into 20, additional 21 years, I left France, went to Italy, moved from Italy, back to France, and then from France, to Spain. So it was 21 years, three countries. I've learned four additional languages. I got married and we have two kids and up until recently like until last December, I was working in the corporate job so like still being a good student like doing the things I was supposed to do moving up the corporate ladder, and as of December of last year, which was December 2021. I'm no longer a part of the corporate world so kind of all that said, yeah, I kind of just joked it with everybody like I mentioned before like those one year sabbaticals you really have to be careful what happens because anything can anything could happen after that, man.

Michael:

That's so good. Billy was so, so I mean, there's obviously a ton there that I want to dig into and unpack but getting back to last December. Did you fire yourself or did you get fired? I mean, what happened?

Billy:

We separated.

Michael:

It was amicable separated…

Billy:

We separated, we separated now, but you know, it's one of those things like, I think corporate life is really, I took a lot of very positive things away from corporate life, I know that there are a lot of people like, don't do the corporate job, quit your job, do all that kind of stuff. I learned, I like I was surrounded by really smart people all the time, because I was working in enterprise software sales and so this is like very cutting edge and I was exposed to amazingly smart people got a chance to go deep industry knowledge on a number of different industries, got to work across Europe, Middle East, and Africa, managed 70 million euro budgets, plus, you know, learn languages learned different ways of thinking and doing things and I was also making a lot of money and so all of those different reasons, like I really enjoyed it, I probably kept going to my corporate job for about another four, four and a half, five years that I didn't need to but because I liked it so much and because I was in a top talent program, I was traveling to Hawaii, because I was part of the top achievers, like it was really good, but it just didn't fill my heart up and it took actually my dad getting really ill in the last part of last year and me being with him in the ICU, to really reflect on life and go, you know, what like, is this really what I want to keep doing and I know that I was very fortunate, I know that there are other stories that don't end so nicely, right because my dad is still alive today and we're able to enjoy him but that incident, what it made me really do, Michael was realize, like, hang on a second. Like, I want to really invest my time in the things that are going to give me the most emotional joy, rather than just going through the motions day after day, so.

Michael:

Right. That's awesome, man. Well, I'm so glad to hear that your dad's doing better, that's exciting.

Billy:

Thank you.

Michael:

No, of course. So how did you get to the point where you were able to leave the corporate world because I think it's very easy to say like, oh, yeah, I'll quit my job because I get more joy, more emotional reward by doing this other thing over here but that's very well, that's nice, well, and good in theory, but I mean, we got to eat, we got to survive. We got to put a roof over our head, so what was it that you did, leading up to that point that allowed you to say, you know, I don't need this job.

Billy:

I read a book and then I retired….

No, it’s a joke!

Michael:

Well I love it, it’s so simple. I wish I had know that.

Billy:

Exactly, I mean, everybody wish I yeah, exactly, everybody's doing it that way. No, you know, in yeah, I wish it was that simple. It took over nine and a half years, almost 10 years. But now the reality was, because I was such a happy employee, right. I mean, even people used to look at my moniker on LinkedIn and it was like happy corporate employee. The thing that happens when you are in a student is you do what you're told, you know, I mentioned earlier and so when you're in the corporate, it's the same thing, like you go in, you work the hours and then once you're working the hours, you want to move up the move up the chain and from there, you also want to make sure that you're maxing out your 401 K and your IRA. Well, I was doing that and then 2000, I'd been working for probably five, six years and bubble burst for the.com bubble that went down. And then a couple years later, the 2008 great financial crisis happened and so I didn't actually have any other kind of backup plan. It was like go to work all day, and then invest in the stock market and so I realized that I had to have my own plan and that is actually where real estate came in. Because I was like traveling between Barcelona and the states. I remember picking up Rich Dad, Poor Dad, and I started reading it, but I didn't actually finish it. So a couple years later, I assume Yeah, I know. Right? So I ended up picking it up again and then I read it and this time I read it and I loved it so much. I was like this cannot be true. This is unbelievable. This is not true. So then I went and read another one it was Cashflow Quadrant and then I read another one and another one another one and all of a sudden I'd read all the rich dad series, right, as most people binge, and then I found some podcasts and I watched some videos and eventually I was like a theoretical like theoretical ninja Michael, like I knew every single thing that you needed to know and then when you would ask me like how many like, okay, cool. So what's your portfolio look like?

You know what you can get to the NOI by taking the revenue minus the other operating expenses and so it took me a while, you know, to realize like, I've got to move from theory to action and unfortunately, or fortunately, the thing that took me that got me into action, once again, was like something that had nothing to do with real estate had nothing to do with money. It happened because as an A student, I was doing all the stuff that I was doing. But at this point, I was a really young father and one of the things that was really important to me early on was like I wanted to be present. At the same time because I don't come from money, I wanted to make sure that I kept winning at the office, like I was doing all the extra hours and all that kind of stuff and rising and getting the promotions. But one of the things that happened that I used to be really ashamed to even talk about Michael was the night before my son's third birthday, my oldest son, I didn't sleep very well that night. It was like not a good night's sleep for me because the next morning, I had to get up and take a flight to Frankfurt, Germany and I remember like not sleeping well that night got up really early the next morning, you know, woke my wife up, woke our one year old up, told them get ready. You know, I want to be able to sing Happy Birthday to our oldest, got in another shower and then like you can imagine, like 5:45 in the morning, everybody's half asleep, I go wake my three year old up, we sing happy birthday hug and kiss and then I'm out the door, like on my way to the airport, like just sick to my stomach, like what am I doing? Like this is completely incongruent, like I want to be present and like I said, I used to be ashamed of it. I didn't talk about it that much.

But it's one of the things I finally realized, like, that's part of what happened to me, it took me from the theoretical ninja to actually getting into action because when I finally got to Frankfurt, and we spent all day in this business meeting that Michael, I don't even remember what the business meeting was about, like even to this day. What I can tell you though, that night, when I was at the dinner, and I walked out to go while everybody else was singing, and gave my young, my oldest son a hug and a kiss and blew out the candles like I was in Frankfurt, Germany, and I was like, I'm not doing this anymore and so that's the thing that took me from the theoretical ninja to actually going out and getting into action and starting to figure out, like, what do I want to invest in and all these other kinds of things and it took me from that point, it took me about eight months later, somewhere between six to eight months, I knew to make the very first purchase of the property I thought I wanted to buy here in Barcelona. But just one thing led to the next didn't work out, I was not in the type of market that would provide cash flow. I wasn't I didn't have enough education or network at the time to really understand the difference between cash flow markets and appreciation markets and all that stuff. But I finally took action and my wife and I were in Cairo, Egypt, I bought my very first duplex, which was in New Jersey and it was just a completely different, like different time, like didn't use leverage so much of the technology and stuff like that, that we do nowadays. But that's actually how I started getting into real estate wasn't really for money, it was just to start to get control because I didn't want to miss any more that really important stuff in my life.

Michael:

And I love that story, thank you for sharing and I know that there's a lot of things. I think it's so hard because there is a lot of things that investors are often have a hard time talking about or ashamed or whatever the cause is and I think it's so important to highlight those and spotlight those because there's a couple of things in my opinion, A it humanizes you, you're someone that's accomplished a ton and it shows people like look, Billy is just a person like you or I or anybody else out there and two like it shows the struggle, like we always talk about on podcast and these sort of things like oh, look at the we've we've climbed the mountain, we're there, we're at the conclusion. But there's this whole build up that isn't spotlighted, so thank you for sharing it.

Billy:

Hey, man, sure, no problem because like I said, I kind of jokingly earlier like just read a book. No, I didn't just read a book like you, you got started from there and then from there, you know, you get your first property, and then you get your next property and you make mistakes along the way. Like I said, I didn't have enough education. I didn't surround myself with people that were more knowledgeable than I did and it took me actually making a lot of money coming in the door, not having processes in place, things were broken, not necessarily the best experiences for the residents that we're living in our properties. I had to stop, I had to decide that it was time for me to pay to have a mentorship, like paid mentorship so that I could actually figure out like, what processes do I need, what systems need to be in place and things like that, and things got better. But definitely, I needed to take action. I took action, and I did a lot of things wrong, a lot.

Michael:

Yeah, well, I mean, that's what kind of builds you up, right and that's what makes you figure out okay, this works, this doesn't work. But how great that you could also leverage your mentor to say, hey, what have you seen because I'm just one person with one set of eyes. What are all the things you've seen him go well, and not well, and I think that's what people often miss out on?

Yeah, yeah. So this is obviously the remote real estate investor people tell them all the time, Michael, there's no way I could invest remotely, but you're living fricking across the ocean across the pond, investing in the state. So what was that like, how did you wrap your head around, not physically being there never seeing the property, like you are different times But like, it couldn't be more different.

Billy:

Yeah, so you know, and this is one of those things, right and this is, I guess, just paradigm shifting. You know, one of the things that I love when you came to join me on the going long podcast is that we start to normalize this, right because a lot of the books that I was the theoretical ninja and always either they said it directly, or maybe kind of insinuated that, like you have to be a landlord, you have to live in the exact same place right and so I guess in my mind, I was thinking that because I initially started looking Michael to purchase properties here in Barcelona, and all the books when they were saying how are you going to make $200 a door $300 a door. You know, I would go and I would because I was a theoretical ninja right, so I went through and I penciled the numbers out and I would go through and talk to Donna rinse minus the operating expenses, net operating income, like and get a decent loan and I was like, hey, second, this is minus 50 euros alright, let me try the next one. Okay, well, yeah, well hang on a second. This is minus 75 euros. I mean, no, no, this can be hang on a second, the books at two and three and conversion, nope, still negative and so negative 150 and I was like, wait a second, like, this doesn't work like none of these numbers were working for once again, I didn't have the education and I did not have the network to actually ask the questions and so what I realized is I got a little bit frustrated, because I wasn't going to be able to invest here in my backyard and thankfully, I have very good friends that challenged me many times and they're like, well, Billy, you're like, you know what, you're American, why don't you invest in us and I just looked it up. I remember going well, that's probably not that's one of the least smart things I've ever heard in my life. It was a little bit more colorful than that but the reality was, I thought, do you not see the Atlantic Ocean between me where I live in where the closest property could be and then I thought, you know, what, actually, let me find out and so then I started figuring out like, what, what, who would I need on my team, because I knew that I wouldn't be able to manage the properties, I wouldn't be able to buy the properties I wouldn't be able to go through plus, that wasn't my skill set and so one thing led to the next where eventually, I ended up making that first purchase, doing it remotely, I started here and Michael, hopefully you have a similar type of view, which is, like, I see it as it's like any relationship.

I knew that I needed in one in something, so I started taking action towards that towards building, being able to build relationships and make purchases. That's what I was, in my mind and so I started writing people emails, calling talk to family members that were back in the States. Hey, listen, do you know anybody who could help me I don't know anything about getting a mortgage and getting a loan and so they would help connect me with people. I was on the phone, I was sending emails. Once we finally connected with the broker, a general contractor, they introduced me to an agent. Then we started going from email to surprise, surprise. Hey, Michael, big, big hint here. Zoom has been around since before the pandemic, most people didn't know that, right? So I've been using it for the last eight and a half, 10 years, right and so you would that progression started happening from the phone calls to jumping on Zoom, hey, how you doing, be able to talk to one another find out if we're aligning certain types of things and then from there, once I knew that, I wanted to go deep into a specific area, because my goals were that big. It made sense for me to actually continue the progression. So I then put my money where my mouth was, and I actually got on the plane, I flew to meet with the brokers with the property managers, because I wanted to go deep in that particular location and that's what made the most sense for me. So it was having that progression, recognizing that I wanted to go deep in a specific location and then I followed that natural progression, to get to the location, meet a number of the members of the team and then started to build the team. I didn't do it very well that time, because I started without really having a mentorship but then afterwards, once I really figured out how to do it, I actually replicated that model in a different location, much faster, much better and with a lot less pain, being able to do it in the next location.

Michael:

Yeah, I love that. I think it's so important again, just to kind of stop and highlight this. So many people, I think, get into real estate and think I got to do all the things, I've got to become all the experts and like you don't, you can go and meet people and people know people and people talk and so once you find one good person, they probably know one other good person, if they don't, they might be able to tell you who you could go ask who might know somebody else. So I love that I love and I love that you took the like the system of setting up the team and you just like, did it another location and that's applicable anywhere, right.

Billy:

But you know what it is and so here's the thing that I did wrong, right because I think I love that you said they're like because we usually talk about the things we do, right and everybody wants to say about those types of things and so one of the things that I recognize now that I did not do in the proper order the prepper sequences, I had money in the bank and I knew I wanted control because I was not going to let the stock market thing happen again and one of the ways of being able to do that was start to generate my own income so that I was not going to miss another one of my son's birthdays or anybody else that I love, right and so, as I started doing that, I just went and I bought the property. Like I knew that I wanted to buy a property so I was looking to buy the property. But then when things so I bought the property had a skeleton kind of team but then when things started happening, I didn't have a team in place. I was like, hang on a second, this is broken, and they're calling me and I've got a Spanish phone number and this is not convenient, like they called the realtor and the realtor then sent me an email. I mean, it was it was because I'm in a different on a different continent and so I then realized that oh, hang on a second after being there for like, over a year in the same location, I didn't really even understand anything about the location that I was in. I just bought it there because I knew family members could get there more or less than an hour but there was no not much more process than that the only thing that I was crystal clear on is that I needed that I wanted the benefit of cash flow, like that's what I really wanted and I understood that I could also get some tax benefits.

So I did it just the opposite of the way that I would say to people today, or that I do, say and teach to people today, which is, first get clear on the benefits that you are looking for what you're looking for, then get really, really clear on why you're looking for them. Because it's not if but when things get really, really hard and I know this sounds like probably an old record, but like you really are going to have to cling on to the why you aren't wanting to do this, because it's going to get hard and then afterwards, then you go to the location that gives you the highest probability of being able to achieve that benefit, tax benefits, cash flow, whatever and then you build the team and then once you build the team that understands the location that also understands the benefit that you're looking for, then it doesn't really even matter if you buy the single family house, it's on 123 Main Street, if you buy the multifamily building, if you buy a piece of energy equipment, if you buy whatever, because all of the four different steps are aligned, but starting with you and what it is that you want to do and why you want to do it like that's the way you're supposed to do it not don't do the way that I did in the beginning, because it's like you're gonna learn but it's just gonna be a lot more painful and costly.

Michael:

Mic drop podcast over Billy exit stage left, like that was amazing. It's so good, it's so good and I think like, it sounds so it sounds so simple, right? Like, it's so basic, you just like break it down into these four steps, I love it. I think it's just the execution, you've actually then just got to go do it and I think the the why piece of it, and we talked about it all the time on the show, and with friends and colleagues like that's, I think one of the most important pieces of this because you're right, it does get hard, it will get hard and if that's what you have to kind of ground you. I think you're gonna be okay. Oh, that's awesome. All right, Billy, let's fast forward. What is it that you're doing today because you mentioned like energy equipment and this is a real estate investing podcast shows like, fill us and fill in the gaps, what's going on?

Billy:

Yeah, so one of the things that I started realizing, right as an accredited investor, right and if you've not talked about that before, maybe if you want, we can talk about what that is. But I started realizing that I enjoyed real estate and I, I really, really, really like real estate, I enjoyed that asset, because it is an asset that you can have much more control over either doing it investing yourself or with a team and you're able to the control you can you can generate the income, you can force appreciation, you can control your expenses and things like that. So I really like that aspect of it and then when you look at the tax efficiency, because passive income is not the income that you're not working for, but the way that the IRS looks at in taxes, passive income, it's really extremely tax efficient, at the same time, because I was someone who is a high wage earner, and someone who was dedicated to working for someone else I understood really quickly, or actually, after a couple of years, that there's different types of ways that it does matter, actually how you earn your income and if you like the income, that is real estate related, which I like it a lot, I needed to figure out a way to stop paying 40 plus percent in taxes, right, and being able to find different vehicles that would allow me to do that. Now and let's say this is an overarching statement, not giving anybody any tax advice, just you asked me a question. So I'm sharing my experience in terms of why I even got into this other area because I believe, Michael, that as long as you know what it is that you want to do, why you want to do it and you have a general idea of the direction that you want to go just like big companies like what's your strategic five year plan, you know, you want to move towards these things.

When you know the destination, then it's about figuring out which are the right vehicles in the right moment in time to help you get there and so real estate very much as an active part of my portfolio, I am also a passive investor and I got into the to the energy sector because there was a very specific energy opportunity so investing in carbon capture equipment, which allowed not only for the creation of consistent cash flow moving forward, but it also helped me on my W two income the taxes that I was paying on the W two income and so the way that I saw it was hey, listen, if I'm able to reduce the amount that I'm paying for my w two in terms of tax, then that's capital that I wouldn't be able to use input into other more tax efficient vehicles i.e. real estate and the likes so that I can actually move faster I can get into vehicles that get me to my destination much faster. So that's how that carbon capture equipment which is part of the energy sector got involved because it's that vehicle helps me speed up a bit if you will to get to the destination because it helps to reduce and relieve some of the tax obligation that I have on my w two income which is something that is very unique in my real estate investing because it's passive income was not doing so it's combining these different vehicles once again to get to the destination.

Michael:

I love it and it sounds like we could probably do an entire episode on carbon capture equipment and the whole energy sector. But for people that aren't familiar with it, like, give us a quick and dirty, how does someone get involved in something like that and really like, what is it?

Billy:

Yeah, sure. So the best way is we've been we've got a thing, and I'm sure you'll probably let me tell how people can get their head around that we have a special guide, it's a free guide, leaving your email, and we'll send it out to you. But in essence, basically, you are part of a company that owns a piece of equipment, that piece of equipment is used by a third party, and that third party, large companies that are using that piece of equipment, because of the because of their they're using this piece of equipment that you can take things like bonus depreciation, if you're familiar with bonus depreciation, if not, it's in the guide. So you can find out in that free guide that that that you can pick up and basically, for the use of this piece of equipment, we're able to use the tax code that's already in place, the IRS says, hey, listen, if you use this type of equipment, you find these types of you have this type of a working interest, then you have the option to or the ability to not the option the ability to take those losses against your active income and so basically, by being able to help, what the IRS is asking us to do, we are doing exactly that, putting it in the form of a company, and the company receives the benefits and the owners of the company are able to receive the benefits that they are proportionately involved in in terms of ownership of the company. I know it probably sound a little bit wordy, but it's only because it's probably easier just to read through the document and you can actually get the specifics on exactly what it is but just technically high level, that's what it is.

Michael:

So good and it's a what's the company called and where can people go get that guide and we'll link to it here?

Billy:

Yes, yeah sure. It's just go to first gen cp.com, forward slash pay less tax, it's: https://www.firstgencp.com/paylesstax and like I said, it's really for a lot of people, if you are a Mac like I was in software sales world, and I was working for a very large three letter German company called SAP and that company, you know, I was surrounded by lots of other people who are high wage earners. Also, today we're serving number of people that are in professional sports franchises or, and doctors, lawyers, and they enjoy investing in other assets like real estate and if they could do more real estate by having their tax bill, the right size, then, you know, they get to their destination much, much faster.

Michael:

It makes so much sense, so let's just turn back the clock for a minute here and I'm curious to know, because you've done both active investing and passive investing and we've been having a lot of syndicators on the show recently talked about the passive side of things. How did you figure out that it was appropriate for you from a timing perspective and how should people be thinking about whether going the active route themselves getting their hands dirty doing it versus just giving their money to someone else and letting them do the hard stuff?

Billy:

Yeah, so great, I love this question. I wish I would have known about passive investing earlier, because I would have done a lot more of it because the type of role that I was in as a high paid professional, if I just broke it down to the amount of money that I was earning per hour, based on the amount of time that I put in real estate versus my day job. passive investing would have made more sense for me at the time. One of the things I also say is there are some people like me, that really, really, really enjoy control, have to have control and so sometimes, well, I wouldn't even say sometimes, probably the right thing for that person that absolutely needs a lot of control is to be able to be the active investor, go out, find the property, do all the legwork, build your team, all that kind of stuff and I say that for two reasons, Michael.

The first is you get the experience and people that have a need lots of control. If you don't do that, you're going to be unhappy, because you're going to be thinking to yourself, I could do it better, I do it faster. I could do it though, all this kind of stuff, right. So that's the first thing you need in will want that control. The second thing is when you do it, you are going to realize how much work it actually is and what it takes to actually make your, your, your residence happy, and your properties profitable and so you may decide after gaining the experience that maybe you can do it better than you shouldn't be doing it better and even if the dollar per hour euro per hour is less well at least you're in control, you're going to be right. For those people who are looking to get to the destination much faster. It's usually leveraging the efforts, the strengths of others and being able to be a passive investor. You can be involved you can learn what you need to learn so that you feel comfortable. Especially comfortable on the one thing that I think no one ever, ever talks about Michael, I'm gonna go out on a limb here and say normally when you're looking as a passive investor you're talking about, okay, great and you look through the business plan and you look and you say, okay the COC the cash on cash return is such and such, and the NPV is something else and the IRR is something else and that looks amazing and this is fantastic and you know what, what you're never looking at the ROS, right and that, to me is the one metric that that trumps all of the metrics, because it's the only one that really matters, right and so, like I said, if you're looking at IRR, well, great, perfect have to it's a 330% IRR. Fantastic, what your ROS, is you're always negative, is it positive, I don't know. Okay and you're probably thinking yourself, well, what is the ROI is Billy?

Michael:

Yeah, I was like for all of our listeners asking for a friend, because I definitely know what it is.

Billy:

Yeah, it's the most part, it's the most important metric of all, it is the return on sleep. So if your return on sleep is negative, even if the IRR is 380%, I'm gonna guess you probably wouldn't want to do that, because there's nothing that replaces the amount of nice, calm sleep that you receive in the evening and so that's, that's one of the other things that you want to look at, look at and think about it as an impassive as a passive investor. Excuse me, so those are the, I guess some of the things that I would think about as an active investor, if that's what you want to do some of the profiles of the people that probably need to try that or not probably, but you do need to try it, because you're going to understand, yes, you can do it better, faster, cheaper, or you should let somebody else do it better, faster, cheaper, better, maybe cheaper, or maybe exactly the same but you're not spending the same amount of time doing that because at the end of the day, Michael, the most important asset is time and how are you using your time? Are you using it to gain more education or insight, build a talent so that you can select the right team to do the same thing or do you are you using it so that you can actually build the skill to go out and find the properties and to be able to fix the properties and be able to do all that kind of stuff? So think it's a personal decision, but you need to sit down and look at the things do you need to control and look at, you know, what is your return on your hour of time and is that the best use of your time?

Michael:

Yeah, no, I love it. I love it. Be like you this has been so much fun as expected you delivered as expected. Where can people learn more about you can learn about your company invest alongside, you, where should they go?

Billy:

Yeah, sure. So are we done already, really? I can't believe it goes by. Yeah, well, you know, it's, it's, so here's the thing. So the best way and I appreciate you giving the opportunity earlier, but especially for those of you that are that you're in that accredited investor standpoint, and you want to understand more about what we're talking about for the energy you can go to first gen cpe.com forward slash pay less tax: https://www.firstgencp.com/paylesstax , the website is: https://www.firstgencp.com/ . You can go there just check out things and look get a better feel for who we are, who I am, who our company is and also to Michael, one of the places I love being able to also connect with people is through LinkedIn and so if you go to LinkedIn, I'm pretty sure I'm the only Billy Keels in Barcelona, Spain. So check out Billy Keels in Barcelona, send me just an personalized request. If you can just let me know that you heard Michael and I already having this conversation. It's just gonna let us keep the conversation going and be much, much easier for both of us. So those are the ways Michael man I really appreciate it and I mentioned before as well if you want to find out more complimentary to what you're doing the going long podcast with Billy Keels. We love talking about people who are remote investing long distance investing, if we can get build more momentum and get more people on board, it will be awesome.

Michael:

It's an amazing podcast. Oh my god, Billy my pleasure. Thank you, man. Thanks again. I'm sure we'll be chatting soon.

Billy:

Awesome, thank you, you too.

Michael:

Okay, everyone, that was our show a big thank you to Billy for coming on super great knowledge bombs dropped throughout the episode. Definitely go back and give it another listen if you missed any of them. As always, if you've liked the episode, please feel free to leave us a rating or review, like Billy mentioned they are super helpful for us, and we look forward to seeing the next one. Happy investing…

What real estate investors need to know about the Jackson MS market Jun 08, 2022

Monique Kelly has been selling real estate since 2007 but has been around the business all of her life. She is the third generation in her family in the real estate business. Monique feels so privileged to work for the #1 company in the industry Century 21 and feels even prouder to work for the #1 Century 21 in over 38 states. Monique understands that a home is often the most important investment a family can make, and she wants to help make the process of buying and selling easy, successful and enjoyable.

In this episode, Monique gives us her take on the Jackson, MS market. We cover what makes Jackson an attractive market, the areas within the market, price to rent ratios, level of competition, geographical considerations, and things investors need to be aware of when investing here.

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Transcript

Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Monique Kelly, who is a Roofstock certified agent out in Jackson, Mississippi and she's going to be talking to us about all of the things we as investors need to know, and what we should be aware of as we're getting involved in the Jackson market. So let's get into it.

Hey, everyone, just a real quick shout out before we get into the episode today, on Wednesday, June 15th at 5pm Pacific time, I'm going to be hosting a group coaching session inside the Roofstock Academy. So that is for all of our Academy members on short term rentals. So we're gonna get together I sent out a message in Slack, I'll be sending everyone an email as well. For those in the academy, keep your eyes peeled. If you are not already a member of the Roofstock Academy, I definitely encourage you to come check us out at roofstockacademy.com and you can even come participate in this first group coaching session and learn quite a bit more about what we have to offer. Look forward to seeing y'all in there.

Hey, Monique Kelly, thank you so much for taking the time to come on and chat with me today about the Jackson Mississippi market. I really appreciate you coming on.

Monique:

Yeah, thanks, Michael. I'm so excited to be on with you today.

Michael:

Me, too. So let's just jump right into it and then we'll circle back to your background. Why should people be excited about the Jackson Mississippi market?

Monique:

Well, it has historically been a really great market for rental properties. People tend to pay a pretty high price point for rentals, I don't really know why. But historically, that's been the way it is and so, you know, it's a great place to invest. You know, the property prices are not too high. But the rent values are pretty high. So you know, it's just a, it's a growing area as well, so just a good a good area to invest in.

Michael:

Just love it and give us a little bit of background on who you are as an individual and where you come from and what is it that you're doing in real estate today?

Monique:

Well, I grew up in here in Mississippi, my family has been in real estate. So I've been around real estate since I was in diapers. My dad started this company about 40 years ago and he started our company with my grandmother and my aunt and so I've just been around it my whole life. I started selling real estate right outside of college and worked with my mom for several years. We were kind of a team. She's since retired and you know, I do this full time I've been selling since 2007. So and then in the past, like, I'd say three or four years, my main focus has been investors, and most of them are from out of state. So it's been interesting, pretty crazy ride, but I really love it.

Michael:

Awesome and I think most of our listeners may not know the difference between like what an investor buyer client versus an owner occupant buyer client looks like. So why did you make the shifts to work with investors and what are some of the differences that you found?

Monique:

Well, um, it kind of was just something that happened, honestly, I'd started working with some local investors and then I got a call, you'd like a an open door with Roofstock and so I kind of had a little bit of the experience and my family, they've all been investing, you know, as long as I can remember, they've owned lots of rental properties and so I've seen it firsthand and I've seen you know what a great income that can be for people and so once I started working with Roofstock, it just kind of blew up and that's been my main focus. You know, it's great that I get to meet people from other areas of the country and even over the world, you know, and get to share the great things about Mississippi and most have never been here. So, you know, it's just great to introduce them to Mississippi and the market here and they're usually pretty shocked with the value of the homes that they can purchase here for and get good rent and everything so, but they are different than owner occupants. You know, of course, they're looking at cash flow, and they're looking at numbers and so I tried to find really good deals and properties that are in great shape.

So there's not a lot of maintenance up front or issues in the beginning and try to find a good product for a good solid product that's going to bring in some good income. So Jackson is in what's considered Hinds County it's central Mississippi would be, and then around it, you have Madison County and Rankin County and so the population would be, you know, the large population would be in all three of those counties. I would say the main, probably study jobs come from government jobs. It is the state capitol. So we have a lot of state government jobs and then we have local government jobs, I would say probably number two, the employment would be medical and we have a ton of hospitals. We've got the big teaching hospital in Jackson. So you have a lot of med students, nursing students, dental students, and then you've got nurses and doctors and just a lot of people in the medical field that live around here and then I'd also say Trucking is another big industry here. We are centrally located. So if you go north, you hit Memphis, you go south, you hit New Orleans, if you go west, you're gonna hit Dallas and if you go east, you're gonna hit Atlanta. So you have a lot of traffic, and truckers coming through and so that is actually a big source of jobs here is.

Michael:

Interesting.

Monique:

We did we are… Yeah, yeah. So I'm in Canton, which is part of Madison County, Amazon is building a facility. So that will be a new source of jobs pretty soon. We do have a Continental Tire factory and Clinton, Mississippi, which is part of Heinz and, you know, so there are some other things, but it's pretty diverse here, most of the jobs.

Michael:

Fantastic, so for anyone listening, we're gonna be doing a kind of walkthrough of Jackson, Mississippi. So take it away, Monique, where should people be looking to find some of those cash flowing rentals and what neighborhoods are you most excited about?

Monique:

Well, okay, so um, I would kind of break it down into three counties. So you've got sort of like the higher income higher rent county would be Madison County and if you look, it's kind of up north of 55, you'll see Madison and if you look up where Lipstadt is right above it, that is actually a brand new city. So it was part of Madison, it still has Madison address, but they just became a city, they've just voted for a sheriff and they're going to vote for a mayor and that part of Madison is growing major. I mean, there are new restaurants coming and just a lot of growth in that area and it's actually not in the city limits. So you have tend to have lower taxes, it's part of the county and that area is where you're going to get the top rents in the whole Jackson metro area. The schools are some of the top schools in the state and that's a big reason why people want to be there and so I would say on average, the rent in that area is going to be around 2300 a month would be the median.

Michael:

Wow, okay. Yeah, for like, three to kind of run of the mill home.

Monique:

Yeah, you're looking at maybe 16 to 1700 square feet, and you're probably going to get around 2300 a month for that property.

Michael:

Right on and where are you seeing purchase prices?

Monique:

The median purchase price is around 363.

Michael:

All right, cool.

Monique:

So but you know, you're able to get a property for under 300, you know, maybe 250 to 300 and rent it out somewhere between 20 320 500. So, also, you know, of course, if you get four bedrooms, you're gonna get closer to 3000 for it.

Michael:

Okay. Right on.

Monique:

Yeah, so that's, that's a great area, I would say probably the middle part would be Rankin County, which if you go down, where you'll see, Brandon… close to 25. I don't know if you see how a 25 right there. That's going to be in Rankin County and I would consider that sort of kind of like in the middle of the three counties and in that, at that area, I would say the median rent you're gonna get is around 1700. You could probably get close to 2000 or a little more, depending on the size of the house. You know how new it is and there are a lot of new houses in that area as well. So there's still there's growth in there too and they have great schools too and I would say the average price for a house would be around 270 and then I would say so then after that would be Hinds County and that's where Jackson is and it's pretty diverse. I mean, you've got little pockets in there. Have that are going to be a little different and so the numbers I kind of pulled are pretty broad. But for Hinds County, you're looking at an average rent of around 1350. Some of the areas, you might get a little more, you might get closer to 1700. Like in Clinton over here. It's kind of like its own little community. There's a university there and it's actually where I went to school at Mississippi College University and so it's a little bit different than the rest of Hinds County, but and the average price for a house there would be around 207,000.

Michael:

Okay, right. So kind of starting to approach that 1% rule, so to speak.

Monique:

Yeah, yeah, you'll probably get a little bit more cash flow in Hinds County. But the houses tend to be older. You know, there's tends to be a little bit more maintenance and things there. But, you know, any of those counties are great areas to invest in.

Michael:

Perfect and talk to us a little bit, Monique, about how property taxes work out in if the three counties vary drastically, or if statewide, it's kind of similar.

Monique:

Well, so we do have homestead exemption in Mississippi and so you know, it that pretty much cuts taxes in half for an owner occupant and so you know, an investor is going to pay almost double, then when an owner occupant pays and each area is different. It depends on if it's in the city, the county, it what fire district it's in and so when I put, you know, upload properties to Roofstock, I tried to do all of that up front and put the investors tax amount into their, you know, Roofstock website so that they're getting the accurate amount and so I'm able to do that sometimes on the tax records, they can they'll let me do a tax estimator type thing and so it just varies depending on the location, how I get the taxes, but.

Michael:

Okay and let's just take a kind of shot in the dark for a $250,000 purchase price. What are you estimating ballpark for taxes, is it 1% of the purchase price, is it some other number? How should folks be thinking about that.

Monique:

In Jackson, it's a lot higher. So a property and Jack that will and it also depends. So in Mississippi, they don't base it on the actual value of the property, they have an assessed value, and it typically is about 80% lower than the actual value. So what I do is I go look at the tax records, figure out the actual assessed value, and then I can base it off of that. So it just depends. In Jackson, you're gonna pay city taxes, which tend to be a little higher county taxes in school taxes, and Madison, some of the areas you wouldn't pay city would only be county and school and so it can vary a lot with that. But I do try to give an accurate amount when I put in input any properties so that they know that upfront or if you know it have been investors interested in a property and is curious about the taxes, I'm happy to make sure to give them an accurate amount as well.

Michael:

Okay, fantastic. Well, that's a really good point to make about the homestead exemption. So for anyone listening out there, if they go on Zillow, and find an owner occupant home and look at the tax record and think, Oh, great, this is the amount I'm going to pay, they should at least be doubling it and then Monique, does the assessed value change on any kind of regular frequency, like here in California, anytime the property is sold, that's when they reassess the property at the price point at which it was purchased. So does a sale trigger reassessment or is it just every couple of years or how does that work?

Monique:

It's every couple years, the sale does not trigger it. So I think it's every like four to seven years, it gets reassessed.

Michael:

Okay, fantastic and talk to us about some of the things that are kind of maybe nuanced or unique to Jackson or maybe Mississippi in general, when it comes to like home inspections. In California, we have termites, that's a very common thing. So if you see termites, it's not the end of the world as long as the damage isn't super extensive. But if you're not used to that, that can make investors run to the hills. So what should people expect to find what's kind of par for the course in the Jackson market when it comes to home inspections?

Monique:

Okay, so in Central Mississippi, we have what's called Yazoo clay in the soil, and it can cause a lot of foundation issues. Just settlement in general. I would say in older homes, it's more common. Now they pretty much will do soil tests, dig up you know, so many feet of the clay and putting good soil so you don't typically see it with newer properties. You might see a little bit of settlement like a little crack in here or there but it's not anything major. But some of the older homes like in Jackson, or even southern brand and a Madison, I mean, depending on the age, it's a little bit more common and so there's a lot of houses that have had foundation work, or they might need it and so I do try to steer people clear from that, just because it can be an ongoing thing. You know, once you repair, it doesn't guarantee that you won't have more movement. You know, because that clay it's going to expand or shrink, depending on how wet it is and we have a lot of rain here in Mississippi. So um, you know, I do try to steer clear that, but I can usually tell, you know, we can look at engineer report and see how extensive the movement is, if it's within so many inches, like three inches, it's not really anything major. But more than that, and it can become a pretty major thing. We also have termites in Mississippi. So I do see some of that, but as long as it's not extensive damage, it's typically okay, those are probably the two major things that you would want to look for.

Michael:

Great and what about natural disasters and this might be a silly question. But do you all have hail down there or tornadoes or hurricanes, right, that sort of thing.

Monique:

We don't typically get the hurricanes. We're a little too far north from the coast. But we do get hail damage and some wind damage, we can get some pretty straight line winds, and there are tornadoes that come through here. So people might notice if they start looking at disclosures, that roofs are pretty much replaced pretty frequently, and it is due to hail damage, you'll get a storm that comes through and you'll notice in a certain area, all the roofs got replaced around that time period. So but that is that's pretty much it. We pretty much have mild weather here. We don't get a lot of snow, if we get shut down if we get any snow. Because it's so rare and yeah, but we do get a lot of rain. It's pretty wet here and we do get some tornadoes and things like that here.

Michael:

Okay. Awesome and kind of in thinking about the some of the natural disasters, and that leads me down the insurance path. What do you see, do you have like a ballpark estimator for what insurance costs are in Jackson?

Monique:

I mean, I would say, it just depends on the price of the house, how new the house is how new the roof is. But for a newer house, like around, I don't know, $300,000 that the insurance will probably be about 1000, somewhere around there.

Michael:

Okay, awesome, awesome, that's great and for everyone listening who is interested in the Jackson market, definitely be looking at your wind or hail deductibles. Oftentimes, those policies have a different deductible, which is different than the fire. So it's in a high prone area, the insurance companies say no no no, you got to pay a higher deductible for this kind of stuff. So that's great to know. Monique, tell us any final thoughts, things that people should be aware of tips, tricks, advice for folks how to be competitive in today's market or things they could do better in working with you as they're making offers?

Monique:

Yeah, so I recently pulled up to see how much inventory we currently have and so right now, for Rankin County, we've got about one month's worth of inventory and then I also pulled up the rentals, and we've got about 1.9 months’ worth of inventory. So almost two months, for Madison, for homes for sale, we've got about one month of inventory and then for the rentals in Madison, we've got about a month and a half worth. Hinds County, we've got two months inventory of houses for sale, and for the rentals about two and a half months and so it's still a really competitive market. There's still a lot of buyers that haven't been able to purchase anything yet. So they're still looking still have a lot of investors trying to invest here and so there's still multiple offers and so you have to make competitive offers, you know, to have a chance and so most are gonna sell for above list price right now and I would say the biggest thing that has helped me when writing offers and getting them accepted is if it's not cash, then to add an appraisal clause where you're willing to pay the difference between appraisal price and purchase price and we often cap it just so that the investor feels comfortable with it. But that has been the most successful tool and getting offers accepted and it just helps them be competitive with the cash offers that don't have those contingencies.

Michael:

Okay, and so for anyone that's not familiar with what, what Monique is talking about, let's break it down. So let's say you're gonna go buy $150,000 house, and you say, okay, I'm willing and the bank with a bank loan, and the bank is going to come appraise the house, and the bank is only going to lend you 80%, say of what the value of the home is. So if the bank comes in and says, hey, actually, the house is only worth 140 grand, they're only going to give you 80% of 140 and so you've got to come up with that difference to get to that 150 purchase price. That's what you're talking about, right?

Monique:

Right, right. Yeah and it's usually not much difference. Um, we're talking five to 10,000, you know, that somebody would be willing to pay the difference for so I'm not seeing your appraisals coming much lower than that. They usually come in at contract price, honestly. But it just gives that amazing set. They're gonna, yeah, yeah, yeah, exactly. But it just gives that seller the assurance that they're going to make a certain amount, and that's very appealing when there's other offers on the table.

Michael:

Okay. Great to know, and how many days on market are you seeing most of the properties sit for? I mean, is it, are they getting souped up within hours of getting listed or is it a week? I mean, how fast should people be prepared to move?

Monique:

I would say usually within one to two days, those houses are pending. So you know, as soon as it goes on the market, I would make the offer. Sometimes they're giving about three days. But at that point, they have so many offers to shuffle through. A lot of sellers are choosing to do it quicker than that. Just so they don't have to continue with the showings and go through so many offers. Yeah, I'd say a day or two.

Michael:

Okay, so for everyone listening out there, if you're ready to move quick, have your pre approval letters, have your proof of funds ready to go and be making strong offers? That's good to know.

Well, Monique, thank you so much for taking the time. If people want to learn more about you or reach out to you directly. What's the best way for them to do that?

Monique:

They can email me at monique@maselle.com and it's M O N I Q U E @ maselle M A S E L L E or you can call me I have my phone with me pretty much all the time. It's 601-941-4447.

Michael:

Amazing. Well, many thank you again, for sharing so much wisdom and knowledge about the Jackson market. I'm sure I'll be chatting soon.

Monique:

Thanks so much for having me.

Michael:

Yeah you, take care. Okay, everyone, that was our episode for today. A big thank you to Monique for coming on and dropping so much knowledge and wisdom about the Jackson market sounds super interesting and while the things are still flying off the shelves, so go get them while they're hot. As always, if you liked the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing on the next one. Happy investing…

Lessons from a pro hockey player for scaling your real estate business Jun 04, 2022

Bob Lachance is a former professional hockey player who dived right into real estate investing with no experience. He took a leap of faith, by asking an investor if they needed help and from there, his story began. He shares a valuable lesson from a mistake he made along the way that cost him $150,000 in one day. Bob is a good example of why you keep pushing forward, taking every mistake as a lesson, and staying open-minded to discover what you will be good at.

Today, Bob shares his transition story from becoming a professional hockey player to a real estate business owner and how you can grow your business using virtual assistants and getting your time back.

Episode Link:

https://revaglobal.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Bob Lachance, who is the CEO and founder of REVA GLOBAL, and Bob's gonna be talking to us today about what it is a VA can do for your business, and why you might want to think about actually hiring one. So let's get into it.

Bob, what's going on, man, thank you so much for taking the time coming on with me, I appreciate you.

Bob:

Michael, thanks for having me. Appreciate it!

Michael:

Oh my god, so a pleasure. So I know a little bit about your background. We were chatting here before we hit record. But for anyone who is not familiar with you, if you can give us the quick and dirty who you are, where you come from, and what is it that you do in real estate today?

Bob:

Sounds good to second rundown and, uh, you and I, we you and I know each other a bit. So you and I have a lot in common actually, I started this thing might not be in common. But I started you know, I played freshman hockey for eight years. Prior to that went to Boston University for four years, and then played near my last four years actually playing hockey, I played in Europe.

That was a pretty good run and then as soon as it started coming to an end, I had my first child and my wife was staying at home with him. So I figured you know what, I don't have really too much either to accomplish in my, in my planning career. So you know, I know a lot of people go through this, where they're looking at becoming a real estate investor, from one industry to the next and I know it's a very challenging time for a lot of people. So I know exactly what you went through. This was me back in 2004, to where you had to make an adjustment and really, you know, jump in, in a different industry, that's what I did. So I jumped into real estate investing back in 2004, start investing, my first deal was a fix and flip drove around neighborhoods, I know you have a lot of a lot of newer investors. So what you teach is farming areas, I did the same thing. So I drove around neighborhoods, I looked at properties that were dilapidated overgrown grass roof that needs to be done the whole nine yards. So I would call on literally I would go home, I would skip trace every single individual. So I write down a list of properties and a lot of what you teach, and write down a list of properties and go on to 401.com, which was a skip Tracing Service back then, you know, you have white pages, you have a lot of different services now and I literally would go home after I'd skip chairs, and I call them and say, Hey, I saw your property located at 123 Main Street. I'm looking to purchase properties. I'm a real estate investor in your area. Do you have anything for sale as your property for sale. So I got a good hit on one of them. It was actually listed property. So I had to go through the region and I knew nothing about real estate investing just so everybody's clear 2004 and went from the hockey locker room to a business owner which back in the day, man, I didn't have coaching programs that I knew about back then. So for me personally, I was kind of it was nerve racking. I had a little money put away but not a ton. So I made an offer on this property as listed at 185. I think I made an offer at 135 and they accepted it and I'm like, oh no, right. Just like any new investor, you're like, what do I do?

Yeah, what do I do? I do contractors. I didn't have bank financing setup, right? I you know, at some money put away but I didn't have you know, it was 135 plus another $30,000 of rehab. I didn't have that sitting in my bank account, right. So I went out to what's called a rare reminder, I found a found some contractors called a bunch of mortgage brokers at the time and I'm finding money, funds with contractors fix and flip the property made 32 grand which was awesome, right? I'm all fired up and all pumped. However, I looked in the mirror and I'm like, I don't even know what marketing was. I mean, I drove around literally, you know, I drove around forever. I got lucky in the property. I had no systems processes nothing. It's all me and went to Home Depot probably, I don't know, 10 times a day because I again, nothing. I met that and then fast forward to the next Monday after I closed I joined a real estate investor Association and I met this dude, which was ended up being my partner for 10 years. His name was Pat Precourt great dude, awesome guy, I went up to him and I said, hey, Pat, I know you are a real estate investor in Connecticut and everyone points to you as being the best individual short sale. So I'm like, I'm looking for someone to work with. I'm not looking for any money. I'm not looking for like a nine to five job. I'm looking to join a team. Are you hiring? He said yes. I'm actually looking for an acquisition person and he goes in specific, I'm looking for a door knocker. Now, if anyone if anyone has ever done door knocking, door knocking absolutely sucks. I just have to throw it out there.

However, you know, you know, my mindset was I said, the first thing I do understand is I know I have to I have to learn from ground up and I'm willing to do the dirty work to learn the business. So remember, I already flipped the property, but I didn't really learn anything, I just kind of managed it. I was mish, mosh and made money, so now I told Pat on my car, I will door knock, he gave me a list of pre foreclosure individuals, those are individuals that stopped paying their mortgage, and a script. So without any training at the beginning, I just got thrown to the wolves and I, from 10am to 3pm, every Monday through Friday, Monday through Friday for a year. So that's how I cut my teeth on understanding how to acquire property sell and then from that I graduated to negotiating with banks and we've done well over 1000 short sale transactions through the years again, this back in 2004, you know, when the crisis hit 2000-6-7-8, done a bunch of those fast forward started a couple of real estate education programs, which we're kind of having a good time about. One of them is called fortunate millers, which ended up being one of the top ones in the in the nation and then I left there. Remember, when I left there a couple about a year and a half ago, let's just say 2014. I know I'm jumping around 2014, I started my first virtual assistant company, out of the need of working with 1000s and 1000s and 1000s of students, they were looking at it saying listen, I know I want to make the jump from a regular job to real estate investing, but they didn't have enough time. So a lot of more working part time with, you know, another job and trying to get into real estate investing. So as a perfect segue to start that business, because you know, probably 99% of all of the students that I've worked with, in my life, needed a virtual assistant. So fast forward today, I have a real estate investment company, we just flipped 160 properties last year, different stuff. We're doing creative stuff and then this year, we're probably going to do about to a little over 200 If I have to estimate right now, while running a virtual assistant company. So I do a bunch of different stuff.

Michael:

That's awesome, I'm just curious, what's the typical tenure of a hockey professional hockey player?

Bob:

It is about I have to I have to check the staff for probably four years maybe so you doubled it. So I double it, I double so I made I made it a pretty long time and I went to play four years here in the US and four years in Europe, which is pretty cool. So I got a little different experiences.

Michael:

Oh, that's awesome. Okay, that was my own my own thoughts coming into play here. So okay, so you run now, you've done a lot of different things in the real estate space and now you're running a virtual assistant company specifically for that target, specifically real estate investors or virtual assistants for any type of book.

Bob:

So any type of real estate professionals, so that would be mortgage companies, that would be you know, wholesalers rehabbers, short sale investors, you name it, we have a lot of property managers, real estate agents, brokers. So that runs the gamut on a lot of different real estate investing. We also have a branch that we started in the medical space as well, that has medical virtual assistants that does you know, insurance verifications prior authorizations, but that's a whole different podcast.

Michael:

Okay, right on. So I'm curious to know…

Bob:

I personally focus in on I handle and manage to focus in on real estate, since that's my specialty.

Michael:

That's your space. Okay, cool. Well, I'm really curious about you know, when people are just getting started, or maybe they're already a seasoned investor, how do they know if a virtual assistant is right for them or when to make that leap or what kind of benefits they would see from using a virtual assistant as opposed to doing it all themselves?

Bob:

Great question. The simple answer is when you get when you get very, very overwhelmed, when you start looking at your calendar, you look at your phone, like, oh, what do I do next, and you have all these tasks. You know, I like to say, if you do $10 an hour tasks, you're going to have a $10 an hour bank account, that's typically when you start looking at that stuff and it's really important to you know, start looking at your calendar every day and see what tasks would should you get off your plate first, you know, for me, personally, I look at the way real estate investing is right now and in you start looking at all the miniscule tax tasks that we need, we need a social media presence we need you know, that needs to be that's very important. So that's part of branding what you can outsource and get off your plate. Next is obviously lead generation. You know, whether it's text messaging cold calling, taking in seller leads writing offers, right? You start looking at exactly how that goes in your business and those are the things that you have to look at because think about this. If I if I want to go on a boat ride with you, I want to go see you I don't know if Mike if you have a boat on are you live in a great area? So let's say you have a boat.

Michael Albaum:

Okay yeah, let's say that.

Bob:

Let's say that or would you want to play golf, right or I want to play golf with you. You're in my area and Michael, let's play golf and if you're not in the office, who's making money for you, if you're working by yourself, right? Nobody, nobody's making those direct mail or nobody's making those cold calls that are needed to drive in seller leads. No one's running your soul. Social media, no one's text message, no one's doing those things that consistently need to happen, right for you to run a successful business, you have to be literally sitting in that seat all day long or guess what your, your, you know, you're not going to answer on the phone, if you and I want to go on vacation, right or you want to, you know, go on vacation with their spouse or your friends, it doesn't matter, who's gonna be answering those calls for you, as well. Very, very important to have somebody sitting in that seat that you can replace and put someone in their perfect virtual system.

Michael:

Okay and what about for like, folks that are using investing, as a very, as a very traditional business model, the long term buy and hold investor, they're making that transition. Now their portfolio has grown to such a point where they're transitioning maybe from a full time job into real estate investing full time, but they're not flipping, they're not wholesaling. I mean, is there a space for them to take advantage of virtual assistants as well?

Bob:

Absolutely, you can look at two sides. Again, if it's if they still, if they're still looking to build their portfolio, that's one kind of set of tasks. Then another side is admin tasks, right? On the property management side, it all depends if they manage properties themselves. So if you want to look at both of them on the acquisition side, you know, if they're in an area that is competitive, they're going to need someone to cold call to text message and take calls to answer calls, maybe to make MLS offers, right? Because you can look at it and every area is different. So if I'm investing in Toledo, let's say you can have, you could have an algorithm or you could have a what's the word I'm looking for, you could have, you could run your numbers on how you your numbers, go and buy and hold right? Cash flow, what the cost of your money is, etc., different in Toledo than it is in San Francisco than it is in San Diego than it is in Connecticut. So you can have your virtual assistant comb through the MLS, if you have access to and make MLS offers as well to find and acquire properties on top of course, you know, taking in direct mail calls, taking in PPC calls, outbound dialing, text messaging, things like that. So that's on that storefront, because if we want to build our portfolio, we need properties that fit whatever kind of box that we want, right? Maybe it is an area that's more appreciation over cash flow. I don't know everyone's different these days, you know, because some people want to put more down, right as a as a deposit, whereas some people want least amount, but get an area that has more cash flow, right? It all depends. On the other side of it, if you could pause me because I'm from Connecticut, sometimes when I get talking, I go pretty well.

Michael:

This is great, man. This is awesome…

Bob:

So, on the property management side of they can do anything from you know, taking in seller calls, I'll give you a perfect example. Today, we have a number of properties that we own and we get calls in from tenants that just want to vent, right? Well my lease that shows that you're going to find me all the apply new appliances every time something happens bla bla bla bla, now as a an owner of houses that beats you down. So if you can actually outsource that to a virtual assistant, the first line of defense, so now they say, hey, let me walk you through the lease that you signed and when they walk you through the lease that you signed, that'll take an hour of your day and if you have I mean, this is one individual now if you have, you know, 10 properties 15-20-30. That's just one little task, you know, you could do other stuff like turning on turning on utilities or getting utilities changed over, you know, talk if you have a property manager, if you want to deal with the tenants, and also the owners of the properties as well. So you could go through a laundry list, you get a leasing, lease renewals, we have a ton of property management, clients actually do a mix of different things.

Michael:

That's awesome and what about kind of on the other end of that, or the opposite side of that coin for like life tasks that folks are doing because of real estate investors, you know, grocery shopping, scheduling, all that kind of stuff that doesn't actually have to do with real estate, but that stuff is all time consuming, and doesn't free you up to then go invest more. So our virtual assistants a good fit for those types of tasks as well.

Bob:

Yeah, we have clients that use them as executive assistants as well, right to help with travel, right. There's little, there's other little niche industries as well as real estate investing, you got the financial industry, right. You know, you have to call to get more customers. So we have some clients that are actually sold that home solar companies because the upside of getting one solar client is huge. So they do a lot outbound dial in and say hey, and they have a whole solar pitch on top of that. So there's a lot of different tasks with calendar management to set up travel to things like that, that worked very, very well. We have, we have a client that has who I can't remember how many I think they're up to 10 Vas to have a flooring company that do different types of they do a lot of billing, invoicing and things like that. So those are really, really niche tasks that you know, if you look at whatever your business is that you can outsource.

Michael:

Okay, okay, cool, because I mean, it's been something an idea that I've been flirting with personally, the problem that I have is it's really difficult for me to identify, okay, what's something that I have to do versus what's something that I could outsource to someone else? Do you have any good tips or tricks, or exercises that someone can go through to kind of sort and filter through? Okay, this is a me task, or this is a someone else task?

Bob:

Absolutely, what I would do is I would take three months for this or three weeks for this exercise, very simple. Okay, what you do is you have a, you have a piece of paper, and then you write down all of the things that you do in three weeks, start with one week, of course, but then go to the next week, next week, then…

Michael:

Including, like, brush my teeth and go into the bathroom. No, no, I can leave. You could

Bob:

if you want, that's okay. That's gonna be task. That's right, that's a huge source that yeah, oh, and then what you do is you take a line of paper, you put non producing tasks and producing tasks, and all the non or non-producing tasks, you're gonna put on one side, and those are typically the stuff that you could outsource, you know, as a real estate investor, what I look at, I look at as you know, the, the non-producing tasks for me is sitting on the phone all day long to call cold leads. So what I mean by that is, if you get if you download a list to whatever, list provider you use, right, Michael, and then you get them skip traced and if I'm the first person who's calling them all day long, right, that's a non-producing task. That's what you should do, too, for a virtual assistant to do get that off your plate, because then you could be working on all of the purchasing tasks, whether it's raising private money, whether it's sitting down with a bank, or sitting down with agents sitting down with other investors, right? Maybe you're going to if you're a buy and hold investor and you want to buy properties, you're better off, you know, having your virtual assistant, Google all of the investors in your area, and then calling them saying, Hey, you want to have lunch? I'm a buyer. I'm a buyer. I'm a buyer, right? That's just a little idea that we do in our office that works very well.

Michael:

That is a great idea. I never thought about that. All right, cool and all of this, I mean, it just sounds expensive. But what's like the realistic cost? Is there, is there such a thing as like a generic cost or can we put $1 per hour cost on it or does it really depend on the industry and the task and all that sort of thing?

Bob:

You know, we've tried every different model, we just do part time and full time, 20 hours a week and 40 hours a week, and we keep it a standard $10.60 an hour, you know, you start looking at what minimum wages and a lot of these areas, you know that in California, I'm in Connecticut, it seems to go up every day, and I cannot find a four year college educated individual my area for $10.60 an hour and all of our virtual assistants in the Philippines are college educated, you know, they've been in the industry, they're very, very seasoned. So it's just separates a lot of what's going on here in the United States to other countries.

Michael:

Okay, I love it and what's the startup kind of ramp up time for someone once you decide to start working with a virtual assistant to get them really producing and doing the things that that we're asking them to do?

Bob:

Very good question. So what we do is we actually recruit and train virtual assistants. So if you if you raise your hand, Michael, you say, hey, I want to start with a virtual assistant today to cold call, I don't know. So what we do is on the front end, we do. So we have a sourcing recruiting team in the Philippines and then we have a training team. So they train for about three to four weeks. So once they get through our, our screening process from application to checking out exactly if they have the right systems to their English proficiency and they pass, they have to take a little test and then go on to our training team. So if they pass through training, right, they take another test, then they do predictive indexing, so checks, Disc profile predictive index and so what we do is we check out a little bit of a profile of what they have, and of course, all of their all of their past experience. So now as soon as they get through our training, now we look at every time we have a sale, it's almost like match.com, that gets to our placements team and our placements team looks at the predictive index the disc profiling and matches that particular resume profile with the tasks of what that individual investor wants. So it's like match.com, we match a VA virtual assistant with the individual, as soon as they match up, right? What we do is we put, we give three different individuals to where you Michael could interview, because not everyone might feel that they're compatible. So as soon as it goes to placements, the match.com puts them into three different puts them with three different individuals. At that point, you pick who you feel is most compatible for you and then you go to our operations team, which you also get with at 1060. You also get a what we like to call a client service manager who helps manage the relationship between yourself and the virtual system. We have a lot of clients that come on say hey, you know, Bob, I want to start first with one full time virtual assistant and all of a sudden the VA does fantastic listen, I want to add another one, I want to add another one in the client service manager handles all of that they also handle all the HR and if there's any other questions that you need, they'll help with some training, too. If you want to add in extra training, there's a laundry list of things that the client service manager helps with, too, which is included in in that 1060.

Michael:

Okay, awesome. So it sounds like the kind of ramp up process to actually get started is significant on your end of the of the equation for me as the end user.

Bob:

So to answer your question, it will take about a week.

Michael:

Yeah, okay.

Bob:

Exactly, it will take less than a week. So to answer your question, yeah.

Michael:

Cool and then what have you seen, from your experience, and from your clients experience with how long it takes that the VA to really start producing? Because what I'm asking for is a very specific thing, I need them to do this in a very specific order. So does that take another month? What have you seen in that in that regard?

Bob:

So I would take from zero to 30 days is it's kind of like, you know, if you hire someone in your office, how long does it take for that individual, we just hired a sales manager, as an example, in our office that is in our office, we give him about 30 days to get stepped up and rent. Okay. So, you know, think about this, to learn what kind of system you have, we have to train them on pulling down lists, skip tracing whatever task that we want them to do, because in you know, this, you know, working with working in Roofstock Academy, you know, you have a client's may come in, you have 80% of the individuals that will run a business the same way, but it's the 20% that makes the magic, right? They'll start changing. You're from the Bay Area. I'm from Connecticut. So we will all learn the same program, right? You'll be my coach, I'll learn the same thing that somebody learns from in your backyard, but it's that 20% that I have to change because it's my backyard. I may be a wholesaler, not a rehabber. Yeah, right. I may be a buy and hold investor and not a rehabber. So it's those 20% things. I look at it the same way, that same thing with virtual assistants. So they're gonna have to learn probably about 20%. That's unique to you. You may use a different CRM, you may use a different skip tracer, it, but that's a small little part of it.

Michael:

Okay and that makes total sense and Bob, how do I communicate with my virtual assistant? Am I texting them on my on WhatsApp and my email, am I calling them, how does that work or is it really up to me and the VA to figure that out for ourselves or is there kind of a standard communication tool.

Bob:

That's up to you, that's up to you. Yeah. So that's up to you. So I have so I have learned how many bas are used now on our own business. We have cold callers, text messengers, data scrapers, skip trace, we have a bunch of them. So I have, I have Viber RingCentral. Those are my two main things that I use. So it's Viber is just like a WhatsApp.

Michael:

Yeah. So same, I used to get made fun of so much for telling some of that I still use Viber. Like, dude, welcome in 2005 and whatever, man, it works, well, like, get off my back.

Bob:

I like it, it's my phone I got I'm like, yeah, it's very, very nice. Yeah and it works is that we also have a Slack channel tool that we use. So okay, so whatever the client wants to use, we use it. So we'll train on how to use that specific tool for them, so it's very simple is up and running right away.

Michael:

Okay, awesome. Man, this is so cool. I've got I've got to do some more exploring. What would you say, are some of like the big mistakes that people make when they're just getting started so that other people or listeners can avoid that they can learn from others?

Bob:

Yeah, one of the biggest ones is, you know, we have some clients that come in and say, Listen, I just want my virtual assistant to run my business and I'm like, listen, it's an assistant want a virtual assistant run my business, too. Yeah, it's a virtual assistant, it's not a, it's not your business owner, get a partner if you want someone to run your business, so that that one's very, very important. And set proper expectations. I think that's important to where, you know, virtual assistants are great at lead generation, I hear people say, Well, I want my VA to go from A to Z and close the deal and I'm like, that is not realistic, because who's going to go meet the seller who's going to who's going to actually walk them through the process in the end, right? It's very, very important, because they're big about this, Michael Jordan, it's your real estate business, right? They are buying you, you get the lead in and if you have a team that is there, then they're buying your company and your Acquisition Manager or rep, right. So the virtual assistants are fantastic at doing tasks like lead generation, they could write up contracts, they could do transaction coordinator, they could do all that. But getting the actual deal closed, it's ours. It's my job as a business owner to do that, right. So I think those two things, as I see are very, very challenging pr some misconceptions out there because they may have heard a podcast and you're like, oh, you know, I'd be exactly go A to Z. Please call me and let me know that business 2004 I've tried everything and it hasn't worked for me. Maybe I'm doing something wrong, but I'm open to hear so anyone ever heard of that? Please give me a call, give me my number.

Michael:

That's great, that's great and we I mean, you kind of touched on it already, but I'm curious. If someone I mean, how I'm thinking about this for myself is just kind of having a VA take care a lot of the life stuff that I've got the scheduling that sort of thing. Where have you seen, I guess, in thinking about it from that frame, what are tasks that are not a great fit for a VA.

Bob:

Like I said, closing the transaction, right being your closer your head closer, you should either, you know, have a trained individual in house being your head closer, I would say that is first and foremost. So look at that. And that's really important. Everything else that you could do over a phone. Because think about this, your head closer is an individual that has a personality trait that is in 100% sales. Now, I don't know if it is in your area to find, you know, a killer salesperson. But sometimes it's difficult in different parts of the area in the United States, right. So outsourcing that to a different country, I found that that is the most difficult part to do, if you want to have a virtual assistant do that. So I would put that on the tippity top and it's really, really important that people know that because, you know, think about this, there's a lot of listeners that are either working part time or full time, right, that are listening to this podcast that want a VA to do A to Z, you are going to have to help with the closing side of it. If you want. If you want to be successful in real estate investing, and you want to get out of the rat race over here, you will need to focus in on that niche for you personally, you know, we have sales training, I pay for sales training every single, every single Tuesday and Thursday, we have our team and our on sales training costs 1000 bucks a month, right on just that one little niche alone. So think about that, and you know, within your business, so.

Michael:

Yeah, that makes total sense. But what if we shift the focus instead of like thinking about it from a sales and funnel, like a business perspective, if I'm having a VA help schedule, doctor's appointments and shopping, that sort of thing? You mentioned it before anything that can be done over a phone is a totally appropriate thing to have a VA do?

Bob:

100%! So if you want help with it depends how many doctor appointments you have, right? It depends. You have to, you have to make sure it also you have to definitely make sure and this is this is what's really, really important, right? You have different companies out there that have different packages, like if you want someone for only a couple hours a week, go to Upwork like that is a place that you could find a VA yourself, right? It's very inexpensive. If you want specific tasks done for your real estate business, I would say go to a company like mine, right? Because it's really written for that's why I've cut I've tried the 10 hour, I've tried the five hour I've tried, you know, the hourly, it's very difficult for any company like mine that has a whole system and process set up at the beginning with the management of your VA in the back end to do, you know, five hours or 10 hours. That's why we specifically cut it down from 20 to 40 hours and it just makes sense. So if you're a bit so if your question is, if you want someone five to 10 hours, I would 100% go to a company like Upwork and they're the best for that particular kind of roles. If you're looking for that, does that make sense?

Michael:

It makes total sense, it makes total sense and something that I'm constantly struggling with about getting a VA for myself is like sensitivity, the sensitivity of information, bank accounts, credit card numbers, social security numbers, I mean, so much of what we do in the real estate space requires that kind of stuff, is those are those types of phone calls appropriate to have a VA do and what kind of I guess accountability is there in the VA space in general.

Bob:

This is the way I always put it. I'm not willing to get my credit card anybody like and this is just this is just, it's really, really important, right? I'm not gonna go out there. I know, if I have a credit limit of X amount of money. I'm not going to give my credit card anybody, right? I think it's really, really important that's sensitive. Like for me personally, I've never had to get into a situation where I gave my virtual assistant, my credit card, and it was sent over, right sent over somewhere, what the best thing to do is saying, hey, have my virtual assistant send me the link that needs that sensitive information, right. Some people you know, I've heard, you know, not my company, but I've heard probably the same thing you had, well, they took my information. I'm like, well, you know, you should never give somebody that type of information because that's our you know, that's information for us. So the best way to offset what you're asking because that's a fantastic question is have them do all of that research and send you that one link that's gonna take you two minutes anyway to put your information we've probably ever pre populated on our computer anyway, right? This is what credits gonna say.

Michael:

Yeah, it's a click. Yeah, yep.

Bob:

So just in that's the best way I can I can answer that because it's really important. It's my responsibility to protect my own data as well. So I guess that's the best way to explain.

Michael:

Yeah, no, that makes a ton of sense. That makes no sense and great answer. Well, I liked it anyway. I think it's a great answer. Bob, this has been this has been so much fun, man. What's the best way for people to get in touch with you, learn more about your company take advantage of the services you offer, how can they do that?

Bob:

Absolutely. You can find me on Facebook, check out our website, which is https://revaglobal.com/ , R E V A global.com, like I said, catch me on Facebook. My email address is bob@revaglobal.com , you could get right to me on our website, if you want to sign up for a strategy session, there's a button right on our website, click on it, you could talk to our admissions team to see if it's the right fit for you. We're open you can have any questions you want. That's the way I always say you know what you, for me personally, it's important to talk to individuals, like myself, like yourself that actually work with virtual assistants and also are open to answering any questions. So whatever kind of question you have, for our team can help. That's fantastic, if we're right fit, that'd be fantastic, work for it.

Michael:

Love it. Well, thanks again, for coming on and sharing your wisdom and knowledge. I really appreciate it and I'm sure we'll be chatting soon.

Bob:

Awesome, Michael. Thanks for having me.

Michael:

You got to take care, appreciate it. Okay, everyone, that was our episode, a big thank you to Bob for coming on and sharing all his wisdom and frankly, answering just a lot of the questions that I've had about VAs super, super, super, super interesting stuff. So I'm definitely going to be checking that out to see if we can free up some of my time to be put to higher and better use. If you'd liked the episode, or frankly, even if you didn't like the episode we'd love to get a rating and review from you, wherever it is listen to your podcast, and we look forward to seeing on the next one. Happy investing…

Tom’s mortgage default nightmare and how to avoid this May 31, 2022

In this episode, Tom shares his experience with a failed autopayment on one of his mortgages, sending him into mortgage default. We discuss how this happened and what can be done to avoid this hassle in the future.

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my two co-hosts,

Tom:

Tom Schneider

Emil:

and Emil Shour...

Michael:

and today we're going to be talking about an issue that Tom ran into that could easily happen to anyone with a mortgage. So let's get into it.

Alright, guys, it's been a minute good to see you both. How are things?

Tom:

Things are good. Busy got two year olds and three month year olds and life man. It is, it is in it right now. But you know, things are really good. Everybody's happy, healthy. Well, so, can't complain.

Michael:

Good, good, Emil?

Emil:

Man. I can't, I feel like it's been forever that the three of us have been on a podcast forever time. Your kid is three months. That's, that's amazing, man. Yeah, same, same thing. I got two kids life is crazy. I feel like I never get to go surfing anymore. So I just like, live in my home gym, because that's the only activity I can do that keeps me occupied and sane. But everything's good, man. So I'm excited to hear what's going on today. Because we were about to tell me what we're like, no, let's just start recording this episode. So I'm very interested to hear what's going on with your portfolio.

Michael:

Yeah, Tom, just take it away, man bring Emil and everybody listening up to speed on what's been going on in your world and we're going to talk through about how to solve it and how to avoid this type of situation going forward.

Tom:

I think I'm gonna start with a shorter path of what is going on, and then we can kind of unpack a little bit. So I through the great financing opportunities, I refinanced a ton of my properties and the most recent one that I refinanced I found, you know, sort of a, you know, bad reviews on the lender, but hey, great rate, I complete the refinance, I sign up for, as with all my mortgages, sign up for paperless notifications, I sign up for, I guess, I'm doing a little more meandering one, I sign up for auto payment on my mortgage, my auto payment…, and my auto payment never hits, so it never hits and a couple of months go by, and I get a notice from my credit card that I've got a foreclosure on my record. So I go back to log in to the mortgage, servicer, and I'm blocked, I can't get in. So now the, speeding up the story much faster. I just reinstated my loan and went through a foreclosure never got like notification on this and I am absolutely, you know, kind of in the middle of it right now and that I just reinstated the loan and I'm going through the process of like, kind of demanding that they fix my credit, and all that stuff. So anyways, that's the that is the issue that I've been going through and go ahead, Michael grill me I'm you know, yeah…

Michael:

Well, just in taking a step back. So you missed the first mortgage payment after the refinance?

Tom:

Yep, yeah.

Michael:

Okay. How, how did that happen? Because you signed up for auto pay.

Tom:

I signed up for auto pay as the first mortgage payment was hitting, and I signed up for it, and figured I was done. The email correspondence I got was, hey, you're all set up for auto pay. What happened is that initial charge hit. So I, the auto pay doesn't work, if you have any amount delinquent. They don't tell them what's on the account. If there's a balance on the account, they don't tell you if their auto pay is not working. Now, I very much like I'm a dummy and I should have noticed in my checking account that there was certain dollars not going out. I have like a bunch of mortgages. So you know, I think this is a mistake by me. I think I am going through right now and you know, paying the you know, few 100 bucks to like make it right. But man, it was kind of easy for me to happen. So go ahead, go ahead, Michael.

Emil:

I have a question here. Tom. How long, how long of payments did you miss before you went into foreclosure, was it just one missed payment, was it like three months? How long was it?

Tom:

So I think it was two months. So as I said, I set up the auto payment, where when I finished it, there was like, a balance on it didn't hit and then two months later, I from my Chase credit card, I, hey, by the way, you have some major derogatory marks on your account and, guys, it is really, they make it so hard to like, come back out, like, they blocked me out of my account, because I like immediately tried to log in to pay. So you can't log in your account, they move the paper your loan immediately to this foreclosure, random foreclosure attorney, you know, in the state, I asked to reinstate the loan from that foreclosure attorney, they say, great, we'll send you a response and a quote in seven to 14 days. So I can't even pay I'm trying to get this done with, you know, from the time that I found out about it, there's like nothing you can do and they have various phone numbers associated with the attorney associated with the mortgage servicer and every time you talk to them, get prepared to wait 30 minutes to talk to another human and it's like, they like kind of, are really rooting for you to fail. Because like, that's a huge incentive for them to sell the loan, you know, but, you know, I like resources and time and like, you know, help where I'm able to move this as fast as humanly possible. But it is really just a gut punch every step of the way. Trying to and again, I'm saying like I made a mistake, I should have noticed that it wasn't. But if you look at my email history, the only emails I have from this lender is congratulations, your setup on paperless congratulations, you're set up on eBay and that's it you know.

Emil:

That's the weird part is that you didn't get like I would think if I'm missing a payment I would get a letter, an email something like hey, you're 30 days past due on your mortgage payment like yeah, what's how do you go straight from miss payment to just like in foreclosure, no correspondence and in foreclosure, that's crazy to me.

Tom:

They would have sold it and I never would have known about it had chase, like my credit card company not told me this. Now. I will say that. I think it was like Friday, like a week after it moved into foreclosure. I got a letter that was backdated. So today is May 23. Friday was made what 21st. I got a letter that Friday, backdating from May 6, letting me know that I'm in foreclosure and it was like a certified mail from May 6, but delivered on May 19. I mean, it's just really flawed the incentives of these companies and go ahead hit me with some more questions. I got the bloods boiling a little bit, so…

Michael:

So where are, where do things stand today?

Tom:

Yeah. So we're in a time where it stands right now. So that seven day period passed or whatever, 10 days where the attorney, perfectly fine attorney doing their job, they sent me this pay off, I pay it off within five minutes. You know, whatever the balance was, I was, I was honestly concerned it was going to be like, you know, 1000s and 1000s of dollars to move it back out. But current interest style interest, yeah, it ended up being a cash, I think it was like somewhere between two and $500, which is like not cool, which like really sucks. But, you know, there's, there's so much appreciation, my loan to value is so low on this property, like, you know, there's much worse situations. So I have reinstated that the attorney gave me a phone number to call to like follow up for making sure auto pay is in place I call the number it turns out it's the wrong group. This is like the group that's having trouble the payment, but it's like, no, you're back with the foreclosure because of reinstating the loan and oh, it looks like you know, you we have received the funds, but you got to call these people tomorrow and it's like if I didn't have like the time and energy and like the resources Michael, thank, you know, introduce me to you know, his attorney to help me out and reaching out to her.

It's, it is it is this could easily slip through the cracks and it's just miserable. You know, a couple of other things I'll say on the like, notification piece. So I don't know if anybody else has rental properties, but I get at least 10 phone calls a day from people trying to buy my house, you know, and you know, I have some like spam phone call, like listening stuff that like makes the person talk first. So it's like, it's not some like auto tree. So I mean, they said that they left a phone call, but it's like, ah, you know, I didn't I didn't get one if you did you know you might be using like a phone tree. Am I supposed to answer every one of these, you know, 10 or however many calls a day that I'm getting from a wholesaler who's trying to buy you know all cash whatever it's like, you know, yeah, go go ahead.

Emil:

I have a funny aside for those I had saw you guys know I'm trying to sell a property in Jacksonville and I just I know they're usually garbage calls when those come in, but I was like, let's see what happens. Like I think I got a couple text messages and emails I like tried to go through the process with them and someone was like, okay, cool, we'll get back to you with a quote tomorrow. Never heard back from any of them. It's hilarious how, like, you guys are spending all this money on lead acquisition, and you guys don't even extend me. You know, lowball offer or something like, just funny anyway, sorry, total aside, then add a comment about.

Tom:

Dude, it's all in this whole ecosystem, you know, like, as part of the process is them leaving a call with me and it's like, you know, they might have left a call, but it probably just got picked up into these random, you know, spam spammers, you know, I don't know. Yeah…

Michael:

That's so frustrating. But so if we take a step back, Tom, you said something at the beginning of your story and I'm curious, if you were to do this all over again, would you change your process any other than of course, looking more closely at the, at your bank statements? Like, I'm Tom, I just have drowning in too many mortgages, like too much income?

Like, yeah, but like, what do you do differently? How do you ensure this doesn't happen again and what would you say to people listening so that they don't find themselves in a similar situation?

Tom:

So I got a couple of thoughts on this. Excellent question, Michael, one of them would be, you know, quality does matter obviously, you know, we talk a lot about this podcast, like how important that relationship is with your PM and it's like, don't be penny wise, pound foolish. No more than learning about it. Man, if I could pick up a call and talk to like someone servicing my loan and not have to wait on hold for 30 minutes? Like there's some real value in that. So would I be willing to pay like a few more bits up on my debt servicing? I think so. Like this is, this has been really painful. So like, I would, instead of just like always hunting for the absolutely lowest like mortgage payment. If you have the time to like, navigate through whatever hellscape….

Michael:

Welcome your real estate, folks, it's gonna get to be a hellscape and run the gauntlet.

Tom:

Yeah, no, no, I, I, you know, I love my rental problem are the reviews are great. They're awesome but like, this is for sure been one of the more kind of like frustrating incidents about it. So back to your regular original question, what would I do differently, I had a lender that was great and I was hoping to get a little bit lower an interest rate, and it was a little bit lower, but like, not enough to have a simpler process, where I just have one lender that's managing everything, and I can call them and talk to them, you know, when I when I need to. So that would be it. The other would be around the fund flow thing I you know, we talked about that before is every month there's gotta be expectations about what money money is coming in, and what is coming out the right and left side of the ledger and I was lazy about it. I you know, I had like a sheet and I kind of just didn't think twice about it and, you know, life gets busy sometimes with kids, work, you know, all that stuff. But like, if you're gonna play this game, like, man, what a what a dumb way to get tripped up on it and I think like a, knowing what the CYA is, you know, he gets familiar with that…

Michael:

Very much so...

Tom:

Cover your butt, yeah and what is that making sure that your debt servicing is in place, is a big one. So, you know, my sort of 10 sense on it. I'm going through the experience.

Emil:

Guys, what is CYA? I've never heard that.

Michael:

It stands for cover your cover your V height with an A.

Emil:

Huh, got it got it. This is probably a good place for us to give a little shout out to stessa you know, if you're if you're using stessa and probably checking it once a month, probably would have come up. So go hop on the stessa train, stessa.com.

Tom:

Yeah, it's good a great point Emil.

Michael:

Great, great, great point, like, yeah, that stuff would have been highlighted for sure. Oh, man. So I think that's something that I share sentiment that I share, Tom is like paying a little bit more on your interest or your loan products for service like to be able to pick up the phone and have a conversation with a live person I think is so invaluable and I think it's a shame because it's one of those things that you don't realize how valuable it is until you need it and it's oftentimes too late. So that's a great you know, a great tidbit for folks.

Tom:

And super relevant you know, insurance right insurance the same thing like if you're trying to like get a claim like I can imagine a situation similar to this where you're hunting for the absolutely lowest premiums and hey, guess what, you bought a piece of paper like you know, it hits the fan I mean, this is like you know, smart, smart money you know Pennywise Pound Foolish the thing. Property Management, like if you're if you're chasing the cheapest dollar like you may get away with it or you may not and like there's something to be said for sure about the quality side…

Michael:

Yeah, absolutely. So going forward, what do you do differently?

Tom:

Yeah, well going forward? Well, one of them is, you know, there's going to be I is kind of fighting tooth and nail to get this like expunged from my record. Just because it's so silly like it was there for like two days. And I think I have like, really pretty reasonable documentation against that this was like, almost a wrongful because I mean, maybe they did, like call me or something. But I like I didn't realize it, but like my email trail. So going forward, I don't think this is exactly your question. This is more like a next step. But I could talk about going forward is, you know, fighting to get this off of off of my record and I thought about refinancing, like just a let's get out of here…

Michael:

To get out of the loan, yeah.

Tom:

But that mean, rates are kind of climbing, and it is at a super low rate. So like, just, you know, measure twice, cut once on making sure that the auto payment is in place and, yeah, I mean, I think that's it. I mean, I mean, on a go forward basis. I, you know, just being a little bit more thoughtful on the quality side and giving a little bit more credence, I think is the right word to like some of the route reviews and some of the peer feedback on certain vendors out there. This has triggered a couple of other go forward items, like I haven't talked to some of my property managers and a little bit like things seem to be looking okay. But I do this monthly review of like, okay, things I want to do as it relates to family finance, career, all that stuff and something I added for next month is hey, I gotta schedule a checkup with my property managers, you know, speaking to like, CYA, I love the passiveness of real estate investing, but you can get to a point where you are not CYA and checking in with your fund flow. Just, you know, even if there's still once a year, once every six month check in with your property manager. I have not been doing a great job at that. So getting slightly less passes passive, but I mean, give myself a little bit of break. I've got like, you know, a couple of babies at home, so a little bit of extra work.

Michael:

Seems like a reasonable excuse. You have to be CYA being like it's an active verb and I love like anytime I hear the word Creedence all I can think of down on the corner is everything else just like in one year out that student Creedence Clearwater Revival comes on.

Tom:

Oh, yeah. Great work. Yeah, yeah.

Michael:

Well, that's great stuff, man.

Tom:

I mean, kind of stuff.

Michael:

Well, I mean in the grand scheme of things, but yeah, as an action item as like a teachable moment as a go forward. Kind of looking in the rearview mirror knowing now what you which you don't what you didn't know then what you know, now kind of a thing. There are some great actionable takeaways, I think for everyone here listening. sorry that you had to be the guinea pig but good stuff, good action items, takeaways, yeah.

Tom:

CYA…

Michael:

Let give you the title of this episode: CYA

Tom:

Yeah

Michael:

Emil, thoughts, reactions?

Emil:

It just, it sucks to hear man like I feel for you. It's so it's like this, you're at the end of it and there's literally nothing you can do and you're just doing damage control. So sorry, you have to go through that man and I hope it all works out for you without like, too much brain damage.

Tom:

Thanks, yes. Yeah, well, you know, glass is not half full guys. The glass is completely full. It's half water, half air. So, optimism. Yeah, keep next steps onwards and upwards.

Michael:

I thought you're gonna say the glass is half full. It's completely empty. I hate this.

Tom:

It’s completely full…

Michael:

I like that a lot. Alright, well, we'll have to have you back on at the end of the saga and hear what the what the timeframe was to get resolution, what the resolution was, if there's any additional costs, to give people an idea of how worthwhile it is to follow up on this stuff at the beginning.

Emil:

And just it'd be really interesting to know like, if this ever happens to somebody like what did you do to get it all corrected and how much did it cost?

Michael:

What’s the roadmap?

Emil:

Yeah, yeah…

Tom:

Totally, I mean, this was like a big black hole of like, kind of understanding what it was and you know, thankfully, shout out to my credit card company for letting me know that some lenders sneakily added my home in foreclosure to try to basically steal this property from me.

Emil:

They just really want your property Tom this is like them just being like, Man, this thing is sweet. I want it give me give me give me give me…

Tom:

Yeah, totally.

Michael:

I don't know if that's I've ever heard anyone give a shout out to chase credit card company in the past but this you heard it here first, folks.

Tom:

Yeah.

Michael:

Sweet. Well, that was our episode everyone. Thank you so much for tuning in listening, watching wherever it is you're consuming this and as always, we'd love to hear from you ratings feedback reviews really helpful for us, and we look forward to seeing on the next one. Happy investing…

What you should know about investing in the Savannah, Georgia market May 28, 2022

George Meyers was born and raised in Savannah. During his years as a business owner, George learned a lot about business and the inner workings of the business. Today he prides himself in helping new and existing entrepreneurs make educated decisions that will help their businesses be more successful. In years past George has owned and sold numerous personal properties that include commercial, residential, and investment. This personal, commercial, investment, and business experience helps him better understand his client's needs.

Today George is a full-time professional Realtor and the founder and principal of Mia Madison Properties LLC. He is a member of the National Association of Realtors, Georgia Association of Realtors, Realtors Commercial Alliance of Savannah/Hilton Past president of the Savannah Landlord and Real Estate Investors Association.

Savannah, Georgia was the beneficiary of rapid growth in the first part of last year but settled into a more sustainable pace that we have become familiar within today’s economy. That said, the city has undergone a considerable amount of growth in the past 18 months. Tourism, port activity, business services, and above all – the housing market –set the stage for above-average employment and economic growth. Today, George talks about investing in Savannah, Georgia: market trends, neighborhoods, price to rent ratio, economic drivers, geographic considerations, and more.

Episode Links:

https://www.miamadisonrealtygroup.com/george-meyers/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by George Meyers, who's our Roofstock certified agent out in the Savannah Georgia market and today George is gonna be talking to us about everything we need to know if we're considering investing out in that market. So let's get into it.

Everyone, just a quick shout out to the Rootstock Academy before we get started with the episode. Rootstock Academy is your one stop shop for real estate education, whether you're just starting out, or a seasoned investor, or just looking to learn more about real estate investing as a whole, we've got something for you. Over 50 hours of automated lecture access to one on one coaching private slack forums and more, come check us out a roofstockacademy.com. Look forward to seeing you in there. Happy investing.

George, what’s going on, man. Thanks so much, take the time to hang out with me. I appreciate you coming on.

George:

Michael, thanks for having me. I really appreciate you having me on.

Michael:

Oh, of course. My pleasure, so right out the gates, give me your elevator sales pitch on why should people be investing in Savannah, Georgia?

George:

Savannah is a man is one of the best markets are the best one. What we have in our areas is a lot of different drivers for investment. One would be military, we have a lot of military that come into the area which make our rental market really, really good. The great thing with that is it's a good economy and bad economy doesn't matter if we have a high economy or low economy we have renter's because of military. We also have a lot of manufacturing plants that produce no matter where there's a high income or low income situations. You know, for rentals, we also have the ports, we were one of the largest ports in the country, and we just deepened our harbors. So we're growing even more and they're saying that will probably be the number one in the next couple of years. Then you got other drivers around us a lot of colleges. So even in a bad economy or a good economy, everybody's going to school. So you got a lot of that going on around us we have some of the biggest colleges in the state here in our area. You know, the other thing that we have is a good amount of influx of people coming in that are transient. So if you want to do short term vacation rental with us, or if you want to do long term, we have a little bit of everything in order

Michael:

Right on, well I'm so we can just call this episode a wrap and go home and you know, that's awesome, George. So let's definitely unpack a lot of what you just said. But I would first love if you could share with our listeners a little bit about who you are, where you come from, and what is it that you're doing in real estate.

George:

Okay, so my name is George Meyers. I am the owner and a realtor at Lea Madison properties. Our company opened in 2002. It's named after my daughter's view as my youngest daughter, Madison's my oldest daughter. We're a full service brokerage. So we do a little bit of everything. We have commercial residential, we do property management, association management for commercial properties. And we have a high on investment department. So in our investment department, we do everything from single family to multifamily. You know, we've been doing it for so long that we work with a lot of subcontractors and stuff as well to help us be the industry. So we're here to help you through a little bit of everything that you can. So me personally, I was born and raised here in Savannah, Georgia. I'm 42 years old, a family man of three, an entrepreneur and a full time realtor he just loves it loves investing.

Michael:

Right on and George, I'm always curious to know with a lot of our partner agents, do you invest yourself?

George:

I do invest myself. So I'm short term vacation rental, I own commercial rentals, and long term, long term rentals as well.

Michael:

Right on. Okay, well, here's a question for you. What do you say to the folks that think that having their property manager also own rentals, there's a conflict of interest there. Because if I own property and you own property, and we both got a vacancy, we all kind of know who's is probably going to get filled first.

George:

Yeah, so we run into that question a lot. You know, in my case, I'm kind of like the Hair Club for Men. I'm not only the President, I'm also a client. So in my case, you know, there is no competition. And the reason there's no competition is because I placed my properties into a property management department, which as I'm the owner, yes, but I have a person who runs my company for me, because I'm a day to day Realtor in a day to day investor myself as well. But in that particular case, there is no priority for my property or another property. The other great thing is in the Savannah market, we are social and housing that industry comes through, I have to worry about my property before their property, because there's probably a waiting list. I mean, and to give you a good example. I mean, we had an announcement yesterday that Hyundai is going to come to you what we call our mega site, which is an industrial park that we have. It was built a number of years ago, and it's been filling up with some great manufacturers and some great warehousing facilities. but Hyundai has announced that they're gonna be coming in there in the coming months and they're saying I think they're gonna bring, like 1100 jobs to the area or something like that it could be a little job number. But the crazy thing is we don't have the housing for it. I mean, when it comes to both purchasing or renting, we were already in the shortage prior to that announcement and that's just one announcement of many that are coming to this area, I mean, Amazon's gonna be opening a facility. They're not calling an Amazon facility, but it is an Amazon facility that's opening in the area that does distribution, and a few other logistic companies are going to be opening that are large providers of employer. So when it comes down to that question, what I can say is, as I said a little while ago, I don't think there's any competition between my property or priority, because we don't have enough properties. I mean, if you were to go to our property management website, and even from the purchase side for investments, our struggle is inventory. I mean, we typically prior to prior to 2019, we average 30 properties on our website for rent, as good as availability. Okay, currently, we have five properties on the site at any given time, because we're renting them before people even walk out the door.

Michael:

Oh, my gosh, that's wild. We've been hearing the same thing in so many markets throughout the country.

George:

Yeah, it is. Wow, it is scary. I mean, you know, the funny thing is everybody in this market, and you've probably heard this from other realtors, everybody thinks that we're just getting rich right now we're making all this money. It's just amazing. Well, the fact of the matter is, I mean, I can be honest with you, I didn't want a business in the recession that I did now, because there was inventory. You know, now we're in a place where we're not selling as many properties I mean, yes, we're making a little bit more money, because the cost of homes are more so organically, you can sell a little bit less inventory, and still make just as much money. But the fact of the matter is, we're not we're not shooting over the moon, because we don't have the inventory to sell. I mean, if we did, and we'd be amazing, and we would all be absolutely rich as realtors, but most realtors are still probably about the same place, they are making a little bit more money, except for that one that top one percentile who who's doing, you know, a high volume of stuff.

Michael:

Yeah, I wonder too, how many realtors decided to get their license during the pandemic, because they saw how frothy the market was and so there's all this new inventory of people fighting for the same number of deals.

George:

It's absolutely crazy. I mean, I've got a couple of friends who own real estate companies and they also schools, you know, that do pre licensing to become realtors and they said they could probably add four or five more classes, it doesn't matter where they are, it doesn't matter if they're here, if they're in Charleston, if they're in Texas, or if they're in California, when I talk to these friends, they say I can add five more classes a month, and still not have enough to let people come in. You know, and I heard a statistic the other day that there were some there are some real estate markets where the associations and the MLS is are adding approximately 50 agents a month onto the roster. Now, of what I understand, I didn't get into the market until 2008. I started in the business in 2007, and was an investor prior to that, and I owned another business before I got into this and I was told that back then it was the same way that they had where they were adding tons and tons of people and then a recession occurred or they figured out they weren't going to make the money that they thought they were going to make and you just have a bunch of licensed individuals, but they're not good realtors and not to say they couldn't be good realtors, they're just not in it full time. They're doing it part time. They're working a full time job during the day, and then they're doing something else in the evening, which is real estate. It's their side hustle, I guess you would say.

Michael:

Yeah, yeah. Okay, interesting. Well, George, you touched on it a little bit, as you were kind of gearing up and talking about the Savannah market. But who are some of the biggest employers, if someone is thinking about investing in the market? Who should they be looking to be kind of bolstering and supporting the economy?

George:

Yeah, so we've got a number of large, large employers in the area. So first of all, we got the military and the government, as we talked about, you know, we have one of the largest air strips in the country. So that's Hunter Army Airfield, within close proximity, about 45 minutes from here in Huntsville, we have forged Stewart, which for Stewart is one of the major bases when most things start to occur for a war or something overseas, typically, everything starts to move first at Fort Stewart and Hunter before it does anywhere else in the country based on my experience over the years. So you got a lot of military there. You've also got a lot of government facilities and government civilian jobs that are supporting both of those bases and all the things going on.

So then, if you move on to the private sector, you've got Gulfstream so Gulfstream aerospace, which is owned by General Dynamics, we all know Gulfstream planes, we all wish we could afford one, especially when you live here, and you see him flying over every day in the drought biome, you know, so we got gold stream, their huge employer. The great thing about Gulfstream is over the last few years, they've started to bring a lot of their manufacturing of additional parts from their subcontractors in house. So they're doing a lot of that and a lot of expansion in our area. They've built I think two or three extra facilities at the airport over the last probably five to 10 years. So they've really increased employment, a lot of logistics and warehouse we've had the largest logistics and warehousing boom we've ever seen over the last three to four years, especially in the last few years. I mean, a lot of areas that were desolate country sides, and down two lane highways are now six, four and six lane highways and now on both sides of those roads, where the train tracks on the other side is nothing but logistics warehouses, and I'm talking massive logistics warehouses, hundreds and hundreds of 1000s of square feet of logistics warehousing, laid out in yards in the same way. So a lot of truck drivers, you know, a lot of people working within these within these facilities to do all the different things and as you can imagine, by building those facilities, you've got construction companies that have been popping up everywhere, they're doing all of the infrastructure, and that kind of stuff, then we go to the ports authority.

So the ports authority, as I mentioned, at the beginning, were one of the largest ports in the country, I think we're either the second or first largest port on the East Coast. Actually, I think New York is right ahead of us still. But at that particular case, I think they just said they were gonna bring another 500 to 1000 jobs over the next year, just for the ports authority and what you have to realize that we've noticed there our research is over the last couple of years, what we started to see is the majority of people, even if they're going to buy a home, they come and rent for the first one to three years because they want to learn the city, they want to learn the market and the thing about our city is lots of places you have just the inner city itself. So for us, the majority of the stuff is going to be an outlying suburbs that are growing really quickly, like cooler, Port Wentworth, Reagan Gaiden and like, for example, cooler and cooler is one of the fastest growing cities in the country, by both population by economic standard, and by growth rate of pure property, meaning the property they're building for retail for warehousing and those kinds of things. So all of the surrounding cities that surround our city, they're all having growth troubles themselves. So what's happening is they're actually doing research and studies to figure out how they're going to control this growth to make sure that they don't outpace themselves, and they can support the infrastructure and everything that's coming on. All of those things bring us back to what we're here for is which is investing. I mean, it brings us back to where it's a very solid state for investors, because they can guarantee that they're gonna have tenants, even if it's for the short term, meaning one to three years.

Michael:

That's incredible.

George:

It is you know, and you have a bunch of other businesses and we could go on and on about a bunch of a bunch of other businesses that are in the area, large companies, large manufacturers, as I mentioned, we've got a mega site. We're, we're going to Tri County area, so not a tourist city here but a Tri County area, so Brian Chatham and Effingham counties are going to be the main focus of where the investors are going to want to look okay, and in this case is there's different types of properties we have depends on what you want to invest in how you want to invest what your rate of return is, or what you want your rate of return to be and those different properties are going to gonna be in those different areas. But each of those areas is growing at the same pace meaning that they're all putting in logistics and all putting in manufacturing but some of the major manufacturing Daniel defenses in our area Daniel offense if you don't know who they are, they're a gun in arms manufacturer. They do a lot of the military stuff they're nationally known. I would say they're probably the Remington of today's world. You know everybody wants one of their guns.

You know you've got Kia who is moving in which is Hyundai, like as I mentioned earlier, Hyundai is doing a subsidiary there begin to build a Kia Evie vehicle here is was what I read. Okay, got Kita you got Mitsubishi, Mitsubishi a few years ago and I say a few years ago, time flies probably five or six years ago, they opened a generator plant here. So they build a generator motors here on site at the mega site and then there's a couple of other manufacturers that are right outside of the city like arm, or a foul. If you don't know where a file is oral file makes any of the stickers that you see lots of times if you see a vehicle, it's been wrapped, or if you see stickers on the front of a retail store, that material that they use to make that is produced very largely here at one of our facilities. So those are just a handful of companies. Like I said I could go on and on and on about who else could support the economy.

Michael:

How great Well George, let's do this. Let's pull up a map of Savannah, Pierre, if you want to give us a hand with that, and I would love if you could kind of take us on a tour around the market as a whole and give folks some insights into some neighborhoods that you're really excited about.

George:

So if we start your little column, you know, the downtown area is always great. You know, if we look at downtown Savannah, it's going to be broken into a couple of districts so we'll be looking at Savannah itself has resumed in here, you're gonna have the closer you get to the Savannah River, which is where the red dot if you see the red dot on the screen of the map. So right there appears got the browser you're gonna see or got the cursor, you're gonna see that's the Savannah River. So all of that area right there is going to be tourism. If you go a little bit to the left on my screen, you know, you'll see up the river you're gonna see all the ports and everything else. But in the lower section of that from the red dot, you're going to ended up in an area that's an historic district, the historic district runs to about from what we call Bay Street, which is the main road that runs through the city or River Street, which is where all the tourists want to go all the way back to somewhere around, I would say 37/3 victory. 37th is really probably the cut off of where you get into your historic district. But all the way back to victory is probably about what we would call it downtown and that area, what you're going to end up with is properties of all different genres. So you're going to end up with a lot of older properties, meaning that they were built as early as the 1890s and there is new as 2022. But there's a lot of historic property there and a lot of them will be redone. So what you're gonna run into in this area in the downtown area is you're gonna run into a weird situation and the weird situation being that there's not a good side of the street, or excuse me, a good side of the tracks on the bad side of the tracks, like lots of times you hear people say, I don't have an RC, there's a good side of the track and a bad side of track, once you run into in downtown Savannah is a good side of the street and a bad side of the street and the reason for that is because of the previous recession. In the previous recession, investors came in and we started to purchase a lot of streets and we were buying entire blocks at a time with multiple investors, then what occurred is the recession came and when the recession came, it left a lot of properties undone. It left half the blocks done or half the streets done and those kinds of things.

Okay, so that's why you end up with good sides of the streets, bad sides of the street, but now we're starting to see a lot of those properties picked up. The other thing you'll run into in downtown Savannah is a big mix of the type of properties, you're gonna run into anything from a single family bungalow, that's probably only several 100 square feet and depending on where it's located, it can be anywhere from, you know, $400,000, all the way down to $30,000. It just really depends on its location and proximity to the historic district or parks or, or areas that have grown and that kind of stuff. But then you'll run into things like quad plexus, or duplexes or large multifamily developments that were built, you know, sometime anywhere from probably the early 70s, maybe even the 60s, all the way into 2022. Okay, I'm the type of let's talk about for a minute, the type of tenant you're going to receive in this type of area, it's going to be a little of everything, it's really, really cool, what you're going to end up with this short term vacation rentals in this area. Now, what I will say is any investor looking for short term vacation rentals in this area, it can be very, very tricky and the tricky part of it is that we have a cap on the number and percentages based on which area they're in. Some of the areas may be called boards, some may be called districts, but depending on where they are in that district or in that ward, they are limited to a certain percentage. So we always want to check and make sure that we have the ability to be able to get them or certificate or transfer them or certificate otherwise they just purchased a property that can't be used for anything short term vacation rental. Okay. So that's one thing you're gonna run into is a lot of tourists, a lot of tourism students, there's a lot of students in this area. So you've probably heard of SCAD Savannah College of Art and Design. SCAD is one of the largest art schools in the country. SCAD is based in Savannah. SCAD has redeveloped and owns a lot of downtown Savannah and without them a lot of downtown Savannah probably wouldn't be what it is today, because they've done a lot of redevelopment and a lot of restoration in that area. So you're gonna end up with a lot of students. The great thing about SCAD students is they come from all over the world. It's not a situation where you know, a lot of schools you run into and you see around the country, as I've talked to people is a lot of these people come from, let's just say Wyoming to go to school here. Now, you're gonna run into people from China, you're gonna run into people from England, you're gonna run to people from Amsterdam, you're gonna run into people from States where I which is right outside Savannah, so it's just a big poll of people into this area and they too, are also a big a big employer in our area, not just an employer directly, but they also employ a lot of subcontractors, who then then create jobs as well.

So you're gonna get those people, young professionals, young professionals love to be in downtown Savannah over the past five years, young professionals that flocked from all over the country, especially during COVID to work remotely in our area, because one of the great things, you can walk us anywhere downtown with an open container. As long as you're not driving. We're one of I think three cities in the country that allows you to walk out of a bar, and you can have a beer can in your hand and when you do as long as you put it in a cup, you can walk with an open container. So everybody loves us for that. Some people judge us for that, but some people love us for that. So you're gonna run into young professionals, you're gonna run into families because there are still a lot of families who live in the downtown area, and that kind of stuff and then as far as income levels, you're gonna go for everything from low income all the way to high income. You're gonna get everything from high income mansion homes, all the way down to subsidized housing and low income section eight housing. So downtown Savannah has got a plethora. The city has done very well and is working very well with investors to be able to make all of these areas and festival investor friendly. There's even been some tax incentives depending on where you are and what you're doing and the city has also been really good about keeping a mix and what I mean by that is they even offered some pro grants to where they can keep families and individuals in the downtown area by giving down payment assistance.

Okay, Pierre, if you zoom out a little bit more for me, if you come to the south side go further away from the from the downtown. If you come to the south side, what you'll do on the map is you'll kind of cross over victory drive, and you'll come into an area which we'll call Midtown, Midtown is going to be congregated, largely Park, the houses typically run anywhere from the 1930s up until there's some homes that were built in the last couple of years. In the Midtown area, great investment area, you're gonna pay a little bit more money for the homes. Those homes are typically pretty well maintained. These are going to be what I call porch neighborhoods, porch neighborhoods, meaning that they all have front porches, the neighbors still sit on the front porch and talk to you next door. They're very, they're the epitome of the Southern home in my opinion, a lot of these homes are probably three to four bedroom bungalows, maybe even down to two bedroom bungalows, there will be some mix in me there's duplexes and quad plexus that are mixed into this middle midtown area, a lot to do a lot of activities, there's a big park in that area, which is called Delphin Park, you're going to end up with good shopping, you know, you're gonna end up with our ball filters there. I don't know if you've heard of Savannah, bananas, but everybody across the country has been talking about them. Grayson Stadium, which is one of the oldest stadiums in the country, is one of our ball stadiums and that's where they play at and that's in Midtown, all walking distance from a lot of these Midtown locations. There again, really good for investors. The great thing about investing in these Midtown homes is that the draw on the is how cute they are. They've got a really good cute walking and look. So every investor, if they if they buy one of these properties with these front porches and they maintain them, they do a good job with them. Just a drive by they want it no questions asked. You know, there's a lot of there's a lot of character to these homes, as you see. I mean, there's a lot of characters, you look at a lot of these homes going through this area.

Michael:

And George, before we move on just curious, what would a three, two kind of run of the mill three two in Midtown costs and what would you think of it rent for?

George:

So it depends on it depends on what part of town you're in. But let's just say you're in, let's just say the Ardsley park or a park side, which are two neighborhoods in that area. If you were in Parkside, right now, a three two is probably going to cost you somewhere in the mid three, rents are going to be somewhere probably anywhere from about 2000 to as high as probably $3,200 a month. Depending on the upgrades you have on the home and everything else. The one issue that we've seen in the Savannah area is because we have so many tenants in place already, and they can't find places to go, they're holding the rents down a little bit. So the one thing that I want to really explain here is using I don't want to pick on anybody particular but we all go to certain, you know websites, we're going to go to a Zillow or HotPads, or something like that and I'm not picking on Zillow, I'm not picking on HotPads, because we understand how they get their data and algorithm they use and it kind of makes sense. But at the same time, when you're in a place like Midtown, the issue runs into that you could have a two bedroom, one bath next to a four bedroom, four bath and so those two don't compare. So when you see one rent for 2001 rent for 4000, the system gets thrown off.

So as an investor listening to this podcast, what I want you to do is don't trust what you're finding online, I want you to pick up the phone and call me call my team. You know, and if you if you don't take that route, the call me or my team or the Roofstock team, then call somebody who's a professional who can truly tell you what's going on. Because what I can tell you is that a lot of the rents are staying stagnant to the lower prices. Because the landlord's we don't have like New York, they got price, you know, I don't know what they call it rent protection is what I'll call it, I forgot what it's actually called. But we don't have that here, we're not held to we have to charge a certain amount of rent, we can't raise a certain amount. But a lot of landlords, they bought the homes a lot cheaper, they bought the homes in 2008, nine and 10 when the homes were 50-60-70-80 $150,000. So they can charge a lot less rent and they've got quality tenants who are there. So watching that tenant out to raise the rent at 3000 and get a tenant who may not be there as long as this tenant is going to stay there losing that longevity and guarantee. So what you run into is when you go into some of these websites, they're still showing what I'll call 2018 and 2019 rent numbers. Whereas if you're buying a property that someone's moving out of, and we ended up buying the property as an investor for you as your investment real estate company, and through Roofstock, we are then going to raise those prices anywhere from probably 100 to $1,000, depending on the property. You know, and we have this issue on a call to issue. We had this conversation in this scenario with one of the investors who we started working with last week the rootstock. They call it and said hey, can you give me some information? I don't think your numbers accurate I think that in this particular property, what I'm looking at online, is the rents going to be 1500 to 2000. But you're telling me that on this property, it's going to be 2000 to 3000. So why is the number such a far swing, and the swing was exactly that this particular property that they were looking at was already under contract, unfortunately. But in that particular case, what it was is, there was a person who lived in the house for seven and a half years, that landlord decided that I wasn't going to rent the property again, because I had so much equity from buying it in 2008, or nine, that I'm going to cash out on my equity, and the next investor, whoever purchases that if it's not a family, what are they going to do, they're going to raise the price or market rent, you know. So you're going to want to talk with a good property manager, a good realtor like ourselves and the Roofstock team, so that we can really get you the true numbers in a market. So don't take the face value of what you're seeing online for what the market is truly doing. Let us know, let us help you through it. There's no additional cost for us to do that. That's what we're here for. That's what Roofstock here for and that's what all of our teams are here to kind of do and push you through.

Michael:

That's such a great tip and something that I'm always encouraging folks to do, that are in our academy is hey, go talk to the people that are actually doing it. Zillow is a machine, it's a computer, they're not the ones actually listing the homes and renting the home, so I love it.

George:

If you're in a neighborhood where all the homes are exactly the same and I want every investor to keep this in mind and even some realtors I mean even some realtors, you're like we were talking about earlier getting in. I hope that there's some realtors that are listening to this and they're taking the information that you're giving them, and the information that we're giving them and they're growing their business with it. But when you run into a situation where there's a neighborhood that's brand new, or 10 or 15 years old, and every home was built almost the same, there was only three four plans. The square footage only varies by a couple 100 square feet, the beds and baths don't vary at all, then yeah, the Zillow or any other company use using an algorithm or an AI system is going to be absolutely the cry, right. But when you put them into a downtown area or a midtown or an older neighborhood area where they're building new neighborhoods next to old neighborhoods, and new homes next to older homes or apartments, or there's condos right next to residential, single family detached, the problem you run into is the numbers get so skewed. I mean, they're trying to compare a detached condo that's two bedrooms, three baths with no garage and new lands to a house next door in a neighborhood behind it that was just built in 2021. That's got three bedrooms, two baths, a quarter acre lane and two car garage. Their system doesn't know the difference within reason of that because they're in such close proximity because of mileage. You know, it's done by radius.

Michael:

Right, right. Now, it makes a ton of sense. Well, George, give us a couple more markets that you're interested in and then I want to transition here shortly.

George:

Yeah, so going outside, or let's stay within the city with a warmer area. So the South side of town, you're going to end up with a little bit older neighborhoods, those neighborhoods were probably built sometime between the 60s and the 90s and those areas are really good places to find, you can typically because everybody's wanting something newer at something fixed up, you can typically find some inventory of properties of these areas that are popping up, that give you the ability to do a little bit of a little bit of repairs into them and still get really good rents with the higher purchase prices that are occurring in today's market. If we want to move outside the market, a few places that I want everybody to really key in on would be Richmond Hill, Port Wentworth and Pooler, as I mentioned earlier, Bryan county is where effing Bryan county is where Richmond Hill is. Richmond Hill is a very fast growing city. They're bringing in a lot of industry, making a lot of changes. There's all kinds of homes you're gonna find single family dwellings that are like condos, townhomes, you're gonna find larger homes and gated communities in that area and you're also going to find family dwellings and more spec type neighborhoods as well that are great for investment and Pooler. Pooler, as I mentioned earlier, is one of the if not the fastest growing city in the country right now, based on what I understand based on economic growth, based on pure size of growth of, of the actual city itself with the neighborhoods and their building with the retail and logistics and all that this area has both old and new and when I say old and new that everything from probably the 50s and 60s, all the way up to 2022 and you can find a little bit of everything from condos to townhomes to multifamily to single family detached. So those will be your hotspots. So again, Southside Savannah is going to be a really get hot spot. Midtown if you can get some but Midtown is so hot and it's very difficult to beat out a family, they're willing to pay more than US investors are willing to pay on stuff like that. Southside of Savannah, pooler, Port Wentworth, Richmond Hill, those are going to be kind of your hotspots and we're really looking at right now. It's a fine property.

Michael:

That is great, George and super helpful. So let's shift gears here just a little bit and talk about what are some things that out of state investors need to be aware of if they're considering the Savannah market like in California, for instance, termites are pretty common, we see a little bit of termite damage, that's not a red flag, but to someone that's not familiar with it, it's like, whoa, why want nothing to do with that property. So what's unique to Savannah that people need to be aware of.

George:

So I would say, just like you mentioned termites in our area, it's not if it's when you're gonna get termites. So you want to really make sure when we're doing this process, that we're doing inspections, we're making sure we're getting what we call a WTO letter, which is a wood destroying organism letter, to ensure that there are no termites, no powder post beetles, those kinds of things that are going to cause those types of issues. Moisture is a huge issue, we have high humidity. So for us in the summertime, especially coming into where we are now, you know, it's a situation where you take a shower, you dry off, you get dressed, just like every day, you walk outside, and it feels like you're back in the shower, and you're sweating to death, and it's just humid. Right, if you haven't experienced that felt the humidity, I mean, dry heat is one thing, and you can extend it up to 120 degrees, but 120 degrees with 90% humidity here, you feel like you're in a swimming pool walking down the street. So moisture is a big issue. So anytime you've had a house has been sitting vacant for a little bit of time, we really want to make sure we check to make sure there's no mold or mildew issues, we want to make sure that ventilation is good. HVAC is are huge. So we want to look at ages of HVAC, we want to look at the quality of the HVAC to make sure everything is operational. So home inspections are going to be very, very big in our area. Now the great thing is with Roofstock, scheduling those and everything else, they take really, really good inspectors and those inspectors will work with us on a regular basis. So they know exactly what to look for. They know exactly what an investor is looking for those kinds of things and the last thing is we go through a pretty heavy rain season, you know, we as we come into the screen, which we just came out of, we have a lot of rain, rainy days, when we get into the end of summer, we come into hurricanes and storms, afternoon thunderstorms.

So we're going to want to make sure that all these properties have good sealed roofs, you know, good windows, those kinds of things and good drainage around the property and drainage around the property is horribly important. Because any of those rainstorms would we get these afternoon thunderstorms that we get, they're basically heat flashes, what we get, and in those cases, we may get one to three inches of rain in a matter of 45 minutes. So we want to make sure that there is no flooding or anything going on around the properties, even on the streets and everything else, you know. So it's those are some of the big key factors that I would tell the investors to really, really look at, you know, the other thing is, you know, what we try to encourage the investors to do is we try to encourage the investor to do a FaceTime or a video with us, you know, if they can't do a FaceTime with us, because you're, you're an international client or national client, or you're busy at work and, you know, just like with this, I mean, I think on the west coast or east coast, you know, there's a time difference. So it can be very difficult for us and for you at times. But if we can't do a FaceTime video live, like we're doing right here, then we definitely want to do some sort of recorded video and try to send that to you so that you can see everything in the home. Because there's one thing that I can tell you that realtors are really good at if they're good at nothing else and that is perception. They are good at taking pictures, and they are going to have photographers make things look, they make ugly things look absolutely beautiful, we were really, really good at that.

Michael:

It's a gift really.

George:

It really is a gift and I don't know if it's us as the realtors, or if it is, if it's the photographers. The other thing we're good at is the creative literature that we use to come up with the descriptions to say that, you know, there's 200 square foot bungalow that is falling down, it has termites is absolutely positively amazing. You know, we just we just have a way of doing that. So if you're 100 miles, 300 miles, 3000 miles away, it can be very difficult. So you definitely want to do video, because that video, you can't have stuff in his videos, you can't hide things, you're gonna see different things and you can stop and pause those pictures are one thing, but videos or another. So I encourage everybody to really no matter what market you're shopping in to really encourage the agent you're working with, to get you some sort of video or something like that.

Michael:

It's a great tip, George, talk to everybody about property taxes and how those work in the Tri County area. How should they be thinking about them? Is there a good ballpark rule for folks to estimate what their taxes are gonna look like post once they purchase a property?

George:

So the good thing is most of the sites that we mentioned earlier, most of them produce pretty accurate tax numbers. So really, in my opinion, you shouldn't be estimating taxes number one, and you should be asking both the realtor and the Roofstock team what the taxes actually are typically, number two, you know, if you're looking at those taxes on those sites, they're usually pretty accurate. But there are a couple anomalies that I really like to mention. So in some areas with our for example city of Savannah, city of Savannah sits within Chatham County, okay, if you're in the incorporated sea, okay. You actually have two tax bills. You have the city tax bill, and you have the county tax bill and the other thing that gets thrown off is those tax bills are due twice a year. They build those taxes in the beginning of the year. I think it's around this time of year which is March or April and then what they do is they build them again in November. Okay, now here's the funny thing about it. They say that the first bill is due You, I believe the first bill is due sometime June. But it's actually not the there's no lazy that is that is the municipalities way of producing pre income so that they can run their business. So you're better off to keep that money in your bank account, draw your interest and then pay the full bill in November because there's no penalty to do that. Okay, however, if you're in the city of Savannah, you have two tax bills and what happens sometimes is on the websites, they only show one of the tax bills, not both of the tax bills. So if you ever go on there, and you see some really cheap taxes, and you've got city and county, you're going to need to ask that question, because it's probably a situation where they put the first part of the year's taxes, but not the second year's taxes. So let's just say if the 1500 bucks, you're like, man, that's really cheap. Well, no, it's probably 3500 bucks, because there's two bills that year.

You know, if you're in the unincorporated markets, like outside of Chatham County, where you're not in the city limits, there's only there's still two bills, but there's only the bill for the county, you're not paying city and county taxes. So in some cases, you may want to make your make your investment market outside the city because you're paying less taxes. It really depends on what you're doing. The other counties in the same way, Bryan County and Effingham County, which the tri counties are what make up the Tri County areas, they are the same way they typically build twice a year. But there are some cities in those areas that you do not pay city taxes, for example, there's a city called Garden City that is between Savannah and between pooler, it's right against the ports, a lot of ports, workers live in that area, a lot of ports, families work in that area, you can actually see the ports from them as anywhere that you can see the port cranes in that location, they do not have some Texas, their city taxes are wrapped into the county taxes and somehow the county and the city work together to cover those costs throughout the year. So you're only paying taxes on one side, not both sides, even though you're in a municipality, inside of the county. So we'll want to look at those on a case by case basis. But I would say that the majority of websites that I see, they're producing, you know, pretty good numbers. But for us, it's so easy for us to get it. I don't see why anybody should assume they should just make the phone call or send me an email and say, hey, do your job, Mr. George, give me this information and I think that's a big misconception is a is investors feeling like they're overworking the realtor? Well, no, I mean, that's what we do every day. I mean, that's what we're here for and that's what we have teams for and if you're working with a realtor who's not willing to do those things, then you should probably find a different realtor, you know, and so the other part of that is, you know, you also have to be respectful of what they have going on, you have to understand that, yes, I wish you were my only investor, but we do have other people we're working with. So you may have to give me a reasonable amount of time to get you that information on my team and get you that information. But my opinion is, don't assume those numbers, let's really sit down and talk about those numbers and the good thing is, in most of our areas, the numbers are very consistent. So if you're in like we were talking about earlier, Midtown, if you're in a certain square footage, and the average price is, you know, $350,000, the taxes are probably somewhere around $3,000, maybe 2800 bucks, and almost every house in that area is going to be very, very similar. So you can kind of use that as a good, you know, good way to do it.

You know, the other thing, when we're, when you're talking about just taxes, you're talking about what they can account for, I mean, there's other things they should be accounting for. I mean, I think every investor should be counted for reserve, I've run into so many investors, even Roofstock investors that we're working with, who they're not accounting for reserves are not putting any reserve money away. So when that day comes to do a repair, they're gonna have to come out of pocket, so why not have it into a reserve account, where it's still money you can use if you need it for something else, but we know that AC is going to break, we know the roof is going to need to be replaced, we know that we may have a termite issue. So why not be prepared by putting a couple of percent into a bank account for that, instead of waiting when it comes down the road and as we all know, the repair always comes in the wrong time it comes with the kids tuition is due, or whatever it may be whenever you have to fix your car. So you know, those are just some tips that I can give and then make sure you're definitely accounting for, you know, your property management fees and those kinds of things as well.

Michael:

Such great tips, George, we got to get started wrapping up here. Any final tips, tricks, thoughts, advice for folks as they're thinking contemplating and researching the Savannah market?

George:

I mean, oh, I think like I said, I think they should check out these different markets, I think they should determine what areas they want to be in. I think the other big thing is, you know, really determine what you want your rate of return to be or be realistic about it, what we run into more than anything, and I'm sure there's other realtors who are going to be listening as they're shaking their head like this, you know, come into the city and come into any city in any investment situation, knowing a realistic rate of return. The hardest part we have is rushing out and putting offers on place, places to realize that we wasted your time, my time and Roofstocks time at the very end to realize that you wanted a much higher rate of return that was never realistic in this market at all. So I would say coming into the Savannah market. If you're going to invest in Savannah Want to get let's set up a meeting? Let's have a conversation, let's really delve into things. Let me tell you what our costs are going to be as far as property management fees, you know, annual cost of termite bonds, maintenance plans, preventative maintenance on the HVAC systems, and then also talk about, you know, what are realistic rents are, and then at that point, we can talk about what a realistic rate of return is, or what you believe is realistic and we can tell you if that's actually a realistic number. I think coming into our market is just like anybody else's market. You know, we got to, we're struggling for inventory. So come in patient, understanding that we're trying to find inventory, and I will say we're doing some things. I mean, we're, you know, it's unfortunate that we haven't been able to produce as much inventory personally as we want to do, because we have investors waiting in line. But the situation is we're contacting other property management companies who don't do real estate, we're trying to get them to, to do a referral program to where we pay them a referral fee. If they do, give us a listing or get us properties that one of their investors may want to sell. You know, we're even doing a lot of mailers, we've gone back to a lot of traditional mailers to where we're driving for dollars and what we mean by driving for dollars is, you know, our team is getting the vehicle and driving around and every vacant property we see or every property we see deteriorate, and it doesn't have a for sale sign in it. We're sending letters and we're saying, hey, do you want to sell this property, we noticed that the front doors fallen down, we noticed the shutters are falling off, can you not afford this property, and then we delve in to try to start to find those investments. So that we can stop competing, like we're doing, we're competing, when a property goes on the market, we're all competing for it, you know, along with other investors and other places all over and other realtors. So if we can find these off market properties, and starting to bring them in. But the other part of that goes back to the beginning of this part of the conversation as we're closing out. If we don't know what a realistic return rate of return is for the investor, it's very difficult for us to even start negotiating to say if we shouldn't send in a letter to this property, because we don't know if it's gonna match what they need or not. You know, so I would say coming into any market, but especially our market, let's have the conversation. Let's talk about real returns. Let's talk about what you want and what you want for yourself, your family and your future and then we can help you build that I mean, between us and what Roofstock provides us and here we can build that, this is not a problem.

Michael:

George, this has been so, so great, man. What's the best way for people to get in touch with you if they have questions want to reach out want to learn more?

George:

So they can call me or text message me. I mean, they can call me or text message at 9123132424 that is my direct cell phone number. So know that sometimes, like I was saying early, be really earlier, be realistic that sometimes in the evenings and stuff, it may be a little slower with family and all that kind of stuff. You can also reach me by email. My email is: george@miamadisonproperties.com and I'm always happy to help. So let's schedule an appointment. Let's get on the phone, let's get on FaceTime, let's get on a Google meet. Let's figure out what you want your future to be and what your what your investment would be and what you want your rate of return to be. Let's do this. I mean, we're ready for you.

Michael:

Awesome. Well, George, thank you so much for taking the time. I really appreciate it. This was awesome.

George:

It was great, Michael, thanks for having me. I really appreciate it. I look forward to next time.

Michael:

You got it, take care.

Thanks, all right, everyone. That was our episode a big thank you to George for hanging out with me and educating all of us about the Savannah market. Super, super interesting stuff he was talking about and sounds like a lot of growth going into the market. As always, if you liked the episode, please feel free to leave us a rating or review. They are really helpful for us, gave a great weekend and we look forward to the next one. Happy investing…

Here is what investors should know about the Tampa Bay real estate market May 17, 2022

A Florida Native and graduate of University of South Florida, Jeff Wills is an accomplished Tampa Bay Area agent who brings a strategic yet personable approach to the home buying and home selling process. Drawing from years of experience as an agent in the Tampa market, he has built a solid reputation for himself as an industry leader with a solid track record that specializes in attention to detail in commercial and residential transactions.

Investors are buying homes in Tampa at a record rate. Between July and September 2021, one in four homes that sold had an investor as the buyer. According to a report from the Tampa Bay Times, Tampa Bay ranks as the 7th hottest metro area for investors nationwide. Today, Jeff talks about the Tampa Bay market: neighborhoods, price to rent ratios, economic drivers, geographic considerations, and more insights that investors will want to know before making moves there.

Episode Links:

https://sefair-inv.com/

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and joining me today is Jeff Wills, our certified agent out in Tampa Bay, Florida and Jeff's gonna be talking to us today about all the things we as investors need to know and should be aware of, if we're investing in that market. So let's get into it.

Really quickly, before we get into the episode today, I want to encourage everyone to go check out roofstockacademy.com. Roofstock Academy is our one stop shop for real estate education, independent of whether you're just getting started or a seasoned investor looking to scale up or get involved in a different asset class. We've got lectures, we've got coaching, we've got one on one slack access forum and a plethora of other financial benefits, as well as money back on your marketplace fee credits. If you're transacting on Roofstock. So come check us out at rootstockacademy.com look forward to seeing you in there.

Jeff wills thanks so much for taking the time to hang out with me today, man really appreciate you coming on.

Jeff:

Absolutely, man. Love to do it and thank you for having me. Yeah, of course. So

Michael:

Yeah, of course. So we're just gonna like jump right into it and we're talking today about Tampa Bay, Florida. I want you to give all of our listeners why Tampa why now.

Jeff:

So why Tampa why now honestly, I've been hearing that a lot. However, it has been very, very popular as of late. A lot of the big things that people are hearing, actually, just yesterday, Goldman Sachs bought 305 units in downtown Tampa for 168 million, setting another record price per unit and a crazy valuation for cap rates right now and so there's just there's a lot of synergy. The biggest thing behind it has been Water Street water streets about halfway through its 10 year growth plan. They've got phase one out of the way, phase two starting, and that has really brought a lot of life and vibrance to Tampa that was kind of growing and burgeoning there prior to COVID prior to all the popularity we have now, but I think it's really hit its peak and honestly, it's probably got a good you know, 10-20 30.50 years stride to soon looking like Miami, although personally I hope not. I'd like there to be a little bit less people and, and keep the enjoyment that we have here and honestly, you know, Tampa is a big town, it's a big population. But it really does have an extremely small town feel with the micro communities inside the neighborhoods inside the certain you know, sectors and where we are on the map and near the water and so I think Tampa has a lot to offer, both from an investment standpoint, from a long term hold appreciation standpoint, and especially, especially a rent gross. I don't know what that's gonna look like now, just because you know, kind of has hit a very, very high mark. However, we're not seeing any vacancies. We're not seeing, you know, any kind of rent concessions. I was just talking to a very big property manager yesterday for a different reason. But they were saying, yeah, we're barely giving written concessions. We're hitting full market rent. Everything's at 95% occupancy or above and there's no signs of stopping. So I love it, I I've always thought Tampa was a hidden gem before COVID and before things got crazy, but you know, kind of very lucky to be here now and enjoying every minute of it.

Michael:

Right on, Jeff, that is that's super interesting. So I'm wondering, what was that cap rate that they got for the Goldman Sachs purchase, do you recall?

Jeff:

Honestly, I don't have that in front of me, I can almost guarantee it was probably sub four. Even after tax adjustment, it's crazy. I actually lived in that building. When it first opened, I got a I snuck in with some written concessions and realtor bonuses and stuff like that. So I kind of skated in a bit but I mean, it went through a lot of challenges. I mean, management was horrible. Two years, they had the same management then fired that one and then fired another one and they've had problems left, right and center what that building just knowing because I've got friends that live there and stuff still and it's still selling for that price given I mean there's a bar across the street that has so much drama tied to it. It's insane, that the publicity from that sale has anything to do and so backing up from that Goldman Sachs has long been rumored to be taking a very, very big piece of the pie in the Waterstreet office space and so while that hasn't been announced Goldman Sachs buying that building to me just sounds like corporate housing instead of them having to go and give all their employees stimulus, oh, we'll give you a 5000 monthly allowance.

They'll say hey here, we've got a block of rooms, pick one enjoy yourself. It's paid for and I think that might be how they're skating that market rent because some of the stuff and water St. Tampa is going up. Actually, I just talked to my friend yesterday 966 square feet with a big balcony 5000 a month and it's it was exactly what I did you have 550 a square foot. Yeah, um, it's, it's insane and I mean, once you set that, once you set that standard, I mean, they do. I mean, okay, the Heron is the best multifamily building I've ever seen. But I mean, setting that precedent, all people have to do is just be nearby and just enjoy the overflows, people who can live there and by the way, they have zero vacancy, and they have a weightless for that unit. That's coming up down hole, it's crazy.

Michael:

Holy smokes. So Jeff, you clearly an expert on the area, give people a little bit background, who you are, where is it that you come from and what is it you do in real estate today?

Jeff:

Absolutely, so I grew up about an hour north of Tampa and a county called Pasco, a very small town and to me growing up, Tampa was a big city, a really big city, I had been there three, four times the aquarium a couple of times, and I just every time staring at the top of the skyscrapers and that was just the biggest thing to me and growing up, went to college, didn't really know what I was doing there. When for finance, I was like, yeah, let me kind of figure stuff out. My dad one day was like, hey, why don't you just, you know, pop into real estate, see what's going on? I'm like, yeah, sounds fun, should be pretty flexible. I like people, like, give it a go. Seven years later, here I am and it's just been, you know, from top to bottom, you get to help people with something that's extremely difficult, extremely stressful, and very nuanced and I mean, you know, from deal to deal, there's always something different. There's always a different backstory a different why and even growing up prior to all that I've always kind of felt that I was a good listener. You know, I, of course, I have my own, you know, opinions and desires and stuff. But I was always able to kind of peel back, what is somebody looking for? What does somebody want to do? You know, what they're, they're telling me one thing, but what do they actually mean and I've always, you know, of course, ask them, hey, you know, you're saying this, but what do you want this, and it's just been very enjoyable and, you know, the client feedback is the same, I've got a ton of referrals, a ton of repeat customers, and it's just, it's very, very enjoyable for me to be able to, you know, simmer it down to its the parts that they can control and make sense of, and then I just handle all the other legal mumbo jumbo stuff on the back end and it's just been very, very enjoyable.

The first three years, I was very retail focused, you know, end user not very investor friendly, and kind of got bored with that and I was like, you know, I, I've always enjoyed numbers always been pretty good at numbers, like, why can't I get to the investor side of things and that's when I joined my current brokerage see fair investments and from there, it just kind of skyrocketed. Our offices set up extremely streamlined and efficient, to the point where in the past 13 months, just me and my broker together have done about 137 million in business, and 98% of that was investors and we're just, we're just masterfully efficient, fine-tuned and, you know, we know how to strike valuations from, you know, Jacksonville down to Fort Myers, it's, you know, it's a few things we know how the appraisers operate, we know what a tenant is going to do to it as far as evaluation what people are paying, because we've got 30 under contract that we can look at and say, oh, you know, hey, a cap rate is this based on this or like, we just have a ton of insight and ability to help our investors and you know, even just last week, you know, we have, you know, I guess it's kind of our, our secret sauce, but it's very simple. Every Friday, all of our clients get an update, regardless of status did nothing happen, hey, nothing happened today, you know, that just wanted to let you know, have a great day and yet again, I had another client last week said, hey, you know, honestly, we haven't even spoke on the phone. Once. It's been all email. I just wanted to say thank you. You were exemplary and you know, he even brought up the Friday things like every Friday, I had an update, I didn't need an update. I didn't you know, I didn't ever had a question about what you were doing, how the property was going and so while those compliments don't always come, I mean, it's always 9 to 10 with that, we haven't had very many upset people at all and they always bring us their next listing or, hey, I'm trying to buy in here and buying has been very challenging right now. So a lot of the investors are on hold being patient, seeing what rates are doing. But all in all, it's been really, really great, especially on the sales side, and we're just, you know, happy to help people while we can while the market is doing great.

Michael:

Right on. Well, it sounds like if you ever transition careers whenever you're done to be ready to be done with real estate, you'd be a great therapist. good listener.

Jeff:

Oh my gosh, I joke about that all the time. I tell people sometimes like, man, I've done so much marriage counseling, I'm good to go. We need to like do one deal. You'll know you'll get one and I'm saying, oh, that's pretty, it's, it's a lot, but it's just very easy. You know, I mean, the end of the day, people want a couple of things. They want to be comforted, they want to be, you know, they want to know that you're honest, and they want someone reliable and if you can fit those buckets, while being a joy to talk to and to interact with, I think that's really all I needed to do.

Michael:

Love it, love it, love it. Well, Jeff, let's dig into the kind of meat and potatoes of the Tampa market a little bit and give listeners some insights into other than this Goldman Sachs transaction, which set new record highs and the buying being a little bit difficult. Let's educate people about the Tampa market. So who are some of the major employers in the market and are you seeing people moving to the area or maybe moving out of Tampa?

Jeff:

Definitely a massive influx, I'm not sure the exact daily rates, but I know Florida, pre COVID was about 1200 people per day. After COVID, we're at about 2400 to 2600 people per day from out of state moving to Florida and while that's not always Tampa, that really is the only place that has had affordable housing, affordable rents, especially compared to Miami. Compared to Orlando, Orlando is a relatively higher price than us just because it was more pocketed it was hard to find an actual community over there. While there are a handful. It's very spread out and sprawling, and Tampa is extremely concentrated. Some of the larger employers in Tampa are, I wouldn't say there's one or two, the majority are a lot of health care providers, hospitals, doctors, stuff of that nature, a very big presence with attorneys and then honestly Tampa is becoming a very, very big tech hub. Reliaquest is a very big cybersecurity firm, they signed in Waterstreet for the top of their class, a class A office tower and so it's been rumored I've seen a couple articles that Tampa is the next Austin as far as a tech hub and you know, we're tax friendly. We don't have any state income tax, we have homestead, there's a lot of things that were already here and then now as other states like California are being, you know, more tax even more stricter on a lot of things. It's just it's increased that flow and I don't think that stops for a long, long time.

Because Florida has so much land, we have so much room for stuff and while you know, even though you might not be right in the heart of Tampa, a 3540 minute drive is no big deal and you are close to a million different things inside that span. So just you know all of those things and then one underlying factor too, that I like to tell that nearly no one knows that I mentioned is pre COVID. I haven't checked these numbers after the Port of Tampa. Probably Never heard of it does 3 billion in revenue every year, if not more and so that has been a very silent provider. Actually, one of the biggest companies in Tampa is mosaic. They own right over 400,000 acres, and they're a fertilizer company. So they are huge in Tampa, as you know, from ground all the way up to politics and everything else. So they are very big employer and advocate for the port and everything else that's going on there.

Michael:

Right on and Jeff, you give folks a sense of like, what is a traditional typical three, two, single family home cost and what would the rent look like and maybe you can give people an idea of some of the different neighborhoods in which they could be considering?

Jeff:

The median home price now is right around 335,000 today, and we have about less than two months of inventory, scroll back to 2019, we had about six and a half months of inventory. So we've reduced that by about 300% and days on market, three to five days max, if it's even close to move in ready and that that median price. I mean, I'm looking at the chart now it's almost it's very, very close to 350,000 as of today, and it's just it's very, very challenging, but some of the better neighborhoods. So if you're in Tampa, South Tampa is really where you want to be, but those price points are honestly million dollar homes for a three two and so those rents and cap rates just won't sweat. They won't crack the code for what we're looking for and what honestly any investors should be looking for. So that's not really where we want to be. But I would say that Brandon is a great area. It's just outside of Tampa. It's about 30 minutes east, very sprawling tons of land, tons of nature, tons of trees and that area is a great neighborhood. Same very roughly same median price per square foot, you'll probably be able to get rents around anywhere from 1900 to 2200 for that size home depending on the condition and that's honestly a pretty savory return. Of course, you're now seeing foreign 450 be the norm there too but the rents are following. You know, I mean rents for those are 26 to 2800, all day long and sometimes that makes the cap rate, it maybe the cap rates a little more compressed and the overall return, but the cash flow is higher, and you know, the appreciation is going to be there.

Another and it's really hard to find a great cap rate neighborhood right now, because it's just, it's getting nipped up so much. If you go west of Tampa, north to the west Chase Oldsmar area, that's a great little area to that has very, very, very, very quickly start to price up as everybody's moved there, to where they couldn't afford South Tampa to where they couldn't afford north of Kennedy and West Tampa and so that's an excellent little pocket there great schools, great golf courses, you've got all ages that enjoy that area, which is, in my mind, for somebody that's looking for a renter, always, that's a good market to be in and then if you go north of Tampa, you've got Carolwood up there and greater Northdale. So all that area, there is also a great pocket of Tampa, the price points are going to be pretty high on average as well. But you can still find that starter entry level home and if you can get it at a good cap rate buy it, the every growth that I've seen is coming north of Tampa, in waves and this cheval Lutz area all the way over to Keystone in an East Lake. This actually has the highest concentration of wealth in the Hillsborough County so it's actually not in South Tampa. It's not in downtown, it's not on Davis Islands, which is a phenomenal honestly the best part of Tampa but a home there's you know, 4 million for 1500 square feet so those prices are crazy, but this area is excellent very equestrian, tons of lakes, tons of lake homes, tons of golf courses, nature trails preserves, an excellent up and coming area to be in and then one last area I'd like to highlight is the Ybor City and Seminole Heights area.

So this area is directly north of downtown Tampa and if anybody on here is familiar with St. Pete and fourth Ave, fourth Ave, stretches out of downtown St. Pete and goes north and that stretch is probably a 10 mile stretch of the most golden real estate I've ever seen retail shopping centers, storage homes, but that's been there for 20-30 years and then north and east where you see that Columbia restaurant is Ybor City, historic Ybor ton of culture there a ton of background ton of history, an excellent place to be but it is very, very pocketed and very hard to find land there, but would be an absolute killer. The next best spot is going to be Tampa heights and Seminole heights. If we see the Hillsborough River here, that's kind of the cutoff point for Seminole heights and then everything south of the Hillsborough River to about 15 Street is both terminal, Tampa heights and Seminole heights. Those areas are fantastic. People love to be there. There's a whole bunch of you know, farmers markets and pop up shops and just cool boutique II stuff that is not you know, another McDonald's and Taco Bell that people are bored with. So this that's another great neighborhood, and that also sprawls out into a sea wells wood, and then West Ham over here by the airport.

Michael:

That's a super great overview. Jeff, thank you so much.

Jeff:

Absolutely.

Michael:

I'm so curious if you can give people an idea of how property taxes work, because I think that can often be and I'm sure as you see, one of the biggest maker breaks of a real estate deal. So give folks a walkthrough in the Greater Tampa area. Of course, it varies county by county, but how should they be thinking about property taxes?

Jeff:

Excellent questions. So obviously, we all know taxes based on a millage rate, every county, like you said is different county by county. But based on that, I mean, there's really not much else we can do to kind of guesstimate and or further understand it besides going to the Property Appraiser website. But plugging in the property and estimating the taxes. A good rule of thumb with that though, is that I found is anywhere between 85 and 90% of the purchase price, and then take the millage rate, then we can kind of skip the step of you know going in there and directly estimating it but that is that will get you within 99% accuracy of the taxes when they become reassessed after closing and so again, that's 8085 to 90% of the purchase price. So if it's 400 it's gonna be about you know, 375 380 and then take the millage and then that'll be your that'll be your new annual tax roll. And that is very, very, very, very important to take into account because I've seen a lot of investors in the past, go into a property and just pull the current taxes without any idea that they're gonna go. If that person's owned the home for 30 years tax you're going to have Got 1000 a month on a $400,000 home after you close, they're going to be closer to about, you know, five to 6000. So that that alone can easily skew a deal. So you always want to make sure that the taxes are, you know, properly at least estimated going in and then double checked while you're going through the process.

Michael:

Jeff, you said 1000 a month for that 30 year old 30 year old hold, but I think he made 1000 a year, right?

Jeff:

Correct. Yeah, absolutely, 1000 a year for sure.

Michael:

Okay, okay. So is there like a good rule of thumb, if someone doesn't know the millage rate like 1% of the sale price, or one and a half percent of the sale price,

Jeff:

I would I would inch to one and a half percent of the sales price because I'm seeing more and more than a $400,000 home is any anywhere between 5500 to 7500, depending on their tax district and while it is county by county, there are some overlays in some certain neighborhoods and CBDs that we'll have some effect on that. So I would I would definitely lean to one and a half percent and then if you want to be real conservative, just go 2% and then it'll always be below that.

Michael:

Okay, right on. Now, anyone who's ever listened to the news ever, or who follows any kind of climate or weather has heard about that Florida has hurricanes. Talk to us a little bit about some of the weather and climate, things that are unique to Tampa that someone from California might not be aware of.

Jeff:

Right, well, I will say anything that you've seen from not being in one, it's always way crazier, that are way less crazy than what they say it is obviously…

Michael:

People hanging on the palm trees, you know, getting strung out.

Jeff:

Oh, yeah. All, all extremely oversaturated. In my opinion, the biggest thing with Tampa Bay is flooding. And that really only happens in South Tampa and waterfront properties. So honestly, I would say any investor in Florida should really avoid waterfront properties because of hurricane insurance and flood insurance. They're just too high and they're gonna kill your returns not on not including any liability insurance you have. For the tenant that's there, I would say waterfront would work excellent in a short term rental, because that's kind of a hotel experience. But a long term tenant really is not going to do great there. I would certainly avoid it. Overall, if you're in the mainland and not in the low lying area, hurricanes aren't gonna do just about anything to you. As long as the home is up to code and you have a you know, Hurricane Preparedness step do you have the metal covers for the windows and just, you know, it's simple Google search will show you how to get hurricane ready, but it's really, it's really way more than they hype it up to be.

Michael:

Okay, awesome and that's a really good point that you bring up. If the house is up to code, you expect it to withstand a hurricane or not became a drone? How should people be thinking about older housing stock or does Tampa even have older housing stock, like in California, we've got a lot of 1950s built ranch style homes. That's just a lot of the bulk of the inventory, what are you seeing there in Tampa?

Jeff:

Exactly the same, the bulk of the inventory is probably going to fall in the 1970 range, a ton of homes and that 1950 to 1980 and then honestly, in Ybor you'll see a whole bunch of homes in 1912, 1915, where the area is very, very old, and has a ton of homes with crawl spaces. So what you want to avoid is homes on a crawlspace. If it doesn't have a slab Foundation, honestly, just avoid it. Can you get around it? Can you figure it out, can you have a foundation inspection? Absolutely but those are all things they're going to tack on to the cost and your whole period. If you're a five year holder, maybe it's not a big deal. But if you're at 1015 20, you are going to be dealing with foundation issues, at least at some point and it is not cheap. So that is one thing I would avoid with the age of the inventory and then one other special thing that kind of gets talked about a lot in Florida is sinkholes and so sinkholes are extremely common. They're not as bad as again, as you see on the news 99% of the time. But what happened back in, I would say 95 205 a couple people had a sinkhole that was relatively bad, you know, the home was falling in and unsafe living conditions and then insurance companies and engineers that were working with them came into the entire neighborhood and said, oh, you've got settlement cracks. This looks like a sinkhole and so you'll see 85% of homes maybe even higher than that that have had a sinkhole remediation done with no significant repairs or need for that at all and once the sinkhole home has been remediated with either a chemical grounding a underpinning or a another. They actually insert concrete under the home once you do either of those three things. Your risk for a sinkhole after that is slim to none because once you solidify all the Lime Rock and silt that's under the home you're done, there's nothing to worry about, just check for warranties, and make sure that engineering report gets to your insurance provider and I believe there's still only two insurance providers in the state of Florida, that will insure a single home. So it's going to be a little bit more expensive as well. So just keep that in mind.

Michael:

Okay, good to know and, Jeff, I just want to go back to the foundation, you said that to avoid slabs or avoid crawl spaces?

Jeff:

Avoid crawl spaces. I mean, you don't have to avoid them at all costs. But if the house looks a little wonky, even on the photos, just go on to the next one. I've seen 95% of every home that I've been that has a crawlspace has some sort of issue, you can drop a marble in the kitchen, and it ends up in the living room every time. It's just Florida. I mean, Florida with sinkholes, and still homes horrible mixture and there's not a ton of those. But you'll see him a lot in Ybor City a lot around some of the older areas of Tampa, but just stick to the easy stuff, you know, slab on frame or slab on block and you'll 9 times out of 10 you'll be good to go.

Michael:

Okay, right on and from a kind of hurricane perspective, what are your thoughts and what should people be looking out for in terms of roofs?

Jeff:

You want as long of a life expectancy on the roof as possible, um, shingle roofs are great, every roof made in the past, I think from 2010, or maybe even earlier, since we had that one bad hurricane that came through all of the code is updated. The majority of the roofs have roof strapping that straps the trusses down to the block and that helps tremendously during hurricanes and just about every home has that and when you get an inspection, you do your wind mitigation and that is a very, very, very big piece of the pie to save you money on insurance, especially if you're considering hurricane coverage. So I would say maybe one out of every 100 to 200 clients gets hurricane protection. But it's available and honestly, you really just want to make sure that it has up to code roofing and those standards and it'll be just fine.

Michael:

Right on and kind of in the same vein as insurance. What are you seeing or do you have a good kind of ballpark estimate for clients and listeners about what insurance costs are in Florida?

Jeff:

Absolutely, to keep it simple, like we did with the taxes, I would probably say that's very close to the 1% rule and probably even a little bit below that, a $400,000 home. I've seen quotes anywhere from 2800 to 3800. So if you use the 1%, it's going to be less but you know, as long as you're not in a flood zone and don't you know don't have any hazard or wind additional add ones, then that should be a perfect, perfect metric to keep track on.

Michael:

Right on. Jeff, this has been super awesome, man. Any final thoughts, things tips tricks that folks should be aware of as they're investigating the Tampa market?

Jeff:

Absolutely don't wait, don't sleep if you want something, get it now get it while it's hot, because it's only going up. I think we've been undervalued for a very long time. I think we're at market value now. But I think the you know, honestly, the 10 to 30 year window and long range gross of Tampa I think is going to pay massive dividends for whoever can get in there.

Michael:

Right on and I guess my last question you, are you seeing stuff go over asking or are you still seeing things come under list price or how are you seeing that?

Jeff:

The market right now is very weird. Only because I've been used to just stuff flying for 18 months now. With the rates kind of adjusting the way that they have been everything has slowed to a tolerable level instead of 20 offers on a home we have three to five, so it's still chaos, but it's controlled chaos and something we can all deal with a little bit. But yet if you're not offering asking, you're not getting the house, if you're not offering 10 grand 15-20 above the house, you're probably still not getting it if somebody else's cash. So it's, it's extremely competitive. You have to be willing to push that cap rate on your own and be ready for the appreciation and the rent growth next year to kind of float you to where you want to be.

Michael:

Okay, so good to know, Jeff, our certified agent out in Tampa, and folks have questions for you want to get a hold up? Where's the best place for them to do that?

Jeff:

Absolutely. Um, you can visit our website at any time https://sefair-inv.com or feel free to reach out to me directly. My cell phone and email will be left in the podcast notes and I'll be happy to do whatever you like.

Michael:

Right on. Thanks so much Jeff, can't wait to hear from you to chat soon.

Jeff:

Absolutely, buddy. Have a great day, thank you!

Michael:

Thanks, take care. All right, everyone. That was our episode A big thank you to Jeff for coming on and hanging out with me. It was a lot of fun, super interesting and clearly he is jazz about the market. I think a lot of us should be too. As always, if you've liked the episode I would love, love, love to hear from you all check out some ratings or reviews from you all and just hear what you have to say about the show. We look forward to seeing on the next one and happy investing!

Cash-out refinance or home equity line of credit: Which one should I use? May 14, 2022

Your home can be a powerful source of ready cash to fuel financial growth, add value to your property, or even provide a cushion should an emergency occur. Refinancing your mortgage and taking a home equity line of credit out on your home are two ways to make that capital available to you. HELOCs and refis are quite different from each other, though, so knowing which one fits your strategy best is important. In this episode, Pierre and Michael talk about the attributes of each and what situations might be best fit for either of them.

Links mentioned:

www.roofstockacademy.com

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Transcript

Pierre:

Hey, everyone, welcome to the Remote Real Estate Investor. My name is Pierre Carrillo and today I am joined with…

Michael:

Michael Albaum…

Pierre:

….and today we're going to talk about refinancing and HELOC and which ones make more sense. So let's jump in.

How's it going, Michael?

Michael:

Good here, I was telling you yesterday, my van broke down in the middle of California. So I had to get that taken care of and get a lift home from a buddy of mine…

Pierre:

In my hometown?

Michael:

In your hometown. That's right, that's right. We were smoking off the highway. So he said, oh, we got to pull over and get this thing fixed and it was going to be a week to diagnose it and get parts. So we just said let's leave it down there and then a buddy of ours was able to give us a lift home and we were like on our way home from being on the road for a month and a half. So we were super excited, super close and then wahh wahh wahh…

Pierre:

Not usually the best place to get stuck, I left…

Michael:

Yeah, if I had to point if I had to pick and choose it would not have been in this particular town. But that's okay, it's how it goes.

Pierre:

All tight. Okay, so let's talk about refinance, what just roughly, what is a refinance? And why would someone want to use it.

Michael:

So a refinancing that's not familiar is basically just getting a new mortgage on top of an existing one and it basically this new mortgage is going to replace the old one and so there are kind of there are two different types of refinances. One is called a rate and term refinance, where you're simply just changing the rates and the term of the loan and so if you have a 30 year fixed mortgage at 4%, and you go get a new 30 year fixed mortgage at 3%, because interest rates are better, but the loan balance remains the same. That would be a rate and term refinance, the other kinds of refinances called the cash out refinance and that's basically where you're actually you're getting money out of the transaction and so if you have that same 30 year fixed mortgage at 4% interest, and you have a balance of $200,000, but your home is appreciated significantly, or the property has appreciated significantly, you might be able to go get a new mortgage, a 30 year fixed mortgage at maybe the same 4% but for $300,000 and so that new mortgage is going to replace your old one, it's going to pay off the 200,000. But there's $100,000 left, that goes to you as cash in the form of tax free cash and so that can be a really, really powerful mechanism or lever to pull if you need access to cash and so those are kind of the two different types of refinances and how they work.

Pierre:

So those both sound like awesome options. Why wouldn't everyone always just refinance?

Michael:

Yeah, it's a really good question and a lot of people do they refinance, and refinance and refinance throughout the life of their property or maybe their own lives because it is such a powerful tool.

Pierre:

Refi till you die.

Michael:

Yeah, refi till you die, so it was it was not shocked to swap your job for the 1031 refi till you die. I love it. So yeah, I mean, it's a very powerful tool and of course, everyone's probably thinking, wow, if it's so powerful, like, is there no downside? I think that there are some downsides that we do have to talk about and understand. So first and foremost is it costs money to refinance, and some lenders will tell you oh, we can wrap the closing costs into the loan and so what that basically means is, if we go back to our initial example of like, $200,000, if it cost five grand to refinance, your new loan might be $200,000, to pay off that initial $200,000 loan, but it might, your new loan might actually be $205,000 and so they're wrapping your closing costs into the loan. So you don't have to pay anything out of pocket upfront day one.

Now, you're still paying interest on that extra $5,000 over the course of that 30 year loan and so it ends up costing a lot. But for from a day one cash out your pocket perspective, it might not and so that's an option for folks to be asking their lenders about is that an option for them, depending on their situation. The other thing I think it's really important to keep in mind is that it resets the time clock, and for how your payment is broken down and so on a 30 year fixed mortgage or any kind of fixed mortgage, your monthly payment every single month is fixed, we know it's not going to change, it's gonna remain the same for the duration of the fixed period of the loan. But what does change over time is the amount that goes to principal and the amount that goes to interest and at the beginning of a loan, the majority of your payment is going to pay down interest. So if someone is towards the end of the life of their loan, they're paying down their principal very, very quickly and so if you go do a refinance again, that time clock is going to reset and now you're going to have a duration that you determined for the loan, but most of your payments going towards the interest. So that's important to understand that distinction as well.

Pierre:

What is a HELOC and how is it different?

Michael:

So a HELOC is an acronym and it stands for a home equity line of credit and basically, that is a line of credit against the equity that you have in the property and so a lot of refinances, they will give you 80% or 75% of the property's appraised value or they'll simply just replace the mortgage if you're going to take a lesser amount. So if you've got a $200,000 property, and it's worth 400k, but you do and rate and term refinance, you're gonna go get another $200,000 mortgage, that would be a 50%, LTV loan, versus going maximum 80%, LTV or 75%, if you're going to take out $300,000 loan, then you're going to be at 75%, you're gonna get cashed out. So a HELOC is basically on the equity and so if you have a let's say you have $100,000 of equity in the property, and a lender says, hey, we'll give you 80% equity line of credit, that means that they're going to give you like a line of credit of say $80,000 and the cool thing about line of credit is that they just sit there until you use them or until you need them and so if you set one up, you set up a line of credit, they're often free to set up with lenders, and never touch the thing, you're not going to pay a penny in terms of interest or principal payments, because you're not drawing on that line and you can think of it like a credit card.

So with a credit card, if you're not spending any money on a credit card, you don't have any payments to make, there's no interest accruing. Same thing with a line of credit, so a lot of these lines of credit have a checkbook associated with them or an account associated with them. And so if I needed a $10,000, tomorrow, or in two days from now for repair, I could write myself a check, write Michael Albaum, a check from Michael Albaum line of credit, I'll deposit the check with my mobile deposit depositing app, it'll have $10,000 in my account, by the time the check clears now is when the time clock starts running on the interest payments and he locks are going to be traditionally interest only payments and the interest rate is going to be fluctuating it's going to be variable and it usually changes monthly.

And there's oftentimes a ceiling and a floor. But so if I have a $10,000 balance, let's say my payments 100 bucks next month, if I make that $100 a month interest only payment, my balance hasn't decreased at all. So I'm not getting this benefit of the loan pay down like I am in a fully amortizing loan, which is basically what a cash out refinance or writing term refinances. So I want to just be very cognizant of what my balance is, what my interest rate is, and how much I'm paying off every month. Because you could pay off the entire thing tomorrow, or the day after, if you got a big $10,000 check in the mail, you decided, hey, I'm gonna go pay this thing off. There's usually no prepayment penalties, you can pay it off as aggressively or as slow as you'd like. It has a set period of set life that you have to pay it off in X amount of time. But that's going to be HELOC specific, but it's a very flexible tool and so your cash out refi is gonna be full interest, full interest and principal payments, fully amortized loan, your line of credit tends to be an interest only variable flexible line of credit you have access to.

Pierre:

Okay, cool. I have a few questions on so the So you're essentially on a HELOC, you're borrowing that money from the equity in your property?

Michael:

Yes.

Pierre:

So when, who are the interest payments going to?

Michael:

They are going to the bank, they're going to the lender that has that line if you have that line of credit with.

Pierre:

Okay, all right. Next question is you said it's a variable rate.

Michael:

Yes.

Pierre:

What okay, so say you're, you have a certain amount of equity in your property based off of its current valuation, and there is some like major market correction where the value of your property drops down significantly. Does that new calculated equity in your property, then replace the amount that you had available to you and that HELOC?

Michael:

It's a super good question and so it's something that a lot of people were very concerned with, sort of COVID is, hey, I've got these lines of credit out, are our lenders gonna start calling them do which they can, they're legally allowed to do that and it's all in the mortgage language and so it's important to read and understand that language very closely. But it can happen, lenders can say, hey, major downturn, like we're closing your line, you need to pay it all back and understanding what that mechanism is and how that works is going to be specific to your lender and your HELOC. Traditionally, I haven't seen that happen a whole lot, because values tend to fluctuate with time and lenders when they're looking at how much line of credit will extend to you. They're building in buffer and that's why lenders are only giving out 80% loan to value or 75% loan to value. They're like hey, Pierre, you've got to have 20% 25% skin in the game and so the property has to drop 25% before their investment is even at risk. So same thing with the locks they tend to go a little bit higher on the LTV I've seen up to 90% and so there's still that tempers sent buffer, which lenders that's how they're underwriting things, but to your question, short question long answer, they can close these lines of credit, yes.

Pierre:

Okay and then how do the HELOC affect your credit rating? I mean, it's pretty big chunk of credit that you're then pulling out on $80,000. That's a huge credit card.

Michael:

Yeah, potentially. So it's a lot of it'll show up as a second mortgage. That's really what it is. It's a second loan against the property and I, I'm not 1,000% sure. So I would ask the lender that you're getting the line of credit from, but my understanding is that most lenders when they do a credit poll, they'll see the full balance, the full amount of the line of credit as a debt on your credit score and so they'll just assume that you're making the minimum monthly payments on that loan, affecting your debt to income negatively. So I hope that answers your question. But again, I'm not 1,000% sure. But that's how I've seen it done in the past.

Pierre:

Going back to the variable rate on a HELOC are can that rate just change from one day to the next or is there a schedule that it changes? Well, you can you plan ahead, you know, and say, you know, did you can use it within this certain time period before the rate rises or is it just like, rates are variable, we changed it.

Michael:

Most lenders do monthly rate adjustments, and there tends to be a ceiling and a floor and so you know, going into it, okay, this is my maximum interest rate this, this will ever be throughout the life of this HELOC, which tends to be five to 10 years. So you can have an understanding, but no, it's really tough to forecast. Okay, rates are gonna go up on this date, and this is what they're going to go to. Okay and if you figure out how to do that.

Pierre:

Alright, so that brings us to, when do we use which one? When does a HELOC make sense and when does a refi make sense? Which one's better?

Michael:

It's a super good question and one that I get in the Roofstock Academy all the time, I'm constantly chatting about it with folks, especially given today's market environment where there a lot of people have made a bunch of equity in their home over the last couple of years. So it really depends which one is better, it really depends on it's a case by case basis. What I often share with folks is if you have a plan for the cash, within six to 12 months, I would go cash out refinance, if you're not sure, but you just know you want to have access to cash. I go with the HELOC because again, in that in that cash out refi scenario, you're paying on those borrowed dollars, day one, independent of what you do with the money independent what you do with the proceeds. So if I've got $100,000 proceed from a cash out refinance, but I don't quite know what I'm gonna do with it, I'm just kind of having it sit in my bank account that's costing me principal and interest every single day it's sitting there.

Versus if I go the HELOC route, I set up a line of credit for $100,000. I can access it tomorrow if I needed it, but doesn't cost me anything to have the ability to access it on a moment's notice. So it really depends, I would say on what you're planning on doing with the proceeds. It also depends on your current loan terms, and what your new loan terms would be in terms of a rate and term or cash out refi if you're at a two and a half percent loan, 30 year fixed, and you would have to go through a five and a half percent. If you want to do a cash out refinance, I would think long and hard about that depending on the loan size on the smaller the loan less impactful a delta and interest rates gonna be, but on a really big loan, that can be really really, really impactful to your monthly payment. Now you could make the argument that oh, I can always refinance again down the road. Yeah, but today, I know exactly what your payment isn't at two and a half percent and I know it's pretty darn attractive. So in that instance, too, it might make sense for someone to go the HELOC route if they have to give up a really attractive or really a really solid loan.

Pierre:

Okay and can you use, is this a product like a HELOC? Can you just use this on your primary residence or can you use this on every one of your investment properties?

Michael:

Yeah, also really good question. They are most predominantly used and given on owner occupant primary residences, there are lenders that will give them out on investment properties, but there are fewer and far between it comes in, it's much easier to get on an investment property. If the lender already has the first mortgage. I'm investigating this right now with a investment property that I own. I'm going back to the same lender that has the primary mortgage and say hey, can I get a line of credit on this thing, there's a ton of equity that they're being open, too or r if you own it free and clear, that tends to be very easy. But what lenders don't like to do is specifically on investment properties because it is a second loan. They're in essentially in a junior position. So they don't want to be second in line to foreclose on the property. If you're not making your HELOC payments to them.

Pierre:

Okay, and so you take a HELOC out on your primary residence and then move out and now it's kind of you're renting it out as an investment property. Do you have to close out that HELOC or can you just keep that open?

Michael:

Yeah, it's a great question. It's that's going to be lender specific as to what they have in their language, I would imagine you can continue keeping it in effect in force if it's if you're making payments to them. That's kind of like when you get a primary mortgage and then move out and rent it out. You don't have to close the mortgage, but it's going to be lender specific and product specific as to what you have to do what you have to disclose if it can becomes a rental and it was a primary at one point.

Pierre:

Okay, cool. I think that's those are all of my questions on this topic. Do you have any, like final tips that you should that that you want to leave everyone with about both of them?

Michael-

Yeah, I think they're both really powerful products, really powerful tools to have in your tool belt, there are applications for both. But if you're not sure, definitely do your research. But also, it doesn't have to be one or the other and there's this kind of hybrid approach where depending on what your new product you're going into, from a rate and term or a cash out refi is, you don't have to take your maximum loan to value. So let's say you've got $100,000 of equity to play with that you can get a loan against. Maybe you take 40,000 in cash out refi and then 40,000 in HELOC. That way, you give yourself a little bit of cash today, but you also give yourself a little bit of flexibility down the road. And again, you really want to think long and hard. What is the plan for the proceeds? What am I going to do with this money once I have it in my account and again, for me, my kind of number is six to 12 months. That's what makes me comfortable. But if you're sitting out there like no, I'm okay having this money sitting my account for two years because of the uncertainty or because of whatever justification you have. Great. But again, it's not an all or nothing type situation for either product. So definitely start chatting with lenders and it's easiest to start with the lender that currently has the mortgage if you're interested in HELOC, but there are plenty of lenders out there that have just HELOC only products that can that can complement a mortgage.

Pierre:

All right, Michael, that definitely covers it. Thanks so much for sharing, anything else?

Michael:

Now this was great, man. Thanks so much for that for the awesome questions here.

Pierre:

All right, let's get out of here.

Michael:

Let's get out of here.

Pierre:

Thanks everyone for joining. Please subscribe to the podcast wherever you listen to it. If you're watching it on YouTube, hit the subscribe button that really helps us get out to more people. Thank you all for joining us and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

How much is too much real estate in your portfolio? May 07, 2022

A common refrain in the investment world is, diversify your portfolio. But many real estate investors have a massive majority of their net worth in property. In this episode, Michael shares his thoughts on portfolio diversification and why he is so heavily focused on rental property.

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Transcript

Pierre:

Hey everyone, welcome to the Remote Real Estate Investor. My name is Pierre Carrillo and today I am joined by…

Michael:

Michael Albaum

Pierre:

and today we are going to talk about portfolio diversification, so let's just jump right in.

Hey, Michael.

Michael:

How's it going Pierre?

Pierre:

So Michael, one of the basic pieces of investment advice that I hear everywhere is diversification, diversification, diversify, don't be too consolidated. Because if any one piece of the market goes down, you're going to be left exposed somewhere. I remember you saying in a previous episode, that you're about 80-85% in real estate, and that made me think, wow, that's heavily consolidated. How do you find, how do you find comfort in being so consolidated in one asset class?

Michael:

Yeah, it's a really good question, Pierre and I think, for me, my strategy has changed over the 10 plus years that I've been investing and so for me, I was very focused on single family when I first got started and I think a lot of people do kind of find their niche inside of single family investing and it's funny because there's this, there's kind of two camps. There's one that says, diversify, diversify, diversify and then another one says, get rich in your niche and niche down and pick one thing to do and do it really well and if you can do it really well, you don't really need diversification. Diversification is for people that maybe aren't able to niche down or pick one thing or particular that they're passionate about, or really good at. So for me, I was always thinking about single families. I wanted to purchase a bunch of them, I wanted to own a bunch and I thought that was great and at the end of the day, and we've talked about it on prior episodes, the like I think what people are always scared about is their value decreasing, given some event or over time and that's when people talk about, like the S&P 500 index funds, you have a bunch of different companies.

And so if one goes out of business, you're not only holding that stock and so that is usually because the value can evaporate and unless the stock is paying some kind of dividend, or it's paying some kind of yeah, I guess that's what stocks dividends, the value of the stock is really in the value and hopefully it goes up over time. With rental real estate, we've got kind of a two headed play here. One is like a yield play a cashflow play, that pays us every single month and every single year and then the other is the appreciation, which is congruent, or synonymous with the stock value going up over time and so again, I'm really less concerned with the value of the property over time, because given a long enough time horizon, I'm comfortable, that thing is going up into the right. But even in the event of a downturn where the value is decreased, I've got yearlong leases and so the rent that I'm going to be collecting is likely going to be unaffected and unchanged. So for that reason, I was really comfortable getting very involved in the single family asset class. The other thing to think about is, I think real estate is this big, all-encompassing umbrella, if you will, it catches a lot of things, and a lot of different events like sub asset classes, for those you watching. I'm doing air quotes, so there's single family investing, there's multifamily investing, there's triple net lease investing, there's industrial, there's flipping, there's all these other things that you can be doing under the real estate umbrella, that I would argue are diversifying you within the asset class itself and so if you'll say, well, people talked a lot about during when COVID first hit, oh, apartments are doomed.

Everyone's moving to single family, they want more space. Well, a lot of people thought a lot of things about during COVID when the pandemic first hit, and I don't think that was necessarily true. It was maybe in a little bit of San Francisco and New York and some of these major, major, major metros, but most of our listeners and most of our beginning investors aren't investing in those cities to begin with and so A) I don't think we saw that happen B) we definitely didn't see values fall through the floor, they kind of went the other way. But you can be diversified within the asset class. So if you own multifamily, you own single family, maybe you did see some folks leave your multifamily but maybe you saw your single family values increase. So I think that there's a lot of different ways to play this and then last but not least, I would say if you're in the short term space, you've been killing it for last two years and so again, that's a kind of third way to diversify with in the real estate asset class itself.

Pierre:

So with for people just starting out and if they're just you know, you save up a big chunk of money and you because there's a high barrier to entry to get into real estate. How should like is does that diversification just happen over time or is there some sort of comfort you can find in that initial first down payment that you're putting up? It's like, chopping an arm off just to get started?

Michael:

Yeah, well, I think for those people who are just getting started, one of the reasons that they may have been attracted initially into real estate is because it is diverse and different from the other things that they're doing. It's not the stock market, it's not a it's not an investor, a retirement portfolio, which is often invest in the stock market. It's not in bonds, so it is different and without getting into like the correlation of the real estate market versus the stock market and talking about, I think it's beta, or maybe it's alpha talking about the differences in the correlations, it's different than what they're currently doing and I think that in and of itself means that you are diversifying and if that's a part of your investment thesis, that diversification is important, this can be a great place to come do that. So I think with regard to your question about saving so much for the down payment, or kind of chopping off an arm and putting a big chunk of your potential overall net worth into that first property, I think people need to think long and hard about that, I think they need to understand what the risks are, what the benefits are and if those are both tolerable, I think the conclusion that I came to and that a lot of other people have come to for themselves is that real estate's a fairly safe place to park money, because of what I mentioned earlier, if it's rented and the value goes down, it doesn't really affect us and it's an unrealized gain or loss, just like in the stock market and so you'll say, oh, I made a bunch of money, the stock market today, well, not unless you bought or sold. So unless you're actually doing a transaction, the value is kind of meaningless. It's always fun to talk about at parties or get together with your friends. Oh, that's probably my net worth whatever like, but doesn't mean anything. It's not tangible and realized until you do something with it and so if you are planning on doing this for the long term, and for the long haul, parking money in real estate, for my experience has been a really great thing for me over time.

Pierre:

Okay, so I know you're not, we're not giving investment advice at all here. But from the tone of it, real estate is a safe place to park your money that implies to me that you are like, you're not super worried about a major market correction affecting your values or affecting rent prices to the point where it brings you into the red. You are you feeling good moving forward into the next year?

Michael:

Yeah, I'm feeling really good and here's why. Like, I was just listening to a book, an audio book, as part of the Roofstock Academy, we do a book club, and this quarter, we're reading first 2 million by Dan sheets, and he's gonna be joining us for a Q&A session with all of our members who read the book. And so I'm reading this book, and he's talking about the 4% rule and for anyone that might not be familiar, the 4% rule basically says, once you've hit a $1 amount inside of an investment portfolio, and a stock portfolio, you can very safely and confidently withdraw 4% of the value every year, because the hope is that you're essentially living off the interest, you're essentially living off the gains that that portfolio is throwing off, and the principle is not going to be reduced. Well, that's all fine well and good when the markets going up. But when the market goes down, and you're continuing to draw on this account, you could see that dwindle very quickly, and possibly to a point that's unrecoverable and so that again, is the value of the stock is going up or the stocks are going up in value, the portfolio is going up, you're drawing down a certain percentage.

For real estate oftentimes, we're not relying on the principal value of the property to do this stuff with, right we can, there are tons of people that I know that only live off the cash flow that the real estate portfolios are generating, they don't care what the value is, it can go up, it can go down, it can go sideways, it doesn't matter because the cash flow the property generates is independent of the value. Your tenants aren't saying, oh, well, the property is valued at x. So I'm only going to pay you why and rent doesn't work like that, which is the nice thing and so I'm much more comfortable and confident in the historic performance, the really strong historic performance of real estate, again, for the rental market, independent of what values are doing and so if I'm someone that's planning to live off my cash flow, I get a great deal of my living income from cash flow. I'm not worried about the principal balance versus in the stock market. When it goes up. It's great when it goes down. I mean, that can that can take a long time to recover from. So yeah, I'm very comfortable going into this the upcoming year 2022 and beyond. That's like a Buzz Lightyear saying to infinity and beyond.

Pierre:

That's good to hear, that makes a lot of sense. I guess there's other ways you can find that diversification beyond just between single family and multifamily or even commercial. I know you're investing in vacation rentals outside of the country. I mean, you're completely separate from the US economy. So and then we've spoken on the podcast before with Peter Badger doing the investing in agricultural land and, and internationally as well. So yeah, I guess there's a lot of different ways that you can achieve that diversity with or diversification within your portfolio just using real estate. Are there ways that someone might be exposing themselves to learn how to say this, but like being under diversified in real estate? What are some things that people need to look out for?

Michael:

I mean, I guess in theory, you could be if you were invested in New Orleans, when Katrina hit and didn't have really great insurance policies, that's probably an area where you could easily be overexposed. It's a really good question and one that I haven't really thought about because I come from the insurance world and so I'm make darn sure that I'm, I'm not taking on too much because aggregate exposure in the insurance world, an insurance company will look at all of the insurance that they have in a particular area and say, okay, well, if an earthquake happens, we're going to have claims on all of these buildings, that's going to be a ton to pay out. So that's how they're evaluating the risk. I do something similar, and say, okay, well, if something really bad happens, I've got the insurance. But how long? Is it going to take these properties to get rebuilt? And what does that look like going forward? So I think you absolutely could, but I think it's, it's going to be a factor related to other things, not purely the fact that you are investing in own properties all in the same geographic location, are all inside the same asset class and as we talked about regularly on the podcast, real estate is so hyperlocal and so someone could argue, oh, you've got 10 homes in Louisiana, and 10 homes in North Carolina and 10 homes in California and so you're all in single families you ever exposed?

Well, I would argue that that might not be the case, I don't think we can look at that. That surface level data point and say, yes, someone's overexposed, I would say, let's look and understand, okay, what kind of natural catastrophes are in an area? Are they all on the same street? Do they have good insurance policies? What does that look like? What does their occupancy look like? So it's tough to say, without doing a little bit of a deeper dive, that just because someone owns X amount of properties, that represents Y percentage of their net worth, they are over or underexposed and it also comes down to risk tolerance, you can have two people that own very similar portfolios. One is can't sleep at night, because they're worried about a hailstorm taking out all the roofs, the other could not think twice about it, because they got good insurance, or whatever the case is for that person. So it becomes very personal and that's why one of the reasons I love real estate is because there's no right or wrong, there's only right or wrong for you as an individual.

Pierre:

Yeah nd some other thing is it's working out in the past, it's just making sure you have multiple strategies available for you with every property that you have. So if you're buying a short term rental, you know, see if it's going to work, maybe you won't make as much money. But could it work as a long term rental? That's another way just to kind of build diversity within your single property.

Michael:

Totally And you're seeing a lot of people do that. Now as they're pivoting. They're realizing, hey, my single family has long term makes way more sense as a short term rental, awesome, don't have to do a whole lot to the property to pivot that way.

Pierre:

So that that'll make sense And thanks for all of that. Speaking about the other remainder of your portfolio, how do you assess where you're going to put your money outside of real estate?

Michael.

That's a good question; That's going into index funds. Just diversification, I have to think about it, I have to worry about it. I just set it and forget it type of thing. We just had a guest on the podcast couple weeks ago, he was talking about picking stocks, and how index fund investing is kind of silly, but go pick stocks and win big. I've done okay, that in the past, but I think it's for me, it's more of a gamble and I real estate for me, because I did a lot of value add investing was definitely a little bit of a gamble. And so I'm very happy now I was in growth mode for a lot of years and now I'm very happy with just a kind of modest return from the stock market and so if it does, great, awesome, if it doesn't, that's okay, too. I'm in it for the long haul and to use that up into the right analogy again, I know given the time horizon that I'm anticipating for holding the stocks and adding to the portfolio. It's going to be going up into the right…

Pierre:

Have you messed it all with crypto yet?

Michael:

Yeah, it's funny. My wife and I have been playing around with crypto for the last couple years and she works in the tech space as well do in for an education company and we were she came home and he like Michael I did an interview with someone and we're talking about this thing called the theory I'm like we should check it out. So we did some research and ended up buying some a couple years ago and we put it on a I forgot to call like a cold a cold wallet like a USB thumb drive. Well I called wallet yeah and then like stuck it in the bank safe deposit box and never thought twice about it and then like last May everyone was talking about crypto and so I just looked at the values and I was like, Holy crap. I think we've made a lot of fun ready and so we did some more research and played on some of their Kryptos. But it's all like Vegas casino money, to be honest, it's not. It's not something that I understand first and foremost and that's what a lot of financial experts will tell you is don't invest in anything you don't understand unless you're prepared to lose it all and so that's totally where we're at. Like, it's rolling the dice if it does great, awesome. If not, well, you know, it was it was exciting while we were in it.

Pierre:

Oh, well, that's all good to hear, man and I think that answers my question about diversification. So I think that's all I have.

Michael:

Awesome. Well, great questions Pierre. Thanks a lot, man. Appreciate you having me on.

Pierre:

Me having you on.

Alright, alright. Let's get out of here.

Alright, everyone that is our episode for today. Thanks so much for joining us. Remember to subscribe to our podcast that helps us bring you more content like this every day and we hope to catch you on the very next one. Happy investing.

Michael:

Happy investing.

Here’s what you need to know about investing in the Greenville SC market May 06, 2022

In this episode, we are joined by Matt Crawford and Alex Fischer, two Roofstock Certified Agents, to discuss the Greenville and Spartanburg South Carolina markets. We cover the different asset classes, neighborhoods, demographics, price points and return metrics, short term rentals, geographic considerations and much more. If you want to learn more about investing in South Carolina, Matt and Alex have the goods.

Contact Matt and Alex at: acquisitions@evernest.co

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Transcript

What's going on everyone? Welcome to another episode of the remote real estate investor. I'm Michael album and today I'm joined by Matt and Alex, two of our agents as part of Roofstock Certified agent network down in South Carolina. And they're going to be talking to us today about the Greenville and Spartanburg markets and everything we as investors need to know about it. So let's get into it.

Matt Crawford, Alex Fisher, how are you guys?

Man? We're doing great Michael here. Thank you guys so much for having us. Good to be here.

I guess. Yeah, our pleasure. So I know you because I work with you guys regularly as part of our certified agent network with Roofstock. But for anyone who might not be familiar with who you are, give us a quick rundown who you are. Where do you live? What what markets do you operate in? And what is it that you're all doing in real estate?

Absolutely. So for everybody out there, you know, welcome to the Roofstock remote podcast as you guys know, Michael, he's a champion of the people he's the one in the van rockin. But for us, you know me now it's we're the greatest broker Team roofstock has ever seen. That lightly, but I do mean it. I think we're very passionate about we, that what we do, how we present the products to you guys, as consumers. And as the educational base, you know, we're very thankful for the opportunity. So we represent a couple of markets here in South Carolina. It's where Alex and I are born raised. Alex, you want to add two cents on top of that, sir?

Yeah, I mean, obviously, our hometown is Columbia, really anywhere in South Carolina. That's where we have most of our experience. And you know, we love doing nothing more than trying to get out here and make some people some money and find some good deals. So our obviously our go to is going to be South Carolina areas. Love it.

And why did you guys partner up? And how did you two meet?

That's such a long story. But it's been we've been kicking it for, like 12 years. And and you know, and we're both we're both 32. So I mean, we were we were young lads and our ladies at the time were like best friends. And you know, Alex's wife was always talking to my girl about meeting Alex and I thought he was strange because he was like, a financially adept teenager, like Alex had his first house and like nine years older, or like, 19, whatever. Don't none of those. And meet Alex just kept kicking it in. You know, Alex was working at one of the top four consultancy firms. PwC. And I was out in Denver, sort of so notes and Alex, you know, hats off to him. He'd call me like, every week, checking up on me, and it's like, Matt, you know, we got to get new real estate, we have the potential. He really convinced me to move back to South Carolina. And fast forward five years. We have our own companies now.

Love it. All right, you too. Well, let's talk about Greenville and Spartanburg, South Carolina. It's a market that I'm not very familiar with. And so we're going to, you know, talk to me, like I'm five years old walked me through. Why is are these markets? Interesting? Why should people be interested in investing in rental properties in these two markets? Yeah, so

I guess the main differences between, you know, the Upstate and Columbia is property values are a little bit higher. You know, Greenville is an incredibly cool city, especially compared to Columbia. So it's, it's pretty big, and it's owned, but there's a lot around Greenville, which would, you know, be the mountains, you know, it's convenient to the beach, which is maybe about two and a half, three hours away. But also, you've got the North Carolina, you've obviously got, you know, Clemson around the area. There's a lot of opportunities in regards to Reynolds because there are a lot of colleges around there. But you know, our biggest thing is pushing the appreciation, you're going to see that the rents are not keeping up as much with the property values are at least as quickly. But the good news is they are good opportunities for long term holds because of the appreciation and from what we've been seeing the appreciation there in the upstate in general is just much stronger than it is in Colombia, that the good thing about Colombia is the opportunity for rents because the rents are keeping up with the property values, but I think we're going to see a lot of that stuff slowly. You know, I guess level off a little Bit just based on how the market is kind of moving now. So then the rents will eventually kind of just end up evening out with what the appreciation is actually doing.

And Matt, who are some of the big employers, I know, Alex, you mentioned, Clemson and a lot of colleges around there, but are other than college students and college faculty. What are people moving to the area for for your typical jobs? I mean, are there big employers there?

Yeah, you know, I think Michael, you know, putting you in the frame of mind of like a new investor coming into South Carolina, and for all the investor, and whether you're 18 years old, looking for your first rental or a seasoned investor with 100 properties, I always like to sort of start at the origin story of the market. And Greenville upstate in general, is like the textile industry of the US. I mean, you got to look historically, in South Carolina and the South, you know, this is where a large majority of the cotton of the Indigo dies of anything the derivative of the textile industry, really was created. And that really set its roots into Greenville and to Spartanburg itself. So Greenville still has a ton of products from that era, which include huge textile mills. What that means from an investor's standpoint, is that you had all this workforce housing, you know, even my mom was from easily, which is about 25 minutes from downtown Greenville. They grew up on the Mill Hill. And so as you can imagine, it's perfect substance for the gentrification to happen, you know, and it's not 20 years ago, where we could buy a house for 75,000. And now it's worth 500. But you can still follow that development curve does molding out of Greenville into areas like easily fantastic market to look into. The biggest one, I think the all star of this podcast for everyone listening is going to be Travelers Rest. And I think Alex knows a lot about this as well. Because Greenville on the Clemson grab, right, Clemson, Clemson Tigers, you know, we're about 30 minutes past Greenville. And so I got to see this beautiful development happened in Greenville, which is just created a pretty high saturated market. So now for any investors and yourself, Michael, you know, I think pushing to the satellite markets that are still quite contingent to Greenville population and economic drivers makes the most sense. So that's really were trout interest is becoming an all stock market, low property purchase prices, you know, you're talking three twos 175,000 or less, the really good median rents, almost to the 1% rule. I don't think it's as sexy as here in Colombia. It is just because Greenville has already seen so much more maturation than here in the middle the state says Greenville, so biggest thing on Greenville. Here we go Pierre’s driving in and if we drive in, travelers risks going to be you're looking at o'clock at 11 o'clock to us. So guys, if you're out there, you're wanting to see properties. I can guarantee if you Zillow, Greenville, you're gonna see stuff for like 300,000 400,000 that rinse 2500 or so now you go up to Travelers Rest, those economic numbers are totally going to flip flop. So please feel free to look at these kinds of products is the same MLS as Greenville. So Alex and I will be publishing properties. And then if we come back to the center of the city in Greenville, and look at nine o'clock on the clock hands, you're going to look at easily so it's directly to the left of Greenville. Sort of right in the left there to the screen. Thanks, Pierre. Also a great case study for what's happening in this market. As a lot of the renters, the investors and the development dollars are starting to bleed out of Greenville, which is sort of the cool analogy as Greenville really had its foothold in the indigo dye business. So if you can imagine this indigo dye starting to come out of this central geo easily is fantastic. You can still find great inventory. But even as Alex and I thought, Hey man, let's open up the upstate with roof stock ease these going to be just fish in a barrel. It's not the case. You know, it's still very, very saturated with investment and institutional dollars, which puts Traveler's Rest as my number one submarket

You heard it here first, ladies and gentlemen. I love it, Matt. And to give people kind of a frame of reference, what was the general population of Greenberg? MSA?

Yeah, I think it's almost like 500,000 Okay, so it's pretty massive city. definitely bigger than I think it's like the fifth or sixth largest city in South Carolina. I definitely Being a local think it's like, probably number two of like, most sought after livable millennial culture cities. I think it goes Charleston and probably Greenville. And you know, guys, if you're looking for Airbnbs, totally different ballgame, we're talking totally different set of data here. But the short term rental market in Greenville is off the charts. And I think that is, yeah, definitely is perfectly perfectly tied to the nightlife and the culture that Greenville has done. And even just to dig a little deeper here, you know, 25 years ago, there really wasn't a main street or a main vein in Greenville, in fact, what they call false Park, which is a main park, and mainstream Greenville was beautiful, natural waterfall, it was actually covered by an overpass right here appears on a false park on the reading. So the Reedy River cuts to the city, this used to be covered up. And now in the last 10 to 15 years, they've probably dumped 100 million or more into this gorgeous walkable facility that has these natural features are just a beautiful suspension bridge. And that is has created this really nice culture that is in Greenville. And I think that's why the short term rental market really works if you're looking for higher property purchase prices, but I think your Airbnb models will be rock star here.

That's really interesting that and so talk to me a little bit about property taxes, because I think that's something that's always on people's mind is one of the a big expense that can either make or break in investment. So how do those work in in South Carolina? Or maybe more specifically, in Greenville?

Yeah, so typically what we do, and a lot of people don't realize this from the get go, but everybody's looking at Zillow, you can go to any house, and you can see what the roughly what the what the taxes would be. However, with Columbia, South Carolina, in general, the property taxes are different, you know, there's two different types of property taxes, you got an owner occupied and the non owner occupied and people don't realize the non owner occupied is obviously, you know, the, these big investors that come in, these are the taxes that these guys are gonna have to pay the small guys, whatever. So when you live in the house, and you look into Zillow, you're gonna see one number, but in reality, that number can essentially be doubled, when you start to consider that you're actually going to put a renter in place, which is a huge buzzkill for a lot of investors. But at the same time, once you kind of understand that is the case, now you can kind of work your numbers around you can kind of you'll you'll look in a different direction for the opportunity, I guess you could say. But typically, what we tell people is when it comes to taxes, the non unoccupied rate is going to be roughly and again, this is just a rule of thumb, this is not exact, is about two and a half percent of the purchase price that will give you a good gauge on, you know what your monthly cash flow would be. And as you can imagine, you know, what I would say is, you know, the owner occupied tax rate is probably around one to, you know, one and a half percent. So as you can imagine, you do the math, it's almost double what the the owner occupied rate is, which is very unfortunate. And that's probably been our biggest hurdle for the South Carolina markets. But again, you know, it just allows us to kind of, you know, I guess stretch our fingers out and see what we can find in regards to more off market properties. Maybe some smaller homes, but it really does make it more difficult for investors to actually go out and find something just because it does, it does hurt the cash flow a good bit.

Yeah, that makes total sense. And we talked a lot about Greenville. What about Spartanburg? What Should folks be aware of and where should they be looking out there?

Okay, cool. Cool. Let's uh, so drive the car, probably about 45 minutes east. And now we're at Sparkle city baby, which is sort of just a local term slang for Spartanburg that I can give no context to. I have no idea why they call it sparkle city, but it makes for a fantastic nickname. Totally. So we're driving the sparkle city. Or we're laying it down and to me, and I think even to Alex's standpoint, I'm a bigger fan of Spartanburg than Greenville. Granted, you know, snagging the Airbnb downtown mainstream Greenville. Sounds awesome. I think if you're looking to build long term rental portfolios, maybe two or three a year you're wanting to be in Spartanburg. That's just because it's more like a It's not rural in the sense, but it's more workforce housing. I think Greenville, you're going to be playing with a lot of individuals that are potentially, you know, making 80 to 100 grand a year. Not necessarily looking for a true three two rental whereas in Spartanburg it's definitely labor force and I think you find that labor force In the biggest BMW plant in the southeast, so BMW Michelin all have one of their largest manufacturing plants, right outside of Spartanburg. I think all the x five series beamers in the world are made here in this BMW plant. Which is beautiful. Yeah. So like you drive by it as it's as gorgeous setup. So really, really cool. And I think that's driven, this workforce class of tenants that you would see, of course, there's 10 colleges in Spartanburg. And if you were to visit Greenville, you're like, oh, man, this place is poppin. Like, there's Michelin star restaurants. In a beautiful downtown, you go to Spartanburg, there's like, you know, mom and pops, Biscuit Company, you know. But what you want to see, and from an investor's perspective, which I think looks good, is right downtown, is this brand new five star hotel, super swanky, beautiful rooftop, you walk into it, and you're like, oh, there's money here. Something's happening. And so to me, that says that a lot of these development dollars that have been looking around different GEOS here in South Carolina, finally, have seen Oh, Spartanburg is a super viable market, I would say maybe it's like Greenville, 15 years ago. And talk quick numbers. Whereas if you were in Greenville, your three two is 250,000. Your three two here is going to be a buck 50. So I mean, we're talking about $100,000. And price changes now that is reflected in the rent rates. That three two in Greenville is definitely a 1550 1695 monthly rent products. That same three two here in Spartanburg, you know, you are going to be looking at like 900 to $1,200. And I think that's just positioned on the type of tenant that we're commonly seeing here. But inventory is easier, you're not going to have such a saturation of buyers unless bidding wars. So I'm big fan and pro tip, bing, bing, bing, for everybody out there listening, I think, I don't know if you're gonna make that a sound but I'll do my own AdWords. I think that you know, me and Alex like, you know, we're we're we have a large acquisition base for different companies. And we're last two years has been a gauntlet with interest rates at 2.3%. Back in January of 2021. As of this year, this month, I just checked really like 5.6. And what we're seeing when we're checking foreclosure lists, we're looking at so many different counties across about 30 Different in essays is things are doubling every single month as far as foreclosures, as far as the evictions that are actually being filed in process. So what that means for you guys, as investors in the audience of the podcast is you get your cash ready. I think the bidding wars are the are finally starting to water down. So whether it is green, or whether it is Spartanburg, you're gonna see a lot more inventory and I think you're gonna have a lot more purchasing power, especially if you're coming with some kind of liquid cash on the deal.

Okay, good to know and what areas of Spartanburg really excites you.

You know Spartanburg,

if you made your number one call for Greenville, what's your number one call for Spartanburg

easy shot right in the heart of Gaston. Gaffney is just a subset right out of Spartanburg, you know I think Spartanburg is old enough to where you can put a stake downtown, though a 30 mile radius around it, and go shopping. That's how I would look on Zillow. But Gaffney in particular, a sub market really great, right on.

And if someone is coming into the South Carolina Market, just in general, or maybe these two markets specifically, what things should they be aware of? What's kind of common practice par for the course, like as an example out in California, we have termites, and so if you see a little bit of termite damage, that's not the end of the world, you can get it fixed, depending of course, about where it is and how pervasive it is. But what are some things that people should expect to see that might be red flags in their home market, that they shouldn't be too worried about?

Let's see around here. One of the more common things that, you know, becomes concerning, I mean, it comes concerning to anybody, but it is pretty normal. It's just more foundational issues. You know, having cracks in the foundation, unfortunately, is normal. But you know, when and I don't know how it is in California, but I know the second somebody sees you know, foundation cracks and stuff like that. It's definitely it becomes something very worrying. But from our perspective, we're like, look, this is normal. You know, we there's plenty of companies don't get me wrong, there are expensive, but there are plenty of companies that can go and help remediate that. At However, even at that point, you know, it's pretty easy to gauge, especially on the inspection reports how severe it's going to be. As long as it's nothing that's like, overall, structurally is going to be concerning, then we don't see it being a big deal just because it is normal. But again, that's from our perspective, we've never seen anything major come up. And if we do, you know, we were able to read through the inspection report and say, you know, hey, maybe we should get one of these guys out here from you know, foundation companies go have a look. But outside of that, from our perspective, that's fairly normal on any house, you end up going under contract on.

Yeah, totally agree with Alex there, we get all the crazy questions to Michael. A lot from this, this Cali investors are coming in even New York people. I'd say like, every time we have a California guy or girl, which we love, y'all, and we've even had a couple of really amazing people come meet me and Alex, here in South Carolina, from the properties that we've helped acquire. So shout out to all those guys, but they're always like, doing the hurricane insurance or like Ardea tornadoes, which is a regular thing to ask the Dow none of that, you know, soccer right, super chill, you know, especially Columbia. We're landlocked, you know, Charleston, definitely, you're gonna have hurricanes. But Greenville, it's good. I think on average is like five inches of snow, which is hit or miss. So very mild climate, and even sort of changing that question of as globally for South Carolina as an outdoor investor, what I would say to make it interesting is like, follow football. It was just about, you know, football, I think is really important to the nature of these different cities. So you know, Clemson University, if you're paying attention to that college, when they were rockin, it created this huge investment opportunity like massive, I cannot express how big the in real estate investment opportunity that was created offset football program. And it's the same thing with the Charlotte Panthers. They're building a brand new practice stadium and Rock Hill, investors are looking at these different data metrics. And even in Columbia, South Carolina with the University of South Carolina's football program is I would just pay attention to those sorts of fun monikers. And that's just another lens to look at an investing and what is important to that specific Geo. And those are just one of the very relatable things here in the South Carolina Market.

Now, that makes total sense. I know one of our other coaches, Tom Schneider, he loves looking at sports teams, and where they're moving and where they're building stadiums, because that's a huge, huge indicator, like you mentioned about like the hotel, big money going into an area. That's great. That's great. I'm curious to know, from your guys's perspectives, what should buyers be aware of how can they be more competitive? And how can they work better with you all and your teams to be competitive and win offers?

Well, so I'll actually say from my perspective, just to kind of give my quick little two cents, because we do see this daily. But our biggest thing is, you know, we've got a team of people that are behind, you know, the whole coordination piece, our number one goal is to get offers out the door at this point is kind of like you got to unfortunately, this isn't like it was two years ago, maybe you can make an offer on a house. And you know, there's only two other offers on it. Now. It's like you make an offer on a house. And now there's about 20 to 30 other other offers on it when you consider in these bigger markets like Columbia, Greenville, and Spartanburg. This is where all the big institutional guys are. And so these big institutional guys are buying in cash, which means you know, if you're buying through financing, it's going to make it very, very difficult to be competitive, especially with a lot of these guys doing, you know, three day diligence, five day diligence, which is something we don't really recommend, mainly because you know, it's very difficult to even get anybody out there and then get a report back. So our biggest thing is and kind of what we we feel like we can control on our end is the amount of offers that actually do go out. So instead of just pinpointing and finding, like, Hey, this is my favorite property, I want to try to win just this one. Our goal is, look, you just got to start, you know, shooting out offers, which is what our team is capable of doing. And then just hope that one sticks in don't get me wrong, obviously, we want the offers to be calculated. But you know, if you kind of get this tunnel vision and try to purchase one house and try to win that one house, you're you're going to be disappointed. There's nothing wrong with just trying to shoot out some offers. That's what our team can do. And all you got to do is just let us know where you go. Obviously go to roofstock and just start clicking on. Hey, I want to make an offer here. I want to make an offer here. But to your point, I mean people are getting over bid. The market right now is kind of unfair just because of these institutional guys. So if there's anything we could at least just give somebody as a takeaway is just make offers. Right now it's a numbers game and hopefully one will stay Pick, but you'll be a lot more likely to stick something than you would if you just try to, you know, kind of become narrow, narrow vision and try to make one offer at a time. It's just going to make it very, very difficult which is with with the way the market is now.

Yeah, makes total sense. Well, sir, I agree. That's perfect. Yes. Awesome. Well, guys, any final thoughts, tips, tricks, tidbits for folks that are listening things you think you want people to be aware of, of South Carolina Market?

You know, I think the, you know, quick sentiment, you know, to leave with you guys out there is, you know, me and Alex have been doing this for quite some time. I know, we're, we're young in blood, but we're old and experience, we're, you know, probably pass or 25th 100, you know, transaction, we've been a part of all these have been investment base. So we're not a residential agent. We're both brokers. So we really have put this as our passion, and our our life loads to support our families. So I think being a resource for you guys, your boots on the ground, providing all of our resources, we do our own flips. And we know the headaches with the flips, you know, we've gone through several, many several Renaud teams, and we've had to create processes and procedures to make sure that we're hitting our numbers and our timelines, and all of that experience, and physical resource, all these teams will be more than happy to open up that toolbox for you guys. Same thing with lenders, you know, dealing with, you know, tons of roofstock, transactions and ELTs. And otherwise, you know, we've pinpointed the best of the best. So, that being said, you know, I'm really, really proud of the team, Alex has helped create, the toolbox that we pieced together, and the family that we met at roofstock. And we want you guys to dig in the toolbox. Come and play. And I think we do it a little different. And that's what makes us stand out. I think, not just selecting property by property like Alex's was saying, Look anywhere look on Craigslist, Zillow, you know, wherever you want to and send us five properties and we don't mind drafting up five offers going out fishing, and if one hits great if several hit, you know, buy them all or pick the best one and we can drop during due diligence. You know, the biggest thing and I will put this star on our chest is we've never lost earnest money in our entire career. And that's because that's pretty impressive. The systems and the communication, you know, that's, that's over 2000 deals we've gone we've never lost it once and I remember Alex was like, Dude, we're never going to because he's, he's come from that consultancy background he has processes and automations to protect you guys and so love to show you these features, talk shop Let's rock and roll and really appreciate everything

Right on. What's the best way for folks to get in touch with you guys?

It's gonna be acquisitions@evernest.co so evernest.co And how I would like to do it is just shoot us an email and the team will set you up a call with me and Alex if you want to just chit chat or if you just want to jump into the rain like email five properties and say hey, I want to run these through the byo P program we Russa heard your podcast It was very strange.

And and we'll hook you up man this is like getting smarter. So that's a you know that's a sale how easy it is and we'd love to show you South Carolina. Another quick thing as you know, me and Alex do this across about probably like 10 states now you know we're from Texas, to Florida and about the southeast coastline. And I still very much like South Carolina and the data shows it has a lot of fruit. So come and join us and let's get financially free

Right on well thank you for taking the time hanging out with me I really appreciate it and can't wait to see we both go from here.

Michael you're the greatest, Pierre back there driving the ship Thank you sir. And to everybody tuning in. Keep catching the next episodes and good luck investment.

Right on, thanks guys. Talk soon.

See ya.

Okay, everyone, that was our episode A big thank you to Matt and Alex for taking the time hanging out with me and giving us all a driving tour of Spartanburg and Greenville. Definitely, definitely two markets that are worth checking out. As always, if you liked the episode, feel free to leave us a rating or review. Those are super helpful for us, and we look forward to seeing in the next one. Happy investing

A quick guide to commercial lending for real estate investors May 03, 2022

Most investors are familiar with using conventional mortgages on residential property, but how do loans work in the commercial space, or after you have hit your 10 conventual loan limit? In today’s episode, Emil and Michael walk through what you need to know about using a commercial mortgage.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions, and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by my co-host…

Emil:

Emil Shour.

Michael:

And today we're gonna be talking about a topic that I've been getting a lot of questions about inside the Roofstock Academy and that's commercial mortgages and what do I do with I've hit my 10 loan limit on the conventional side. So let's get into it.

Emil, what's going on, my man?

Emil:

Hey, dude, how you doing?

Michael:

Hanging in there, traveling on the road. Hanging out, no complaints how you doing?

Emil:

As always…I'm good, I'm good man. Just ready to talk real estate and loans, conventional commercial. I mean, this is it is an interesting one, actually. Because I think when you're new, and you hear about like the 10 loan limit, you're like, what do I do after that? I remember being like, what am I going to do after that and then you learn a little bit more about commercial, you're like, oh, this isn't that complicated and it's really not that much more expensive from an interest rate perspective.

Michael:

Yeah, yeah. It's so funny, I hear the same thing all the time from folks like, oh, what I do, like, I can't get started investing in real estate, because what if I hit my 10 limit, like you have a little worry about that after you have 10 properties, like, that's a great problem to have and by that point, most people figure out an alternative source of financing anyhow, so.

So I just, you know, let's start by talking about what a conventional mortgage is kind of how it works, what the mechanics are of it, and then we can transition to talking about commercial mortgage. So Emil give me the breakdown of what a conventional mortgage looks like, and sounds like and what some of the terms are.

Emil:

Sure and please correct me if I incorrectly say any of this. So conventional mortgages, you know, your typical bank will loan these out, they are usually government backed, they come in 30 or 15 year amortization, meaning that is the life of the loan and the repayment period. What else am I forgetting here? You pay your I mean, do we want to get into like the nitty gritty like, most of your interest is paid up front, and then more, your principal is paid on the back end. So it's not like a linear payment through those 30 or 15 years, but…

Michael:

Not yet, I think that's perfect, man. So most people, when they go to their bank, they're gonna see their 15 year fixed, 30 year fixed, they also have ARMs, a lot of banks will offer ARMs, which just as an acronym for adjustable rate mortgage and you'll usually see that as a five one or a seven, one or a 10 one and that first number is just how long the interest rate is fixed for. So in a five, one situation, it's fixed for five years, and then it adjusts once per year, every year, is what that five one means and that amortization can either be a 15 year or a 30 year, I believe, but check with your lender see what options they have and just like Emil mentioned, the, it's like how many pieces the loan is cut into is the amortization, so 15 years, you're gonna pay 15 years by 12 months, or 30 years gonna be 30 years by 12 months. So on a shorter mortgage on a 15 year mortgage, your payments are going to be higher for the same interest rate, because you're just paying it back sooner. So let's shift gears here a little bit and talk about commercial mortgages to you I can't remember called do you have any yet?

Emil:

I don't, I have only used since I've only bought single family and two to four unit, I've been okay using conventional 30 year fixed.

Michael:

Awesome and that's a great point to that, like for everyone listening, that might not be familiar, two to four units, you can still use conventional financing. So you can still go to your Standard Bank get a mortgage on that property, commercial is anything five units or greater and this can take the form of a couple, this can look like a couple of different things. This could be five single family homes purchased as part of a portfolio that you want to put into a single note or a single mortgage, as opposed to having them on each individual five mortgages. So you can go can commercial that way or it can be a five unit building a small apartment building small multifamily and so commercial mortgages work a little bit differently and one of the biggest differences is that the lender is going to look to the property or the asset to carry the debt as opposed to you as the borrower.

So anyone who's gotten a conventional mortgage for the for their primary or for an investment property is likely familiar with the full cavity search that the that the process the mortgage process is and so they want to see tax returns and income statements and bank statements and who your mailman was at your last three properties and all that sort of thing. So it's just like it's so intense, which is great and a big part of that came about after 2008 people said, hey, we have to get stricter with our lending requirements so that people aren't defaulting on their mortgages causing this whole, massive tailspin. So the lending institutions really tightened up and I think that's a good thing. People who shouldn't be getting mortgages are having a harder time getting them. Now, the commercial industry is a little bit different, because those loans tend to not be backed by the federal government, like Emil was talking about Fannie and Freddie are two government industries, agencies that back and often purchase these mortgages, the commercial world is a little bit different and so a lot of these mortgages are actually kept on the books of the lender and so that's often referred to as a portfolio lender, the mortgages, they on their portfolio are part of their portfolio and so because of that, they don't have the same lending requirements that conventional lenders do and so they can actually look to the property or to the asset itself to say, okay, this is what the taxes are this with the insurance are, this is how much the debt services or the mortgage payment is.

That means there's this much leftover for you okay, the property works, the numbers work and what they're often looking for is what's called a debt service coverage ratio, or a DSCR of some number, a lot of banks use 1.2, or 1.25 and they want to see, okay, the debt is $1,000, I want to see that the property brings in at least 1200, because that's going to be a 1.2% debt service coverage ratio. So they're taking the fraction of how much the property brings in as compared to how much debt you have on the property, they're also going to look at what the taxes and insurance and other expenses are an underwriting accordingly. But that's in essence, what they're looking at, they are going to be concerned with you as a borrower, they make sure that you have money in your account that you're not in the middle of a bankruptcy, and that you haven't defaulted on a bunch of other loans. But you also have what's called non-recourse loans, which are basically where the lender is saying, okay, if you default on the loan, we're not coming to you as an individual, we are going to just take the property back, and we'll deal with it afterwards versus full recourse is, hey, you still make your mortgage payment, that lender is going to take the property back, and they're going to come after you to get their full payment back.

Emil:

I have a question for you, Michael, what is when are you usually eligible for non-recourse? Because who wouldn't want non-recourse?

Michael:

Yeah, so some lenders offer it at a certain dollar amount for the loan, that's the threshold like over a million dollars is non-recourse, or you can potentially buy it and so you can pay a higher interest rate to have it be non-recourse some lenders will offer that and so it's a really good question to ask lenders as you're having the conversation with him is, hey, is this recourse or non-recourse? Oh, if they tell you it's recourse, ask them if there's an option for non-recourse and see what they say. Because you're right, it's given the choice, non-recourse is definitely better. I have the vast majority of my loans are full recourse. I'm a personal guarantor on these loans, even though they're made to my LLC, the loan isn't the name of the LLC, I'm a personal grantor on these, but I'm in the business of paying back my loans. So I'm, I'm less concerned with the non-recourse part. But again, all things being equal on choose a non-recourse 10 days at a 10.

Emil:

Did you choose recourse because you got better rates and for all the like the reasons you meant, you're just getting like, it's cheaper, I guess, for you…

Michael:

It's cheaper, and it really wasn't an option for a lot of the loan sizes that I was taking on. I just now to get a loan on a on a commercial property ownership on that property that I own with my two brothers. And that was non-recourse half of its non-recourse half of its full recourse qnd then similar on another loan that I'm working on for cash out refi up to x dollars is full recourse and everything above that was non-recourse. So I'm getting into that kind of sphere now.

Emil:

Very cool.

Michael:

Yeah, it's a pretty cool thing and then we did a webinar last night for Roofstock Academy and somebody asked a question about getting Portfolio loans out of their self-directed IRAs and I'm pretty sure that all of the lending done in the self-directed space is non-recourse, but definitely check with those lenders who are lending there as well.

Getting back to it, so the terms are just going to be a little bit different on your commercial property, the amortization period is gonna be a little bit shorter, typically gonna be 20 or 25 years, and the fixed term of the interest rate is kind of like an arm. So that first number you see, in a commercial loan statement, it could be a 525. That first number five is the fixed period, just like with an arm, and then the second number, the 25 is the amortization period. So 520-525-1027-20 these are all very common mortgage terms, and amortization periods and again, it's just important to keep in mind that the shorter the amortization period, the more expensive or the larger the monthly loan payment. So I'll just give everybody an example here. On a 200,000 to $250,000 property, you put down your 20% 50 grand you have a mortgage of 200,000 at a 4% interest rate on a 30 year amortization, your payments 954 if we shorten the amortization period of 20 five years, your payment goes up to 1055. So about an extra 100 bucks a month by shortening the amortization period by five years. So again, just want to be aware of as you're running your, your analysis, make sure that you're getting your amortization periods, right. I know a lot of folks are using a 30 year calculator, make sure that you adjust that accordingly, if you are going commercial, or you are using a different amortization period.

Emil:

Aren't there commercial loans where it's like amortize over 25 years, but there's a balloon payment at the end of like 10, where you basically have to refinance or pay the whole loan or something.

Michael:

Yes, super good point Emil, so you want to make very sure that you understand how your loan operates at the end of that fixed interest rate period. So oftentimes, what you'll see is the loan, let's call it a 525, at the end of that five year period, it's just going to reset, it's going to reset for another five years at whatever the prevailing interest rate is, and most lenders will say it will never go below your current rate. So let's say you're a 4%, five year fixed for over 25 years, and in five years, now rates are at 6% well, your loan is just going to reset at 6% for the next five years, if rates go down to 3%, your loan is going to stay at that 4%. So you might have to refinance, go through that whole rigmarole process to get a better rate. But you could also talk to your lender about hey, you know, rates are dropping out, let's talk about a loan modification kind of thing, which is I mean, I've done in the past and that's really one of the benefits of a portfolio lender is that they keep the loan on their books and so they can be a lot more flexible with what they're doing with their loans, as opposed to the conventional world that serviced by a servicer, there's really not a whole lot they can do to change it without going through the full refinance process.

So what Emil your referencing is if the alternative type of loan is one that has a balloon payment at the end and so if we go back to our 525, five year fix over a 25 year amortization period, at the end of that five year period, you might actually owe the entire remaining balance of that loan. Now, you've only paid it off over five years. So you're only 20% through that loan, and the majority of the interest is paid at the front and so you're paying very little principal at the beginning of the life of that loan. So let's say on that $200,000 loan, after five years, let's say you paid off 10 grand, I just picked it over. So you would essentially owe 190,000 still on that mortgage and that's due at the end of that five year period. So what it forces you to do is you've got to go refinance, unless you had a windfall, you had some cash laying around, you can go pay off that full balance, but what most people do is they end up refinancing a little bit 30,60, 90 days before the maturity of that loan, and then they'll go get new debt, pay off the old existing debt. Now they'll have a new mortgage, hopefully, at better terms, maybe it was even with some cash out, if you're in an appreciating market.

So people tend to recycle this over and over again. Now something that's super important to keep in mind is the cost of capital, or the cost of doing a refinance or doing a loan. Most lenders are going to charge origination points, their title and escrow fees and so personally, I love locking in the longest term rates, the longest term loans I can get. Because if it cost you five grand to do a loan, and you're doing that every five years, that can start to add up pretty quickly and so even if I've taken a slightly higher rate on the interest rate, but I get to lock it in for 10 years, I can calculate out, okay, if I'm paying an extra $50 $75 a month on the mortgage, because I take a higher rate, but I'm saving $5,000 every five years by not refinancing. That's a pretty big win in my book. So definitely be strategic and look at the math and the numbers behind what type of mortgage you're getting conventional versus commercial, and also what the what the physical cost of capital or the cost of closing those mortgages are because again, it might be sound counterintuitive, but sometimes taking a higher rate for a different type of product could be the right move for you.

Emil:

Yeah, especially if you, you know, feel like interest rates are never going to be lower than they are now. Why not take like, as long of that rate, you know, even though it's higher, it'll still, you know, you may think it may be lower than 5-10 years from now, so lock it in longer.

Michael:

Yeah, lock it in for as long as you can. I mean, that's something that I've just spent the last six months doing is actually found a lender that would do 30 year fixed on multifamily commercial property, so five units plus and so the rate is like four and a quarter 4.3 which yes is higher than what it would be for a five year fixed are a 10 year fixed on a 20 or 25 year am but I'm looking at it for 30 years and so that additional quarter percent or half a percent that I'm paying over the life of the loan, I'm happy to for this the assuredness that the rate is never going to move and at some point along that 30 year time horizon I'm pretty sure I'm gonna be comfortable and patting myself on the back for locking in a four and a quarter on commercial multifamily. Something else to be cognizant of is like I was talking about the portfolio lender, so asking are these lenders? Hey, are you the one who's gonna be servicing the loan? Do you keep it on your books or do you sell it because there is still a secondary market for commercial loans. It just usually not Fannie and Freddie.

So I was working with a commercial lender and a portfolio lender, I kept everything on their books. Back in 2018, I think I did a cash out refinance with them, I bought a property all cash, I turned around 30 days later and did a cash out refinance for 70% of the purchase price, and then use that cash to do a lot of the rehab and I've talked about this on prior episodes, but I did that. So I could get the purchase price down by using all cash, and then just turn around and refinance a bunch of my cash out to then go do the rehab on the property and that worked out really well and so at the end of the day, it was basically a financed purchase for me, and the purchase price was lower than it would have been had I gotten in originally with financing. So that's the strategy that I really liked using. So when I got that when I got that refinance, the rate was 4.99 and that was a 10 year fixed over a 25 year amortization and the rate was fine at the time, like 4.99, that was a decent rate. But a year, maybe six months, nine months, fast forward, and rates had come down quite a bit and at this time, I was traveling internationally with my wife for the better part of a year and so I remember distinctly, like I was in Costa Rica, and I called my lender and I was like, hey, rates have dropped a lot. What can you do for me? He goes, oh, let me see what I can do. He goes, we can drop your rate to three and a quarter for 1200 bucks. And I was like, yes, let's do that. So literally, I signed two papers while in Costa Rica scanned it back to my lender, and he was able to adjust my rate, and the payback on that the like what I saved in in finance charges compared to that 1200 bucks was it was like a three or four month payback. So after that three or four months, I was making more money and saving more money than I was originally.

So it's like, yeah, this is like a massive win. So if you can find those portfolio lenders, they can often be your best ally and they can be really flexible with their mortgages and I think asking them how their process works. Do they ever do loan modifications? What does the process look like? Really getting a good insight into the commercial lending space and commercial lenders, specific commercial lenders is really going to behoove you and someone on the webinar last night asked, hey, should you know should I go develop relationships with conventional or with commercial lenders, now, I'm only using conventional lenders, I think you should be doing both in tandem and in parallel, is developing relationships with commercial lenders, because at some point, you will likely need them and so have good relationship with your conventional lenders be talking to commercial lenders, and by the time you are ready, and need them, hopefully, everyone's going to be primed and aware of your situation and aware of what it is you're trying to do and that just makes that transition so much easier. As opposed to shoot, I hit my loan limit or my debt to income limit, I can't get any more loans I got I got this great property though. I gotta go scramble to figure out the financing. I think do it, do it in tandem do it in parallel and you'll thank yourself, your future self will thank your past self.

Emil:

I know this could be like a full episode. But if you had to summarize in 30 to 60 seconds, how do you go about finding commercial lenders, like where's a good place for people to start?

Michael:

Yeah, talk to your existing lenders, see if they have a commercial lending department, there are some banks out there that do and so you might already be aware of them. Other than that, I would ask for references. So from your local agents, local property managers, local vendors, any other investors investing in the area and as part of the restock Academy, we have a vendor discussion channel in our Slack thread and people are talking all the time, hey, who do you use for lending in this space? Are you flooding in this space and like, it's amazing, I got some incredible recommendations and the URL, Emil I know you did, too.

Emil:

Yeah, yeah…

Michael:

So it's an amazing, amazing community, so check out different communities online forums, see who people are talking a lot about, the good lenders tend to be talked about pretty regularly and if you can't find that, those fruits of your labor don't yield any results. I think that's a sentence. That's the same online just look at Hey, commercial lenders in Kansas City, commercial lenders in whatever market you're in, and see who pops up and just start cold calling folks and start talking to him. Part of the webinar last night, we showcased the some of the Roofstock Academy resources that we have and we have interviewed templates and questionnaires for folks and so we showcase our one about lenders interviewing lenders, specifically and also property managers.

But we have this great like seven page questionnaire and interview template to interview lenders to help you get an understanding of okay, what are the pros, what are their cons? What types of questions should I be asking, especially if I'm brand new to the commercial space? So come check it out. It could be helpful https://www.roofstockacademy.com/ . But there's definitely conversations and legwork to be done on the front end. Don't just choose the first one that you meet.

Emil:

Solid!

Michael:

Thanks so much everyone for listening. Hopefully that was valuable and again, even if you're not someone that's taking advantage of commercial loans right now I'll bet you think you might be, definitely go start having those conversations, go start reaching out to folks and just learn a little bit more about the landscape. It will definitely behoove you for when you are ready for when you are there. So as always, if you like the episode, feel free to leave us a rating or review. We'd love hearing from everyone, as well as future episode topics and suggestions. We look forward to seeing you on the next one. Happy investing.

Emil:

Happy investing!

Investing in multi-family real estate and opportunity zones w/ Michael Episcope Apr 30, 2022

Michael Episcope is co-CEO of Origin, co-chairs the Investment Committee, and oversees investor relations, marketing, and company operations. Michael brings 25 years of investment and risk management experience to the company and believes that calculated risk-taking in inefficient markets is the key to building wealth. He frequently shares his knowledge with individual investors on Origin’s blog, Forbes, ValueWalk, and HuffPost, and his expertise has made him a frequent speaker on real estate investment panels and podcasts.

Michael learned about the physical aspects of real estate in his youth as he helped his grandfather manage his apartment buildings on Chicago’s west side. He began college at DePaul University and a year later was introduced to the floors of the Chicago Mercantile Exchange. He continued to work full-time on the trading floor for the next sixteen years while attending night courses to complete his undergraduate degree. After rising from runner to broker, Michael was given an opportunity to become a floor trader by a Chicago-based hedge fund, Tradelink, LLC, and then had a prolific nine-year trading career, twice named one of the top 100 traders in the world by Trader Monthly Magazine. Join Michael, as he walks us through his role doing ground-up multifamily development and discusses current market conditions and qualified opportunity zones.

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Episode Links:

https://origininvestments.com/

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Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Michael Episcope, who is the principal at origin investments and Michael is going to be talking to us today about his role in doing round up multifamily development in today's current market conditions. We're also gonna be talking about inflation, and qualified opportunity zones. So let's get into it.

Michael, thanks so much for taking the time to hang out with me today. I really appreciate you coming on.

Michael E.:

Thanks for having me, Michael.

Michael:

My pleasure. So I know a little bit about your background. But I would love if you could share just a quick and dirty Spiel who you are, where you're coming from and what is it that you're doing today in real estate?

Michael E.:

Yeah, how is the quick and dirty so I'll take you back. Well, I'm CO-CEO of origin investments were a real estate investment firm, located in Chicago, we primarily focus on ground up development in what we call the smile states tax friendly, climate friendly, business friendly states. Even though we're located in Chicago, we don't do any investing here and my real estate career if I want to, you know, take you kind of far back started God, I didn't realize this, but I was about 10 years old and I used to go and work for my grandfather in the summer and he was somebody who was pretty gritty bought buildings in the west side of Chicago and if anybody knows, the west side of Chicago, it's not a good area, it hasn't been a good area. Never was and he bought buildings out of tax sales and that was at a time when people didn't take pay their taxes, you can go in there and buy, I mean, a 25 story building for $100,000 and that's what he did and in order to run those, though, you had to be hands on you had to be gritty and so I used to spend my summers with him and, and then I had another friend too, that his dad was in construction. So I love swinging hammers and the bricks and sticks and putting up garages and things like that and didn't get paid much. You know, he'd throw me 20 bucks at the end of the day, which felt great, you know, you had fun building things and then you know, it kind of I left that industry obviously I wasn't in it, you know as a as an employee or even thinking about it.

But I got my feet wet there, went to college, I studied finance and econ at DePaul, I got a job at the Chicago Mercantile Exchange when I was about 19 years old, and I was a runner, and that's kind of the lowest position you can hold down there and I loved it, I thought it was amazing. It was just like nothing I'd ever been exposed to and I pushed all my classes tonight and started what I'll call my first career at a very young age and again, I didn't realize that was my career. But I'd stayed in there for seven or eight years till I got an opportunity to trade at the age of 27. So I've worked my way up from a, from a runner to a clerk to a broker and it really didn't love anything I was doing and I wanted to try my hand at trading and I and I got an opportunity and it turns out, I was pretty good at it. So I did that for nine years and ended up just building more wealth than I had ever set out to and when I was done with my career, I was married, I had two kids, I had another one on way on the way my risk profile had changed and I literally decided I don't want to do this anymore. I don't want to be leveraging myself 300 to one every day, and have you know, like be always faced with the potential for a four or five standard deviation because the bigger you get trading, you know, those moves can wipe you out and I've seen guys literally, you know, like lose everything in these moves. So I punched out of that career and oh five, I stayed home for about three months and I think my wife thought I was retired at that time. So I quickly you know, I sort of started at what I'll call a family office.

But I also enrolled in the Masters of Science program at DePaul, right to really retool, I knew this is where I wanted to go into real estate to grow my wealth to build passive income because when you get out of one career and I know a lot of people out there are in the same boat you have your asset rich, but you're kind of income poor and how do you turn your assets in income? How do you do it in a very tax efficient manner and real estate is one of the greatest avenues to be able to do that and I never loved the stock market bonds didn't pay enough and figured like, you know, my partner and I got together in oh seven. Candidly, we didn't have a lot of great experiences out there investing our own capital and we just said, look, we can do better than this. Like let's do it together, let's pool our money. Let's build something together and we did and that's what it was in the beginning hanging it started out with the two of us. In oh seven, we syndicated a couple of deals in 0809 started building the high net worth, investor base launched our first fund and 11 launched the next one and 13, the next one in 16 and so today, we, you know, we have four open funds, we've closed for funds, we have close to 3000 High Net Worth investors, two and a half billion dollars in assets under, you know, equity assets, which is the total value of the real estate and it you know, we're considered a top decile manager for all of our performance. So it's been a fantastic run, that's probably a lot more than he wanted in this this quick. But, you know, it's hard to condense all that. Because I think the story from how I started to how I got here sometimes doesn't connect unless I share those early days with you

Michael:

No, it's so so good. So I just curious, Michael, you started with multifamily, or that's kind of where you ended up?

Michael E.:

It's more or less where we ended up where we gravitated towards and in in, 0708. I mean, you can think of us more like a family office, we were two guys trying to put our money into real estate and we're buying deals and at that time, were buying distressed notes. The world looked very different, though, in a way that in oh eight, capital had all the leverage, everything was trading. So far below replacement costs, we were buying bank loans, and it was more of a pricing exercise which fit perfectly for us because we wanted to protect our wealth, we wanted to manage it, we were looking for big edge in the market and that was the way that you were able to find it and when we launched our first fund in 2011, the dead space and sort of dried up right the distress that and throughout that entire exercise of buying debt, what we really gravitated towards was value add buying things cheap, fixing them up adding value and so that's what our first fund was about. But it was really agnostic in terms of asset class. So we did everything from industrial, retail, multifamily, even student housing in that and then fun two was a little bit narrow or fun two was multifamily office and industrial fun, fun three was office and multifamily and today we've sort of narrowed the world down to multifamily only and the reason is, is what I talked about earlier is that in the beginning capital had all the leverage and then as you as the world normalized, and things started a trade at or above replacement costs, you really have to understand how to win at margins and the only way to do that is by setting up operations in a way where you can, you can buy at scale that you know every penny nickel dime and when you're pricing things like you are true experts and for us as a as an investment firm, just making sure that all of our technology, our people have that institutional knowledge and they can bring it with them every day and it's hard to do that if you know, if you're as big as Blackstone, you can have these massive divisions that are huge companies in themselves.

But for a company like us, I can't look people in the eye and say, yeah, we're the best at industrial and we're the best at student housing and in and we're the best at multifamily and what I love about the real estate market, it really is dynamic, and we say market, but what do you mean by that? When you say the market? Is it self-storage? Is it you know, multifamily? Is it industrial? Is it ground up? Is it value add is that the dead space and I just you know there is I guess what we would quote unquote, call a market out there. But there's so many different avenues that you have to choose where you want to play and there's no wrong answer, you can make money anywhere in this market.

Michael:

Love it and Michael, you've mentioned this concept twice now and I want to come back to it for our listeners that might not be familiar with it. But you said that it was cheaper to build or you are buying value buying properties at less than replacement cost. What does that mean and why is that impactful?

Michael E.:

Well, if you think about the Great Recession, what came out of there, prices reset everywhere and one of the governor's in real estate investing is replacement costs generally as you bump up against it and you go, you know, above replacement costs new supply is going to come in, because of the fundamentals. If you can build for a multifamily project, when we do a lot of this for $270,000 a unit, you'd rather build in that case, then go out and buy something that's 10 years old for $300,000 a unit right, eventually, the fundamentals prevail. What came out of oh eight is that the market was so distressed that if you if the market, you know properties that were 357 years old, even 20 years old, we're training 50% of replacement costs 40% of replacement costs in some cases. I mean it was we were buying some class C we don't operate in that today but some of those deals were too good to pass up where we buying, you know in the Atlanta market $15,000 a unit, where if you were trying to build brand new even back then those would have been 150 $180,000 per unit, they were a little bit on the rougher side, you know, so replacement cost is maybe a little bit, you know, not a play there. But when you're buying buildings, 10 years old at, you know, half the value of replacement costs, and you can lease those up. You know, that is, that's a great way, kind of a barometer to, you know, when you're out there investing money and when the market is trading like that, especially what happened in 09-10 11, no shovels went into the ground for years. Because why would you build brand new when you can buy something that is a few years old at such a discount to what you can build for today, because ultimately, if you build, you have to get rents that support those higher costs and so we were really well protected at that time. But the market ultimately caught up and then we saw building start to take off in certain markets and in the higher growth markets that were under supplied in 12 right, that that was the very early stage of development, and then 13, a little more, 14 a little bit more and, and then it's taken off and today because the market is so under supplied. You see a tremendous amount of new construction happening across both single family rentals, or single family homes and multifamily.

Michael:

Yeah, it's so interesting, and it just out of curiosity, how long do you think it's going to take to get caught up before we see kind of a more equilibrium?

Michael E.:

It's got to be two to three years, I mean, the supply chain logistics COVID set us back. But right now, we need to deliver about 500,000 units a year just to keep up with current demand and we're delivering about 300,000 units of current demand. So between single family homes and apartments, we're still way under supplied on both sides and what's interesting right now, that's going on in the multifamily side is that a lot of millennials are trapped renting, because we all know what's going on with the interest rate side. Well, the it definitely the financing costs hurt us. But what's helping is that it's actually driving demand for apartments, because Millennials can no longer afford to buy a house. Because even as much as construction prices have come up for the projects that we've been building, it's 35% more today than it was 18 months ago, that calculus holds true. Also, for single family homes, you add on top of that mortgage rates, 30 year mortgage rates that have gone from 3% to 5% they've gone up 70% in the last year, millions and millions of individuals can no longer afford to buy a house and are stuck renting. So that's really creating these kind of anomalies in the market right now. They'll eventually work their way out and that's why from our perspective, you want to own quality, you want to own newer, you don't want to be, you know, chasing something, I think that those who are buying existing properties today above replacement costs, there's a short runway to make money, and then and then you're gonna see the water settle.

Michael:

Interesting, okay and so what would you say to newer investors that are running up against that issue, they're going to look at the properties, where the prices are, where the cap rates are, and they're getting their insurance quotes, and they're seeing this disconnect between the replacement cost and the purchase price how do you what do you say to those folks?

Michael E.:

Tread lightly in those situations, because here's the thing, everything works on paper and when you look at historical norms, they all look great. But ultimately, the fundamentals do prevail and this is why we're not in the value add space today. We haven't been in for two years. Now certainly that's been a mistake. Anybody who was buying value add deals pre 2020 did very well. But we started to see this metric where at that time replacement cost was obviously a lot lower, we didn't realize that it was going to be 50% higher in two and a half years. But the math just didn't work out. We're like, wait, why should we be buying this 20 year old property at 220,000 a door when we you know when and we're going to put another $20,000 into it when we can build for 232 to 40, right, something similar? And we started getting sort of queasy about it then. But the thing that you everybody needs to understand is yes, there are times that if you have barriers to entry, and you're an urban markets, and you know there are times that you can buy above replacement costs and you will do fine. But when the world normalizes in 234 years, if you're a long term holder, and you have more and more and more supply that comes into the market, and it will, that older product is going to be the first to suffer. So if you're paying 20% above replacement cost today, and in five years from now, buyers have the choice of buying brand new properties at replacement costs or your property that's going to be 10 to 15 years old, then dd above that, they're not going to choose those. Right. So that works itself out over time. It's just today what we're seeing distortions in the market and distortions are not good and it's okay. Like one of the lessons I learned very early on is one of the best words you can learn investing is no, like, let it go, you know, there's always going to be another bus that comes by. So, you know, that's why I say I say tread lightly. We're treading, like, we're not in that market at all, we have completely exited, buying existing properties, Core Plus value add, because it's just not a good risk reward in today's market, in my opinion.

Michael:

Interesting and it makes total sense. Michael, I want to shift gears here like entirely, as we were talking about, before we hit record, the market is super-hot prices are sky high and so I think a lot of people are thinking, well, is now a good time to sell and if they are on that bandwagon thinking is a good time to sell, where should they be thinking about placing their money, and I'm talking specifically about opportunity zones and a 1031 exchange. So we'd love if you could talk a little bit about where people should be thinking about placing some of their gains?

Michael E.:

Yeah, it's a, it's a little bit of a crystal ball, I can I'll tell you what we're doing. So in our legacy funds we are selling. We've been net sellers the last year, but we also have funds where we are more of a buy and hold strategy and markets behave in weird ways and I'll give you an example. If I would have told you two years ago, hey, guess what there is a there's a pandemic coming and the world is going to shut down and Russia is going to invade Ukraine and the 10 year note is going to you know, rally from you know, this rate to this rate. Would you have bought real estate? No, you would have put your head in the sand would you want to sell… you wouldn't you wouldn't jump, hey, listen, I got this crystal ball, I see all these bad things on the horizon, I'm going to jump into this.

So I don't, I don't ever think that people should panic. If you have great real estate, the idea is that you want to buy quality, you want to be adequately leveraged so that you can make it to the other side and the thing about owning real estate is that if you want the real benefits of owning real estate, you have to own it for the long term and the people who I know who got really wealthy in real estate, they bought it and held it and the people I know got really wealthy in stocks, they bought it and held it all these day traders, these flippers, things like that they're just churning money constantly paying taxes making a little bit, it's a good living. But I would say real wealth is created by buying and holding quality assets for ever and that's what you have to remember in real estate to that depreciation. You can't get depreciation, if you sell the asset. You can't take advantage of that, that tax free income. You can't take advantage of refinancing tax free if you sell the asset, right. It's only if you hold it, let it appreciate and there's so many reasons, you know, to hold long term because as expensive as everything is today, it's going to be more expensive in five years and 10 years and 15 years and if you study what's going on, especially in the multifamily market, or even the housing market, there's been no period in history over a 10 year period, where multifamily real estate has lost money institutional real estate, and even through the Great Recession, oh eight no nine. I mean, we were almost fully recovered by 2012 on the multifamily side. So you know, like buy quality real estate, hold it for a while now, you asked the question, if you're going to sell it, you know, 1031 I don't know like with the 1031. If you're actually you're selling an existing property, you're buying an existing property. Certainly there are 1030 ones, there's ways to reduce risks, there's ways to reduce headache. You know, buying some of these triple net mailbox money retail properties is always pretty simple to do versus trying to be an active landlord. We do run QC funds. I know a lot of investors who can't find 1031 Exchange properties, they've been coming into our funds as an alternative. And the difference there is QC the way the law is made up is it requires us to build brand new so we are diversified across high growth cities in the Sunbelt markets places like Nashville and Atlanta and Tampa and Phoenix and Dallas and Austin and places like that. So building brand new radio, like getting in at a cost basis is I think a safer way to invest today and I know that might sound like an oxymoron go into construction to actually have you know less risk what are you talking about, but I will write like I would way rather build a brand new property and be in it for 250-260 door than go out and buy something that's three years old for 400,000 a door. Did I answer your question, Michael? That was a very long… Yeah…

Michael:

No, no, it's great, it's great. Well, I'm curious if you could define for people what is a QC because I think a lot of our listeners might not be familiar with the term.

Michael E.:

Sure, a qualified opportunity zone qualified opportunity funds came out of the 2017 tax cuts and Jobs Act and it was there at 700 QC areas around the countries and these are maps essentially, of low to moderate income areas, some of them have been adjusted by governors in each state. But really what it allows you to do, if you have capital gains from any source, it can be from stocks, it can be from appreciated art, it can be from a home, you sell an investment property, it doesn't matter. So if you invest into a you QZ fund today, right, let's say you have taxes due for 2021 and you have a million dollar gain, if you invest in a QC fund today, you don't have to pay those until 2027 because that's when you will recognize those on your tax return for tax year 2026. So there's a huge deferral, and there's a value to that deferral because it's basically a zero interest rate loan from the United States government and during that period, you your money is working for you in ground up development in deals, things like that. But you ultimately have to pay the piper, you know, come 2027.

The other benefit that is phenomenal about this program, if you're in the program for 10 years, and one day, if you're invested in a qualified opportunity's own fund, you Pay Zero Taxes on the game. So if you double, triple, quadruple your money, you pay zero taxes, and you can be in this program for 10,20,30 years, our Fund is designed with optionality, you want to get out in 10 years, you can get out you want to get out in 30 years, you can get out. So this is a place where I'll tell you, I don't think there's any place better to invest, if you have capital gains, and you want to be in the real estate, because when you run the math, you have to earn about 50 to 75% more in a non QC investment to get the same after tax return. So it's exciting, I'm certainly putting a tremendous amount of money into our funds, my partner is as well, but it's one of the best programs that has come about in a while and Michael, the last thing I'll say about it, you know, I mentioned moderate to low income neighborhoods. The caveat to that, like were we sort of searches along the edges and those maps are drawn based on the 2010 census. If you think about how much cities have changed since 2010, many of them have changed drastically and I'll give you an example Nashville. We're in Nashville right now, there's an area called the Gulch and if you were in Nashville in 2010, there was nothing in the downtown area and it was only in about 2012-13-14 that you began to see multifamily residential real estate take off. But before that, it was almost a see through city you could see from one end to the other. Now today, it looks like downtown Denver, it is insane. I took a trip with my son this summer, we drove through there again and I was looking at some of our sites and our properties, didn't even recognize it. Because the last time I was there was three years ago and it looks like I mean, you know, something they build in China, it was going up so quickly, right? They're building these cities in like a matter of a days and that's what's going to Nashville. The point is, there's all of that is considered a ques area and those are the areas that were looking and you wouldn't know the difference between a QoC area and a market rate area, because to us accuse a good future development is just a good development. There's no qualifier to it

Michael:

Interesting and so how do people? How are people able to find out and take advantage of TOC funds? Is it Do I just Google QoC II fund Nashville and I'll find them?

Michael E.:

Exactly, I mean, you can there's a tremendous amount of information out there and I would recommend anybody who wants to go, who's active, they should be doing this in accuser area, and looking at the areas in your neighborhood because it'd be silly like, you know, we have some QoC projects where across the street is market rate development. Now, those are pension funds, institutions that are building those, so they don't care about the QoC benefits. They only endure to taxable investors. But if you're a taxable investor, you absolutely need to understand this area because to me, it's the best place to gain real estate exposure. You know, so, hands down.

Michael:

I love it. All right, Michael, the last question that I have for you today is curious to get your thoughts about inflation and where things are going and how people should be thinking about it and how you at origin are thinking about it?

Michael E.:

Well, inflation is real. First of all, we've seen this there's nothing transit worry about it. At some point, it will run through the system. I don't know when that is, we watched the yield curve constantly, some people are calling it inverted, it's more flat today than anything and if you if you kind of go out in the yield curve, and you look past 23, and 24, it looks like rates are going to remain high until that period and then maybe start coming down. But I just don't see that it can say, sustained at this level and I think once China fully comes back online, we take care of a lot of these supply issues. I think what we have to really be concerned about today, and this would not be a good situation is deflation and more and more, I'm reading about that in the market. Deflation is not good, where you have a continued rise in your expenses and things like that, but your demand slows down and you can't raise rents anymore, and your equation just flips a lot. That wouldn't be really good for any investments out there and I'm not saying that it's going to happen. But it's definitely more of a risk today than it has been in the past. A lot of these inflationary pressures, they will you know, get solved over time and right now, it's a difficult period to invest, especially when we're building a brand new ground up multifamily development, and we're trying to get to a guaranteed maximum price contract. It's challenging, because even oftentimes, the general contractor won't fix prices, they won't fix lumber. So we have to leave and by the way, sometimes we're happy doing that we're like, look, we don't want to lock in lumber at $1,700 a board foot, we just don't think it is we'll underwrite to that scenario, we'll leave it out and that's a place where sometimes we can actually have savings in a project like that and certainly, in a market like this today, it would be great to see inflation sort of add for us to be able to, you know, get to a normal place. But it's making it a lot more difficult to do business. I have a friend who runs a lumber company, and he said they used to quote people and they used to have these quotes out for three months at a time and now at the top of it when they quote people 24 hours, they gotta get back to them and I don't think that's a healthy environment for anybody being there's too much volatility. But I would, you know, from an interest rate perspective, we're, it's moving up. I mean, today, it's over 290. Today, I think with interest rates, or with inflation running above 8% it's kind of surprising, it's not at four or five, but I also think that that's kind of a sign to come that inflation will run through that we're seeing these prices sort of top out, we're gonna see some of these supply chain issues, get solved and you'll see 23 late 23, early 24 probably rates come back down, hopefully to you know, 2% or below.

Michael:

Okay, I've got my fingers crossed for that too. Michael, this has been super informative, a lot of fun if people want to learn more about you or origin investments, what's the best way for them to do that and get in contact?

Michael E.:

Yeah, so just go to our website https://origininvestments.com/, we make it really easy for people to learn about us engage in our content, download our decks things like that or connect with somebody at origin we have a little pop up there we use but you can also just register and then somebody will reach out to you as well, so…

Michael:

Sweet. Well hey, thanks again for coming on. Really appreciate you taking the time we'll be in touch

Michael E.:

Thank you for having me Michael.

Michael:

Hey, you got it, take care. Alright, everyone that was our episode. A big thank you to Michael for coming on the show super, super informative and really cool to hear what they are doing over at origin investments. As always, if you liked the episode, please, please, please feel free to leave us a rating or review wherever it is you get your podcasts and be like focusing on the next one. Happy investing…

Take control of your finances and invest with a purpose w/Jaden Sterling Apr 26, 2022

Jaden Sterling is an award-winning, international Best-selling author of, “The Alchemy of True Success.” Creator of Wealth & Wisdom Daily Oracle Cards and founder of Sterling Stock Ed. Inc., an International stock investment program with hundreds of students worldwide. Sterling draws on 30 + years as a professional investor assisting people to become confident investors by simplifying the investment process. Prior to consulting, Sterling held title as Regional Vice President of Asset Management for Citigroup increasing sales from 100 Million to over 300 Million in two years. Sterling also worked as a financial consultant for Merrill Lynch and Smith Barney advising some of the wealthiest families in the United States.

Sterling’s passion and purpose is to assist people to take control of their finances and live life financially free. Sterling teaches via online platforms how to invest in stocks and how to buy and sell stocks via his software, “Sterling Stock Picker.” Join Jaden, as shares his story, his passion for teaching and helping people in real estate, what people need to be aware of going into their investment career, and an overview of his software, Sterling Stock Picker.

Episode Links:

https://sterlingstockpicker.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I have with me Jaden Sterling, who is going to be sharing his story about going from equity stock investor, to real estate investor to now equities teacher back in the markets which he left but with a purpose this time. So let's get into it.

Jaden, what is going on? Man, thank you so much for taking the time to hang out with me that I really appreciate it.

Jaden:

Hey, my pleasure, Michael, happy to be here with you.

Michael:

Awesome. Well, I think we're gonna have a lot of fun today and I know a little bit about your background. But I would love if you could share with our listeners who you are, where you come from, and what is it that you're doing in the financial sector today?

Jaden:

Currently presently in British Columbia, Canada, absolutely beautiful up here and working in the financial realm. I've worked in this area for 33 years and finances and 11 years in real estate, and then the last 20 in the equity markets. So I'm super familiar with both and yeah, happy to be here with you and share some value with your audience.

Michael:

Awesome and so you're living up in Canada. But did you always work up there? Are you doing equities in Canada or in the states talk to us a little bit about that?

Jaden:

So I've been up here 11 years prior to that I was in St. Petersburg, Florida, where I built a portfolio of affordable housing units with the city of St. Pete partnered with them. We did 125 projects, and it worked out really well built a 12 and a half million dollar business in the real estate markets and this was even during the 0708 when it was really tough money was tight, super challenging, but got through it, thank goodness and but my background is steeped in the equity markets. My an initial training was in my 20s, I worked on Wall Street for Merrill Lynch and Citigroup and loved everything that I learned from my wealthy clients, not what I learned from the brokerage firms. That was actually kind of shocking in terms of what I learned about the equity markets and how the system is rigged and it's rigged to make the wealthy wealthier, and the firms are situated in a way to make money off of clients, not for clients. So when I recognize this, yeah, when I learned this truth, I was like, okay, I'm out of here and I'm going to help people also understand how this is set up, and then help people work through work around the situation there.

Michael:

Interesting, so can you say more on that about how the system is rigged? Just curious to get, you know, an insider scoop on it, because you hear that being said, and but you also hear the opposition of no, we're here to make money for you and with you and grow with you. So talk to us about how you came to that conclusion.

Jaden:

Yeah, a lot of professionals in the financial arena are great people, you know, they have great intentions to help their clients, they, they sincerely have some have a desire to really help people and make a difference and the challenge is the system is set up to steer clients in the direction that makes more money for the brokerage firm, not for the client. One aspect is you know, a lot of people think they need to diversify. We've heard that throughout the ages, right? Diversify for a safety. The challenge is it's like I love what Warren Buffett says diversification is the tax that people pay who don't know what they're doing.

Michael:

That is a great quote.

Jaden:

He's so right about that. You know, the key is to really focus folk focus your business when I was in real estate, I focused on one area affordable housing. Now, when the stock market, I have owned eight companies, shares of eight different companies. That's it not 100, not 200, not 300. So it really gives an investor leverage to get their money to finally work for them and not work against them. So the industry absolutely, it tracks the it's called velocity, it's still to this day, and I was in it 30 years ago, it tracks how much a portfolio turns over, meaning how much a broker or banker makes on that client's portfolio, not what they make for the client. So just in that understanding alone, you just kind of go yeah, I think I need to find another way than a banker broker to help me make money.

Michael:

Yeah, yeah, that makes tons of sense and so just a curiosity. How did you end up in the affordable housing sector?

Jaden:

Well, no, I got out of the brokerage business and when I was 31 and I looked around and I something very strong inside me said, start buying real estate and I didn't, I didn't really know I mean, I, you know, I didn't know what to do, I didn't have a mentor in that direction, I just knew that I had to do it. So I researched raw land, I researched apartment buildings, I researched trailer parks, I researched single family homes, commercial real estate and I landed in a, in a category that I felt comfortable with and that was like, from a personal level, doing good helping other people. I'm a big believer in that, the more the better we do for others, the more we help ourselves and it's a beautiful circle that way and so I liked the idea of affordable housing and I also felt like it gave me leverage, if I bought an apartment building that was you know, let's say 12 units, I could, I could renovate, you know, half of them in the beginning, and then still have income coming in. You know, there's only one roof on an apartment building, rather than if you buy 12 single family homes, you've got 12 roofs to deal with, and everything that comes with that. So I felt like the leverage was great and did you know with affordable housing, I didn't know this. But I learned back then that there's special financing for investors who get into that arena, you can get loans that are better rates, some of the money is forgivable in terms of the down payment, less down payment, like it had all these great attributes from an investor's standpoint and then once I bought my first affordable housing project, and made a lot of money, by the way, there's a lot of money to be made in affordable housing, it was always confirmation that when you do good by others and for others, that you'll be abundantly blessed.

Michael:

Interesting. So you did that for quite a while and sounds like did quite well and then you moved back into the equities market.

Jaden:

Yeah, I knew that my mission was to assist people to teach people how to become wealthy how to work with money, how to understand the principles of money that actually bring in money, rather than take someone's wealth and I wasn't teaching it. You know, I was in my office, I was running a big real estate company, I had 15 employees, we were busy, you know, so I wasn't I wasn't doing what I was intending to do, which was to teach others. So I wrapped up my entire portfolio all in one shot and stepped into my actually my twin brother got sick with cancer. He was diagnosed with stage four cancer.

Michael:

I'm so sorry.

Jaden:

And this is back in oh seven and he basically they told him look, you have two years to live and during that time, we had incredibly deep conversations and one at one point he said to me, you know, bro, I don't feel like I've lived my purpose and I said, What do you mean, you're doing great. You're a realtor, you're married, you got two great kids, like, what are you talking about? You know, I didn't really understand and he said, no, no, I just feel like, I didn't do what I came here to do and that really struck me because I knew at a very young age, what I was here to do, I had an epiphany at 14, you know, it's like something told me deep down inside, that I would be working with people assisting people to be empowered by money rather than enslaved by it. I just had this clear knowing and that's why I went into working in the equity markets and then ultimately real estate, you know, putting to practice what I had learned and, and I knew I had to start getting out and teaching so I made an about face right then and there. I told my brother I said, man, I'm going to do it for you and for me, I'm going to start getting out there living my purpose and start teaching.

So I did I sold my entire real estate portfolio right then I met my wife, she's up in Canada, we realize our relationship worked better and we lived in the same country. So I made the big leap and came up here and man, it's been amazing. It did bring me right back to my training and stocks and knowing because I I was able to build my real estate portfolio from what I had built from my stock investments over an eight year period. So one fed the other and you know, people ask me all the time, you know what, which do you like best right? Did you like stocks or real estate? I know this is the real estate show. I totally respect that and the thing that that I really draw from is real estate will give you a roof over your head. But stocks are a whole lot easier. There's no fixing toilets and dealing with tenants and you know that situation. So I think a balance of both is key. You can use one to support the other and one to actually buy hi there, I've, I bought an eight unit apartment building by putting my IRA up as collateral with a bank. So no money down. I just said here, take my IRA, and I'm going to do you know, X, Y and Z to this building. Once I get the rents raised and get it improved make these capital improvements, can I get my IRA back? And they said, sure. So I bought it, I got an appraisal done at that time. Six months later, after we made the capital improvements, raise the rents, I got another appraisal done. They issued they released my IRA back to me, so it was a no money down deal worked really well. But had I not had that IRA, it would have been a whole different situation.

Michael:

That's unbelievable, Jaden, that's wild. So people, I think in your sphere, some of your coaching students know you as the spiritual money guy and I'm detecting a little bit of that as we converse here, but I would be loved. I'd love to hear from you. How did you come by that name?

Jaden:

Two reasons. A lot of people know my background story, that epiphany that I had it 14 that I shared with you that understanding and really clear knowing I've always been a clear knower. So some people call it Claire cognizant, Claire means clear, and then Cognizant is knowing so I've had always had a super clear knowing in my life. But I live that way. You know, I just have, I have a very simple life and there's nothing complicated. I do my best by not lying, stealing, or anything like that and I think by having, having virtues like that, and paying attention to those virtues, and honoring them for yourself, you have a certain amount of clarity in life and things get a little simpler that way. So when I heard one day, it's actually a speaker in a podcast. I wish I could remember who it was because I would give her credit. But she said something really interesting. She said, look at the word prosperity, the Latin derivative of that word is pro spare, which means force spirit and she went on to say, you know, you honor your spirit when you're prosperous and that really spoke to me because I, I really, I believe that I believe she was absolutely correct in that and, you know, think about it, we're not here to worry about money, right? We're not here to let play life and in a small way to play a game that, you know, I look at life as a game. It's a big monopoly board, you know, you have so many houses that convert to hotels, and then apartment buildings, and yada, yada…

Michael:

And you hope don't go to jail.

Jaden:

That's right, yes right. That saves a lot of hassle when you say right, right.

Michael:

Yeah. So let's get deep for just a minute if that's okay. So you I think, are a very lucky person in the sense that you've always been knowing and you've had this clear direction for your life. What do you say to folks that don't have that clarity or that are struggling to find that clarity? How do you how do you become how do you gain that clarity?

Jaden:

Well, we know that purpose doesn't it's not like a billboard that drops out of the sky and says, this is your purpose. You know, it doesn't work that way. What I find for most people who asked me that question is what they're doing in that present moment is truly their purpose or else they wouldn't be doing it. So what someone is really asking is, how do I know if I need to be doing something different? That's really the question you're asking, right? Because if we start to acknowledge that where that person is, in that moment, is exactly where they're intended to be. If there's discomfort around that, if they say, you know, I know there's more for me, or there's something out there, but I'm not sure what it is, then it's, there's no way around it, my friend, it's a deep dive inside. It's, it's, you know, I, when I got out of corporate America, I took six months off and I did yoga, I worked with a shaman, I did a deep spiritual, inner work around what I was here to do and that really helped to give the clarity.

So I think people have to spend a little more time off screen and more inner work time. Push away from the, you know, these devices that we use these iPads and phones and computers, lower your brain function that your brain has to actually slowdown in order to connect in with this device to be able to take the information in. So what someone can do, I'm just thinking back then the practice that I did every morning, I'd wait before your eyes open, connect in with your higher self and just ask what do I need to know right now? So this is before the brain kicks in before your phone before any type of device phone or what have you that you turn on the that, that's the time when you're gonna get information, you're still kind of in a sleepy state you haven't fully woken up yet. Just sit with that at that time and you'll get information you'll get, you know, an idea will drop in or something inspiring or the thought of oh, yeah, I need to reach out to this person and then the universe aligns all of that for you. It happens in such an elegant way that a lot of people overlook it. Because they think oh, simple, is not powerful and actually, the truth is, peace is the new power, simplicity is the way to get there.

Michael:

Oh, man, I love that I'm getting goosebumps just hearing you say that. I think my problem is I have that thought coming to me at 2am oh, I gotta call this person and then I can't go back to sleep. So I need to figure out a way to get around that.

Jaden:

Yeah, super simple. Just either put a whiteboard in your room, and you get up and write that down on the whiteboard, or a pen and paper and so I just use a big fat marker, because I know I'm not gonna be able to read if I do a ballpoint, I can't read it in the morning, reach over, grab my piece of paper, write it down, and then in the morning, you'll have it.

Michael:

Oh, that's great, too. I love it man, I'm getting way more than I bargained for here having you on. This is awesome, man. So okay, so let's fast forward now to what you're doing today. Because A, I think it's super interesting and B it's kind of controversial, I think from a traditional investment standpoint. So you are now picking individual stocks. Is it so I have that right?

Jaden:

Yeah, so you know, like I say, I'm totally counter narrative, I anything that is out there in the narrative, generally, I'd like to turn on its head and look at it from a different perspective and we have to look at what's being pushed on people, mutual funds, packaged products, manage money, CDs, you know, all these things that are simply not going to give someone a successful retirement, a profitable retirement. And I realized, so back in 2017, I put a course together to teach people how to invest in stocks and what to look for, you know, how to read a chart what, how to interpret it and, and then one of my students said to me, you know, I love your course, could you create software around this and I was like, my brain just exploded, you know, like, oh, well, how would I do that and that's such a good idea and I'm not a techy guy, you know, and, and, and then the universe lined it all up and sure enough, I partnered with two gentlemen who are amazing IT guys, we spent three years developing software called Sterling stock picker, and it does exactly that I said to the guys, if we can create software that in three clicks, someone finds a winning stock, we could change the world and I believed, I believe it, I believe we can, and I believe we are.

So we did that we put the software together, it calculates the algorithm calculates all the metrics that someone needs to know so they don't have to worry about you know, it, about not knowing and it empowers people to find stocks aligned with their personal values, aligned with their risk tolerance level, it's a really comprehensive software that we've put together. And it worked out so well it became profitable right out of the gate that now I'm in the middle of a Regulation A offering where we've raised half a million dollars, I'm taking the company public in two years. So we've got two more years to go to increase the revenue for the for the software, and then our subscribers who get in at 50 cents. I'm going to just do a super low issuance and the float. So my goal is $8 a share to go public in 2024.

Michael:

Holy crap, that's amazing. So how has someone not done this before? It seems it seems from the outside looking in so obvious, right?

Jaden:

Like yeah, yeah. Oh, there's software out there man. But it's so convoluted it's so cuz I've paid 10s of 1000s of dollars to buy software to invest in the markets and I was confused and I'm like, if it's confusing for me, like this is my background. It's you breathe know what I did for a living for 11 years. If I was confused, there's no way that most people can understand it and it was so confusing. I couldn't put it to work. So we've made our super simple, so easy and I think that's our superpower is we've simplified the complicated with the software.

Michael:

So Jaden, tell me why everyone like that is so different and counter to what you hear from everyday investors to the professional investors go get mutual funds, they're safer this and that. Why does this work?

Jaden:

Well, it works because people are getting 30 4050 120% return on their investment. Like, first of all, you know, my biggest challenge, Michael, when someone comes into our platform is I have to, I have to teach them that 8% that average is not what they need to be shooting for. But everyone has been so conditioned to focus on, you know, just settle for average returns, right? Don't expect to outperform the markets. I mean, it is why it is so easy to outperform the markets, when you have the right information. That's, that's the key you got you got to have, you got to know when to invest. So our stock, where it tracks when to invest in certain sectors, it's been heavy and mining and oil and gas companies for the last 18 months. Those have been super profitable over the last 18 months, as we know, with the price and rising in oil, and hard assets, commodities, like gold, silver have been, you know, doing fairly well, I think they're still being suppressed in the prices.

But that will change at some point, it has to. So yeah, I'm totally contrarian but you know, think about it as a if you're a business owner, entrepreneur and if you have 150, or 200 products to sell, right to manage in your company, you'd be like, I don't even know where to start, let alone how am I going to be profitable and successful, right. But if you have six to eight products that you're selling, you know, you're super focused in your business, you know, what you're doing, you know, your target audience, you know, your, your manufacturing costs, like you just have the six to eight products that you're selling, there's a really good chance your business is going to be really profitable. Wouldn’t you agree?

Michael:

Yeah, I mean, I'm thinking back to my prior career, and we sold one thing and one thing only, and killed it, as opposed to the other competitors that had multiple lines of similar business, so.

Jaden:

Then you answered your question, my friend, it's exactly why we know a smaller, concentrated portfolio of stocks of these are the some of the largest companies in the world, mostly in North America that you know, buying into those shares, you can get rich, there's no question. I did it with one company, the decade in my 20s. It was the company that I worked for Citi Group, that the parent company at the time was travelers, and that stock tripled. So I turned literally $70,000 into over a million and that's why retired.

Michael:

Holy smokes… That's incredible. All right, so talk to me a little bit about the software itself. I mean, it must be really expensive.

Jaden:

You know, it's not, it's $33 US a month, we have a 14 day free trial. So someone can take it for a test drive for free for 14 days. We priced it in a way that everyone could take advantage of it, you know, we know it should be probably a few $100 a month. But we didn't want to do that. We want to just leave it at a price that people are comfortable paying. If you're paying 15 a month for Netflix, you might as well pay a little bit more.

Michael:

That's such a that's such a reality slap in the face like yeah, I'm willing to pay 50 bucks for Netflix, don't even think twice about it. But for to help yourself get rich like well, 33 bucks.

Jaden:

That's it, that's it my friend. Exactly, you know, it might as well invest in your future and learn a little bit. I'm in there. Every Monday I do a live stream every Monday at 12:30 and I share what's going on in the markets from an a macro economic standpoint and then I get into the micro aspect of what I'm buying why I'm buying I tell I'm very, very transparent. I tell people what I'm buying the reasons behind it and why. You know, two weeks ago, I was gonna buy Tesla stock, it was $1,200 a share. I went on to the live stream and I said this these other reasons I'm not buying it here. I know it's going to pull back and I walk them through the software and show them. This is why the stock broke below their short term averages the MFI The Money Flow Index is too high, you know, we just go on and on. So I like to educate people through the platform. That's one of my big things in life is to teach people what to look for when they're buying the stock. So yeah, that's the that's the software.

Michael:

That's awesome and so how well versed does someone have to be in the stock market in order to participate or really take advantage or utilize the software to its fullest intent or can someone literally just click a button and it'll spit out based on their inputs, stocks that they should buy?

Jaden:

That's it right there, three, three clicks, and they're going to find a list of winning stocks that they can buy at the exact right time. We've already figured it out for them. We actually incorporated personal values as well because, you know, my belief is if you're if you're aligned in alignment with the companies that you're investing your money and then it'll work out far better than you know, let's say if you're a health nut, you probably don't want to own McDonald's. Well, did you know McDonald's is in most mutual funds and most equity funds in the US has holds McDonald's stock in there. So it just depends, right? If you want to steer clear of that you can with individual stocks. That's what's so cool.

I'll tell you a story and this is really this hits home as to why I do what I do. When, when I was a broker with Merrill Lynch, I was like 25 years old. I had a client named Dr. Walter Arnold, and he told me a story about a friend of his who was a back then we call them secretary, she was a an executive secretary and she, she invested $5, every single week in her stocks $5 back then and she did this for 40 years, while she retired with $1.2 million and her stocks grew like exponentially like she had 20% annualized growth year after year after year and he said, he said the fascinating thing was, was how she found these companies what she did back then, in the 40s, and 50s, it was very expensive to advertise in magazines in color. So she would flip through these magazines and any companies that advertised in color, you know, back then it would have been Kodak and just companies that were doing really, really well. IBM was advertising and color back then she said she bought shares of those companies. She had four different companies in our portfolio and she just kept investing in them week after week after week, $5 a week, her portfolio grew. She didn't touch it, she didn't take any dividends out until she retired with $1.2 million.

Michael:

That's incredible.

Jaden:

Isn't it simple?

Michael:

It sounds totally the KISS principle.

Jaden:

That's it, yeah…

Michael:

My gosh. So it's funny, because you took the question before I can even ask it and I was gonna say, one of the things I think that's so powerful about real estate is leverage that you can take $20,000 and go control $100,000 worth of asset where you cannot do that, with lesser buying margin sort of thing in the stock space. So is it worth it for someone to take a little bit of money and invest it or does it need to be something a larger amount to really become impactful? And it sounds like I got the answer to that question. But curious to hear your thoughts.

Jaden:

Yeah, well, you got to start somewhere and with how the equity markets are set up, you know, if you're in the US, you can buy stocks for free, it doesn't cost I my US accounts with TD Ameritrade zero commissions, right. Robin Hood, same situation. So yeah, all of that money goes to work for you were when I was a broker at 25, we were charging several $100 to buy stock. I mean, in one transaction, right? It was it was a lot of money back then. Now it's just that barrier is gone. So more now than ever. It works with starting to invest someone can dollar cost average into the equity markets. That's what that's what Ann did $5 a week. So she didn't try to time the market, she didn't try to figure out you know, what's the best price for a stock she just said, hey, I've got five bucks a week I can invest, put away and not touch and so that might be someone can start with $100 or but we got to start somewhere and like you said, margin is another aspect that can increase their purchasing power.

But you know, we're seeing something very interesting happen in these markets, real estate as well. There's, there's a construction happening, right? The Federal Reserve Fed is starting to raise interest rates on mortgages and I lived through like I said, oh seven and oh eight where it was a scary time. You know, it was a totally the market was contracting lines of credit were being reduced. It was hard to get access to cash. So I would say for an investor today you know, look at it from a multi approach standpoint, have some money in equities, stocks, companies, four to six different stocks. Consider real estate, but also hard assets like gold and silver coins. The actual physicality of gold and silver, I think, I think if you look at you know, there's talk about a central bank digital currency coming in. That has to be reset in the previous 500 years, whenever a currency went bust, it was reset against gold, the gold standard. So when that happens again, which it will at some point, it's probably sooner than later at this point. They're going to have to mark to market gold at a fair price. So that may be instead of 2700, or $2,000 announced it might it might be 20,000 an ounce. It could be 30,000. We don't know what that number is going to be. But if someone starts investing that way, thinking that way, you know, how am I going to maintain my wealth? How am I going to preserve my wealth and grow my wealth during this time? Because this is a tricky time we have we have inflation, probably hyperinflation, you know, on the horizon. We've got interest rates going up, which to me sounds totally counterintuitive. I don't know why they're raising interest rates as inflation starts to run rampid. But the printing presses printed and minted way too much money. So now they're trying to make up for that that's at least that's the narrative that they're telling us. So we have to plan for that and prepare for that.

Michael:

Okay and one last question for you Jaden. As so many people, you hear talking about how frothy and how top heavy the equities market is, the stock market is so high, it's never been higher. You know, what do you say to that in terms of people who are just getting started?

Jaden:

Yeah, so there's so much new money going into the equity markets right now. It's on an it's an add a net 15 billion, that's what the be a month net buying. So there's more 15 billion more month being purchased equities purchased on the exchanges than being sold. Because frankly, it's one of the best investments out there. So there's tons of money going into the equity markets that will continue to drive then the markets did pull back early this year 15% decline and just two years ago, remember, it was down 35% in a six week period once this COVID pandemic kicked in. So there's, it's pulled back. But what drives the market is buyers, not sellers, and we see the buyers continuing.

Michael:

So okay, I like to have one follow up question for you. When Warren Buffett says I think it was Warren Buffett who said be greedy when others are fearful and fearful when others are greedy. To your point of there's all this money going into the market, I mean, is that people being greedy and so therefore should we be fearful or should we be kind of jumping on that bandwagon thinking, Well, hey, if these people that make a lot of money are investing, maybe I should to, you know, hitch my horse, my horse hits my car to their horse, so to speak?

Jaden:

Yeah, it's that's such a good point. Because there are so many great companies out there right now that are thriving during this time, and you can make a lot of money in stocks. So I think I think you have to have a balanced portfolio in terms of some money in real estate, right? That's, that's important. People always have to have a place to live and equities and then like I mentioned hard assets, the golden silver coins and then once you have that perfect trifecta of investments, you can really sleep better at night because you're not worried about, you know, what the markets are going to do. You know, you have a study plan. If the market does pull back, well, you get to buy more shares, which is pretty good.

Michael:

Now they're on sale.

Jaden:

That's right now they're on sale, exactly, right.

Michael:

Awesome. Jaden, this was so much fun, super, super informative, and interesting. Where can people learn more about you or take advantage of your software if they'd like to?

Jaden:

Sure, https://sterlingstockpicker.com/ is where you can find me reach out to me, we have a clear, great website that shows how to get started in the stock picker software, and how to connect with me if you'd like, I always return emails. It may take me a while because I get a lot each and every day but I promise you I'll certainly get back to you.

Michael:

Right on. Well, thank you again for taking the time to chat with me really appreciate you coming on and I'm sure we'll be chatting soon.

Jaden:

My pleasure, Michael, I look forward to chatting again. Thank you!

Michael:

Awesome, you got it take care. Alright everyone that was our show a big thank you to Jaden for coming on super, super cool software he's developed I will definitely be checking it out and I thought he shared some really interesting perspectives about how to balance a portfolio. So if you liked the episode, please feel free to leave us a rating or review wherever it is you're listening to this podcast and as always, we look forward to seeing the next one. Happy investing…

Building the life you want through real estate investing with Omni Casey Apr 21, 2022

Omni Casey has been a real estate investor, broker, and coach for nearly 20 years. His real estate career started in Hawaii where he grew up. Over the last 10+ years, he and his family have lived in Northern Virginia and have been very active in both growing their real estate investment portfolio and growing a top-performing real estate team and office in Loudoun County Virginia. With a passion for building wealth and helping others achieve financial freedom, Omni has coached hundreds of real estate investors, real estate agents and clients alike to create and execute a plan to grow their real estate business, grow their investment portfolio, or both.

With a hyper-focus on building wealth and passive income through real estate investing, Omni is committed to helping as many people as possible stop needing to earn money, and start down the path of creating money, and setting up what he calls "PIFL" or Passive Income For Life. Join Omni, as he talks on the subject of passive income and rental properties. He will share his story, and what people need to be aware of going into 2022 with their investment career.

Episode Links:

https://www.omnitheinvestorguy.com/

https://www.instagram.com/omnitheinvestorguy/?hl=en

https://www.roofstockacademy.com/

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Transcript

Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have a guest Omni Casey, who's an investor, broker, author, coach, and he's gonna be talking to us today about what his story has looked like, and what people need to be aware of going into 2022 with their investment career. So let's get into it.

Before we get to the episode, let me just give a quick shout out to the Roofstock Academy, which is a one stop shop for all real estate investors independent of where you're on your investment journey, whether you're just getting started, or a seasoned investor, our program offerings have access to over 50 hours of on demand lectures, one on one coaching, private slack forums as well as a plethora of other things. So come check us out at roofstockacademy.com and all of this is backed by the way with a full money back guarantee. So there is no risk to you for just coming in trying it out. We hope to see in there.

Omni Casey, what's going on man, thank you so much for taking the time to hang out with me today. I really appreciate you.

Omni:

Okay, super excited. Thanks for having me on.

Michael:

Oh my God, my pleasure. You've got a really interesting story and we were chatting a bit about it just for hit record here but for all of our listeners, give us the background who are you? Where do you come from? What is it that you do in real estate today?

Omni:

I'd love to um, Omni Casey is my name, I am originally from Hawaii born and raised in the islands and I don't live there anymore, migrated out to East Coast just outside of DC Northern Virginia about 10 maybe 11 years ago but started in Hawaii very entrepreneurial family, got into real estate investing fairly young. That wasn't my first business venture but it turns out that you know, real estate's a really cool business I love the business aspect of it I just always knew I wanted to be an entrepreneur business owner and eventually got into real estate investing real estate brokerage as well side of things so just all things real estate for the last 20 years it's been my passion and for the last few years I've been nominated the investor guy I do some coaching we run a meet up to about this site and I just love helping people learn how to invest you know, especially new investors starting out for the first time.

I remember how daunting it was and so we do a lot to you know help them get to their first few transactions and most of what we do is cashflow rental properties I love that's why I love your podcast because it is you know that you know remote investing concept less of the active hands on concept more of the remote concept that that I love and then we teach that as well.

Michael:

Awesome. So did you get your teeth cut out on the islands when you're doing real estate investing or has it always been remote talk to us a little bit about that.

Omni:

I started on a wall who is which is where I'm from I saw actually started. I was a surface surfboard salesman, you know I was working absolutely and you know I read the book Rich Dad Poor Dad and I'm like alright, so I love business and I was doing a couple of businesses at the time. But then I really wanted to find out more about real estate but no one in my family really was in real estate and especially on the investing side. So I just started talking about it more and more and it was really a couple customers that came into the shop that I was having this conversation with and you know, they they were a real estate investor. So I said, well, you know, tell me about that. What did we do and it traded off, you know, some surf lessons for some education on the investing side and I lucked out by finding some friends and really they became mentors at that point and invested in Waikiki in Honolulu and as slowly as I want to expand and as I wanted to really shift towards the passive income side the cashflow side Hawaii just doesn't cashflow that well great for appreciation rate for equity, but I had to find some outside markets and that's where I started to invest you know in the mainland you know, various markets that that were more affordable that the rent to price ratio was more accurate to my goals there.

Michael:

Oh man, that's awesome. I used to work as a surf instructor too, but I didn't get diddly squat from my clients and then you'd lucked out big time.

Omni:

Yeah, paid off. Definitely!

Michael:

That's awesome, all right. So now let's fast forward you move to the mainland. Now you're out on the East Coast. What are you doing out there as Island guy? I mean, you don't have snow on a wahoo but you do where you live in now?

Omni:

Yeah, it's what is it spring well, I'm recording this and I think we just know today so it's crazy weather not quite used to it's still you know, my wife's from the area and one of the beauties of real estate, you know, both on the investing side and as an agent brokerage side. You can take that and do anywhere, you know, once you learn the core skills, it you can do it remotely and, and you know about I don't know, 10,11,12 years ago, having a conversation about if you wanted to move back home and be closer to family, we can do that and we can make that work and she took that and ran with that fairly quickly and we haven't looked back, but I've loved it because by that point, we're already into the remote investing side and the downside, if there's a downside to living in Hawaii, the downside is a time zone difference. And I love being on a, a similar or closer time zone to my property managers, my agency, other investors that I was networking with and so I jumped at the opportunity to be able to do that, and, you know, be a little bit closer to the properties that we owned.

Michael:

Yeah, that makes total sense, for about the better part of a year back in 2019-2020. I was traveling internationally, and trying to sync up my calls with clients and people on my team was pretty difficult to do. So I totally get that. Awesome well, I know you just wrote a book and I would love if you could share with our listeners a little bit about what it is where they can find it, what they might expect to see in it.

Omni:

Yeah, I'm super excited about this. It's called the cashflow Breakfast Club. I don't know if this will ever be on video, but just got my author copy today. So I'm like super stoked…

Michael:

Nice

Omni:

because it's been written for a few years, it's been written for a few years, actually never planned to publish this or never thought I'd really published it, it was just kind of my story, I just need to get it on paper and it was the steps have kind of a step by step process that I went through to become financially free through passive income through real estate investing, and really very, very simple steps that anyone can do. And I started coaching my real estate agents and my, my, you know, new investors that came to me for help and this kind of became my instruction manual. So for a time it was a manual and then last year, my wife was kind of pushing me said, we might as well you wrote it, you might as well publish it. So finally got off the ball and this turns out, I'm pretty good at writing a book, I'm terrible at publishing books. So find the right publisher to help me through that creating the website, actually go through the vetting process of the various publishers and finally, as of this week, got my publisher, copy, author copy, and a should be out, probably in about two weeks or so. So we're excited about that.

But really, it's a story, you know, I think in bullet points, and I'm very direct and so I love, you know, you know, just reading like a manual. But I know that makes a terrible book and so I was able to kind of look back at some of the books that really impacted me the most, you know, you got Rich Dad, Poor Dad, you have several others and a lot of them were in this parable format, the story format and so I rewrote this manual in a parable format and it had to be happened to be about this character that grew up in Hawaii that got into real estate investing that started to invest remotely. So it was the same story but it allows kind of the reader to one experience becoming an investor vicariously, you know, ups and downs, and everything in between real estate agent side as well, look gives you a glimpse into that, as well and then the foray of having to trust you know, how do you trust someone overseas to kind of help you invest remotely as well. So it kind of takes you through those emotions, vicariously from the comfort of your, hopefully your couch there while you're reading it and I'm excited to put it out there.

Michael:

I love it. Well, I'm very excited to read it, where can people grab a copy of it?

Omni:

So my website is https://www.omnitheinvestorguy.com/ , that's probably the best place to get it. I'm assuming at some point, it'll get syndicated out to everywhere you can buy a book. But right now, I'm not the investigator calm, there's a tab that says: book and that'll take you there.

Michael:

Awesome and we'll link to that in the show notes here. I want to shift gears here just a little bit and I'm curious, you have a mantra that everyone needs two professions, one for you and one for your money. Talk to us a little bit about what that means and why it is you feel that way.

Omni:

Yeah, it's a training and I guess I need to come up with a better name for that. But it's a training that I've done over the years multiple times and I'm a father of three they're the my whole life. You know, my oldest son is 13 year old, my daughter is nine and my youngest son is seven and everything I do is like most parents are involved around them and I kind of keep them involved on the investing side the education side and I would love nothing more than my kids should just be obsessed with real estate investing like I am. But the reality is one of them is and the other two I'm not sure yet right and kind of to figure out from a parent's standpoint, you know, what's the right way to go about that? How much do I actually push? How much do I actually kind of encouraged them to kind of go down the path that I found and I guess you can kind of take that whether it's real estate investing or any sort of profession you're in and realizing that even though they might not be passionate about real estate investing down the road, the reality is real estate investing or that knowledge.

If they get that baseline now and start investing, you know, as soon as possible, they can eventually do anything they want. So you don't actually have to be passionate, you know about real estate investing to make money in real estate investing. So my daughter wants to be a ballerina, she can go be a ballerina, she wanted to go be a barista, somewhere, she can be a barista, that's not going to pay the bills. So hopefully the real estate investing side right making your money work for you. Because for a very long time, like, I'm passionate about real estate investing is the only thing that really makes sense to me and I'm talking to people, I'm like, can't you get it? Why don't you understand this? Why don't you understand? Why don't you and then just the reality is not everyone's as passionate about it as, as I am. That being said, everyone could benefit from that. So understanding how to put your money to work for you, or how do you set up that passive income coming in, so that it can fund whatever you actually want to do with your time and you know, it doesn't always need to be the same thing, I just feel blessed that I happen to do both at the same time.

Michael:

I love it, I love it. Any pieces of advice or tips or tricks that you've picked up from being a father and a parent over the years to get your young ones involved.

Omni:

So one of the things that I did recently, in the last few years, I started to invest closer to where I am not because it's the best place to invest, I think it's a decent place to invest it. But there's clearly other markets that outperform my market. But I wanted to have something that I could just drive by, take my kids do and keep them involved. So if you are, you know, investing, not everyone invest, you know, somewhere near them, but try to find something where you can kind of take them and keep them involved. Every single weekend we're driving by we're visiting a project, we're checking on a renovation, we're doing something where they just kind of feel like alright, they get to kind of point and we actually assigned the rights, I guess, if you will, to various rental properties to each of our kids. So they know that that's their property, right? Technically, they're not old enough to own the properties yet. But that's their property and so we got to go over the numbers with them. We go over the details when we get it from our property manager, we go over kind of the breakdown and so they can kind of see the numbers on the back end and on the oldest side, my son, he gets it. My daughter's getting there. My youngest is like I don't understand it, any of them but I think just having that knowledge and having those conversations or you know, they're hearing terms at some point. I mean, it took me a whole life to kind of start hearing these terms until I started investing and so they're very involved and then just to kind of spark the conversation. There's a great game, Robert Kiyosaki put out the game, the cashflow a board game and we play that we play that quite often and we have the kids challenge the parents, and we talk about it after and they get to see the correlation with the game, and actual P&I statements that we review together about our properties.

Michael:

I love it, I love it, it's probably a good thing that they're too young to own property, because your tenants might take issue with writing rent checks to a seven year old.

Omni:

Exactly, sure.

Michael:

I love it, I love it. Well, I'm really curious if I'm very curious to get your thoughts on a topic. That's I think, top of so many people's mind around the country and that's inflation. We're recording this mid-April inflation is 7- 8 - 8 and a half percent. So curious to know, I mean, how is that affecting your personal investment philosophy going into 2022?

Omni:

That's such a great question. This is probably one of the top questions I get and if someone asked me to come in and teach a class is probably the one that they request over the last two years or so and we've been talking about it for a while, right? Inflation is always a discussion. I would say four years ago, the title of my course was like, what would you do if inflation hit 5% right and talking about this crazy, guys and we ran the numbers and so here's what it would mean to you for your money, here's what you would do on the investing side and then last year, had to update it and like, alright, well, looks like we're edging towards 6% you know what it hit 6% and then, earlier this year, I updated and, and change it to 7% and then I'm doing a class at REI event next week, and I had to update it to eight and a half percent.

So reality is what we've been worried about for so long is here, right? And we don't know if it's transitory and how soon is going to go away, but it's already here much longer than most people thought it would be and it's already affecting your money, right? So money in the bank is just kind of deflating in value drastically, by that eight and a half percent level, and it's probably going to go up more so finding assets or asset classes you know, that can hedge against that and it really speaks to kind of what we're in and validates a lot of what we do already, in terms of its less about the nest egg and the money in the bank, your net wealth, all the way to something that people track and it's fun to track that it really is your income, or at least your passive income that is most important because your wealth, and your net worth goes up and down with inflation goes up and down with market values goes up and down with lots of things that you really don't have control over. But ultimately, if you're talking about financial freedom, you're talking about paying the bills or having money to do what you want to do. That comes with from your passive income and when you look at rental properties, especially long term rental properties, that is the closest thing that does scale up with inflation, not exactly, but it does scale up with inflation, as prices rise, people start to make more money, rents start to trend up.

Now, it's not immediate, because of the length of the leases, but typically trailing about six months to a year, you're able to pull it up and if your passive income is tied to long term rental income, that is one of the closest things that actually increases with inflation. I talked about the values of home, you know, equity and appreciation is beautiful. But my portfolio gets cut in half value wise tomorrow. Typically, I'm still okay, because the reality is I bought most of those properties because of the rental cash flow value, and the cash flow value doesn't actually change based on the actual value of the property itself. So understanding, I'm not saying rental properties are the only thing out there, it's the thing that I think makes the most sense. But you know, something that brings in cash flow that does scale up with inflation is something that you'd have to focus because if you're just in the stock market, and you're just in the equity play, even, you know, Bitcoin or anything else, there's lots of things going up and down in value, but it's not pushing off cash flow to you. That's where you're probably losing out because your money is really going to go down in value at some point once it all hits the fan.

Michael:

Yeah, makes total sense. So I've got a question for you, Omni. So we talked about inflation going up through the roof and that means that the dollars held in the bank not doing work for us are losing value over time. We're also seeing this kind of unique set of circumstances where interest rates are going up very quickly as our prices, there's got to be an inflection point where interest rates hit a point that causes prices to stagnate or either fall and so for those people that want to have cash in the bank, take advantage of those maybe price fluctuations, but are also losing money by holding cash. I mean, how do you reconcile and square that?

Omni:

That's a great question. It is tough and it's I've never seen a market change and evolve as quick as this one is, I was just doing so typically, I buy most of my properties cash and I try to refinance out into the birth strategy. So I buy a portfolio, and then I rehab them, update them and then go to the bank and pull out equity, and I keep recycling the money that way. So mid rent refinance right now and, you know, typically, you know, from a multi small multifamily level, somewhere in the fours to 5% range has been, you know, the happy medium for a very long time, I just got an estimate at seven and a half percent, so…

Michael:

I got six and a quarter, yeah

Omni:

Like seven and a half and it's a lender that I've used it right, and they're like, you know, it's just that's just where we are at so I'm making a decision, do I leave my money in there for a while, do I cash out, knowing that I'm probably gonna have to refinance out pay a penalty in a couple years, and because I definitely don't want to carry a rate that that bad, but I just don't want to leave money in it, do I, you so you're having these conversations, and it's a little bit of everything, so really depends on your need. You know, when I have money sitting and I don't have enough deals, I usually lend it out. I'm a private money lender as well, because I don't like just hold the money, I want that money working for me. But even some of the rates that I'm getting back is like comparable to what you know, you know, a regular mortgage rate is now it's like, alright, I think private money lending needs to go up in value or cost, you know, to kind of offset that as well. I think it's really having multiple strategies to place your money and it's really, we have to be conscious stewards of our money, because it's just putting the bank I'm gonna go to work and I'm just going to forget about it, right? We stick our head in the sand and we're just whatever it's it is it is what it is. Well, that mentality is really, you know, the people that will get, you know, hurt the most because if you're not recycling your money, or if you're not making moves in terms of how to maximize whatever the market is giving you, you're just going to be stuck with the worst possible option typically.

Michael:

Yeah, that makes tons of sense and so curious to get your thoughts on what some short term investments are that people can make to recycle their money, because they anticipate a market correction to be able to use their cash to then purchase properties in cash. Is that would that be hard money lending, would that be some other asset class?

Omni:

Yeah, there's a few things you can do on that, it really depends on whether you're already an active investor or not real estate investor, if you're activated real estate investor, that is looking for a few projects, right, I'd rather have my money in a project that I'm personally overseeing and I'm increasing in value or increasing in the net operating income on it and if you can do that, great, that's park your money in, and probably the safest hands up, you know, your own hands. But if one, you don't have the deal, or two, you're not an active investor, then it is figuring out, you know, where can I place my money and that's what I do private money lending. There's something called gap funding, which is more of a partnership. So it's less of an interest rate that you're getting in return. But it's the gap between what the investor needs, what the hard money is wanting to give, and what the investor needs to bring for the down payments on bringing it down payment on a flip, they're getting the majority from a hard money lender. Now, it's not an interest rate that I'm getting, I'm getting a percentage of the actual profits of the deal.

So one, I need to be able to vet the deal and to I need to trust that investor, that they have a solid track record and have the ability to like send resources over and help them make sure it's a profitable deal. In the long run it allows me to be a part of more real estate transactions without an active role in it and my money's just not sitting there. For those who just don't have that level or even that ability to have time, then it's looking for some sort of, you know, can I be an LP on a syndication somewhere. I don't love being LPS on syndications, because it usually means I'm leaving my money in there for five to seven years and although there's great syndications out there, right, you can turn that into 10,12, 15 plus percent return with really no interaction. Me personally, I know that I can probably do better than that, if I had that money, and I'm using it over and over again. But if you're just going to let it sit, like worst case scenario, go lend it out, or put it into some sort of, you know, syndication out there, because that is beating inflation at the very least and then coming up a little bit more above and beyond that.

Michael:

Love it, love it. You talked about Omni people getting hurt via their investments, curious to get your thoughts on some mistakes that you're anticipating people may make in 2022, or that you've already seen people make because of this really unique environment that we're in.

Omni:

I think we've already been seen it, but we're probably going to see it more and more I call it the dumb money effect. You know, there's a lot of dumb money in the market, it's not speaking to people in general, but the money is just dumb, right and…

Michael:

…because there's so dumb people as well if I am being honest.

Omni:

So there's just so much money out there and then you take, for example, when I'm buying a property, I have some strict criteria of like it needs to pencil out in this box, it needs to hit me this return. Because one, I need to get a certain amount of return for my expectations, my time as well is all factoring into that and then someone comes in and buys that property for, you know, half of a return or a 10th of the return that I need and I'm thinking that was dumb, why. But if we understand who that person probably was, it was probably someone that like, like, sooner than then they thought they would sold the property and they need to turn 31 and they're just stuck with money, which is dumb money, it's a great problem to have, they're not looking for the same return, they're looking to park money, that's a park money and do it right. So that's a big, big factor, right people because everyone's been set, you know, being approached and said, I want to buy your home, and people are just selling their home, it wasn't part of their plan, right, they're planning to sell it at the five year mark or the 10 year mark, and the sort of the two year mark, and now they're stuck with this equity.

That's a great problem for them to have and then you have so much money in institutions and being raised in some of the syndications that we talked about that can't find the right deals and so rather than sitting and not investing and really they haven't to pay interest on that, they just are going to park their money as well. For a much lesser of return than what you were I would typically require out so it's one understanding that there's dumb money out there and don't get caught up in the competition of that dumb money. Because if you just say, alright, I guess a, you know, two cap is what we're expecting in this market, I guess I gotta go do one and a half cap to compete. That just doesn't make sense, right? I think one you'd have to just readjust your strategy, or maybe look in a different market, or try to find some sub market or some niche that just doesn't have the big competition and it might be you know, lowering your price point a little bit because it typically is that larger price point portfolio or building those often attracting the dumb money. So if you kind of take it down a notch, maybe you have to do a few more transactions to spend the same amount of money but you can you can get it done.

Michael:

Interesting, okay and what do you say to all the first time investors out there that are coming up? against all this dumb money, and they just can't get a deal and they're like, man, what am I supposed to do like I've done all the things I'm supposed to do, I'm making offers, I have my pre qual letter, I can spend up to x, I've run the numbers, this is my Buy Box. I just can't find anything that fits the buy box. What do you say to folks like that?

Omni:

It's tough to be a first time investor right now. But it's always tough to be a first time investor. The reality is, it gets easier and easier as an investment, the more experienced you are and so last year, it was a tough market, I bought 46 properties last year and so that was a big, big year for us, I set a big goal to do that, and didn't actually hit my goal. But the reality is part of it was one, I knew I wanted to buy as many properties as possible, I want to get as much debt as possible and, and I want to just prove that it was done because for several years, we've been hearing about how tough the market was and the reality is, there's deals out there, most of those deals were off market and so it's building those relationships, and it's understanding where you're gonna go to do that. But I tell every new investor, the reality is until you buy your first property, you haven't even started, you start, once you buy your first property, you can take every course, you can listen to every podcast, and it's good to have knowledge.

But so many people get all the knowledge and never actually do anything and until you actually are like in the trenches, making decisions, talking to your property manager solving problems, like pulling your hair out, you're not growing, you're not actually becoming an investor yet. So I say, one, err on the side of just go get your first investment property first, right, just figure out does it come very close to your box, because, in reality, the worst case scenario is like it's if it's a $20,000 property, you're not losing $20,000, if it's a bad investment, you could probably still at least have the value of the property in there. Maybe it's not cash flowing like you had hoped to and if you have the exit that maybe you're losing, you know, breaking even or losing 5%, which I don't advocate losing money for. But I've seen I've had conversations like eight years ago with people, and still today, they haven't bought their first property, they just would have been so much better going in and just getting their first property because that second property, that third property, that fourth property doesn't come to you until you get that confidence and that confidence is overcoming obstacles that you occur that you come up against after you have your first property. So it's just getting in there because of that, most people I talked to end up lowering their price point quite a bit to like dip their toe into the market. So it's almost like, alright, I don't want to, I understand I'm taking a risk, but we're risk instead of $300,000, I'm gonna risk $50,000 worth, and then okay, now that the spread one way or the other, it's a 5% gain or a 5% loss, it's not as bad and so we people looking people have people looking for those types of markets and then once they do that, then they're expanded to either a larger unit counts or other markets that they're more comfortable with.

Michael:

It makes total sense that I see the same thing inside of Roofstock Academy and share similar advice with folks that hey, it's once you get your first deal done, the physical act of doing that you're going to learn so much more than I could have ever taught you in this course or any course you take, like, like you mentioned, but it's funny because I hear stories, anecdotes of people going into that kind of $50,000 price point, having a bad experience or having a water heater blow and now they're cashier screwed for the year and like man, real estate investing sucks, it doesn't work and so you kind of have to, you know, frame people's expectations around, okay, well, this is the asset class, these are the types of risks typically associated with these types of properties and that $50,000 property, by the way, doesn't speak for real estate investing as a whole, right?

Omni:

You're exactly right and I had to reframe so I used to say, all right, let's how to get your first property. Now it's I don't even help anyone until they're committed to like for like the next five years, like figuring out alright, what is your plan, because the worst thing you could do is own a rental property, like no one in the right mind should own a rental property or even two rental properties. Because guess what, you're not financially free by owning one or two properties and you still have all the headaches of being a landlord under stress and anxiety and you are a terrible landlord, because you only own one or two properties and you probably found subpar investments because you haven't been an investor for a very long time. So it's just getting started, you don't really ramp up and benefit from being successful landlord or a seasoned investor and you just kind of sit there hitting your life. And so I kind of frame that and say, this is what it's going to be like. So really, you got to get 2,3,4,5,6 property, you got to get to your number.

We always come up with like a baseline financial freedom number, not like your dream goal. But like you need this to pay the bills to call yourself financially free. What is that number, is it 3000 a month? Is it 5000 a month is it $100,000 a year, whatever it is, and figuring out the math working, working your way backwards and say alright, that means it's eight properties that means is 20 properties or whatever it is shoot for that goal, because if you don't and you're just saying I need to get an investment property, and you get an investment property, guess what? It's going to suck it's gonna, you're gonna hate you the landlord like why am I doing this for a few 100 bucks a month? What does that even make sense? It does not make sense until you scale your portfolio. Most people just never get there. So you have to like pre warn them and they say, okay, here's the vision. This is just step one of five to 10 steps.

Michael:

Yeah. Now it makes total sense and I agree and my last question for you, I'm gonna before I let you go is, for those people that just can't even see path like getting their first deal done is already scary enough. They can't possibly envision getting more properties as part of a portfolio because I was there I was that person for a long time. So how do you kind of coach people or what do you share with folks to just get them to that point that says, hey, I know you might not be able to see properties two through one right. Now, let's focus on one, I mean, how do you how do you reconcile that?

Omni:

So it's tough and the reality is, not everyone will get there, no matter what I feel like I convert everyone into a real estate investor, because I believe, would benefit from that I just can't and I've tried, there's people that no matter what their comfort level, my wife's one of them like she's one of the most conservative nervous people there is and if she wasn't married to me, she would oh, no real estate, we own a ton of real estate and if I was gone tomorrow, she would sell it all tomorrow, right? It is the stress involved with just owning real estate, right? There's just things and yet she doesn't really do anything with it, other than you know, just kind of see the income coming in and so for some people, you need to be on that passive side and that is the lending that is a syndication site. So there is a percentage or personality type where that is always going to be the most comfortable. I personally am not that I love the control, some people hate the control, having that responsibility, having that control.

So it depends on the personality type and then, you know, for those that are kind of right in the middle, I take them through that five year plan or 10 year plan and just say, okay, it's one per year, for the next five years, can we focus on setting a goal of one per year for the next five years, you know, $50,000 100,000 down, whatever it is, whatever they are able to save up, you know, from their job, just alright, you already know you can do that instead of doing what you're doing right now, can we supercharge that and just say next year, we're gonna buy a $20,000 property with $50,000 down and the year after that, we're gonna save up all our cash flow, and then buy a slightly higher property with $50,000 down plus the cash flow, and you're just gonna stack it on top of each other, right? You keep stacking and stacking it, and things are gonna go right and things are gonna go wrong, but but you're moving in the right direction and you get them to say, all right, yes, I think I can commit to that plan. Let me just go look for my first property now and then knowing that once I get to that first property, once I go through that learning cycle, I'm going to feel more confident to actually take it to that next step.

Michael:

Love it, love it, love it. Well Omni this was so much fun and where can people learn more about you reach out to you if they have further questions touch base with you?

Omni:

Yeah, I'm all over all over social media, not all over. I'm on Facebook I'm on…

Michael:

Omni present…

Omni:

So I do have a Facebook account, I have Instagram its @ omnitheinvestorguy on all those handles I do have a tick tock account have not done anything with it yet but apparently I supposed to be on Tiktok as well. So look for some content on there. But probably my website https://www.omnitheinvestorguy.com/ is the easiest place to find me and I'll reply to any questions or inquiries anyone has.

Michael:

Perfect and for everyone listening and not watching this Omni is O M N I,in case you're wondering.

Well, Omni this was so much fun. Thank you so much for coming on and dropping so much knowledge and sharing with us. Definitely look forward to staying in touch and seeing how everything continues with your journey.

Omni:

This is awesome thank you.

Michael:

Hey, you got it, take care.

All right, everyone that was our episode with Omni, a big thank you so much for coming on. Super, super fun episode. I learned a ton and we'll definitely be chatting with him going forward. As always, if you liked the episode, feel free to leave us a rating or review wherever you get your podcasts and we look forward to seeing on the next one. Happy investing!

Can you still get good deals on turnkey real estate in Florida? Apr 19, 2022

As a founding partner of JWB Real Estate Capital, Gregg Cohen has seen the company grow from humble beginnings to serving over 1,300 clients in 49 states and 13 countries, managing over $750 million in real estate assets. Gregg’s recipe for success in business includes a belief that whatever is measured gets improved and a true passion for creating passive income for clients. He and his team have been featured in The Wall Street Journal, Inc. Magazine, The Jacksonville Business Journal, The Florida Times-Union, Advantage Business Magazine, and Entrepreneur Anchor Magazine. Gregg is a graduate of the University of Florida and contributes to the JWB Real Estate Capital blog and its Facebook group connecting with the community by sharing insights.

Rental properties can be a great source of additional income, but committing to that first one can be intimidating. In this episode, join Gregg Cohen, as he talks on the subject of passive income and rental properties. He discusses the strategies for taking advantage of secondary income through real estate, the pros and cons of turnkey solutions and how vertically integrated companies can produce great results for investors. A great episode to learn from if you’re looking to get into investing in rental properties. Episode Links: http://jwbrealestate.com/ https://www.jwbpropertymanagement.com/nyai-show/

Transcript

Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Gregg Cohen, who's the founder of JWB real estate capital and he's gonna be talking to us today about vertically integrated companies, turnkey solutions, and what investors should be aware of when it comes to investing in the Florida market. So let's get into it.

Gregg Cohen, welcome to the show man, thank you so much for taking the time to hang out with me really appreciate it.

Gregg:

Absolutely can't wait, man.

Michael:

I'm really excited because you've got a really interesting story and background. But for anyone who doesn't know, give us the quick spiel who you are, where you come from, what it is, you're doing real estate.

Gregg:

Yeah, absolutely. So my name is Gregg Cohen, I run a company here in Jacksonville, Florida, called JWB real estate capital. We're here to make rental property investing easy for the masses out there, which, you know, most people see rental property investing as an opportunity to make money to make a great return on investment. That's not usually what holds people back from it. What's usually the thing that holds people back is the experience when it comes to rental property investing. So we really built our business to make this a wonderful experience. It keeps people coming back to be able to take advantage of an asset class here, which, you know, historically has performed so well, and especially for what our country has been through over the last couple of years, has performed incredibly well. And I just think that there's real value for families and communities, when you can invest in a stable asset class that performs well over time. You can do some really great things for your family, for the community for the world.

Michael:

Totally agree. Just out of curiosity, what is JWB stand for, where does it come from?

Gregg:

Oh, man, how far do you want me to take you down this path? We've been in business for 16 years and like any other entrepreneur, we didn't know exactly what we were doing when we started right. You know, we started our business. Man, I could just I could just talk for a lot of stories about my business partner is one of my best friends. We went to college together and we lived in a house with a lot of our friends in college and we just nicknamed that house, the huse. Literally, it makes no sense. We call it the who's why I don't know why. So when we first named our company, we were like, oh, we're 23 What should we name our real estate investment company? Let's call it whose homes and investments? Makes no sense at all.

All right, so that company, it still is our holding company, we own a large number of rental properties, and it's still in whose homes and investments. But over time that name clearly did not stick did not, you know share what we were hoping to accomplish in the world. We started to market ourselves under the name of Jacksonville wealth builders and that was really when we kind of hit our stride as far as creating these turnkey rental property investments and packaging the Property Management Services here in house and Jacksonville. Jacksonville wealth builders really talked about what we do but you know, we're a vertically integrated company and that means that we have everything under one roof acquisitions, property management construction. It is all here under one roof and so we had Jacksonville wealth builders as a company but another name for our company. Our home buying company was progress homebuyers and then there was peace of mind property management as we became bigger and started to develop a reputation in the community people would say oh, I really love that company. Jacksonville wealth builders. Have you heard about those guys over at progress homebuyers? I really haven't done too much business with them yet or Jacksonville wealth builders is great, but peace of mind property management, I don't know them so well.

So eventually, we realized you know, how to actually appropriately name a company and that became under the JWB brand, which is now JWB real estate, capital JWB property management, JWB homebuyers. So JWB actually would stand for Jacksonville wealth builders, we just condensed it and made a little bit more user friendly for everybody realized you're there, who they were doing business with.

Michael:

Love it and the whose story so I feel like so many people have similar college experiences or stories like yeah, it was a, we were geniuses at the time and looking back at like, what were we thinking?

Gregg:

You know, we just weren't thinking very much. It's a credit though, because my business partner and I now have three business partners. You know, in the beginning, we just wanted to get out there and try to do something weren't afraid of failing. I think you can clearly see that by the way that we named our companies we weren't afraid of failing and so many investors out there just get paralysis by analysis, paralysis, and they can't move forward, right? Just name your company something you can't possibly screw it up any worse than I did and, you know, there are so many more important challenges to overcome and then simple things like that.

Michael:

So it's funny, my wife actually works for a company that has a very similar story. When he started it, he didn't think anything was gonna come of it and so the company is named Michael management and so when she posted that on her LinkedIn, a bunch of my college roommates were like, oh, yeah, I also used to work for Michael management in college like, no, no, like, it's a real company, like, I actually have a job. I'm not just managing Michael's like, life and stuff. So he's like, I never thought it would take off and it's an SAP company. But needless to say, so talk to me, Gregg, about what it is that JWB does?

Gregg:

Yeah, absolutely. So we're a vertically integrated company and what that means, as I mentioned, is we have everything under one roof. So what we do is actually we buy land, and properties, but mainly land, especially in the current environment and we've been doing this for over a decade, we buy a lot more land than we're actually going to build and sell that year. We've been doing this here in Jacksonville, as I mentioned, we started build to rent back in 2011, before all the big hedge funds and private equity groups, and even now we're in this build to rent space, we actually started this in 2011, they put us on the front page of the Wall Street Journal in 2013 as being a pioneer in this space and so we secure this land, we buy this land, we actually own it and what that allows us to do is to create a path so that our clients have a consistent source of inventory, that they can turn, that we can turn into positive cash flow and high growth investments for them.

Once we own the land, we then build that new construction home, we then fill that home with a resident, and we do all the property management in house, we really focus on long term residence stays, we believe that's the approach that's going to lead to winning in rental property investments and so we only signed two and three year leases, we set resigned 70% of our residents, and that leads to an average duration of about four and a half years for our residents staying in our homes and then our team is just rock solid, we're here to make this. This a wonderful experience for our clients. Most of our clients live outside of Jacksonville, we have clients in 49 states 13 countries, and we get to serve over 1300 clients and manage about 4400 rental properties here in Jacksonville. And our team, we have about 85 people here on staff here and just really focused on creating a wonderful experience for folks and doing something more than just literally buying selling renting properties, right, we believe we have a higher calling, right, a higher mission here than just doing property management, we think that we can really change people's lives, by the returns that we create for folks and also what we can do in the community through the platform that we have.

Michael:

Amazing, Gregg, this is like a super niche way to get involved in in real estate. I mean, you're kind of doing it all. So in that sense, it's almost not very niche, but curious to know, how did you get your start, because this is, again, kind of this is a very specific way to go about it.

Gregg:

You know, my story started, where, you know, I went to school at the University of Florida, I was raised by a single mom and we never really discussed entrepreneurship and we never discussed real estate, it was my both my mom and my dad to have wonderful loving parents, but they never owned a house other than the one that we lived in growing up and so the idea of entrepreneurship or real estate investing was just completely foreign to me, I grew up, went to University of Florida and just tried to work very hard to get a great job and I really found comfort and security in the thought of going and working in corporate America. I realized now how much I just really, really was excited about that. Because it's very different than then how my life and my career has turned out. But I went to go and work for a company here in Jacksonville, a fortune 500 company and after about a year and a half of working there, I was really just depressed, demoralized. What I had thought was going to be my career path was not what I wanted, and I really didn't know what to do. So a friend of mine who was also struggling with the same thing at the same company turned me on to that amazing book, Rich Dad Poor Dad changed my life as I'm sure it did for you, Michael and most of the listeners I would imagine, right?

Michael:

Hmm.

Gregg:

So that book, I remember sitting down reading it, it was about nine o'clock at night and I read it all the way through till two o'clock in the morning, I finished the book, I got up and I looked at myself in the mirror and I said I'm gonna quit my job and start my own real estate investment company and if you know me, well, that is not how I make decisions. I'm very conservative, I'm more on the slow side. So this was a really big moment of inflection in my life, and a very, very powerful moment for me. But the thing that I took most away from that book was that I couldn't just put my head in the sand and just assume that I was going to work for a company and that if I worked really hard that I would just hit my financial goals. I had to mind my own business which can mean doing really well in my active job but it also means keeping my mind open and how I'm going to manage my money investments outside of my active income. But for me, the pain of working in corporate America for me was so great at that moment and I was also 23, I didn't have a lot to lose and I said, you know what, let me go big. My business partner, my original business partner, one of one of three business partners now has been my best friend and he realized that, you know, this was an opportunity for to get me on board, he is much more entrepreneurial than I am. So what he did was, he was still in his final season of Gator football over in Gainesville and I was in Jacksonville working and so his big plan was, you know, what, I know I can get Gregg on board if I just literally move in with him.

And so I didn't have that for him, I didn't have a room for him. So he came over and he said, hey, I'm gonna come over for the weekend, he ended up not leaving sleeping on my couch and he wanted to make sure that I would see him every day, when I would wake up and go to that job that I did not enjoy, he wanted to make sure that I would see him and every night when I got home, just demoralized, he wanted to make sure that I would see him searching for properties, figuring out how we're going to build this business and we did that for a little while and eventually I gave in and quit that job and we started this company. But in the beginning, we didn't really know what we were doing. We were just trying to survive and over time, and really, you know, this was 2006. So the market started to really change on us. You know, we can certainly talk a little bit more about that. But long story short, we evolved into understanding what really that intersection of what, what we are built to do and what we want to be great at, which is that turnkey rental property investment along with the property management, we really just love the fact that people can trust us with their money, we happen to be experts in real estate and we can perform as a team, even though they may live 1000s of miles away and return their money back to them on the backs of a very stable asset that just became our calling card and that's, that's really what we're very passionate about doing.

Michael:

I love it, man. Gregg, I'm curious, I think it's probably come as no shock that a lot of turnkey providers get a little bit of a bad rap in the industry and so what makes JWB difference and who is a turnkey provider really a great solution for and maybe who is it not such a great fit for?

Gregg:

I think it's a great question. You know, I think that when I started to invest, when I started to build this company back in 2006, and we started to go to market with our strategy of what turnkey was, I remember needing to fully explain what the term turnkey meant, because nobody had ever heard it before. Because it wasn't a very profitable niche back in 2006, or 2008, or 2010. Right as the market turned right, but it wasn't very profitable and so you didn't have any turnkey providers. And I remember feeling like I needed to just educate and share with people this this asset class, this possibility for you to invest in rental properties and to do it passively and I just remember just almost just being exasperated because nobody understood it. Now when I think about the space right now you are overrun with companies that claimed to be turnkey. The name turnkey means something different to every person out there. You don't have to spend as much time educating, right? Even the big media outlets are talking about why single family rental properties are such an incredible asset class. But now we're in this phase where we have to really specify what turnkey means and you know, what providers out there may be claimed turnkey, but really means something different.

For me, I really think there's a very big benefit for working with a vertically integrated company, which is a slightly different definition than turnkey, turnkey for me is really working with somebody who owns the asset, who does the property management in house and who can control that experience. That is kind of the definition of turnkey and, and what their job is, is to make sure that producing a return on investment for you today and that is wonderful. There's a lot of companies out there that claim to be turnkey, but don't meet that threshold. They might not own the asset, they might not do the construction themselves, they might not do the property management in house. But if you want to be a passive investor, you got to have all the goals in line and that's really the turnkey threshold. The reason that vertically integrated is different why I think it's so critical is it's a much higher threshold to be vertically integrated company. vertically integrated means that I might I'm not just taking care of your money today, I'm not just focused on selling you an asset that can produce cashflow. I'm not just focused on producing rent for you every single month and making sure that the home is rented and earning a return today. I want to take care of your money for the next 10 to 20 years over a full market cycle and in order to do that, you have to be much more forward thinking, right? You have to be able to source inventory a decade in advance to make sure that you have enough runway for your clients to actually finish their buying plans and own maybe three 5,10, 15, 20 properties as the market shifts, which it is right now.

And you also need to be an innovative team, you need to have an innovations department, you need to be one where you're thinking of what things are going on in the local marketplace, what boards are you on in that local marketplace? Are you a player in the social economic scene in your local market, because what many turnkey companies fail to do if you're not focused on raising median incomes, which a vertically integrated company is if you're not focused on raising median incomes in your local market, your return on investment has a cap that has a ceiling. Because as we are finding across the country, affordability is becoming an issue in many markets, and it will become an even bigger issue. No matter what supply and demand does. If homes are too expensive, then your home prices are not going to appreciate. And home price appreciation is a big part of your overall return on investment. So a vertically integrated company is actively has an impact in raising median incomes in that market, when you raise median incomes in your market. Home prices have the ability to appreciate you have a better chance of producing a return on investment for clients. So I kind of took us down a path of vertically integrated in my mind, there's a threshold of turnkey. First make sure if you want a turnkey company, that they own the assets that do the construction in house and that they actually do the property management. A higher threshold, if you're investing for a full market cycle, which is 10 to 20 years, you want to be investing with a vertically integrated company because rising median incomes and making sure you have a runway of assets is something that you need to be thinking about over that time span.

Michael:

It makes total sense. So how does a vertically integrated turnkey company actually affect and be concerned with raising median incomes?

Gregg:

It's great question. So, you know, Jacksonville is downtown is a great example of this. If you ever been to Jacksonville, Michael?

Michael:

I have not known I've been meaning to make it out that way.

Gregg:

Yeah. Well, I hope you come down here. So Jacksonville is downtown is on the precipice of a really wonderful revitalization. Now, for anybody who is in Jacksonville, who's listening to this podcast, you may have heard that same thing five years ago, 10 years ago, 15 years ago, 20 years ago. So we have so many natural assets here in downtown Jacksonville that we just haven't taken advantage of for many, many years and what it means is we have to take advantage of the political will we have to make it take advantage of the business community and we all have to come together to revitalize with downtown Jacksonville is we need to make this a place where employers come. Employers come employees want to live downtown and then when we do that, and we're surrounded by amenities, you're gonna see median incomes rise in downtown.

I'll give you kind of some numbers here. For the longest time in Jacksonville, we had a very low number of people living downtown number was about 3500 people living in downtown. It's really low number to stay that way, probably for CDs up until about three years ago probably stay that way for the previous 10 years. It just was growing just in the last three years now these are, these are small number games, but it's big on a percentage basis. We're up to about 7000 residents living downtown. Wow, yeah, we've done a lot of research to other successful downtown's and what we have noticed is that when you get to 10,000 residents living downtown, what happens is the numbers start to work so the developers can come in start to renovate buildings that might be sitting vacant in your downtown, turn these into amenities which of course creates this, this flywheel effect of require of encouraging more people to come and live downtown and up till this point, what the city is actually doing is incentivizing developers. So the city gives millions of dollars to developers like JWB in order to actually do these projects. Because right now, the numbers don't pencil they don't make sense until you have enough people living downtown and so what we are doing is JW B is buying a lot of buildings downtown, not for the purpose of earning a great return on investment in the short run. We're here for the long run. In the short run, it's actually not a very wise use of our capital and our dollars, we can make a much better much better return on investment elsewhere. But what this is doing is starting this flywheel effect, so we actually can have an impact we can be a player and helping to raise meaning and incomes attract future employers attract folks living downtown and our belief is that in the next five years, and over the next 10 years, downtown Jacksonville will look very different than what it looks like today.

Michael:

That's awesome. That's so cool, I actually was awarded one of those grants as well out in a market in downtown on Covington, Kentucky, for doing the exact same thing developing an old building. So yeah, I'm very familiar with it and I think it's an amazing program that they've got kind of going on in a lot of places.

Gregg:

You look at some of the other most successful downtown's, like Nashville, we like to think of ourselves as Nashville and 10 years in Jacksonville. And it's the same model, right? You incentivize development in the beginning, right, in order to increase the number of people living downtown, and so that the numbers work, and then eventually, the cities don't have to give these incentives and the development just works, because the rents are high enough for it to make sense on an investment perspective.

Michael:

Right, right. Awesome! Well, Gregg, let's circle back to the question of if someone is listening, thinking about getting involved in real estate, but not quite sure how, who is turnkey, a great solution for and who should maybe steer clear and go another direction?

Gregg:

Well, I think the biggest differentiator is your level of active involvement, if you want to be an active investor, turnkey, does not make sense for you, right, your upside for you to be an active investor is much higher, of course, you are also going to take on a lot more risk. But if you have the stomach and you have the expertise and the time to do the active business, to actually get out there and source your own inventory, renovate it yourself or with your crews, and then manage it yourself or even hire a property manager, go have a field day go do that, because you're probably in a position to earn a higher return on investment. I think the turnkey or vertically integrated approach really works well when you compare it against other alternatives on the passive side, right, let's this really works well, if you're somebody who would never actually go in pounding the pavement, and make hundreds and hundreds of offers to actually secure an undervalued piece of real estate and if you do that, you go to the active side.

On the passive side, though, you're probably investor who has money in the stock market, or in bonds, and they're just not performing like you want or maybe you have too much money in those asset classes, you need maybe a third wheel, or excuse me a third leg to your stool there, right? That's where passive investing in real estate can work and that's where turnkey plays really, really well. You can get the risk mitigation that you can find in asset classes like bonds with the upside that you can also find in stocks and that's why rental property investing really is an asset class that a lot of money is moving to Now, the key is, can it be passive for you? Can it be as easy and enjoyable as it is to invest in the stock market? And I know, that's what you guys do over at rootstock. You guys have made such a wonderful business model of making this an easy transaction and you know, I think that's been the missing piece for most investors.

Michael:

Yeah, no, I totally agree, I totally agree. So let's shift gears here slightly and talk about returns because I think so many people listening, that's what's going to drive the decision and when, when considering different options that's what's driving that is, hey, where can I get the best yield? Where can I get the best return? So we're recording this end of March 2022, where are you seeing investors or rather, what are you seeing investors returns look like in today's market, given all the tumultuous nature that we seem to find ourselves in?

Gregg:

Yeah, you know, listen, home prices are going up, and interest rates are going up and so what that means is that cash flows are being compressed. This is something that I've been talking about with clients for the last two years plus, once the dust settled for COVID and we knew that prices were going to go up and so what we're finding here is that cash flows are coming down. But the interesting thing is that the data and the numbers show that this trend of home prices continuing to go up and interest rates continuing to go up is here to stay for at least the short run and so what we're seeing here is home prices, and cash flows will actually lead to further cash flow compression, further lowering of return on investment and the same property that you would buy today is actually going to give a lower return on investment if you buy that property in future years, assuming that home prices and interest rates go up.

So that's kind of the big picture of what we're seeing. This is becoming a less profitable business model because you've had such low home prices and such low interest rates in the past that won't always stay the same. Specifically, though, for the Jacksonville market, what we're seeing are returns on investment between seven to 8% and that's not including home price appreciation that's taking into account your net rental income, your tax savings, your principal pay down, but it's leaving off to profit centers that are highly influential home price appreciation, and of course, inflation hedging as we all know, inflation is a real thing. It's at its peak since the last 40 years and rental properties do a wonderful job of hedging against inflation.

Michael:

Awesome, awesome and Gregg curious to get your thoughts on where you've seen the Jacksonville market go in the last three to six months and what your projections are. I want to I want you to put some fresh batteries in your crystal ball and give me give me your take on where it's heading in the next three to six months.

Gregg:

I've never been more confident in where the market is going. I said that last year because the data was so telling as far as us seeing above average home price appreciation, and the data is even more telling, I'll tell you which data I'm kind of referencing. But over the last three to six months, we have seen 15 to 20% annualized appreciation in Jacksonville. Those are staggering numbers, we've never seen 15 to 20% appreciation over the year in Jacksonville's history and you got to ask yourself, why is this happening? Well, it's happening because of low supply and increased demand and when you have very low supply and increased demand, it puts upward pressure on pricing. Jacksonville happens to be an affordable market. So you've got a lot of upward pressure and people can still afford to buy homes at this at the appreciated rates.

You know, one thing that you can look at to see where pricing is going in the short run is something called months of inventory, something that we look at and we track we've tracked every month ever since 2014. Here at JWB we track it because it matters, it tells us where pricing is going and so what you're seeing is if you look at the number of homes that are on the market, you can just divide it by the number of homes that sold in the previous month and you get this measurement. It's called months of inventory. Historically, between six to seven months of inventory that would lead to average, or normal home price appreciation, which in the Jacksonville market is 4.6% per year that's coming from 1982 all the way through 2022. So if you got six to seven, you're thinking oh probably about four to 4.6% somewhere around there as what you would expect over the next six to 12 months. Well last year when I was super confident home prices were going up we had like three months of inventory. Looking at it now we have about one month of inventory in the Jacksonville market and so that's why we're gonna see higher than normal home price appreciation. I usually don't make a specific prediction. I can't if you want me to I'm not afraid to do it. But you know, you got to do it guys you want me to do all right, I'm gonna listen. You it's better to go conservative. So I'm gonna go a little conservative. I'm gonna say eight to 10% home price appreciation in Jacksonville.

I think it could be higher. You look at Zillow, Zillow is predicting 16% home price appreciation or 12%, I can't remember which one, Goldman Sachs is predicting either 16 or 12%. You go in most, most outlets out there and they're predicting higher than normal home price appreciation, I think it could get that high. But they're the real reason why I'm so confident home prices are going to go up is because you gotta think about what's going to take to get to an equilibrium level of months of inventory, you're gonna have to build yourself out of this inventory crunch and it's taking longer to build new construction homes today than it has even last year and much longer and much more costly than it did a number of years ago. So it's going to take us some time it's going to take longer than one year and you still have room to run here in the Jacksonville market. So we're gonna see higher than normal home price appreciation over Jacksonville in Jackson over the next year. My opinion.

Michael:

I love it, you heard it here. First, folks, eight to 10% and Jacksonville. Let's circle back in a year and see how close you were. That's awesome. Gregg, this was awesome, man. Thank you so much for taking the time if people want to reach out to you directly or learn more about JWB or invest with you all what's the best way for them to do so?

Gregg:

Michael, thanks so much for having me. It's just really been a wonderful opportunity. For those who are interested to learn a little bit more about JWB. You can check us out online at https://www.jwbrealestatecapital.com/ . We also do a show called- The not your average investor show would love for you to listen to that either. Wherever you find your local, your favorite podcasts. We also do a live audience as well you can check out the show@nyais.com. We do it every Tuesday and Thursday and if you want to join the fun, the fun club come and hang out with us in the audience here on the show.

Michael:

Right on, well thanks again Gregg and we'll definitely chat soon I'm sure.

Gregg:

I appreciate it. Bye.

Michael:

All right, everyone. That was our show a big thank you to Gregg for coming on, super interesting topic. A lot of really good stuff to chew on and definitely gonna be go checking out JWB real estate capital out there in Jacksonville. As always, if you liked the episode, feel free to leave us a rating or review. We'd love to hear from you all, as well as include a topic suggestion if you'd like to hear something more from us. We look forward to seeing on the next one. Happy investing…

Is it a good time to refinance your property before for rate rise even more? Apr 12, 2022

With all the current uncertainty in the markets, recent interest rate hikes, and the fed’s talk of continuing to hike rates through out the year, the decision to refinance should be made carefully. Why are you trying to refinance? For cash out? To lock in a rate? To take advantage of current rates before they increase even more?

In today’s episode Emil, Tom and Michael discuss what they think is important to consider before deciding, and Michael shares his recent experience with a lender backing out of a deal.

Emil:

Hey everyone, welcome back for another episode of the Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co-hosts…

Tom:

Tom Schneider

Michael:

and Michael Albaum

Emil:

…and on this episode we're going to be diving into refinances. Is it too late as rates are going up, or should you do it now or what's what do we all do it? So let's hop into this episode.

What are we doing with our lives? Hey, guys. Hey, Tom, welcome back.

Tom:

Yeah, yes. What’s up Emil, what's up, Michael?

Emil:

How you doing?

Tom:

Excellent, excellent. Hey, but a quick, quick personal note. I was been working in my garage trying waiting to build this little lot of land and I started getting lightheaded and I realized that there is some just kind of like, toxic fumes in my garage. So back in the house, so apologies if you hear some baby noises while we're waiting to build out the exterior office. That's my yeah, I am doing good man, not not lightheaded anymore, so…

Michael:

and the baby's not in the garage?

Tom:

….Right Dukes of Hazzard area. Yeah, we switched babies in I mean, it's good young lungs, like they feel.

Obviously…

Emil:

Did you have the gas company come out and like, report on, what's going on?

Tom:

I did, they gotta have to come back again. So they came out, I mean, there's like two like gas entry points into the house. There is like a little further away the house like, like a little gear thing you tighten and then next to the house, there's the meter. They replaced all the meter stuff and I think it helps, but there's still stills of issue. So anyways, don't want to go too deep into that rabbit hole, yeah…

Michael:

Never a dull moment with Tom Schneider.

Emil:

Alright. Well, I'm glad you are alive, your brain cells are hopefully intact for this episode and yeah, let's get rolling. All right, so we're recording this, it is April 11. Interest rates have been climbing pretty quickly. I think I'm hearing four and a half 5% plus, when we were in like, you know, I got to 2.8 on my primary back in November, so four or five months, pretty crazy how quickly rates have gone up? And Michael, I think you have some pretty interesting going on you were in the middle of a refi currently. And give, I'm not gonna put words in your mouth. Go ahead, tell us tell us what's going on.

Michael:

So not even in the middle of a refi, I was at the end of it, I was supposed to close today and the lender calls me he goes, hey, Michael, we're not going to be able to do this loan. I'm like, what do you mean, we're not gonna be able to do this loan, he goes, yeah, at the rate that we locked you out, we're, we're not going to be able to do it and so basically just give everyone a little bit of context. I started this investigation like three months ago into getting 30 year fixed mortgages for multifamily commercial property. So five units and up, and I found a lender that would do it and I was making them compete against other lenders at a bunch of different quotes and I found one and they were like, We can beat it, we can do it 4.275 for a 30 year fixed on a commercial multifamily loan directly to my LLC, load docs, they just needed my property specific information how the property performs like a DSCR loan. So we're getting all the paperwork done, I paid for the appraisal, several $1,000 for each property and then my loan processor, like just stops returning my phone calls and emails. I was like, that's weird and we're getting up to the point of closing.

So I got a hold of, I called I called his line, and somebody else answered and I said, hey, I'm trying to reach this person. They said, oh, they're no longer with the company. But this other person is handling all of your stuff now and I said, okay, I mean, that happens, turnover happens and this new person who's handling my, my, my files, sends me this email, she's like, hey, I need all these things from you. I'm like, I already sent those to your company months ago, the original person had that, like, do you not have access to my file and went back and forth and back and forth and I got them all these docs, and then they go, oh, we're gonna have to close on Monday, otherwise, your rate will expire and I said, okay, great I'm ready, let's do it and today, Monday, he calls me and says, hey, we can't do this loan. And what I'm pretty sure happened is they just realized that I got too good of a deal, and they can lend that money elsewhere and get a higher interest rate for it and I still have not heard back from them as to why I haven't got a direct specific answer. But as soon as I do, I'm going to be naming and shaming these people all over the place because I posted about it on Twitter and seeing if there's any kind of recourse and be like, yeah, I've been hearing this happening more and more of lenders just dealing with bad PR, rather than taking the loss on their, to their pocketbook.

Tom:

What does a rate lock mean, if that doesn't allow you to like lock your rate, right?

Michael:

That's a great question and so what a lot of people online have been saying is that, oh, if the rate lock expires, then then the rate lock is no longer valid and which I totally get. But the question that still I'm having is, well, what if a lender is just dragging their feet intentionally to drag out the rate lock to expire? So that they can say up great lock inspired, sorry.

And so they recorded they said, well, we can re quote you at today's rate and I said, great, do that and they said, oh, it's at six and a quarter. I'm like, so 2% greater than what I locked it in and I did this three months ago, because I knew that rate hikes were coming, everyone was talking about it and I said great let me just lock this in, set it and forget and be done with it. So it's pretty infuriating, so everyone, stay tuned, I will keep you all posted, how it how it shakes out, but I have yet to hear a get a call back from these folks explaining themselves.

Emil:

I wonder if this is like a you said it's a commercial loan product. It's a portfolio loan, right? Like it's a loan they're doing themselves. It's not like government backed or anything from I wonder if there's like different rules, you know, if you're going to get your traditional conventional 30 year fixed rate, Fannie, Freddie, like, is that would that have gone through versus like a portfolio? And like you said, they're like, why would we? Why would we put this money out there for 2%? Less than we can get it today or two to 200 basis points, not 2%. But you know what I mean?

Michael:

Yeah, no, I gotcha gotcha. Yeah, I don't know and that's the one of the questions that I have out to the Twitter versus Hey, what kind of rules and regulations are these companies governed and bound by and how do we hold them accountable? Because I think for the government back stuff, it is a little bit more clear cut, I would expect this less to happen in that space. But it seems like the commercial world, the private lending world is just a bit more unregulated and so I'm wondering if that just might be the cost of doing business because of that lack of regulation.

Tom:

Like they're, you're, you're done with, like, their lifetime value of you have a customer is gone. You know, I don't know, like, I think that like, could be kind of short sighted. You know, there's funny, these different vendors where there's like perverse incentives, you know, like for this example, like them just kind of like waiting out the clock, because they see the interest rates going up. There's a couple other incidents, other scenarios where vendors that you rely on could have like, bad incentives, you know, like for literally, property managers that get paid on work orders, you know, they're making more money on work orders, they're gonna be loved to be performing work orders. So I guess this speaks to that whole, like, trust and having a, like, a good partner that you're working with, but and Michael as yeah, that's a that's a bummer like, what a huge jump.

Michael:

Oh, my God, it's yeah, it's so incredibly frustrating and like, I had so many big plans for this money, too. So it's just been a bit of a whirlwind of a day. But in speaking to, like, the question, and the topic for today, I don't want this whole episode of your woe is me session, my therapy session, you guys can build me later. I hope you take insurance but um, I think it's really important for everyone looking at their portfolios now, or looking at their properties now to determine and kind of ask themselves the same question of hey, does it make sense to refinance right now and for me, it made total sense when I locked it in three months ago, I was paying a little bit higher interest than the current mortgage that I had on the property, but it was going to be a longer amortization period, at 30 years over the 25 years that I that I currently had on the product and then it was going to be fixed also for 30 years. So it wasn't gonna have to go refinance in five years or 10 years, like I will, with the current properties of it, the current mortgages that I have on these properties, and one of them is coming due, I think, next year, or in 2024 and so I said, you know what, I can lock in the rate for 30 years, I know what it's going to be, there might be times when my rates a little bit higher than what the current market is.

But my guess is that for the most part, it's going to be less than the average interest rate that we find ourselves in over the course of the next 30 years. So let me just lock it in and I'm sure I'll be stoked today at 6% and a quarter percent, I can't say that with as with as significant with as much confidence and so for everyone out there listening if your rate is less than what you're going to be refi into think long and hard about giving that up. But also, if you're going to be taking I mean, there's two ways to refi right, there's the cash out refi and then there's just a rate and term refi. For your rate and term refi, if you're going to refi into a higher interest rate now might not be a great time to do it. But what are your guys thoughts about like the cash out piece of this?

Emil:

I mean, look, if you bought a long time ago, maybe you've put some money into the property, you fix it up, your cash flow is nicer and you're sitting on an opportunity to pull some cash out and still cashflow, that's something you should still consider.

I don't think it's like, okay, rates have jumped 2% now, it's a definite no, it's just, it's like we always talked about, you gotta run the numbers, see if you're still cash line, right? Don't don't make it negative cashflow I in in my eyes and yeah, make that make that call for yourself.

Tom:

I'd say, you know, you, obviously you do have like tons of equity and like you have a plan on what to do with that equity if you were to convert it into a cash out finance, that makes sense. I think in, in some markets, with interest rates going up, you would expect a little bit of a reflection in pricing to go down potentially, I don't know, it's hard to say because there's a there is a good amount of demand, I would say it's more likely to be in like secondary and tertiary markets where you have a property with a lot of equity, cash out, refi, get that in your back pocket, there could be some opportunistic acquisition opportunities with interest rates going up, I would say with like primary cities, you know, like really big ones, Dallas and whatnot, since a lot of the maybe institutional investors out there are not going to be, you know, have too much moving within their debt structures. But I'd say in some of the secondary and tertiary markets, there could be a bigger impact on rates going up, and potentially prices going down. Like I don't know, you would you would assume that right, I don't know that, that's my 10 cents, Michael, and Emil thoughts on that take.

Michael:

I mean, I think that makes sense. But I'm wondering, too, if we can kind of try to think like two steps ahead and is there an instance or a scenario where it makes sense to take out cash via cash out refi, because you know, what the rate is today, and you have equity in the property, knowing full well that you don't have a plan for it in the immediate future. But you are opportunistic, you foresee an opportunistic environment and so you're just going to kind of sit on it and see what happens versus doing nothing and then you might see that equity actually evaporate from the property.

Emil:

It's good point, right? If rates are going up, right, I just before we hit record, I just threw my loan into a calculator, right that our primary, looking at that 200 basis points difference and it's, it's huge, like, I don't know, if we would have bought it like it's over $1,000 difference, you know, and so it's like, it's big. so, you know, you can't have rates keep going up payments keep going up and like, we have the same kind of crazy appreciation. I don't think I'm not looking into a crystal ball. But yeah, so that that is a good point, right?

If you think okay, rates are gonna go up, rates are going up, it's going to keep putting pressure and like prices need to come down, then yeah, that could be a great time to cash out refi, hold some cash, then buy when there's a little bit more opportunity down the road.

Michael:

Yeah, and that's, it's not something that I've thought about in the past. I've always kind of said, especially as in, in coaching with folks and Roofstock Academy is like, yeah, cash refunds are great if you have a plan for that money in the next 612, nine months. Or even just know what the money is going to be used for versus getting a HELOC could be a better use of funds and time if you're not sure what you're gonna be using the money for. But now, with rates going up so fast, I might I think I'm changing my tune a little bit and saying, yeah, maybe, you know, even the fact like we were joking about Emil last episode that having your money in the bank, it loses 7% in value every year, maybe that 7% hit is more valuable than or should be is is less impactful than the future opportunity down the road. Because if prices dropped 10 or 15% I'll pay that 7% to have money sitting in the bank all day long to be able to jump on something for 10 to 15% discount.

So I think you're right it is super tough to know what to do. But I'm of the opinion that if you can lock in something today and you know what the payment is for the life of the loan or for the next foreseeable future that has a significant value to it and having cash in hand we know what the value is today and we don't know where rates are gonna go and so if it turns out that rates go down in a year from now okay, will you do a rate and term refi and take advantage of lower rates then get your cash out now and arm yourself. I don't know I think that I think that makes sense for a lot of people.

Tom:

So I've got a little question for you guys, I'd love your guys's feedback. So with my primary refi you know maybe a year ago also took out a HELOC use that HELOC to improve the value of my house…

Michael:

But not the gas line apparently?

Tom:

No, my the gas line is fine. It's it's more like it's a garage and it's moldy. Like don't worry yeah don't worry things are okay.

Emil:

Gas lines are not value add by that.

Tom:

I meant to say this the beginning. They do it for free, you they have a number you call they send person out there just because like massive liability if there is issues with the gas line, but my question for you guys is so I have a HELOC on the primary, did some improvements and my strategy was originally just to refinance again and then put that HELOC at into the primary, but with rates going up right now, does that make sense like I, you know, have a good sized amount of cash on that HELOC or a debt on the HELOC. Do I just eat it and roll that into a refi or because, you know, assuming rates continue to go up like that HELOC payment is gonna become more and more.

Michael:

Yeah. How have you seen your HELOC interest rate creep up in the last couple of months in lockstep with with like traditional mortgage rates?

Tom:

Um, I assume it would be sensitive to it just in that HELOC, you know, is not fixed debt and that it's moving. I haven't I haven't looked at it in a minute but that was always part of the plan was to roll that in.

Michael:

Do you know how big of a difference? Your interest rate would be from your current primary mortgage to what your new one would be?

Tom:

It's a very good question, it's very good question. These are all good, good action items to go out.

Michael:

Tom always finds a way to get just personal advice and…

Tom:

Self-serving all the time..

Emil:

Free coaching on…

Michael:

That's it on the fly. Gee, man, you're you're smarter than the average bear. I think that what would be that is one thing I would want to know is what's the new rate?

Tom:

You lock your new interest rate right now is 2.49. So not going to do better than that. But you know, and…

Michael:

That hasn't moved in last couple of months…

Tom:

Hasn't moved in the last couple of months, no.

Michael:

Yeah, so I was saying… Tom, you turned me on to that lender and I actually got a HELOC from them too and it's amazing.

Yeah, I would, I would try to get some clarity around. If you did roll this all in what would be your new primary interest rate?

Tom:

I like it.

Michael:

Because you gotta remember even if the rate blows up on the HELOC call it 567 percent. It's interest only, versus the fully amortized principal and interest payment you'd be making on that additional debt and so I would, I would look to figure out okay, where's my breakeven point, you know, at what rate can I afford to pay fully amortized principal and interest versus just interest only because interest only it's gonna fluctuate up and down versus the P&I, that's for the life of the loan.

Tom:

Yep, that makes sense, Michael, it's good, good feedback, sself-serving.

Michael:

And then I just on top of that, to also think about the cost of doing that refinance. There's several $1,000 associated with it and so if that's what you have to eat in terms of your additional interest payments on the HELOC, but you still have a better rate than then you would, that that in my mind, make means pay the extra interest, just eat it.

Emil:

Michael, I should have asked you this before we left the conversation of your refi changing. Are you gonna go through with it? That's the big question, right?

Michael:

No, I'm not because here's the here's one of the problems is like right now, I'm at three and a quarter percent interest on 10 year fixed with a 25 year amortization and I'm like, three, three years into those loans. So they haven't a long lifecycle still left, I would much rather be on 30 year fixed and at four and a quarter, I'm happy to pay the additional percentage point on interest, just for that fixed and additional cash out. So the thing of it is, it's almost like, and the payment on that was going to be a little bit bigger than my current one, even though the interest rate is higher, but I was getting a ton of cash, but it's over a longer amortization. So it all kind of smoothed itself out in the end. So I was essentially getting some free money. So yeah, it's just infuriating beyond belief.

So stay tuned, I'll keep y'all posted how it shakes out.

Emil:

Got it? Yeah, I just wanted to, I don't think we close the loop on that. I wanted to know, like, are you still moving?

Michael:

These people will be getting zero of my dollars ever and I will encourage everyone I know or ever will know, to not use these people if they don't make it right.

Emil:

But okay, let's say you go get the same six and a quarter whatever from some other lender, who is not a monster and screws you over like that. Would you do that?

Michael:

No, no, no. I mean, the rate the rate at that level just doesn't make sense from a cash flow perspective and that's why I was so excited about this long as I locked it in when it totally made sense.

Tom:

So not just a spike decision.

Michael:

It's like yeah, yeah, it's it's a financial one like he just financial this doesn't make sense. It doesn't make sense. So and that's something that people really need to be thinking about is kind of like we were mentioning Tom with your loan is the cost of the loan. If you're gonna go do a refinance, there was money involved to physically do that. Some lenders will wrap the closing costs in so you pay it, you know, paid up front, but you pay it over for the loan, and so just be factoring all this stuff in and also be factoring and like what could you do with the proceeds, if you already want to cash out refi? What kind of return could you get on that money if you want to inspect it elsewhere? Because that can often make the interest rate a little bit easier to swallow if it is high.

Yeah, you might pay in 6% but you can go back eight, nine 10% on that money somewhere else. I think it's important to to find out and take it from me what the track record is of your lender if you are going to be refunding research them online, do your homework, find out if they can actually close the loan because anyone can say anything, but until they fund that loan and it closes it's all just hearsay apparently, I'm so bitter God, this coming out terribly.

Emil:

It will probably be hard to vet this one because like, you know, we've been in a really low rate environment for years. So no one else has probably experienced this. I'm sure there's other people who are trying to get a loan from them who are now going through just like you, but you probably wouldn't have found any of those online because you know, rates have been low for a long time and everyone was just scooping up reefer.

Michael:

Right, right and they had like a guy had good reviews online. So I did do my homework. It's just a weird time in the market.

Emil:

Yeah, it's just interesting. Another rate lock, at least with like, I don't know, maybe just portfolio lenders it basically mean meaningless.

Michael:

It's meaningless until they unless they decided mean something…

Tom:

Rustproofing on your offer.

Emil:

Yeah, well, maybe that's maybe that's the takeaway for our listeners is like, if you're going out buying refiling whatever. Find out about your rate lock, like, you know, see if it really is like for 30 days, or you or however long you are 100% guaranteed that rate or can the lender opt out of it or how does it work? So good question, ask your lender.

Michael:

Yeah, tell them you heard a horror story on this podcast you just started listening to and say I don't want this to happen to me.

Emil:

And with that, we bid you all fair do, fairly well, fairly well, fair do.

Michael:

A fortnight fair do.

Emil:

Farewell, all right, so I guess that's probably a good place for us to end this episode. Thank you guys. As always, Michael, thanks for giving us a little deep dive into your paper cut flesh wound.

Michael:

Oh, dude this feels like a full digit got sawed off isn't just a paper cut. Lost the whole thing.

Emil:

Hopefully, hopefully the story ends out ends up well for you.

Alright everyone, we will catch you out on the next episode. Happy investing.

Michael:

Happy investing.

Protect your short term rental with the right insurance strategy Apr 05, 2022

Jason Bott joined Robertson Ryan in 2004 as a Vice President and in 2016 he became a Shareholder. Being part of Robertson Ryan, the largest independent insurance agency in Wisconsin, and a Top 100 US Agency, gives Bott the resources to handle standard and non-standard policies. He specializes in real estate risk management and has developed a national reputation for insuring real estate owners and investors of varying sizes.

The short-term rental space has become more accessible over the last several years, with industry leaders like Airbnb currently boasting 5.6 million active listings worldwide. Short-term rentals can be an attractive alternative to long-term rentals because of the increased cash flow on your investment. Before deciding to rent a portion of your home for a vacation rental, though, you need to consider how your homeowner's insurance views short-term rentals. In this episode, Jason will walk us through the short-term rental space and what we as landlords need to know about the types of insurance that are available.

Episode Links:

jbott@robertsonryan.com

https://www.robertsonryan.com/

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Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Jason Bott an insurance broker with Robertson and Ryan, and Jason's gonna be talking to us about the short term rental space and what we as landlords need to know about the types of insurance that are available. So let's get into it.

Hey, Jason, welcome to the show. Thank you so much for taking the time to hang out with me today. I appreciate you.

Jason:

Thanks for having me.

Michael:

No, my pleasure. So for those folks that don't know who you are, give us a quick bio on who you are, where you're come from, and what it is you're doing real estate.

Jason:

Sure. My name is Jason Bond, I'm an insurance commercial insurance broker with Roberts, Ryan and Associates based on Waukee. I currently write about 25,000 units in 30 states with my team and we specialize in the real estate space, specifically in small to mid-size landlords. So anybody that's got a small single family portfolio, kind of building that all the way up to some of my largest clients have maybe up to 1000 units but that's kind of the space that operated

Michal:

Right on and today, we're gonna be talking about a super-hot topic that's been popping up all over the real estate space, short term rentals. So I would love if you could just give us kind of a high level on what people need to be aware of what questions they should be asking. But maybe we could start with like, if someone's going to go get an insurance policy and they own like they own the property, its landlord, give us a breakdown of all the different types of policies they could get if it's your long term rental, and we can build up to the short term.

Jason:

Sure, sure, yeah and this is such a fast moving space, at least in the insurance world terms at the insurance market hasn't fully developed to take on the short term rentals. So it's still in flux and even if somebody listened to this five years from now, it's probably going to even be more, it might even be fully developed at that time who knows. But the way they traditionally the way that the insurance world works is a property in a sort of building the insurance policies based on the occupancy so you could have your homeowner's policy, a long term rental, you could have it use for business and retail, industrial, or basically any building depending on who's inside that's how the insurance company knows what policy to put on there. Okay, so traditionally, homeowners policies for your primary, primary home, okay, so if you're living there, 24/7, that's a homeowner's policy, if a traditional rental policy is based on either month to month, or annual leases, but the idea is that you don't have a high turnover of people. So all the insurance policies written out there that a landlord traditionally set up for annual leases and that's where some of these, the short term rental thing kind of came into play. All of a sudden, it, it kind of, it didn't match up the traditional, you know, insurance policy, you know, they're all legal documents that are all filed with the state and the insurance companies have to keep updating those and that's what we're going through right now, if it makes sense.

Michael:

Okay, it does make sense, but just a clarifying question. So you said either month to month or annual leases and so when we say the term short term rental, does that mean 30 days or less?

Jason:

Yeah, it means 30 days or less. I mean, I mean, there was a little there's a little give and take and a gray area there, it's the problem is, is along with the traditional landlord policy, if that property was vacant for more than 60 days, then you would default to what they call basic coverage, which means that we exclude theft, exclude vandalism, and exclude a lot of those items that still might on a short term rental, I mean, that style still might be present. So the short term rental policy picks some of those things up and that's really so that's why if you have a traditional landlord policy, and you're using it for short term rentals, even a month to month there, it's still really not the right fit and still create some gaps.

Michael:

Interesting okay. Well, I definitely want to circle back to that and what type of policy they should be getting. But curious, because, I mean, I always joke that I get to ask self-serving questions on these podcasts, somewhat like the house hacking, I own the property, I live in the property full time, but I rent out the upstairs unit and so should I be on a homeowner's policy or should I be on a landlord policy? What's right for you?

Jason:

So, so you should be because it's your primary residence, it should be a homeowner's policy. Okay, all right. Now, knowing that you've you've taken some time and you've traveled in been away from the property for quite a long time. There is also the next step where you can buy another basically, short term rental policy where you can still go visit the politicians The property and live there, but it's not your primary residence. So that's still like another step in the evolution. So if I if I had to talk through, like all the evolutions if you have a single family property, and you live there by yourself, that's a homeowner's policy. If you have a single family home, you live there and you got a roommate, you can add an endorsement to the policy, right? If you have a duplex, you live there by us, you know that your primary residence, and you have a renter upstairs, that's a homeowner's policy with a landlord endorsement on it. The next step is, let's see, you then sell that property or you move out of that property, you buy yourself another single family home, the house hack, that first duplex now turns into more of a either a short term rental property, if that's the way you're going to use it, or landlord property or policy, if you're going to go ahead and lease it out annually. So see, each time you take that step, yeah, in the occupancy changes, it does trigger a change as you should make on your insurance policy.

Michael:

Okay and that's such a good, I mean, good thing to know, cuz I think so many of us think, oh, well, our mortgage doesn't change if I move out of the property now rent it. But the insurance absolutely does, right. So this is a phone call, we should be making ahead of time with our agent and having that conversation?

Jason:

Exactly, I think a lot of people think that just because it's still in their personal name, they still have their personal mortgage on there, that they're all good. But again, the key thing you want to think of is, are you changing the usage or the occupancy of the house. And if so, you probably need to make some sort of adjustment on your insurance policy. I mean, all the products are out there. You just have to keep your, you know, as you're scaling up in this real estate, investor space, and you keep going working up your ladder, and keep leveraging, on every step, you do need to make an adjustment. It's your policy.

Michael:

Okay. Great to know and then kind of another hybrid of the hybrid question. So my situation I live permanently, it's my prime residence downstairs, I rent upstairs monthly, month minimums. But now let's say I want to start renting out the bottom portion when I go out on vacation for doing nightly short term rental, what type of policy or endorsement do I need then?

Jason:

So you get a short term rental policy, at that point…

Michael:

A totally separate standalone policy, or is that an endorsement that I'm putting on top?

Jason:

You could it all depends on the this is the space that's not fully developed, so you could try to go back to your homeowners policy and say, hey, do you offer that I'd say three fourths of them do not offer that type of policy, but then the fourth of the veal, like calm state farms, all states or whomever, a fourth of them may still offer that option to be able to short term your own units along with a duplex. So it gets you kind of get into that in that gray space in the bottom line is where's your primary residence…

Michael:

Got it, okay. ´

Jason:

…that’s what kind of dictates what your true that one.

Michael:

Okay, okay and if I do if the carrier that I'm currently with does not offer that type of policy change or endorsement, and I do need to go get a true short term rental policy? Is that policy going to cover me for when I'm living in the property as well?

Jason:

Some of them can you get to and, again, I hate to keep seeing endorsement, but you get to add the endorsement back on there that you will use it personally.

Michael:

So now I've gone back kind of the opposite direction.

Jason:

Yeah, yeah.

Michael:

It's okay. All right.

Jason:

Yeah and I mean, an overview as well as when you're in a homeowner's policy. That's, that's a personal policy, you know, personal homeowner's policy and then as soon as you move over to the 100%, where you are short term in both units, that becomes a commercial policy. So basically business usage and that's why, okay, now you have a business policy, but now I want to go back in and use it personally, it gets a little bit, you got to, again, add the endorsement to be able to be protected for that. Another thing that you want to think about, which kind of overlaps is if you just get yourself a renters policy for yourself, that will cover you, when you go back to that property, if you have to have it set up an LLC, on a business policy that will cover you for personal use there.

Michael:

Okay, so if I if okay, so the scenario is I've moved out of my primary, now I'm renting it full time and both units and I've got on a commercial policy and because I've moved out now, I want to put this property in the name of the LLC for business purposes and so I have the short term rental policy on that and for myself, I go get a renters policy and sometimes I come and stay in my short term rental and the bottom unit that renters policy is going to be effective for picking up some of the coverages there?

Jason:

Correct, correct because on a business policy, it the liability only covers that premises or that building. But from a personal standpoint, you know, you're going all over the place, and you need to have some that those liabilities, you know, picked up on your on prem. So when you go rent somewhere else, they're gonna say, hey, I need some proof of coverage to stay in my unit, that renter's policy now gives you the ability to do that, versus before when you had a homeowner's policy and a homeowner's policy would extend liability all the way over to wherever you're staying. So for instance, when I go on spring break with my kids, and I go stay at the hotel, my home Moroz policy is extending liability All the way to that hotel room.

Michael:

Got it, okay.

Jason:

Yeah, yeah. So you lose that when you go to a commercial policy and so, yeah…

Michael:

Okay. Well, for those people that are still with us, I hopefully we haven't bought it and went to tears. Jason, I'm curious if you could share with us what types of coverages we should be looking for an asking for on a short term rental policy, because, as you well know, there's all these different lineups and coverages and endorsements that you can add on your homeowners policy. So what do we need to be asking for on the short term side of things?

Jason:

So on the short term side, there's only a few companies that have a very robust, you know, policy. And some of those, some of those coverages, for instance, would be, you know, if you had jet skis at your rental, and at the short term rental, so think of a lake like, a bigger home that will have, you know, bigger, you know, let's say can can house 14 people or something like that, well, they're probably gonna have some parties.

So you can get all sorts of other business endorsements onto that, that location that you're not going to get with a traditional like State Farm or Allstate policy, that's going to give you what they call like liquor liability, you know, extension for for jet skis, or for the golf cart, or some of those other items. So if it's, if it's a much more robust, you know, short term rental, you know, it'd be like Orlando, or east or lake house, then you're gonna want to probably go with a little bit more of an expensive, broader short term rental policy. But if it's just in the city, and you don't, you don't have any of those other ancillary exposures, then you can go with this, most of these other smaller policies will, will take care of it. So Okay, hopefully, that that gives you some indication. But again, it goes back to usage and how, you know, what you're gonna be doing there, whether or not which endorsements will cover.

Michael:

Okay, that makes sense and I guess really, the best way to go about it is to chat with some of the folks that are that do have robust policies in this space, and simply explain to them, hey, this is the type of property I have and this is the type of usage that I envision happening there and then hopefully, that agent or broker can go and put us in touch with the type of policy that we should be is appropriate for the space.

Jason:

That's correct, yep.

Michael:

And that's something that you could probably help out with, right?

Jason:

I can, and then there's a couple options where you can go direct, but again, it's, I'd say, you still want to line up with the insurance broker insurance agency that specializes in that short term rental space, because they're going to be I'll tell you the difference, I'd say the normal home, a normal agent is not really going to know the difference between the two, it's, again, the whole space is still being developed. So most agents still don't know what they don't know, in the space.

Michael:

Yep, makes sense. And who are some of those carriers, agencies, brokers that you think have really robust policies in place?

Jason:

So the leader in the space is probably proper insurance and that's another option where you can go direct or some agents can also access their policy like we're contracted with them, their programs are always going to be it's going to have lots of bells and whistles, it's going to be a business policy is going to be probably the most robust out there and that's always going to be a little bit more expensive. But again, if you're going into a higher end, you know, short term rental property that's worth, you know, 500,000 or a million, I mean, some people go really, really nice with some of these. I mean, you definitely want to spend the extra money to get those, get that policy, and then probably in the competes, and everything is foremost, they're also the one that was one of the first in the space, and they can do it as well.

And then there's a lot of third tier players that for some reason, you're up in the mountains, and you know, in California and your high fire, high fire area or zone, then you may have to go to some of those third tier carriers, and they may not just have all the bells and whistles, but still can provide the coverage you need.

Okay, that's probably the one of the most difficult things right now is either if your coastal, I mean along the ocean, probably within five miles of the coast, or if your weapon mountains, not by a fire, fire department, those two spaces for short term rentals are difficult to insure right now and there's not much what we in the industry we call capacity, meaning nobody wants to write him. So and when that happens, I mean, it's just the price keeps going up. So if you're looking to actively look for properties, you know, here we are in March of 22, for the rest of 22. I'd say insurance premiums will be going up. So don't rely on what the previous person is stating their insurance cost was you're going to want to get that double check because the prices are going up.

Michael:

That's really good to know and your opinion with a company like proper insurance where someone could go direct, I can just call a proper talk to an agent and get coverage. I mean, why would someone go with a broker, like yourself or someone else they might know they could just do it direct?

Jason:

Yeah, I think it's the same way with going direct with any of the respirators like a, like a State Farm is, they're always gonna try to keep you in their box. So and they're very, they're still very limited to, you know, alternatives, unfortunately. So again, I do believe they do have the most robust policy out there, and I would recommend them. But they're not contracted with formal, so they're not going to as a second, as a second option, give them a quote, you know, the decline of coal to foremost, you know, versus a broker is going to give you those, you know, foremost proper, and also, maybe there's a third tier option, this is Hainaut, this property is, is not obviously not that nice, but doesn't have a lot of the exposures and maybe your investments not that great and you'll meet, you may want to try to at this lower end, you know, option meet every investor is different, every investor is getting different reserves, different controls in place and so a broker is going to be able to give you that wide range of options versus just calling and just getting the one thing done. In this, you know, this is the only option you could buy it or, or not.

Michael:

So, yeah. Okay, and quick little side anecdote, Jason is actually, you know, you are my insurance broker for a significant chunk of my portfolio and that was one of the best things about having you in my corner, as I said, hey, here's the portfolio, I want to get it recorded and you went to all these different carriers and said, hey, these are the kind of two best, in my opinion, let's focus on these, as opposed to me having to call all of these ones directly, if you can even access them, because some of them you can't even access without a broker, right?

Jason:

A …, correct. I mean, you got I mean, most, most programs are not going to go direct. For me, it's kind of somewhat of a new model where you can go to work and go direct to the, to the insurance carrier, I mean, we are moving that way. The only drawback is, is you just don't have that third party in there kind of guiding you saying this is what's good is what's what's bad. It's kind of kind of like going to the car dealership before a car dealership and saying, Well, is there anything better than a Ford and, of course, you know, and so you kind of get that same, that same experience that way.

So that's why that's what a broker will do for you, just like an independent financial planner will do. If they're not selling their own products, I mean, you just get that non biased view. So I wouldn't recommend that, you know, for anybody, and then you can still go direct and still compare those. The one other thing I'd say, once you go to just the same examples, like a financial planner, or independent broker is we can then establish what your hot buttons are, what you really want covered, and what's important to you, and then go to the marketplace with those things in mind first, and kind of put in your rack and stack the policies and the quotes from that standpoint, versus you get all these random people, you asked for a quote and now it's apples, oranges and grapes, you're comparing you can't figure it out. I mean, I have so many people will call a time trying to figure things out, or they bought all these policies, and none of them, you know, all the risk is different in each policy and, you know, their best property has a lot of risk and their worst property has no risk. You know, it's all upside down. So that's another reason to go to a broker.

Michael:

Yeah and is it more expensive going using a brokerage versus going direct?

Jason:

No, it's the same cost. So, you know, if you go direct, you know, just for instance, proper, I'm assuming that they just pay their salespeople, you know, whatever the commission is, versus if you go with us, we just get that commission. So it's the same price either way, with farmers foremost, you know proper…

Michael:

Awesome, awesome. Okay, geez, let's shift gears here just slightly and so if I'm an Airbnb host, I have insurance actually, through Airbnb, they have a million dollars in liability, they have their host damage Waiver insurance. Why do I need a short term rental policy, especially if it's more expensive?

Jason:

Sure. So sometimes those hosts policies will have exclusions when you're not using the property. So for instance, you have you know, you start you, you place your Airbnb, tenant, you know, whatever you want to call them, you know, the person checks in on Saturday, they check out on the following Saturday, well, the Airbnb coverage covers you during that week. But then as soon as that stops, you don't have the coverage. So you do still want to have your own policy, all encompassing. So there are some gaps and coverages that way.

It's the same way as getting into a car accident and say, well, the other guy's got insurance, and he's always going to be a fault. So why don't we just, you know, make sure he's got the coverage and always sue him off. The fact of the matter is, sometimes those claims get stalled out for years and if you want, if you want your property brought back up, sometimes you have to go through your own policy first, and then that your insurance company then sues the other insurance company, get the money back, in our business we call it subrogation, but they happens all the time. But that's why I would I wouldn't say that it's it's good to have there and it's good to mention because you will get you know priced, so you get the price break for having that policy in place. But it's not a it doesn't cover 100%

Michael:

Okay, hat's great to know. Because I think so I know I'm totally guilty of it. When I first started out, did Airbnb my property, I was like, oh, there's this coverage here what do I need this extra coverage for and ended up chatting with my agent who ensures that property? You know, again, no, this is like, you need more robust than that. So that's really good to know.

Jason:

Yeah, I think that's probably the problem in the space like I said, because it's been so it's still new in the intro. As far as the insurance world goes, I mean, the whole space really took off, like you and I were talking the other day and since 2016 2017, it just has blown up, it's like 10 times the size. So insurance for financial terms, like that's still a short period of time, you know, and people are still kind of figuring out insurance companies don't like to just jump in on a new risk without seeing a couple years of experience to see if they're going to pay in claim. So it's still developing and, you know, the important thing is just to keep asking, because I believe that every, every couple of months, new products are going to be coming out to new solutions, and more, more competitors are going to be coming into the space because so far, it seems to be a pretty, pretty profitable space you know, from the insurance carrier standpoint. So it should be here to stay.

Michael:

Okay and kind of on that note, Jason, just as a ballpark, if you have an idea. If I'm paying, you know, X for a traditional long term rental policy, what increase should I expect to see if I convert that to a short term? Do you have a ballpark idea?

Jason:

Yeah, so I think with some of the other lowering carriers, probably it probably be about the same.

Michael:

Really?

Jason:

Yeah, it's probably almost like a sweat. It's not to me too much more, right. Now, like what the proper because they're adding levels of the bells and whistles. For replacement costs. I mean, it's a it's a really nice policy that can that can go up to 50%, or maybe double, depending on how valuable the property is. The other problem is, is we don't know how the first person had it insured to begin with. So we don't know what the starting point is, I guess. But I would say maybe it could be anywhere from 25% to 200%. More, if you're really going, going all out.

Michael:

Okay, that's good to know.

Jason:

Yeah, yeah. But I would argue I mean, if you're, if you're going from an annual, you know, rental to short term rental, that's, if you're doing it right like that cost that additional costs should be way offset by the additional revenue that you're bringing in by the property. So it really shouldn't even be, you shouldn't be an issue, I should point to be honest with you.

Michael:

I agree, I think you and I view insurance as an investment, a lot of investors probably incorrectly view it as an expense. So I think that's…

Jason:

Right, right…Yep and just curbing the risk, you know, he's gonna get their risk off the table. So you don't have to write a check for 50 grand someday that you in that, right.

Michael:

So right. Yeah but Jason, this was super helpful. Any final thoughts for folks on the short term rental side of things?

Jason:

No, I would just say, you know, every time that every time you're making a change, and you're working your way up the ladder on the scaling up, just call your agent make a change and if for some reason, your personal home and auto agent just cannot help you anymore and they say, well, that's it, we can't do it, then it's time to find a commercial broker, and then start getting them to work on your account.

Michael:

Okay, perfect and for folks that have more questions that want to reach out to you and possibly leverage your services as a broker, what's the best way for them to get in touch with you Jason?

Jason:

Sure. You can reach out to my team at 494-270-6834 or jbott@robertsorion.com it's about what to buy with 3g Right on. You can put in the put in the show notes, right.

Michael:

Perfect can do.

Jason:

Yeah, buy a fourth for 14 members that all they do is work with my landlord. Clients constantly, constantly working through these issues. It's just a constant churn.

Michael:

Awesome, awesome. Yeah, I can. I can attest to that personally, you got really good response rate. So I'm all on board. Well, Jason, this was great man. Thank you so much for taking the time and we'll chat with you soon, I'm sure.

Jason:

Thank you, Michael.

Michael:

Okay, well, that was our episode. A big thank you to Jason for coming on the show and helping to educate all of us short term, landlord investors. Definitely get out there and take a look at what policies you have if you have an existing short term rental and if you're thinking about one, now's the time to go do your due diligence on some of the companies that are out there and policy types that are available. As always if you enjoyed the episode, please feel free to leave us a rating or review wherever you're listening or watching and we look forward to seeing the next one.

Happy investing…

State of the real estate market 2022 with Gary Beasley and John Burns Mar 31, 2022

John Burns co-authored Big Shifts Ahead: Demographic Clarity for Businesses, a book written to help make demographic trends easier to understand, quantify, and anticipate. Before founding John Burns Real Estate Consulting in 2001, John worked for 10 years at KPMG Peat Marwick—2 as a CPA and 8 in their Real Estate Consulting practice. John Burns founded the company to help business executives make informed housing industry investment decisions. The company’s research subscribers receive the most accurate analysis possible to inform their macro investment decisions, the company’s consulting clients receive specific property and portfolio investment advice designed to maximize profits.

Gary Beasley is CEO and Co-Founder of Roofstock, the leading online marketplace for buying, selling and owning single-family rental investment homes. Recognized as a leader in the future of real estate, Roofstock was featured on Forbes' 2019 Fintech 50 list. Gary has spent most of his career building businesses in the real estate, hospitality and tech sectors. After earning his BA in economics from Northwestern, Gary ventured west to earn his MBA from Stanford, where he caught the entrepreneurial bug and still serves as a regular guest lecturer. Immediately before starting Roofstock, Gary led one of the largest single-family rental platforms in the U.S. through its IPO as co-CEO of Starwood Waypoint Residential Trust, now part of Colony Starwood Homes.

In this episode, we discuss the current state of the real estate market and the economy more broadly. Gary and John share their thoughts on what has been happening year over year in the housing market; what 40-year highs of inflation, rising interest rates, and geopolitical unrest mean for real estate investors; and highlight some of the risks that investors are faced with today.

Episode Links:

https://www.realestateconsulting.com/

https://www.linkedin.com/company/john-burns-real-estate-consulting/

https://www.linkedin.com/in/gary-beasley-956647/

https://www.roofstock.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have two very heavy hitters in the real estate space. John Burns, CEO of John Burn's real estate consulting, and Gary Beasley, co-founder and CEO of Roofstock. So without further ado, let's jump into hearing their thoughts and opinions around what's been going on in today's real estate market.

John Burns and Gary Beasley so happy and excited to have you both back on the podcast. Thank you for taking the time to hang out with me today.

John:

You bet.

Gary:

Hey, Michael, great to see you.

Michael:

So I of course, know a little bit about both of your backgrounds and who you are. But for those of our listeners that might not be familiar with who you both are, if you could give us a quick two minute, two second intro of who you are, where you come from, and what it is you're doing in real estate and John, if you want to go ahead and start, that'd be great.

John:

Okay, I'm the CEO of John Burn's real estate consulting, I founded it back in 2001, to figure out what's going on the housing market for a lot of people, mostly big companies and that's what we do.

Michael:

Love it and Gary?

Gary:

Sure, I am Gary Beasley, I'm the co-founder and CEO of Roofstock and we've been at this for about six and a half years now. Building out really the complete ecosystem for single family rental investors and I've known John now, I think, John, since about when you started the company, it feels like we've known each other for a while we when we I think when we met we we both had dark hair. Remember that?

John:

It's been a very long time.

Michael:

That's great. Well, I wanted to chat with you both around a lot of things that I've been getting questions about, and I'm sure that the two of you have as well and that's just kind of what's been going on with the housing, market and economy over the last couple years since the pandemic started. So I would love to just jump into things get into the meat and potatoes and get both of your thoughts on really year over year, what's been going on at the macro level in the housing market.

John:

Well, I guess I go first, if you let me go back maybe three years, so but pre the pandemic because I think it's relevant. The housing market was extremely hot. We have a different view than a lot of people on on how undersupplied the market was, we don't think it was I just applied at all actually until about 2019, then it started to be under supplied and with interest rates. So damn low everywhere in the world, people had figured out that single family rental housing was a great investment just to get some yield and we were seeing a lot of investors come in to the market, then COVID hit so you know investors are very volatile. They stopped for a few months, and then they came back very strong and probably the biggest difference in the last year is the fear of inflation has piled in on top of the need for yield and it's double the reason to invest in rental homes. So we're seeing money from all over the world focused on housing in America.

Gary:

I would agree that clearly the residential market has been booming and I would say despite a number of factors that you would have thought might have slowed it down. We went through a global pandemic, and housing chugged right on through and we could talk later perhaps about why some of those things happen. But the reality is really kind of across price points and geographies. You've seen robust demand for housing and if you look at price increases year over year, John, I know you track the SFR space really closely and it kind of mirrors what's been going on even if you look at owner occupied sales, but home prices have been going up call it 15 plus percent, year over year, pretty consistently. That's a big number, when you think about historically, it's been about 4%. If you go back 40 years on a compounded basis. That's how it had been up until fairly recently.

So a lot of you know in rents have lagged that a bit but you've seen high single digit to low double digit rent increases as well in a lot of these markets and so in oftentimes, I feel rents are a little bit of a lagging metric because especially a lot of the mom and pop owners don't raise rents every year don't raise them, really even to market so we're seeing a lot of homes come to market today that have rents that are 10 or 20%, below where the markets are today. So, so you've got just a lot of demand for the product and, you know, we're at an interesting time now, and I'm sure we'll talk about, you know, some of the current dynamics in the market, interest rates have moved up quite a bit in the last, you know, month to six weeks, we've got a lot of interesting things going on geopolitically, we're not yet seeing that impact, demand or pricing. One would think that those factors should that have an impact over time. But for now, I think just the supply demand dynamics very, very much in the favor of demand over supply.

Michael:

Okay. Interesting and I'm curious to get both of your opinions on this, I mean, we are at such a unique time, kind of in history and curious to know your guys's thoughts on do you think that real estate investing fundamentals have it all shifted because of where we find ourselves today? John, I'll let you go first on this one.

John:

I don't know if the fundamentals have shifted, because I've seen this game before. But what is different is that by investing in rental homes has become a very easy thing to do, thanks to Roofstock and others. I mean, prior to 2012, you couldn't get on your computer and figure out exactly how much a home was worth and how much it could rent it for in about five minutes, you can now there's all sorts of vehicles where you can invest in funds and completely passively invest in housing and I think it's become an asset class that really was very illiquid, and pretty lumpy before that now has become more liquid and I think that is a permanent change in the market, doesn't mean things can't go down. But I think it's actually had a permanent positive increase permanently on home prices.

Gary:

I would agree with John, I don't think the fundamentals, I don't think the fundamentals of real estate investing have changed. But I would say perhaps some of our maybe preconceptions or assumptions about how it would perform is I kind of mentioned earlier, or maybe a little bit challenged, and that there's just so much demand for the product and in the pandemic. You know, it was almost counterintuitive that home prices would go up and rents would go up. But when you think about the fact that people really demanded shelter, safe shelter, and there was an exodus of from a lot of the coastal cities to secondary and tertiary markets drove a lot of that demand. So but I think still, the fundamentals of real estate are very much about location and supply and demand. Those things, those fundamentals I think are true. I think one of the things we're seeing though is perhaps there are different things get that can drive, demand and pricing for different types of real estate assets. So if you look at for example, housing, and industrial, which have done quite well, throughout the throughout the pandemic and the aftermath, and then you had some real estate asset classes that really suffered, because you look at office and retail and and REIT in hotels, things like that. So it's it. I think real estate broadly can be influenced by different things. The fundamentals of each have to be examined, but certainly for housing. It's been it's been very strong, despite what might you might have considered some some headwinds.

Michael:

Okay, interesting and you both touched on inflation in the conversation thus far and so I'm curious to know, how much of the demand do you think is being really driven by inflation? And do you think that folks are right or wrong to be considering real estate investing as a hedge or as a defense against inflation?

John:

People's expenses are going up and your investments should beat inflation and nothing in the treasury market does it in fact, nothing in the high yield bond market pretty much does it now too, I don't know how you earn returns. But this was going on pre COVID and that's why I mean that there was a surge of money coming into the market pre COVID. We at our conference at the end of 2019, we had Bruce flat, the CEO of Brookfield asset management, who at the time manage more than $500 billion was fundraising all over the world and he literally said that this is the most significant thing he seen in the last 15 years, is everything that produces cash is gonna go up in value, and that was pre COVID and so that this this has just got even more accelerated because inflation wasn't even part of the equation. Now if you're now if you need to beat inflation in your return and inflation is right now the latest print is seven 8% where you're going to get seven or 8%? And so housing, if wages go up which they are, you can raise rents, if the cost of the structure going up is going up, which it definitely is, every single component in the house has gone up, their cost of construction has gone up at least 10% in the last year. That's an inflation hedge too, because nobody's gonna replicate what you own for the same amount of money. It's very much an inflation hedge.

Gary:

Everything points toward continued inflation, in my view in the housing market. Now, that being said, interest rates going up, you would think should moderate that. That's an offsetting influence, but the cost of the inputs, the labor and the materials, clearly upward pressure, everything that's going on in the world, disrupting the global supply chain, and the cost of transport and all that putting upward pressure, Pete wage inflation to keep people in their seats, and to hire people. That's allowing people to have more and more money to spend on housing that's also pulling pricing up. It's hard to see how much that's going to, in an absolute basis reduce the price of housing, I do think that we will see some moderating of the rate of inflation of homes over the upcoming quarters and years, I think that 15% is gonna come down naturally. But I don't see, I don't see it coming down to the point where it actually reverses and you see absolute price declines, like we saw in that really unusual time in the Great Recession, which was, arguably a once in a generation adjustment to housing prices there. I think, a lot of fundamental differences between what we're seeing today and and what we saw back then this is not a credit bubble.

John:

So I agree with everything you said until this is not a credit bubble. I mean, maybe you meant a credit bubble on housing, because I agree with you.

Gary:

That's what I mean, I mean that there's a lot of embedded equity, as opposed to people, you know, having 3% or less equity in their homes, they've got 20 plus percent equity. Now, you can talk about the I wasn't speaking to the global kind of free money, credit bubble, but…

John:

Well, that's a I think there's a credit bubble going on in the world on pretty much everything else. I mean, Dodd Frank, made it impossible to do it on a mortgage going through a bank. But people are lending against crypto, it's the highest borrowing and stock prices ever. We're seeing deals even in single family rental that well, I would say are being done with pretty much no due diligence, because it's a mess piece. So there's a little bit of equity in front of me and what I worry about is a recession caused by a credit bubble outside of the housing market, which impacts housing demand and you know, that's when housing was struggle, but I think everything else in the world would struggle at the same time, maybe even more, so. So I'm not, I'm not saying get into stocks or bonds, because it's just that, that that's what caused the great financial crisis, and it was housing last time. I think it's other stuff this time. We were seeing flip flipper loans are being securitized on Wall Street. I mean, there's, you know, I see that in my business, one of my clients is lending against crypto balances. You know, I think another famous person just came out and said, if you've got if you can put up crypto, I'll give you the value of your crypto to make a down payment for a house, that there's some different stuff going on. That concerns me but not on buying rental homes or Roofstock more concerning on the economy.

Michael:

Okay and so curious, John, just, you know, personal thoughts. What's a good defense?

John:

You know, normally it would be cash, but holding on to cash it goes down 7% in a year. So I think Howard Marks who's a famous investors calls this an everything bubble. We're in an everything bubble right now and how do you invest in an everything bubble? I have no idea. That's why I run it…

Gary:

Maybe maybe negative interest rate German bonds don't seem so crazy.

Michael:

Yeah.

John:

Well, no, exactly. So, so if you're, if you know, in the coming world, losing 3% is probably a good deal relative to everybody else if that's if that's how that plays out.

Michael:

All right, well, keep both you keeping your eyes and ears peeled and let me know if you hear something great for hedge against the everything bubble, I'd appreciate it.

John:

Well, it's it's still specific. I mean, that that's what the smart people aren't doing. They're just, they aren't going to do just a sector. They're looking at everything carefully and in this industry, if you don't have a lot of competition going around where you're making investments, that's a far safer place to be if there's some great job growth in your conference. In a job growth because those employers are profitable and making money and going to be there all the time, that's a different story than the job growth being in a sector that's currently losing money, for example.

Michael:

That makes total sense, that makes total sense. I'm curious if we could take a step back and understanding that neither of you work for the Federal Reserve, but I'm curious to know your thoughts and kind of get some insight into? I mean, you talked about the wage growth going up, and then the cost of goods and services going up? How do we not get into this upward death spiral? And I know, Gary, you mentioned, you know, raising interest rates could curtail that, but it seems like there's just so much money out there how to, how do we kind of ease down from this?

Gary:

Yeah, well, I think there's it I don't know, if there's been a tougher, it's never easy being involved with setting Fed policy, but you have a lot of things to balance here. This is a tightrope act. So you want to slow the economy here, enough to curtail inflation, yet, not necessarily throw it into a big recession, you've got a lot of things going on overseas, that should you could argue are already going to cause things maybe to slow a bit because of what's going on over there. So do they need to pump the brakes as much here. So maybe that means that the Fed doesn't raise as aggressively here and what that may mean is, you know, rates grow a little bit more slowly and maybe the economy tends to overheat despite the global weakness. So it's a really, really challenging balancing act, I think that the Fed is under enormous pressure to curtail inflation and so I think, despite that, we'll probably err on the side of pumping the brakes a little bit heavier, even though that may mean we're risking recession. That would be I'd be curious, John, if you have a view. But if I had to, like on the continuum of what they're more worried about right now, normally, they're, you know, I would say that they've been historically more worried about not wanting to put us in the recession. But we've never, in a long time had these sort of inflationary pressures and in particular, where I think people feel it, it seems to be at the gas pump, right? We're always talking about fuel prices people feel that very deeply and there's a lot of political pressure, even though the feds, in theory, a political, political pressures tend to work their way into those decisions.

John:

Yeah and my 30 plus years of paying attention to this, I've never seen the Fed more politically tied than they are right now. They frankly, they seem to me to be puppets of elected officials. I mean, the fact that Powell had to announce for months and months and months, they were going to raise rates, but never raised them once until he got reappointed will tell you something. So I mean, I always honestly think it seems to me like elected officials are calling the shots right now and I think the ultimate fear is a recession or we want to get inflation down, because inflation isn't good either and then, you know, the way I think about this, too, is there's, if you really talk about people's true costs, there's a huge variation in inflation. So if you're a homeowner who owns your car, you know, your your housing costs haven't gone up at all, maybe you got a little bit of a property tax reassessment, you haven't had to go back and purchase a car or release a car and if you are close to work or working from home, frankly, your cost of living might be down over the last year or two.

If you're somebody who's commuting to work, Rance had to you know, really your lease was up had to get another car. I mean, your cost of living can be up to 15 to 20% and the Fed seems to be focused on those people, rightly or wrongly. But that that's how I'm thinking about this is it's a huge difference in what's actually happening depending on what you are, and then the wage growth. You know, if you're in the hospitality sector, you haven't seen anything. But if you're a construction worker or a truck driver, your wages are up dramatically. So and those are the ones I that we're seeing that are buying homes, renting homes, people that are affluent, able to work from home, hey, I can I can now go out to the suburbs and rent a really nice house and my housing costs are gonna go down, not up because my boss says I only need to come into work twice a week. So it's it's very complicated story on picture painting here, but that's exactly I think how the Fed is looking at it.

Gary:

Yeah. And then you also have, obviously those who own assets versus not I mean, this is similar to what John was talking about, but not only can you have the cost of living impacted a lot, a lot less if you own your assets. But in fact, John, you may know this figure I read it, I think last week, some fairly sizable percentage of the US population made more off of their homes this year than they did from their jobs. The power, the power in an inflationary environment of owning assets, it's kind of hard to overstate it. That I think one of the reasons, I think we're seeing more and more kind of first timers wanting to own their first investment property, even if they aren't in a position to own the home they're living in right now. Going to some of these lower price markets, and getting on the ownership bandwagon and just writing that asset appreciation. It's, you know, it's a powerful force.

Michael:

Yeah, absolutely.

John:

I think you were going to say, it’s a powerful drug.

Gary:

Well, some people do become addicted to it…

John:

We're starting to see that. So people are taking the $200,000 in price appreciation of their house with a refi out of their investment, and then using it to buy three or four more homes, right, that that's what's going on right now. So it is it is addictive.

Michael:

Yeah. That makes total sense.

Gary:

Yeah. Well, it's been it's been a, a tried and true, a tried and true way for real estate investors to make money, right is to buy that first property, refinance it, take that money, buy more properties and build. But I think, John, to your point, what's happening is, a lot of people are doing that with their primary home equity to get started, as opposed to being more of the intentional investor who just started to do that, I think more and more people are doing it with, you know, equity in their homes, which I think in many ways makes a lot of sense from a diversification standpoint, rather than having so much of your wealth, personally tied up in a single property address, where you happen to live, where you're really subject to the vagaries of your local real estate market, local job market, all that kind of stuff, because that's where you tend to work to diversify into other markets and other assets, I think does make a lot of sense.

Michael:

John, would you agree?

John:

Yeah, no, diversification makes a lot of sense. I just, I also think it makes a lot of sense to watch how much leverage you've got and to make sure you've got the cash flow, you know, just in case something bad goes wrong. And I think people that are investing like that, and doing exactly what you're saying, are going to be great. But last time, what we saw was, people just were ignoring that and then you lose your job, and then you lose your tenant, and you're your host. So you got you got to be careful here and I think the more I'm a generalized a little bit here, but the more mature people that have seen this before doing that, and I'm sensing the younger people only think home prices only go up and I are more willing to take more risk than I would recommend.

Michael:

John, kind of to that point. I'm curious to get both your guys’ thoughts if someone is taking out equity their home, because interest rates are so low, and they've seen the value go through the roof and they're going to go buy investment properties. What's the harm? What's the risk there? I mean, and how does someone know if they are over leveraged? If their cash flow is covering their mortgage payments? I mean, if the value dips, nothing really changes for them from a payment standpoint. So how should people think be thinking about being over leveraged or how much risk is too much?

John:

I mean, that's a very personal decision for folks. You know, confidence in your employment situation is probably the most important thing and depends on what you do.

Gary:

Yeah, I think, Michael, I mean, to your point, as long as they think it is an important point, in a rental home portfolio. Yeah, even if prices drop of that home and you've got a fixed mortgage, your payments don't change, right and unless rents come down, which they traditionally have not, they tend to be more sticky in single family rentals than say in apartments. We followed a lot of that data over time. So you should be okay. Even if on paper, the value of your home, your rental home has gone down. But I think in the primary residence, which is where John I think was going is if you let's say you have you know, 60% equity in your home and you lever it up to 90 through various means, then all of a sudden, you may be at a point where if you lose your job, and you don't have the reserves, you may be in a little bit of a tougher spot because you don't have that home equity to tap, which historically has just been a really nice thing to have as as a safety net and so when that if that were to happen you might have to sell some of your other properties or you have your equity elsewhere and it's not like you can't necessarily get at it.

But I do think in times where you do have some uncertainty, some global uncertainty and some things like that, having some reserves, make sense, not being over levered, make sense, play the long game, I think that's one of the things that we talk to people a lot about is, this is not a, you know, get rich, quick fix and flip, you know, strategy when you're buying investment properties?

Michael:

Are you serious?

Gary:

So over the long run, Michael, you're going to do just fine. But you have to be patient. So no, but there's plenty of there's plenty of ways you could make bats to win quickly win or lose quickly. But that's generally not what people are doing with us and I think there's times when people are more risk on is a lot of confidence to maybe lever up and things like that, I think this is a time to be more a little bit more thoughtful about all about leverage ratios and so yes, you give up some levered return, potentially. But if you're in a, I would argue if you're in a place where home prices are going up at such an extraordinary rate, you don't need as much leverage to get a phenomenal return. Even if you're only 50% levered, and your home's going up seven or 8% a year, that asset level, you know, obviously, you're doing much better than that, and the return on equity level, so I would say just don't get greedy. It's a long game and you know, make sure you're, you're around to, you know, fight another day, in case there's any sort of corrections.

Michael:

To play the end of the game.

John:

I mean, that that's the perfect, that's how I see it, too, is cut the long game. And that's how everybody who's been doing this for decades will all tell you that that's exactly the way to play it. I am I am seeing and hearing and running into 20 somethings who aren't listening to Gary's advice and I have no idea if that's 1% of the market or 40. But they're out there and fortunately, they're not getting loans from banks that 90% LTV, at least that I can find, so that's, that's good.

Gary:

I mean, Michael, you talk to a lot of people all the time, what is what is your assessment are people do you think people are thoughtful about this? Do you think that is? Do you agree with John, that people who might not have seen a down cycle might be overly optimistic or do you think that they're better informed?

Michael:

Yeah, you know, I think it's really a mix of the two, I think that there are two big camps. One camp says this is going to go on forever and that tends to be the folks that haven't seen a recession before and then there's the folks that say, you know, we're it's got to come down at some point and so let's just kind of see what happens and those tend to be the more seasoned folks. So I'm curious, I'm curious to get your guys's thoughts on for those two camps and someone who's just trying to get started trying to get their foot in the door? How should they be thinking about that, is this something that they can kind of catch on the upswing or is do they really need to be a bit more timid and reserved and say things are maybe a little bit too hot right, now let me let me just take a seat on the sidelines and see how this all plays out?

John:

So we've been calling this the high risk high reward the part of the cycle now for 13 months. So I would have told you 13 months ago to be cautious and the person who would have taken a lot of risk what I made far more money than the person who listened to me so but that's how these things play out at the end at the end of the cycle. When you take a lot of risk you should make a lot of reward right? But you know, you also need to know when to take some chips off the table you know, unless you believe we're never going to have a recession again which I don't believe that and then also what Gary said has been very true for single family rental rents. The rents have been very stable over time compared to apartments because there's basically been very little construction of rental homes forever and there's always been a ton of construction in apartments and that's when you get hurt killed is when you know three huge apartment complexes open up down the store down the street totally empty and have to lease up 500 units you're done that even though billed for rent is growing pretty significantly in Phoenix right now it's still a lot smaller level of supply than apartments. So this is a more stable investment than comparative some other rental classes for sure.

Gary:

Yeah, it's it's really we like to say it's a lot easier to go up then sideways because if you could you go vertical with apartments and it takes a lot more land and it's typically much more difficult to add the single family rental supply and then over time, you also have more than one on exit on the on the rental homes because you could you could exit to a yield investor or ultimately, an owner occupant. So that's I think one of the things that I've always liked about single family rentals is you've got built in optionality. It's very rare in a real estate investment, to have two very distinct buyer sets on the back end, right. You have an office building, you're going to sell it to an office investor. Same with a hotel, they would, but so this is, you know, I think a unique aspect of single family rentals, which gives, you know, it kind of gives investors a bit of a of a hedge.

Michael:

Yeah, that makes total sense. Curious, what do you tell investors who come to you and say, John, Gary, you know, I can't seem to break in, all my offers are getting outbid by all cash offers that are 10 to 15% above asking, I can't go that hi, how can I get my foot in the door? What should I be doing? What tactics should I be using?

John:

I mean, I might be the wrong person to ask because my clients tend to be very large companies, and this is for their capital partners, this is less than 10%, or maybe of what they're investing in the spectrum of certainly less than 20%. So they may be all in in this industry. But it's it's not, what you're alluding to, is maybe somebody with 100% of their net worth or 80% of their net worth getting in. That's, I don't advise on that, I mean, people are building rental homes, with the appropriate amount of leverage in good locations. That's where we're coaching people to go, there's also people building rental homes, with a lot of leverage in tertiary locations, right, where there's a lot of other construction going on and that that would be to me a higher risk scenario. I think I think there's room for 100 unit rental community, brand new built in every city in America of size, because you can pull it there's 1000s of people that rent ratty old homes with lousy landlords, and there's a percentage of them that would really love to rent something new. Well, and what's your biggest fear is the tenant that said, they're going to sell the house you live in it, you're gonna have to move out? Well, you know, if you're in a rental community that's owned by a public REIT, they're not selling the house, you know that that fear is gone. They may charge you a little more, because it comes with better service and other things. But I think that's a tremendous long term opportunities to build rental homes.

Michael:

Interesting perspective, Gary?

Gary:

Yeah, well, I would say, people should do their research, and be patient, be opportunistic, but but not be afraid to act with conviction when they find things that make sense for them and so I think, what we find is, on Roofstock, a lot of times people will come and they will look at properties for months and months and months and talk to people and kind of develop their strategy and eventually, something is going to hit your radar, that's going to check most of the boxes and in this market when that happens, as long as you've done enough work to kind of know this, then be ready to act, you know, I wouldn't recommend somebody come and buy the first home they see because then you're not you just don't have enough data. But when you see where these things are trading and all that, and so that's why I say you know, be disciplined, but also act with conviction, when you find something that does work if you do want to get exposure.

Otherwise, you could sit back and just sort of watch things. But you can also wait a lot of times with stock market, also people want to buy on a dip and just wait, maybe there is a little bit of a correction and that could be a time for people to want to wade back in. The challenge with waiting for a dip is, as John pointed out, there just hasn't been even throughout COVID there's been no dip, it's just, you know, been up into the right and, and so, you know, I don't recommend people just, you just buy because of the momentum, right? You want to, again, you want to feel good about the markets you're buying in and the home that you're buying. But also, it's really hard to time a market. It's just it's almost impossible. So heard that that's why overtime, we recommend people not, you know, even if you're only in a position to buy a home now once but, you know, have a design to own a portfolio of them over time and buy them at different points in the cycle and over time you get that market exposure. It's just, it's hard to time your ins and outs perfectly.

Michael:

Yeah, yeah. Okay, cool. Well, I'm curious now to get your guys’ thoughts and opinions looking forward, which I know is always a dangerous thing to do, but I'm going to ask you both take out your crystal ball and in talking, John, you mentioned about new newly built homes built to rent communities and so I'm curious to hear your opinions around, if the housing starts that we're seeing, since COVID, are going to have an impact, you know, several years down the road 8-10, you know, 5-10, eight years down the road, kind of like we're seeing now, as a result from the 2008, lack of home starts.

John:

Yeah, we've done more research on that than anybody else. There's a couple people with some very simple analysis that says we're short, about five to 6 million homes. I think we're short about 1,000,007, which is still a lot of homes and that's not the same shortage in Buffalo as it is in Dallas. So you know, this is we've got the numbers by market. But at a high level, if we're short, 1,000,007 homes, there's 1,000,007 homes that have brand new homes that have paid for our permit that haven't been finished yet. So we've got all of that under construction and it's taking about nine weeks longer to build a house for the best production builders in the country. So this is taking a very long time, so it's going to be at least a year before we satisfy that, because there will be some growth along the way, too. So I'm not what is different about this cycle is the lack of construction. But what I want to point out is there's this notion that the low level of supply just means that this is almost a sure thing and I think the most important thing for housing has always been job growth always, even rates can go up dramatically. But if everybody's got their job, okay, we're, you know, maybe prices will be flat for a while, but we'll be fine. It's when you see massive job losses that we cycle down hard.

So that's why I was I was bringing up earlier the whole credit cycle issues. You know, know, if we if we knew exactly how much debt every company had in every industry had and how much they could cover their cash flow, I think I'd have more certainty. Some analysis I've seen is there's quite a few publicly traded companies that aren't currently generating enough cash to pay their debt service. That makes me concern they're not in the housing industry. In fact, the homebuilders have never been better capitalized like, they're amazing. They have the lowest debt levels ever and the bonds that oh, yeah, and the bonds they borrowed, they don't mature for like four or five or six years. So I mean, the homebuilt talk about a safe play, in terms of going through the cycle, I think it's the builders. I'm not recommending stocks, because I don't do that for a living, because I think all of this is priced in. But I'm telling you, publicly traded home builders are very, very strong, right now.

Gary:

Yeah. You know, it's interesting, because John does such good research. So I have no reason to doubt the million seven. But I have seen, you know, estimates between four and 6 million homes deficit in in. So I don't know what the right number is and I'm sure that the method, there's methodologies that but but it's still, it's a couple of at least a couple million homes. The question is what, you know, what does that mean, going forward? Do we catch up as quickly? Can we catch up in a year or two?

That's, I think, optimistic. I think it'll be interesting to see if we do. One of the things that John mentioned was job growth, and that historically has been a real driver. What I think is so interesting now is jobs are so distributed and because companies are adding jobs doesn't mean the jobs are going to be where the companies are located and that kind of makes everyone's head explode. If you're trying to forecast, what's the impact of job growth, it really comes down, arguably, more to population growth. So local jobs are one thing and some things have to be localized, right? If you're going to work at a hotel, the hotel is in a particular place, if you're going to be a software engineer, working for Apple, you know, maybe you could be anywhere or any of these other places and so it's a it's a different calculus than I think it was 10 years ago of treatment, trying to forecast job growth from companies and then okay, well, people are going to need to live within a 30 minute commute or 45 minute commute it that's all upside down. So I think it does bode well for some of these secondary and tertiary places that have seen disproportionate growth. But then you also have these places like in Austin that continue to explode and arguably housings no longer very affordable but they keep building more houses and people keep buying them and keep renting them and there's plenty of land in a place like Austin and so I think almost looking at where taxes are low, and people can still get relatively affordable housing almost seems to be more powerful than local job growth. But I'd be curious about, you know, John's view of that.

John:

No, he's right. There's a there's a large sector of the economy where you can live wherever you want and I mean, we, we've been doing this since before COVID, as I was never, never believed that all the best people to hire on the world, we're always within commuting distance in my office. So we've been hiring in good locations, and but you got to get the right person who can do that and companies have figured that out now. So your it is about a great location, it is about where I can get a lot of house for my money if I'm a tenant, or if I'm a homebuyer or I can pay lower income taxes, or I can have better weather. So it's really the same place as people were moving pre COVID. It's just more people have been given the permission to move. So you're right, the job growth. It's pretty correlated to the metro area. But I would say the more outlying areas should see more price appreciation, and they are seeing more price appreciation right now, because more people are being allowed to go there.

Michael:

Okay.

Gary:

Yeah and it's almost interesting. It's a little bit like the job, the jobs are almost coming with the people. So you think of a place like Boise, Idaho, where people move there not for jobs, necessarily, but because they could bring their jobs with them and they all had all this embedded equity in their homes for more expensive markets. So now you have all these people moving into a market like Boise, and you get incredible growth in the prices of homes in Boise. But now people are working from Boise. So are those jobs created in Boise are there jobs that now exist in Boise because it was inexpensive, and it's a nice place to live?

Michael:

Yeah, I was gonna ask John, does that make it kind of squirrely to nail down that job growth metric because of this new phenomenon?

John:

Yes and no, so there's two jobs surveys, there's one where they call the employer and said, how many people did you hire this month? That's based on where the employer is located. But the one where they call people and say, are you looking for work or not, that comes up with the unemployment number, that's where you live. So actually, we always triangulate the two. So I'll use my example. So we perfect example, I'm in Orange County, California, we hired somebody in Boise, but she could live anywhere. She's showing up on my here in Orange County on one survey, and she's showing up in Boise and the other, so you just you need to look at both the sample size on where the company's located is higher and better and the unemployment number at the Metro levels more volatile. So you got to look at a trend over time and not just overreact to a month or two.

Michael:

That's super interesting. Okay, and great to know, too. So, the last question I have for you both, and I think I already know the answer. But for everyone listening, I'm gonna ask on their behalf and your guys’ opinions, have there been asset classes that have become more valuable and less valuable as a result of the pandemic and if so, what, in your opinion, are they?

John:

You can handle crypto, Gary. I am not going to touch that one.

Gary:

Why don’t you start then?

John:

As I as I said earlier, I think new technology which was not around prior to 2012, has allowed the single family rental business to just blossom permanently And it's, it's now gonna be a permanent part of people's portfolio passively investing in real estate And that has already pushed up prices more than it would have been going forward. Whatever price appreciation would have been otherwise, it'll probably push it up a little bit more. The only thing you have to concern to certain yourself where there is, you know, the government doesn't like that And they tend to be pro homeownership. So you gotta watch regulation. I am seeing a lot of our clients tend to avoid California because they're afraid of rent control. So and there was just a Bloomberg article that 12 Different states have had rent control proposed because of all of this. So you just got to keep your antenna up on on that side. But the rent control is being proposed seems to be more reasonable. It's at the rate of inflation or maybe 1% higher than that, that you can raise rents. It's not, you know, zero or something ridiculous.

Michael:

Okay and what in your opinion has been devalued or become less valuable, if anything?

John:

Um, I can't think of anything that's become a …Cash!

Gary:

It's it makes sense, right? I mean, you're you're losing. I mean, John, John mentioned, if you're literally if you have money sitting in your checking account, right now it's point 001% and we've got 678 percent inflation, that's how much you're losing by sitting in cash and so that does create a risk incentive to put it somewhere. And you know, I would say, Michael, I mentioned this earlier, but I think housing and industrial, which is driven a lot by distribution for E commerce, a lot of those have been really darlings of, of, for investors, they've become very much in favor and I do think you're still seeing some challenges with in some questions about office space demand and you know, not that there aren't always office investors, and there are always going to be people in offices, but there's probably structurally some percentage of less space that companies are going to utilize and so that puts maybe some uncertainty into the minds of investors, if there's another I think, I think a lens people investors are looking at today is okay, there's going to be another pandemic someday, what are the likely implications of this and, you know, office, retail, traditional retail was hurt by the pandemic, but it was also being crushed just by Amazon, right, and so you, so that's, I think, got its own challenges. And then hospitalities is very cyclical anyway, if people stopped traveling, you know, they didn't travel for a while.

So those those I think are, you know, maybe a little slightly more challenged than housing, which is, which has proven to be much more resilient than, than I think most people thought and, as a consequence, you have a lot of a lot of investors, not just, you know, traditional or not just individual investors or institutions from here. But yet people from all over the world saying, well, US housing looks pretty interesting, relative to other places that they could invest.

Michael:

Yeah.

John:

There's something we take for granted here called Title laws that don't exist in other countries. I mean, people in other countries don't want to buy real estate there, because the government could take it away from them. You know, and I hear that from foreign investors. That's one of the things that they love about investing in America.

Michael:

Pretty scary notion if you had to be overseas

John:

…Or get I should have mentioned everything that Gary said to I mean, there's a lot of huge funds, pension funds, who like to put a percentage of their assets a 10% in real estate all the time, and it would traditionally go into retail and office and hotel. Do you think they're ever going to go back to the same percentage of retail hotel and office? Probably not, it's going to be far more in this business. Because retail is now industrial. I mean, it's a warehouse and in line, you know, the best retail centers are all going to be fine in the best locations, but they're in line space is dead. So, so you're right, that's gonna push more money into our business.

Michael:

Okay, well, guys, this was super informative. I know I had a lot of fun. Hopefully our listeners did, too. If people want to learn a little bit more about each of you, where's the best place for them to do that?

John:

Oh, we've got a website https://www.realestateconsulting.com/ I post pretty regularly on LinkedIn. So you can look up John Burns on LinkedIn and get some free stuff every day.

Gary:

I love the free hoodie that you got right there, Michael. John, I know you've got a Roofstock hoodie as well. I don't know if you ever wear it.

John:

I do, I should have bought it today, I'm sorry about that I should.

Gary:

So yeah, I think I would just encourage people, if they want to learn more about what we're doing at Roofstock just come to https://www.roofstock.com/ you could also follow me or hit me up on LinkedIn, I post pretty regularly there as well. But yeah, and keep checking out the podcast I know Michael's been doing a great job along with Pierre and the rest of the team here trying to get they couldn't get any interesting guests this this time so they got John and me but I know they've been otherwise doing getting some pretty interesting folks and doing a great job.

John:

Well I saw that you're then the one of the top 1% of podcasters in the world. Hopefully we didn't push it down to 2%.

Michael:

A filler episode though this this was great you guys. Thank you so much for taking the time and I very much looking forward to chatting again as we continue along this crazy trajectory that we're on.

Alright, everyone that was our episode, a big thank you to John and Gary for taking the time out of their extremely busy schedules to hang out with me and chat about what's been going on in the real estate market and where we might be headed going forward. As always, if you liked the episode, feel free to leave us a rating or review wherever it is you get your podcast, and we look forward to seeing on the next one. Happy investing…

Rachel Richards on what it really takes to succeed with syndicated deals Mar 29, 2022

At age 27, former financial advisor Rachel Richards quit her job and retired. She now lives off $15,000 per month in passive income. Rachel Richards is the best-selling author of “Money Honey: A Simple 7-Step Guide for Getting Your Financial $h*t Together.” She is an entrepreneur, professional speaker, and investor. In her newest book, "Passive Income, Aggressive Retirement," Rachel dives deep into the topic of passive income and financial independence. She explains why building self-sustaining income streams is so brilliant. She outlines 28 different passive income models and how to start creating them.

For most of us, retiring at 27 sounds like a dream, and while it may seem unattainable, it’s certainly not impossible, as we learn from Rachel. In today’s episode, she sheds light on how real estate played a key role in achieving financial freedom. We learn about her real estate journey so far, the metrics she focuses on, and how she ensures that a property will ultimately be a worthwhile investment. Although the rental income she makes from properties is now passive, Rachel does not sugar coat the effort it took to get her into this position.

Episode Links:

https://theshorttermshop.com/

https://www.instagram.com/moneyhoneyrachel/

https://www.moneyhoneyrachel.com/

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Transcript

Michael:

Hey everyone, coach Michael here from the Roofstock Academy just wanted to let everyone know we had Avery Carl on our show a while back and she was talking to us about short term rentals and she was actually kind enough to host me on her show as well. Theshorttermshop.com you can find that anywhere you get your podcasts, and I did an episode with her and it's titled dig your well before you're thirsty. We're talking a little bit about my story and some of my coaching background. So definitely go check that out. We want to support her show as well. You'll find the link in the description right below. Let's get back to the episode

Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have a very special returning guest Rachel Richards of money, honey and today Rachel's talking to us about syndications and also her thoughts, predictions, and where we are in today's market. So let's get into it.

Rachel Richards, thanks so much for coming back with me and hanging out. I really appreciate you taking the time.

Rachel:

Yeah. Thanks for having me again. This is so fun.

Michael:

Oh, my pleasure. You're one of the really fun one. So we're happy to have you back and so excited to hear and chat with you today, because we're talking about syndications and the current market conditions. So definitely, definitely excited to hear from you. For maybe our listeners that aren't familiar with what syndications are, can you just give us a quick two second definition? What is it, how do they work?

Rachel:

Absolutely! Real Estate syndications are one of my favorite things to talk about right now. So let's say there is a $10 million apartment complex, and an investor wants to buy it but she can't afford it, she can form something called a syndication. This allows her to raise money from private investors, people like you and me. So we can pool our money together to buy this large piece of real estate that otherwise we all might not be able to buy. So we can pull our money together, buy this piece of real estate, the cool thing is we are not lending our money to this syndication or to the syndicator. So we're not earning interest, we're actually part equity owners in this syndication, which means we are entitled to a share of the profits. So and the other cool thing is we're limited partners, we are very passive investors. Once we do the due diligence, and we find this indication, and we analyze it and we send in our money. That's all we do. We're not managing tenants, we're not overseeing renovations or day to day operations, you just sit back and you collect a monthly or quarterly cash flow distribution and if the property's ever refinanced or sold, you get to share profits at that point as well, in addition to all the tax benefits you would normally get by owning real estate. So I'm super excited about them. It's one of my favorite ways to invest in real estate and one of the most passive ways I have found to own rental property.

Michael:

Yeah, really sounds like it and so it sounds like you kind of meets all the definition of criteria of true mailbox money.

Rachel:

Absolutely. It's definitely actual mailbox money.

Michael:

That's awesome. All right, so let's dive a little bit deeper and talk about, you know, what are the mechanics involved behind actually getting involved in one of these syndications? Because I think a lot of people when they hear the word syndication, or they hear 10 million or $100 million apartment complex, they think, well, not for me only for somebody else. So how does somebody get involved with participating in syndication?

Rachel:

The first thing to be aware of is, you really need to find a good syndicator and people refer to syndicators as different things, sponsors, operators, general partners, GPS. So all those terms mean the same thing. I've heard way a lot of horror stories about people sending in $50,000, to a syndicator. And then the syndicator running off with that money and it's truly scary. Yeah, it's very easy to get scammed and the thing is the syndicator eventually gets caught and gets thrown in jail, but investors typically can't recoup their money. So it's very scary, I don't know anyone that's personally happened to you, I've just heard about this happening online, and, and whatever. So you really need to find a trustworthy syndicator. This is a lot of money that you're sending to somebody, and you need to find an experienced and qualified professional. So let me put it this way, if you're going to spend five hours doing due diligence, make sure you spend one or two hours analyzing the deal itself, and you spend three or four hours doing the due diligence on the syndicator the person you're sending your money to.

Michael:

Okay. That's a great way to say it. So really, we're evaluating the person or the operator of the company much more so than the deal itself.

Rachel:

Absolutely. Because they're the ones who are ultimately in control of this asset. They're going to be overseeing the renovations managing the tenants. They did all the underwriting there anyone who found this deal negotiated this deal and they're going to be managing it the entire way through until you sell the property. You don't have control as a passive investor, you're not making decisions. So you need to trust that they know what they're doing. They're knowledgeable and they're going to get you the returns that they promised you.

Michael:

Okay and you bring up such a great point that they are the ones kind of steering the ship and they should hopefully be the one ones who are experienced, I think of myself as a semi experienced person on the spectrum definitely on the on the ladder on the lower half of the rung when compared to operators and syndicators. But if I'm evaluating a deal, and I'm seeing numbers that really don't make sense to me, or I would underwrite it differently, I mean, how scrupulous should I be underwriting their deal, if they're the operators, they're the really experienced ones doing a massive deal.

Rachel:

I would be very scrupulous, especially if it's your first deal that you're doing with that syndicator. So I'm the phrase verify her trust, verify, trust, but verify definitely applies here, I'm always looking at their assumptions, and then double checking. So when you are first looking at investing in a syndication, you will get a deal from a syndicator and they'll send you something called an investor deck, and it's normally a 30 or 50, page PDF presentation and shows you the property and not the pictures, the pictures, the financials and the comps and all this data and that's kind of what you have to review and to make your decision based off of, I'm going through all this data and I am asking myself, do I agree with that? Do I think that's right, do I think that's reasonable?

So there's a few, there's a ton of things I look for. But here's an example: A lot of syndicators who are not as experienced might put in a really large year one rent increase, whereas more experienced syndicators will gradually increase the rents over the three or five years of the hold up the investment term. So if you see, all of a sudden they're going from, you know, they acquired it in year zero, and they're increasing the rents up to the full max amount that they are projecting right away in year one. That's not a very reasonable projection, or a reasonable assumption. So that's something to look out for. Another thing is to just double check the comps in the area, they will have their own comps of you know, here are some of the other, for example, apartment complexes in the area. Here's what they're renting for. Based on these, here's what we think ours can rent for, I would just double check those, make sure the data is accurate. Make sure it's up to date, and they're not pulling comps that are from a year ago, or they're not pulling comps that are 20 miles away, you know, just again, trust but verify.

Michael:

Okay, that's so good. That's so so good and I've seen a lot of the syndication, offering memorandums or pitch decks that that I've personally seen, we'll have like a deal track record, showing some of the other deals that they've done and what the returns have been and compared to what they were projecting. Is that something to expect from a syndicator? Is that something that you should have to go get on your own?

Rachel:

I think it's something to expect and if it's not shown, I would certainly ask for it. I am very hesitant to invest with a syndicator, who hasn't already exited multiple deals, because then it's really hard to see what has his returns actually been that he's gotten for his investors or for her investors. So what that means if somebody has exited a deal is that they've purchased the asset through the syndication, and then three or five or 10 years later, they've already sold the asset. So all their investors’ money have been returned. They know for sure what the actual return was compared to the projected return. The numbers are there, it's it's very black and white and when a syndicator send you those exit deals, it's very clear how the syndicator is doing. Now, here's the thing you want to ask them, though, is hey, are these are you showing all of your exited deals? Or are you just showing the best ones, right? Because they have a good one, they might only just show you the good ones. So one of the best questions I ask any syndicator when I'm sort of interviewing them or screening them is hey, what's the worst deal to date that you've ever done? And how did the returns compared to what you projected? What happened? What did you learn and what are you going to change going forward?

Michael:

Oh, that's so good. That's so good and when you're interviewing and screening these folks, are you actually getting the main operational team? Are you getting their sales kind of inbound leads person that's going to tell you what you want to hear? I mean, how far up the food chain so to speak can you get with these some of these folks.

Rachel:

You get the main syndicator you get the head honcho, so I'm not I'm never I'm never delegated or relegated to somebody, that's the sales person or the investor relations person. I'm talking to the main syndicator the main sponsors putting together the deal, and that's always who you should expect to talk to.

So basically, I go in anytime that you are introduced to a syndicator or you meet a syndicator, they should always be asking to have a call with you or to have a zoom with you have some type of initial 15 to 20 minute conversation. I feel like it's a red flag if they don't, first of all, a lot of them are required to have some type of preexisting relationship with you before advertising their deals to you. That's an SEC regulation for a lot of not all the time but most of the time, so keep that in mind. If they're not requesting an initial phone consultation, I think it's a red flag and even if they're not required to, it's nice to know that somebody wants to get to know you. They want to get to know your goals and they're giving you an opportunity to get to know them as well and to get to ask them about their experience and their history and what kind of syndications they do. So I think that's a really positive thing when they make the effort to set up a phone consultation with you.

Michael:

Oh, that sounds so good as well to keep an eye out for all these great like red herrings kind of gotcha. things to look out for, I think is great.

Rachel:

Yeah, it’s lot of them.

Michael:

It's, it sounds like there's a lot of them. Yeah and so what types of because I've seen that there are syndications for all kinds of different deals multifamily, industrial, self-storage, what kind of syndications are you investing in, it gets you excited.

Rachel:

There's so many there are multifamily mobile homes, self-storage, industrial, office, you could kind of syndicate anything, I think, I don't think anything's off limits. The ones that I personally invest in or multifamily, because I'm very familiar with him having on so many multiple multifamily rentals myself, I had a portfolio of 38 doors at one point, by the time I was 26. So being able to analyze those and trust but verify those, it comes very naturally to me. Also, mobile home parks, I think are such a great opportunity right now. It's a supply and demand thing. There's a limited amount of mobile home parks in the US and they're not allowing anyone to create more mobile home parks. But affordable housing is very much needed. So I think mobile home parks is a really great opportunity and then self-storage, I think is a great place to be in because it's another supply and demand issue where there is not enough self-storage for people and people just continue to need a place to store their stuff. I have a self-storage unit, so

Michael:

I do too.

Rachel:

Yeah, it's like oh, my gosh, we've just been on the road and traveling since May. So it's killing us. They raised our rates by $30 a month and it's like, what what can we do, you know…

Michael:

You don't really have much of a choice.

Rachel:

You can literally just raise rates on you. So anyways, I think it's a really awesome investment opportunity. So I'm looking to get into that and one of my more unique syndication investments that I'm in is a laundromat in California, which is totally random. But I love that because when you don't have tenants, same thing with self-storage, there's no evictions that you have to go through. So there's no you know, landlord tenant rights issues and that's probably one of the only ways that I would want to invest in California is knowing that I'm not going to have landlord rights being restricted. So with a laundromat, there's no tenants, and it's actually been one of the best performing syndications I've invested in so far.

Michael:

Really?

Rachel:

Yeah.

Michael:

Yeah, that's wild. So are you participating in like so the syndication owns the land or the physical building and the business are or they're leasing to a business?

Rachel:

Yeah, they own the property on the business.

Michael:

Okay. Oh, interesting.

Rachel:

Yeah, it's super interesting. So my cash on cash return. I just looked actually this morning. My cash on cash return on that one so far has been 22%. Yeah.

Michael:

Holy smokes!

Rachel:

I know.

Michael:

And what about rejecting?

Rachel:

I think about the same, so.

Michael:

But wow. I guess I've heard are like big businesses.

Rachel:

Yeah, it's crazy. That one, I was started in November 2020. So so far, it's been amazing.

Michael:

Nicely done. That's awesome. Good for you.

But yeah, I'm talking back to the self-storage thing. I remember walking in, like, looking around thinking, there's no people here. But there, everyone's paying rent, like all of these units with locks in them are paying rent. It's incredible. No pipes to fix No tenant repair calls to worry about. So I'm like, I think it's a really interesting opportunity. So we were talking about at the beginning of the show how syndications really are the definition and embody so much of what people are searching for in terms of passive income or mailbox money. So it's passive investment, we get a lot of the tax benefits. We get a lot of the upside potential on the exit whenever that happens. But one of the things that we have with direct ownership, as you're very familiar, is loan pay down or leverage and so is there a way to really utilize leverage in a these types of syndication? Can I go to a bank and say, hey, I'm going to go invest in this deal can you give me a loan for it? How does that work?

Rachel:

You know, that's a good question. I have never tried to do that. So my answer is that I'm not sure. I would have to get back to you on that.

Michael:

Totally.

Rachel:

Um, yeah, I don't know. I mean, I think it depends on the bank, you might be able to do with the hard money lender. That's a that's an interesting concept to look at. But, you know, one thing I do want to say about syndications, we've talked about a lot of the positives and I don't want to make it sound like it's this amazing thing.

Michael:

The silver bullet.

Rachel:

Yeah, like, oh, everything's perfect. There's a lot of cons as well, there's a lot of drawbacks to syndications and I'll list a couple of them. But just like with any investment, there is risk involved, right? Anytime you invest in something, whether it's the stock market or your own rental property or, or anything, you could lose your money. So it's the same thing with this, you could lose your money. And I also think it's a little riskier to because you're trusting another person, right?

It's not like you're relying on yourself, you're relying on another person. So, so there's risk. Also, another con is, I don't really think it's for beginners, this when you invest in a syndication as a limited partner, this isn't something that's for beginners, you really need to have a lot of knowledge and it's better if you have experience to it's better if you've already invested in your own rental properties, because you'll be able to do better due diligence, and you'll be able to do better analysis. Another con that we've already talked about, you have less control, you're not making decisions, which is both a pro and a con, right. You want to be a passive investor, but you have less control over how things are going. If things start to go downhill, there's not much you can do about it. If you notice the management is sliding and people aren't doing a good job, there's not much you can personally do about it.

And then the last con for investing in syndications as a limited partner, is that you have to be eligible to do so. So a lot of these syndications require you to be an accredited investor and a lot of them have minimums of 25 or 50, or $100,000, to invest. Now, when I was starting out as an investor, I was not an accredited investor and I by no means had that amount of money I started off basically broke, I had $10,000 that I scraped and scraped together, not an accredited investor. So there's no way I could have done syndication starting out. But later on in my journey, this is something I've been able to enjoy doing now that I have more money. So I think it's a strategy that you can be intentional about and think about when in my journey, can I start implementing this as a really passive stream of income.

Michael:

Love it, love it, you know, I'm just about getting there myself. I'm, I'm gotten to the point where okay, my portfolio size, I'm kind of done with the whole buying and managing and owning thing. I'm ready to let someone else do it now and it sounds like this is the next logical progression.

Rachel:

So exciting.

Michael:

Thrilled. So Rachel, what's been your worst syndication that you've invested in?

Rachel:

Um, I think I haven't looked at all of the numbers on all of them. But I'm pretty sure it's this one multifamily property in Louisville, Kentucky, which I'm so I'm so upset about I know cuz it's my hometown. It's my hometown and so I felt like I should have done, I should have known and I should have been able to do the due diligence. So here's what I think went wrong is that this was my second syndication I invested in and even though I have background in multifamily, I still wasn't, yeah, in Louisville, Kentucky, right. So embarrassing. That that didn't matter so much, because I still wasn't as well versed in what questions to ask the syndicator you know, what should I be looking for? How do I fact check that they know what they're doing and this was a new syndicator.

And I also just wasn't aware of how do I check that they're experienced? How do I check that, you know, I wasn't asking things like I've already talked about in the interview. So I was just kind of going with it. Even though I thought maybe the deal looked good. I wasn't doing the due diligence on the sponsor. So and then it quickly became apparent that things were like the closing, I think was delayed, and I wasn't getting communication from them for a while and I was like, What's going on, and then their reporting was, was not up to par. So when you get reports from your syndicator, it should be detailed financial reports, right? They should be like, here's what we projected, all these different numbers. Here's what you're getting, here's your distribution, here's how it compares. So you should clearly be able to see, are they giving me what they told me that they would get me in terms of a cash flow number. The reports from the sponsor were like, hey, we were able to trim the landscaping back and we repainted the outside, and it was kind of like, I don't need to know the operational stuff you all are doing, I want to know my results as an investor. So it was that kind of stuff and I was like this is kind of weird. But again, it came back to me just being a little bit inexperienced as a investor into syndications and not knowing the right questions to ask. So and I'm not losing money, I haven't lost money. I think so far the cash on cash return has been about 8%. So by no means is it performing badly. I mean, that's that's the worst one return. Yeah, that's that's not including any potential profits for from a refinance or sale. That's just the cash flow. So I'm in good shape. But yeah, I mean, there was definitely some things that I learned from doing that deal.

Michael:

Okay. Okay. Well, that's great. Thanks for sharing and it sounds like on that one. I mean, if you had had a different operator, I mean, it doesn't sound like it's an asset issue. It sounds like maybe it's a more of an operator issue.

Rachel:

Yeah. And he is experienced as a real estate investor, just not a syndicator, so…

Michael:

So one doesn't necessarily translate well into the other.

Rachel:

Exactly, exactly and I'm not gonna like bad mouth him, I think he's been, you know, really trying to make this work and really trying to do a good job, he just doesn't have the experience as a syndicator and that's not always a red flag. But what he should have probably done is partnered with a much more experienced syndicator that could have really partnered and teamed up with him on this deal and showing them the ropes. That's what I've seen other new syndicators do at least for their first few deals, so…

Michael:

Okay, okay, awesome. Well, this has been super helpful and informative. But I want to switch gears here and I want to get what's going on inside your brain in terms of market insights. Where do you think we're going? How long it's going to take us to get there and what are you doing in the current market cycle and conditions where we find ourselves today?

Rachel:

This is my favorite question, Michael. Because everyone's asking me this and, you know, a lot of people are really hesitant and really afraid to buy real estate in this market. So the reason I love getting asked this question is because I love this market.

Michael:

What?

Rachel:

Yeah, I love this market. I think it's one of the best markets to invest in real estate and there's a lot of reasons why and I'm personally investing in real estate right now as well and buying property in Denver, Colorado, which I personally think is one of the toughest markets. Everyone's using Colorado, the I mean, I know the housing market is just crazy everywhere. But the appreciation and the competitive. The competition here is just through the roof. So I say that because I'm putting my money where my mouth is, I guess, and I’m doing it. I'm doing it. So yeah, I get the uncertainty though I get the hesitation, I get that times are a little bit volatile.

So but I appreciate being asked this question. So I think there's four things that the market has going for it right now that makes it a great time to invest. So first of all, there's a lot of confusion about whether we're in a bubble and I, what I want to say, what I want to preface this with saying is that I'm not an economist, please take this with a grain of salt. I'm not going to just pretend like I know, I have a crystal ball and I know everything because I don't. But I don't think we're in a bubble, I think bubbles are driven by greed and fear and nothing. Bubbles are just driven by a lot of nothingness and they don't make sense, right? And that's why they pop and then prices fall. What we're in right now, I believe to be a supply and demand issue. So there's a lot of graphs out there, if you look at the US housing starts by decade over the past few decades, like the number of construction, the new houses being built. It's shocking. I've done some Instagram posts about it. But the houses being built, like if there were this is a silly number. But if there were 100 house 100,000 houses being built per decade, for the 80s 90s 2000s. Then in 2010, it dropped down to like 50,000, which that number is not right. But it went down to half basically.

Michael:

Yeah, yeah.

Rachel:

I have no idea why I don't know why and what happened. But the fact that our housing construction dropped down to half in the last decade is alarming and because of that, that explains the entire housing crisis right now, that explains why the market is so high. There's not enough houses, it's a seller's market, this explains our entire problem and the thing is, that's not going to go away anytime soon. It's going to take years to catch up and to build enough houses where people finally have enough homes again, population is still increasing, maybe like very, very, very slowly. It's almost flatlining now, but it is still increasing and it's just a supply and demand problem. There's not enough houses to meet to meet up with demand. So that's what I think now. Could we have a market correction? Absolutely. But I don't think we're in a bubble. So that's my thoughts on that. I think that 2022 is going to be another year of real a lot of housing growth, maybe not as much as last year, but I just don't think this is going to stop. So, so that's reason number one.

Michael:

I love that insight in that take.

Rachel:

Yeah, um, reason number two, that I think it's a great year to invest is because inflation is creeping up. More it was slowly at first and now it's more quickly and erases slightly alarming. Yeah. I think the last report from December was 7%, that's 7%. I don't remember the last time it was that high.

Michael:

I heard this is the the biggest, the most severe, it's been in over 40 years.

Rachel:

Well, that explains it. I'm 29. So this is the highest inflation has been in my lifetime. Yeah, but that's a weird thing to say and with inflation, the best place to keep your money is in real assets, things like land and real estate. So that one that's easy to explain, I think, real estate's a great place to put your money right now, certainly not cash, I have too much in cash, I'm trying to figure out where, where to put it. So that's why I want to get more invested in real estate this year. So inflation is another reason. Also interest rates, interest rates were so low for so long, they don't have anywhere to go but up and as we are now seeing interest rates are starting to rise. My husband and I are under contract on an investment property in Denver, Colorado and it was like every week, our lender kept telling us you need to get your loan application in, we need to lock these interest rates because they're literally going up every single week and we'd already missed out on a couple percentage points because we couldn't get stuff in or we couldn't get stuff done, like within a week or two, you're like, oh, my gosh, interest rates are just rising really fast. So you know, it's a really great time to invest. So you can get that little interest rate locked in.

It's your we're not in the times of refinancing anymore, like we were in the last few years where you could refinance into a lower rate going forward, now's the time to buy real estate and lock in a low interest rate and get that low mortgage payment. So that's the third thing and then the final reason, I think it's a great time to invest in real estate is because this is my personal strategy. I do not invest for appreciation, I invest for cash flow and if you invest for cash flow, it does not matter if the market goes up or down. If the market goes down, and your property's already cash flowing, it will continue to cash flow. However, if you invest for appreciation, and the market goes down, you are you're going to lose money, you have lost money and I'm scared for a lot of investors who are trying to ride the high of the market going up and they're just investing for appreciation, because that's really risky, I think that.

We all saw what happened in 2007 and 2008, investors were doing the exact same thing. And then the market crashed, people lost money. They were foreclosed on landlords lost money. It was a disaster. But if you invest for cash flow, that's never going to happen. So there's that saying, you know, you you buy, you make money when you buy, not when you sell and there's another quote that I'll share, which is don't and this goes for all the reasons why now's a great time to invest. Don't wait to buy real estate, buy real estate and wait.

Michael:

Ah, that's a good one.

Rachel:

There we go, mic drop.

Michael:

Rachel. Oh, that is really good, that is really good. Well, I love so much of what you just shared. But I have a follow up question for you. If you're investing for cash flow, how the hell are you doing that in Denver, Colorado?

Rachel:

Good question, okay. If you are in a market like Denver, or California or an expensive market or a competitive market, my advice to you is you have to be creative. You have to look at a potential property very creatively, you're likely not going to meet the 1% rule. If you're just going to look at a property and rent it out to a long term tenant, which the 1% rule states that the monthly rent should be 1% of the list price. So a $500,000 property should bring in $5,000 a month in rent. Okay, now that's just a guideline that I use to determine if a property is overpriced or underpriced. It's not a black and white roll, but I post about it sometimes on Instagram or whatever and then people are like, you're kidding, right?

I'm not gonna find a 1%...

Michael:

This doesn't exist.

Rachel:

Exactly yeah, this doesn't exist in California like that. You're joking and I'm like, well, it does if you do two things if you are creative, and if you look for off market deals. So what I, what I mean when I say…

Michael:

Another mic drop.

Rachel:

Yeah, thank you.

When I say be creative, I mean look at it through another lens. So can you build an accessory dwelling unit an ADU on the property? Does the zoning allow for that where you could actually build a tiny home or another unit that you could rent out thereby increasing your cash flow would that be allowed? Could you convert a single family into a duplex? Could you convert a duplex into a triplex? Could you add on another unit by just making building another wall or making a very simple switch?

So these are ways you can increase your cash flow. One of my favorite methods that I personally have done and I'm doing again, is the rent by the room method.

Michael:

Yes.

Rachel:

Yes, if the zoning allows for it, if the city allows for it, if the HOA allows for, you have to check all these different things. But you can make any poor or good property into a cash cow by renting it out by the room. So take a single family house, four bedrooms, two baths, instead of just putting one tenant in there, or one family in there, or whatever, rented out by the room and put four tenants in there and now you've doubled your cash flow and now you meet the 1% rule. This is how people are doing it in Denver and you can house hack and do it this way and you can live in one room and rent out the other rooms and now you have a 5% down payment and now you have a cash on cash ROI, that's 30%. Or you don't have to live there and you rent out by the room. I mean, it's I get so excited because if you think outside the box, you can find a way to buy a cash flowing property in any market, I promise you that, so…

Michael:

That's so good.

Rachel:

Thank you that yeah, that's the first tip and then the second tip, and this is something that I specialize in and that I teach is you have to get off the MLS, and get off Zillow, and get off the couch. You have to go, you have to go out there and find off market deals because everyone right now is doing what's easy, right? Everyone who wants to invest in us, in real estate is working with an agent, they're looking at deals on the MLS, they're looking at deals on Zillow and they're sitting on the comfort of their home waiting for something to come up. That's what everyone else is doing and the market is so competitive, and it's so saturated, that you're just not going to find a good deal that way.

You have to be willing to do what others are not if you're going to find a good deal right now and that means doing things like getting probate leads, and getting Pre Foreclosure leads and driving for dollars and putting up bandit signs and there's a ton of other methods that you can use to find off market deals. And again, it comes down to being creative and going and spending the extra time and effort and getting off the MLS so that you can find the hidden gems.

Michael:

I think that's so good for people to hear. Because I think I do think so many people look at the MLS and equate that with the market, what the real estate market is doing and you're so right like competition is fierce. There's a lot of owner occupants out there that are getting lower interest rates that it can afford to pay more with lower down payments and you're competing with them and so you've got to you've got to get creative, I love that. Did you see the SNL skit talking about millennials and Zillow?

Rachel:

No!

Michael:

Oh, it's so good.

Rachel:

What is it?

Michael:

It is basically like every millennial late at night watch, like getting online going. Looking at Zillow, like gets poured like oh, look at this 320, it's amazing. Like every millennial.

Rachel:

That's so true. Well, one of my favorite pastimes is going on Zillow and looking at homes I can't afford so.

Michael:

Yes, I think a lot of us do the same. We're all kind of sick in the head like that.

Rachel:

Yeah, like, Oh, that $10 million waterfront property in California. Beautiful!

Michael:

Yeah. Maybe one day maybe?

Rachel:

My price range, yeah

Michael:

Awesome. Well, Rachel, thank you so much for chatting with me again today. I really appreciate you coming on. If people want to get in touch with you have more questions have follow ups. Where's the best place for them to reach out?

Rachel:

Thank you so much. Yeah, my Instagram is always great. So you can follow me @moneyhoneyrachel both of my books money, honey and passive income, aggressive retirement are available on Amazon. And lastly, Michael, what I'd love to do for your listeners is if anyone wants to download my passive income starter kit, I will give that for free, so yeah…

Michael:

Amazing, thank you so much.

Rachel:

Absolutely. So you can go to www.moneyhoneyrachel.com/passiveincome to download that.

Michael:

Okay and we'll post that definitely in the show notes below as well for anyone listening to this. Awesome, Rachel. Thank you again, always a pleasure to see you and look forward to keeping in touch, I can't wait to hear how this rent by the room goes for you.

Rachel:

Thank you. Thanks for having me on again. It's so nice to hear to talk to you.

Michael:

Thanks, take care, talk soon. All right well, that was our episode a big thank you to Rachel again for coming on and spending some time with me. Super interesting perspective on where we are in the markets really great insights on syndications and how to get involved if that's something you're interested in. I definitely can't wait to hear from Rachel going forward on how her rent by the room in Denver is going out in the Midwest out in Denver, Colorado.

If you enjoy the episode, feel free to leave us a rating review. Those are super helpful for us. We'd love to hear from you all and as always, we look forward to seeing the next one. Happy investing!

How the Russia-Ukraine conflict may affect the real estate industry Mar 24, 2022

Dana Dunford is the CEO and co-founder of Hemlane, a technology-enabled property management platform. Through real estate she became a strong advocate of purchasing properties anywhere, as the best investments are not typically in your backyard. Dana helps real estate investors set up the most intelligent process to manage rentals from a distance, while connecting them with local, licensed professionals.

Russia’s attack on Ukraine has taken financial markets by surprise and its consequences are already having a severe impact upon energy, transport and logistics, stocks and assets. To help you stay understand the situation, Dana will talk us through in today’s episode how likely the war in Ukraine is going to impact and affect our economy locally in the States as well as the real estate investment market.

Episode Links:

https://resources.hemlane.com/author/dana-dunford/

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Transcript

Michael:

Hey everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by Dana Dunford, CEO and co-founder of hemline property management and today Dana and I are talking about a pretty heavy and serious topic and that's the war in Ukraine, and how it's likely going to impact and affect our economy locally here in the States as well as the real estate investment market. So let's get into it.

Dana Dunford, welcome back to the pod, so happy to have you on. Thanks for taking the time.

Dana:

Yeah, thanks for having me back on. It's been a while.

Michael:

I know it's been too long and in between our last recording, and now you gotten some series a funding, right?

Dana:

We did, we did. We announced it in January and now we're on the property management side, ready to ready to rock and roll and provides more innovation there.

Michael:

Oh, congratulations. That is super exciting. So today, I was hoping that we could talk about kind of a more serious topic, a bit of a heavy topic and that's how the war in Ukraine is likely to affect our economy here locally in the States and this is a sensitive subject, a heavy subject, there's some incredible atrocities going on right now over there. So want to be sensitive to that. But very curious to get your thoughts around what we here at home can be doing on the economy site to kind of help weather through this storm.

Dana:

Yeah, definitely. Um, so so just to begin with, I think, with the conflict that's happening in Ukraine, I take it back the strategist, tragedy, and think about, again, two to three years ago, also with COVID, right, basically major event that was global, that everyone was watching. And on the real estate side, we got through it, we got through it together, and we got through it also with our tenants, and with communication. So at the end, I want to really talk about that of like, next steps, actions you can do as a current landlord, and what you should be doing immediately, what you should be doing during your lease renewals, and how to handle what is happening today in the news and in the economy. But a lot of questions that I do get is, you know, from the real estate investor perspective, hey, how is this on the rental side going to affect be here at home as well. And so from there, I think the first thing to talk about is essentially the economy. I'm not a politician. So politics stay 100% away from I will really talk about about rentals themselves. There'll be some things I want to talk about in here, such as short term rentals and development. That's not my expertise. So I think we'll just touch on that. I'm really on long term rentals, and talking about what we're seeing in the economy, and then where we're going from there.

Um, so I think that like, probably first place to start is at a high level, um, you know, affecting properties here in the US. What are we expecting? Um, obviously, there, it depends on your property depends on the type of property you have the rental property you have, as well as the types of tenants you have in your property. And so we'll go over that.

Um, the other thing about it is location. So I think from that perspective, Michael, let's just face it, like people are asking, is the recession imminent? What's going on with the economy? And how does this conflict impacted? I think, at a high level, when you look at it, definitely will help prolong inflation, may speed up some of the concerns that people have had about recession, but from the rental industry, and what you and I think about every day, as owners of investments of rental properties. For us, we're actually here to assist. You saw this in other recessions, such as a Great Depression, when you saw that people were losing their homes, foreclosures, there was no development, I think 95% of development was caught, right of new homes and there was a huge surge in rental properties and or demand for rental properties, I should say.

And so it's the same thing here for landlords to consider of hey, there, if there is a recession, and this conflict does kind of spoil it to happen a little bit faster, or prolongs inflation or anything like that, you as a real estate investor can help by providing a roof over people's heads here in the US, because you have that property and you have that decision to make of renting the home versus keeping it vacant or anything like that. And so I'd say at a high level there, there is benefits to owning rental properties and helping spur the economy from that perspective.

Now, I think let's talk about geography, as well as that like a good another place to start.

Michael:

Yeah.

Dana:

I've learned from that perspective on the rental side and just to also primary residences, people always say what are the most three most important things in real estate and purchasing and it's location, location, location, they say, right.

Michael:

So it's four things.

Dana:

Is that is that for location, location, location?

Michael:

Location, location, location, and then purchasing, right?

Dana:

Oh, and then purchasing? Yeah, and actually purchasing it, there you go and so from the location perspective, we are overseas where we're, there's one big ocean of the seven seas, that is between the US, the continental US, and the conflict and so I do think Europe is going to be, Europe real estate will be much more impacted than US real estate and so you have that at play there. I also think, with the location of your property and the type of property you have, understanding the tenants that are in your property is something that's super important here with this conflict and the reason I say that is because I wanted to go into inflation and talk about inflation here and from that perspective, with inflation, what you do see is that inflation is expected to be prolonged 8% of gas and oil right comes from Russia and so we're looking at prices going up here in California I don't know, if you've looked at gas prices, but I think I saw $7 when I was down in San Diego last weekend.

Michael:

Yeah, diesel is like seven bucks, pretty no unleaded is around six and change most places.

Dana:

Unheard of yeah and so from a location perspective, also your property, the type of property you have in the location. renters who are more cost burdened by that price of gas and oil and just travel and transport to their jobs will be much more greatly impacted than those were up an increase of, you know, seven to 11%, whatever it is, with the inflation doesn't touch too much of those. The consumer goods and stuff that's just part of their of their of their daily life. So I think that would be one thing I would say on the on the location side to think about is not only geography and looking at the big picture, the map, but also where your properties are and who your tenants are.

Michael:

Dana that makes perfect sense. I think for those folks who are looking kind of towards the future about future purchases based on location and what type of tenant class they would be looking for. But what would you say is important for folks to keep in mind? Or maybe go out and do if they have an existing portfolio? Is there anything that they could do you know, proactively as opposed to reactive?

Dana:

Yeah, absolutely. Um, so I think from that perspective, it's talking to your tenants, right. So it's the very first thing to do and, um, I'll give some parallels also on the COVID side, but going out and talking to your tenants of, hey, we know there's inflation out there and we, we understand that there are other things in the news that are affecting this inflation even more so that we didn't anticipate back in December. And now that we're in 2022, how are you doing from that perspective, you know, from a perspective of, you know, income to rent ratio should be three to one. So you should have three times the income to the amount that your monthly rent is, but are other things in their lives affecting that where are they suddenly it needs to be higher than three, or they're finding that their salaries not increasing as much as the rental rates?

So certain things like that, to just be mindful of to talk to your tenants and from a bank account perspective, are they seen any of their savings deplete they're where they really are living paycheck to paycheck if they didn't before? Or if they are today, living paycheck to paycheck, which many renters are or they find finding that cost burden becoming easy and greater with the inflation rates, rising care, which is more of like general from an economic perspective, something to be mindful of.

Michael:

Yeah, I think that's a good point and I think that real estate, rental real estate in particular is kind of one of those interesting businesses in that there often maybe isn't a lot of interfacing between owner and client or owner and tenant. And that's just not the case in some of the businesses. If someone goes to retail store, they're going to be interacting with employees of the store and get feedback there on the spot. But in real estate, we often don't get that feedback until it's too late, or those lines of communication aren't open. So I love that you you're talking about just going and having a conversation with folks kind of taking the pulse, finding what their needs are and looking to see if they can't be met to be mutually beneficial.

Dana:

Yeah, it's KYC, right. Know your customer, I call it KYT, know your tenants and being there for them we actually saw here at Hamline, we saw it really, really helpful in COVID, where landlords reached out to their tenants and just said, hey, listen, there, right now there's a pandemic, how are you doing? How are things going with your job, you know, if you are going to lose your job, or you are affected by COVID, please reach out to me and then if a tenant does reach out, it's like, oh, well, because they think they're going to lose their job, they're in the restaurant industry or anything like that. It's like, okay, well, if that's the case, then let's go ahead and talk about early termination with no fee, or whatever it may be to help the situation.

I think that kind of know your, know your tenant is super important in any in any situation like this, and taking a proactive approach and the reason I say that is there's a lot of misinformation out there about how things are handled. We saw it in the news during COVID, where it was like eviction bans, no tenant can get evicted, right. It is headline news. But it was really only if you were affected by COVID and there was like five boxes, would that eviction a plane ban apply? So by knowing your tenant and reaching out to them and telling them, hey, listen, if you're affected, reach out to me, then you're actually in the know more so, you have more information there and you're having a conversation, rather than making assumptions of how the other person will handle the situation.

Michael:

Yeah, that makes total sense and from a from an implementation standpoint, I mean, if someone has a portfolio of 20, single family rentals, they're all with a professional manager, is it reasonable for the owner to reach out to that manager and say, hey, go, you know, go chat with these folks? Or is this a time that is kind of unprecedented in our history and so those owners really need to be picking up the phone themselves and having those types of conversations?

Dana:

Well, I think definitely, in that case, if you have a property manager, you should reach out to your property manager about it, right. So from that perspective, definitely, um, the other thing I would say with it is, the biggest time to do it, is during your renewal, right, so when you have an annual renewal, and this is actually a strategy that I wish more landlords, smaller real estate investors would implement, where they really understand during that renewal time, that this is a time to rescreen the tenants and understand are they especially during these unprecedented times? Are they going to be able to afford another year? And is it going to be very passive income to me? And what I mean by that is, for example, if you're expecting to increase your rental rates by let's just say 4%, which actually, by the way, is standard, they saw year over year, that our rental rates increased by 4%, this was in 2021.

Michael:

Okay.

Dana:

Then understanding with your tenants are will or is their income increasing by subsequent 4%? And if not, then are they going to be more cost burdened? And is that going to be a concern for you in should you make it month to month rather than any annual contract because of not? And so really understanding from that perspective on what it is what's really interesting is that when you looked at the data, so this is January of 2022. The government actually reported out that businesses had said they were increasing salaries 3.9% for the year, right annual reviews on average for all the data they could get and the reason they had noted that 3.9%, which was the highest they had seen since 2008. The reason they had said was one inflation and two the other reason was new hires, because we've seen kind of we've seen a lot of more jobs transition that we've ever seen before.

In November in December, we saw a lot of jobs turnover and so from that perspective 3.9%, then when you looked at the rental rate increase from all the data that they could get was that 3.7% year over year reported in February and so when you look at it, it actually looks like tenant salaries went up equally or close, almost equal to what rental rates went up by and then John Burns had mentioned the same thing and his reporting of the economy, to back that up that he had basically seen something very similar, and his numbers and analysis that he pulled, that really, this whole cost burden by rent increases actually didn't happen, or we haven't seen that happen today, because you're also seeing that salaries are increasing as well, by the same amount. Now, if you are that landlord, who says, well, I looked at Wall Street Journal, and I saw rental rates go up eight per I saw inflation is that close to 8%. So I'm going to increase my rental rates by 8%. Now, your tenant tenants may be cost burdened, if they weren't part of that for 3.9%, or 3.7%. Yeah, or they only had that they didn't have their salaries increased by 8%. Um, so something to be mindful of and the only way you're going to know that is by having a conversation with your tenant, so know your tenant, or asking them to reapply to the property. I've actually seen real estate investors do that quite successfully and property managers do it successfully, where they say, can you please go and fill out your income again, run your background and credit check again, making sure that there isn't this cost burden year over year that you didn't see in the initial year?

Michael:

That's really interesting. I mean, it's almost like playing offense and defense, you know, at the renewal, there's there are things that can be done. It's not just a, are they gonna renew or aren't they? It's, well, no, they need to earn that right to be able to stay in the property. That's really interesting concept.

Dana:

Yeah and most and most real estate investors want any annual lease, right? They want it on a summer turnover, or any time where demand is highest in their market and industry. But what you end up seeing nowadays, and this this was with COVID, now this is with the economy shifting, right the economy, they everyone is saying that it's shifting, it's changing this year, and the conflict in Ukraine is also playing a role in that and so then now, suddenly, people are saying, oh, maybe I should do a month to month and we didn't see that.

Five years ago, that was not a conversation that I would ever have with a real estate investor, everyone was like, I always do 12 months leases, and that's it. Unless the local regulations require a month to month, San Francisco does. Um, but unless they require that I'm doing an annual, and now the conversation has shifted, where suddenly it's changing and real estate investors are having that conversation with their tenants and saying you could go month to month, or you could go to month to month at this rate, which is much higher rate. Or you could get locked into an annual contract at this rate, which is a lower rate, or much more aligned with maybe their salary increase year over year that they had, which you would hope that your tenants received if that's what the nation, the nation is reporting, you would hope that they had a slight increase as well.

Michael:

Yeah, that makes total sense and then I want to take a step back something you said previously, and understand and fully appreciate that you're not an economist. I'm right there with you, I'm also not an economist, but I'm curious to get kind of your personal opinion and thoughts around. But you were saying that rents on average moved up about 4% 3.9% average salary increase was at about 3.7%. But those people looking at Wall Street hearing those reports heard of inflation at 7-8% and so if they're kind of in that camp, thinking, hey, I need to keep up with inflation because my cost of goods and services went up 8% I got when I go to Home Depot to get the materials to make the repairs. Those are up 70%, so I got to raise my rents here. I mean, we're how do we not end up in this in this kind of ratcheting up where everyone is, you know, I gotta raise my rents keep up with inflation, but inflation is outpacing my cost of goods and services and now so you know what I mean?

Dana:

Yeah, no, I definitely. I think actually, from that perspective away, a real estate investor should think about it is on their, on their tenants, right. If your tenant moves out, by all means, move it up 8%, bring it up 8%.

But every smart property manager and real estate investor knows that when they do a renewal, they're not going to raise it exactly the market rate. You're going to put it under market rate slightly to incentivize them to stay there because turnover costs are a lot can be a lot, you lose one month's rent a lot of times in vacancy, or paying a leasing agent and so all of that cost of doing business and being in the industry of property management already takes effect and so from that perspective, that's where you have to know your customer because if your tenant says, if you can see that their salaries increased by 8%, then yeah, maybe you have some more wiggle room there or maybe you do want to go month to month with them and raise it a bit more because the market is hot, and you can get that demand.

But having a conversation, understanding where they are and what they can pay, and then understanding should we go month to month? Should we do annual with them or should we not renew the lease because we are going to be increasing it or letting them know we're increasing it but our qualification is still three to one for income to rent ratio by having that conversation with the tenant, everyone is aligned and you don't get into a situation where it's month four and the tenant is suddenly saying, Michael, can I pay with a credit card? Now I can't I don't have enough in my bank account and you're saying shoot, I just signed a 12 month lease with this tenant. This is this, this is not good for them. It's not good for me. It's not good for anyone involved.

Michael:

Right, right. Yeah, that makes total sense. That makes total sense. Well, Dana, I was wondering if we could shift gears here a little bit and I'm curious if you have any insight into how big of an investment, maybe Russians play inside the US market, because it's now been announced that there's going to be an energy ban on all imported Russian energy business accounts have been frozen. I know, for folks in Russia. So do you know, is that likely to affect things here locally?

Dana:

Yeah, good question at a high level, just absolutely no, they are such a small portion of the real estate market, and also of the rental market. So if you look at the market today, right for foreign investors, right, it's less than less than 2% of existing home sales are foreign investors and then Russians of that are point 8%, like not even 1% point 8% and usually, when you see it, it's much more affluent, they're buying properties in Florida on a private islands, or in New York on the most expensive street, they're not buying rental properties and so when you look at it, it's point 8% of the sale of homes to foreign investors and so overall, if you do the calculation, I think it comes out to like point oh, one 4% of the rental market of like homes, total homes, value of homes, but total homes are owned by Russians and so from that perspective, it's just small, like if you think I'm if I mean, we're real estate investors, we think about the person who owns a rental property down the street from us. It's most likely not, it's most likely not Russian money from that perspective, yeah.

Michael:

Okay, okay makes sense. All right, Dana, let's talk about a fairly hot topic and that's short term rentals, something we've been talking a lot about here on the podcast, something that we roofstock just recently launched our marketplace to accommodate short term rental. So curious to get your thoughts on how the war in Ukraine is going to be affecting short term rental, the short term rental market here locally.

Dana:

Yeah. So I'm in the long term space, and definitely found during, if we take the last global event, which was COVID, being in the long term space actually was much more beneficial during most of the time than short term, especially at the beginning. Here, I believe it's the same thing, where short term will be more impacted than long term rentals and here's why:

Everyone needs a roof over their head. So when you think about consumers ability to spend money on they will be able to spend a lot more on goods and services when you don't have huge inflation. But now that we have inflation, it's expected to be amplified with the with what's happening with Russia, Russia, and gas and oil prices and from that perspective, what is the first thing you're going to cut? It's travel, it's your personal travel, you're not going to cut the roof over your head, but you are going to cut travel. So anything that takes a flight to get to anything that takes a car to get to or train, anything like that is going to be reconsidered or just scrapped from someone's budget. And so from that perspective, short term will be more effective than the long term space. How much you know, is still to be determined. I think, you know, for from a consumer perspective, it takes always a while for this to play out of people canceling trips or reconsidering traps, but I definitely think that it will play a role.

Michael:

Okay, interesting. Do you have any plans to get into the short term space on the personally?

Dana:

Personally, no. The Airbnb space on my end is a much more active investment and it's considered a hotel to me and so from that perspective, I think of long term rentals as like a completely different industry than the short term space and the short term space. If a tenant says their lightbulbs out at midnight, I think if I own a hotel, I'm going to be like, great, let me come and fix your lightbulb right now at midnight for you and you I want to treat an Airbnb the same way, right.

So it's much more active on the property management side from that perspective. Typically, when you're on the long term side, you do see that your cash flow from that perspective might be slightly less than an Airbnb, depending on where you are, it will, it could be less you get greater returns from an Airbnb. But on the management side, it is more passive because if a tenant says my lightbulbs out, less, it's a 25 foot ceiling and still not an emergency, you're not going to send someone out the tenant is going to replace that themselves. And so I find it's a how you handle it as is different because it's a hotel versus a home and it's a different type of process end to end. Yeah.

Michael:

Okay, Dana. Well, this has been, you know, super informative and helpful. Curious to get final thoughts, actionable takeaways that we haven't covered yet things that folks can go out and do today?

Dana:

Yeah, I think from that perspective, there's a couple of things. We spoke one about, do we see a recession coming up right, and one thing I would say from that perspective is, you know, an informed fade recently said, most likely not in 2022, potentially, in 2023 and, you know, I can't predict the future. But what I would say is, don't lie, no, don't live in fear and we know that while the economy is shifting and changing on even if there is a recession, which is obviously something that no one wants, rentals are a relatively safe investment from that perspective, you know, purchasing a single family property on Roofstock, to hedge that inflation, and then going through a and having tenants in the property and a surge in demand because people are holding back from purchasing homes because of a recession.

You know, that's not a bad situation for a real estate investor to think about, where should I put my capital, you're thinking of putting in the stock market, or in real estate. So I think one of the biggest things that I would say, as final thoughts is like, definitely make sure you aren't living in fear and it's a great time, from that perspective to invest in real estate, even with the inflation going up, that you can help hedge that by having properties that appreciate and then also, from that perspective, make sure that you are always talking to your tenants and that would be the other thing you live in fear because of the unknown. But the moment that you can reduce the number of unknowns that you have, like, I know, Michaels, my tenant, and he just got a 10% raise in salary. That means I suddenly don't have an unknown and when I'm thinking about, hey, I've seen inflation, I need to hedge against your point, Michael, these additional costs from repairs, and supplies at Home Depot that I'm picking up on, you have some information that helps you eliminate and reduce having any fear or anxiety. I think anxiety is the biggest thing that I see with investments when you when you have some unknowns and so really know your tenant, KYT, and then also make sure that you're out there and making strong investment decisions and I definitely think real estate is that.

Michael:

Love it, love it. Well at 10% I'm gonna have to have a conversation with my boss because that would be that'd be pretty nice. But no, that makes that makes a ton of sense Dana, it makes a ton of sense and I love that you're talking about things you can do proactively not just reactively to the situation that we've we find ourselves in. So thank you so much for sharing and always such a pleasure to see you. I'm sure we'll do something again soon.

Dana:

Great. Thanks so much for having me.

Michael:

You got it, take care.

Alright, everyone and that was our episode, a big thank you to Dana for coming on the show and talking about difficult and heavy topic. So we hope you liked the episode, we hope you found it useful and valuable. As always, if you liked the episode, feel free to leave us a rating or review whatever it is that you get your podcasts and we are looking forward to seeing you on the next one.

Happy investing…

An insurance professional’s thoughts on risk management in real estate Mar 22, 2022

Understanding risk management in real estate is crucial to protecting your hard-earned assets. Being proactive and educating yourself as to where risks lie can save you a lot of time, money, and headaches in the long run. In this episode, Jason talks us through all the things that we need to be aware of as property owners when it comes to insurance.

Episode Links: https://www.robertsonryan.com/

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Michael:

What’s going on everyone? Welcome to another episode of the Remote Real Estate Investor. Today with me I have Jason Bott who's actually a personal friend and my personal broker for a lot of my Midwest portfolio. Jason is gonna be talking to us today about all the things that we need to be aware of as landlords and as investors when it comes to insurance. So let's get into it.

Jason Bott, man, what's going on? Happy to have you here and thanks for taking the time.

Jason:

Thanks, Michael. It's always great to talk with you.

Michael:

No, it's always a pleasure. So I, of course, know who you are and we'll get into that in just a minute. But I'm curious if you can give everyone a little bit of background on who you are, where you're come from, and what it is that you're doing with real estate.

Jason:

Sure. So my name is Jason Bott, I am based in Milwaukee, Wisconsin, and I'm a commercial insurance broker and I've been specializing in the space for about six or seven years exclusively and so I currently write about 25,000 units and in about 30 states. So in any state that you can find reasonably priced real estate that cash flows, that's usually more where some of my clients are.

Michael:

Okay.

Jason:

And I've been part of the firm, I'm a shareholder at the Robert surronding associates we are top 100 Insurance Agency in the US and you have been doing this for bots, about 20 years now.

Michael:

Right on and so in full disclosure, for everyone listening, Jason is actually my insurance agent, we got connected like I think three or four years ago now

Jason:

I think it's about four now.

Michael:

Yeah and Jason has been handling the vast majority of my Midwest portfolio, and I've been a very satisfied customer. So thank you, Jason.

Jason:

Hey, thank you, Michael, we always appreciate the business.

Michael:

No, absolutely. So for those of our listeners that are brand new to insurance, maybe looking to purchase their first rental or are now taking a look at their insurance. What are some high level terms that people need to be aware of? So they can talk intelligently with insurance brokers or agents?

Jason:

Sure. So I would say that the main thing that everybody comes up with is should I do actual cash value replacement cost.

Michael:

Okay.

Jason:

And I mean, that's probably the most universal question of the mall and it's very difficult sometimes to get replacement costs. If you're buying a let's, I mean, that in this market, but let's say three or four years ago, you could pick up a house for 20, grand 30 grand, and it was really difficult to get replacement costs at that low of a level, so you know, you're going to want to do, so when you're starting off, the lender will have certain requirements that may hinder you from making any decisions, they may already tell you, hey, you're going to get replacement cost, you're going to need ACB or you're allowed to have ACB, so I would always say check with your lender first. Anytime we start working with an investor, and they say, hey, I'm going to close on this property, we say that's great, connect us with your lenders, we can get your lenders terms.

And then once we have those, we can kind of show the investor what kind of options they'll have.

Michael:

Okay.

Jason:

So the best way to maybe compare actual cash value replacement costs is when you're thinking about replacing a roof, let's say you have a $10,000 roof on a single family, and it's a 30 year shingle and the property is you know, 100 years old and let's say the roof is 15 years old, right?

Michael:

Okay.

Jason:

The replacement sost policy, if the hail comes through and sheds it and it blows off whatever the case may be the placement costs policies, just gonna replace it, doesn't really matter the cost. So if it's eight grand, 10, grand 12-15 the insurance period is going to replace it.

An actual cash value, they're gonna say, hey, this, this, this roof brand new is probably 10 grand, you're 50% through the 30 year lifespan, so we're going to give you five grand and so now that equation applies to every single thing in your house, the door, you know, the paint, you know, the drywall, the flooring, the kitchen. So those things really do. If you don't have enough data building, it can really harm you. So, you know, if you're talking about buying from a turnkey, you know, operation, you know, like yourself with things or maybe fixed up, the next cash value doesn't really hinder you as much because if it was just updated, then the depreciation cyclize and starter, and so you're not going to get killed on it. But if you have a 30 year kitchen or 40 year kitchen, you know, you're probably gonna get 30 cents on the dollar to replace it.

Michael:

Got it, okay.

Jason:

So as you can see from a beginning investor, where they're buying their first one, you know, they're using that flush with cash, you know, usually they've, they've put together the nest egg to buy that first property. It's not like they got 30 or 40 grand set aside in reserves yet to compensate for that loss. So I always advise on the first one or two to go replace because and then as you build a portfolio and build up those reserves, then if you want to take a little bit more risk to save on premium, then you can do so.

Michael:

Okay, Jason. So what is that like, is there a difference in cost savings for the investor? If they go with actual cash value versus replacement costs or how should people be thinking about that?

Jason:

Sure. I think the easiest way to think about it is if you're buying a single family home, and let's say that single family home was $50,000, but it's 1000 square feet, 50 bucks per square foot is the market value.

Michael:

Okay.

Jason:

Many insurance companies will want to, in order to extend the replacement class coverage will require you to insure the building to 100 grand or 100 bucks a square foot.

Michael:

Okay, just because that $100 is an arbitrary number, that's their number they come up with?

Jason:

They feel like that they're getting enough rate or premium in order to extend replacement cost.

Michael:

Okay.

Jason:

So, you know, versus so let's say, an annualized basis, the replacement cost policy at 100 grand is $1,000…

Michael:

Yeah.

Jason:

…versus the ECB policy in trinet, and 50,000, is $500. So they just work their rates of, you know, their actuaries are back in the, you know, in the back room, making as much…

Michael:

…punch the numbers away…

Jason:

And that's exactly it and they just say, no, we need this rate in order to extend that replacement cost.

Michael:

Okay, all right.

Jason:

So, that makes sense.

Michael:

It does and so, about, like, thinking about bur investors or value add investors, if I'm someone that goes and buys properties for 50 grand, knowing that they're going to be worth 100 grand after I put, you know, 20 grand into, um, what type of policy should I be looking for if that's my strategy?

Jason:

Sure, yeah, there's a couple different ways to do it. So one, the insurance company always wants to kind of ensure exactly what you're buying. So if you're buying something for 50, grand, you know, and it's, it could be worth 200 grand, they're not going to ensure that the 200 grand right away. So we do have many investors that will buy that thing for 50 and they'll just say, hey, you know, what, we just got a kitchen done. It's not 30 grand, bump it up to 80 and you can tear it up, you know, throughout the year.

Obviously, that's kind of a pain in the butt. So you want to try to maybe, you know, do it in bigger chunks or if you're just in this market gig can get contractors really fast just last time, right?

Michael:

Yeah.

Jason:

But that's probably about the easiest way to do it. It's just to kind of inch it up as you go. But here's the here's the thing is, everybody wants to insure for the ARB value, no, that's a replacement cost, or after repair value. But the insurance company is only going to pay out what you invested in it. So and they're not going to give you the market value. So if you buy the property for 50, and you've put 30 in and you're like, hey, man, now it's worth 120. That's great. But if as soon as you get that, you know that you've made the improvements, and you have a claim, the only amount that the insurance carriers gonna give you that 80 grand.

Michael:

Really?

Jason:

Yeah.

Michael:

Even on a replacement cost policy or that now are we still talking about ACB?

Jason:

No, if you rebuild it, you'll have the policy limits, but if you decide to not rebuild it, and just cash out, you're only getting the money that you put in.

Michael:

Ah, even the replacments cost?

Jason:

Yep.

Michael:

Okay.

Jason:

Yep and if enough times gone by, you know, meaning like six months to a year, then they'll bring in a third party adjuster, and kind of our appraiser I should say, and kind of give you say, and then at that point, they'll say, oh, yeah, it's worth 120.

Michael:

Oh, okay

Jason:

…Very, and so but if you just literally just finished and they're like, hey, man, last, you know, six weeks ago, you bought for 50 grand, and you just put 30 and you're telling me just, you know, what I'm doing for the yeah, we're not paying for the extra. Now to speed that up and say, okay, well, I'm gonna flip this thing really fast and I already have an offer. Well, as soon as you have that offer on paper that somebody says, I'm gonna buy it for 120, then they'll give you the 1/24.

But there's a window of time that, you know, though, everybody says I just made, you know, I just made this money, but it's, it needs to season for a little bit for the insurance carrier to to pay that out. And that's kind of a little bit of a gray area. So I've never seen it where people really I've seen it online where people said, you know, I just took the loss right after it. I'm not getting, you know, the true market value, but this was worth. But it's never happened to one of my clients.

Michael:

Okay.

Jason:

It's a risk.

Michael:

Well, you got Jason in your corner. I mean, no way it's gonna happen. That's really interesting, that's really interesting. Okay, so is that seasoning period that you've got up on the property?

Jason:

Yeah…

Michael:

Okay. That's really good to know.

Jason:

Yeah. So as long as you get somebody right offers ASAP, during good again, and this market still works, right. So you're again dodged a bullet.

Michael:

Okay, awesome…

And Jason talk to me, I mean, you're talking about the value add investor, calling their insurance agent telling them hey, I just put another 30 grand into this and so what it sounds like I'm hearing from you is that insurance is not a once a year type of thing, set it and forget it, right? If you're someone that's constantly adding value or making changes to property, there really needs to be a conversation with your insurance representative, not just a, hey, let's talk at renewal time.

Jason:

Yeah, and I think especially for people who are buying new the brand, their first, you know, the beer method, and then they move to their second, people start to miss start to misunderstand that that's a major insurance change that you need to talk to your agent about. So as soon as you move your primary residence from your home, you know, from address one, to address two, a lot of times people forget that the first location is no longer a homeowner's policy, which is meant to be owner occupied.

But it's now a rental or a vacant building, or it's being rehabbed, whatever the case may be. But at that point, if people just leave a regular homeowner's policy on there, and it's been greater than 60 days, and you no longer live in there, you could have a denier, no declaration of a claim, because they're gonna say, hey, you stated that you live there full time and now you don't, you know, we're not covering any of these claims. So, oh, there's another shift…

So yeah, as you build a portfolio move from one to the other, you got to make sure that you have those, you know, those coverages in place. Now…

Michael:

It makes total sense.

Jason:

Yeah, I can jump ahead a little bit. But when you're doing one or two, and you're working with your home and auto, you know, agent, or whatever the case may be, you really have to be on top of it. Once you get to three or five or more, there are commercial policies that are built for that, or built for real estate ambassadors that kind of take that into consideration. When you're dealing with state farm and allstate or anybody like that anybody that you're ever home and auto with, that you're going to need, they're not going to make that change, then I can have the correct policy fit for you for that…

Michael

Okay, okay, so and that leads me kind of to my next question. So I think so many investors who are just getting started, they've got maybe they own their home, or they're renting, and then they have a car and so they've got their auto policy and renter's policy or homeowner's policy, with a State Farm with Allstate with the farmers and so that's the insurance, that's kind of the they're known insurance world, as they start investing, they're likely that's the first person they're gonna reach out to is, hey, this is my insurance agent. So do those types of companies have great policies for investors, or should investors be looking elsewhere?

Jason:

So I, they can have great options, you know, and I'd say, especially on the first one or two, if you're in a very good financial situation, where you have good credit, those, those insurance companies, their premiums are based on your credit. So you can have the exact same house, you know, with somebody with 100 credit, and they're getting $500 a year and somebody who's got 550 credit, they might get, they might be paying double or triple that amount, for that same property. So from that stance, you know, the first individual's probably best to stay with their home and auto carrier for that policy, that second person, you know, they may want to spin off and try and see if they can get a lower rate on a commercial policy.

Michael:

Okay.

Jason:

So it is it's, it's to each their own, what's going to be the best fit, but you can get, I would say that you can get some of your best rates and your first or second rental through your home and auto carrier. No, there's no, there's no doubt about it. Especially if you've been with him for a long, long time.

Michael:

So good to know…

And when you say commercial policy, what is that?

Jason:

Sure. See the homerun auto policy like with you that you have with the State Farm, let's just keep using them as an example, you know, the number of the largest hole insurer home and auto. So those policy forms are the legal contract that it sits on is a personal form, it's meant for personal dwelling, commercial form is more of a policy meant for a landlord. So it's meant for business, right?

So it can be a rehab policy, a vacant building policy could be a non-owner occupied property, could be leased, triple net, what any of those scenarios are all going to be on a commercial foreign policy and it basically just removes the personal liability of the palace. So let's say you have your personal home, and you go play baseball over the weekend at some field and you hit somebody, your personal home and auto or your home policy will respond from a liability standpoint for your personal liability in that situation. A commercial policy will not it does not extend the liability off the premises. So, only somewhat a landlord don't big deal. Like you just want to be covered for that property on that property. And you're good to go. Obviously, but when you have a home, you know, you want to no matter what your shenanigans are over the weekend, you want that you want to make sure that's covered.

Michael:

Right, right, right. Okay, yeah.

Jason:

Hopefully that makes sense. That's kind of the main difference, main difference.

Michael:

That makes total sense, that makes total sense. All right, Jason, let's shift gears here just for a minute and talk about people who are house hacking. So people who are kind of their landlord, but it's also their primary residence?

Jason:

Sure.

Michael:

What type of policy should they be getting?

Jason:

So if it's still their primary home, they will want to be getting a homeowner's policy. Okay…

And within that policy, and if the insurance agent sees that it's a duplex, they should automatically know to go ahead and add the landlord liability onto that policy, it should be built into their rating system. But it's really a little bit of both, you know, even if you have, you know, two properties, or two buildings on the same property or same parcel, you're living in the front, you have your garage rent on the back, whatever the case may be, as long as it's still on the same legal personal land, that needs to be a homeowner's policy.

Michael:

Okay.

Jason:

And then they just add landlord liability to cover that back unit.

Michael:

Okay.

Jason:

So that's first now, again, now let's say you move from that property, and you buy a nice one down the block, then the first property becomes a full blown commercial landlord policy, and you buy a homeowner's policy for the new building.

Michael:

Perfect.

Jason:

And that's just kind of how it keeps going.

Michael:

Okay, perfect.

Jason:

As soon as you get to four or five, single families, you know, or rentals. At that point, I advise, it's just usually easier to then silo both your home and auto coverage, and then your landlord portfolio. So it's okay to have a blended for a little bit. But at some point, you start to run into a risk, you know, I'm not at risk, but complications where the insurance company and I think, I mean, these numbers always change. But there's, there's other companies similar to allstate nationwide, you know, State Farm, where they may say, hey, we're only gonna allow you to have two rentals, and then you got to go commercial, well, their commercial policies, like four times the price of the home and auto policy that they feel that you could get paired up with your home and auto, so you're gonna want to get that, you know, you're just gonna run into a roadblock and at that point, you're going to go out and look for another standalone, you know, commercial policy.

And at that point, it might just be best to just to just move them all to a new program. And that's usually kind of when people usually start to run into myself…

I say I usually am fixing a lot of problems of people that have anywhere from, you know, three to 15, you know, properties or units, and they've still working with their personal home and auto carrier, and they just cannot, they can't do it, and they can't handle it, at least can't do it on a reasonable basis. Those policies are sometimes no good for the commercial lending that you then start to have to do after, you know you get was a 11 loans or something like that….

So I mean, there's it's a little bit farther down the road from a one to five space that we're talking about. But it's, it's kind of like right on the horizon if you're gonna keep growing.

Michael:

Okay, so and in kind of continuing down that chain of thought, How should people be having these conversations with agents, brokers? I mean, what type of questions should they be asking? And how should they be kind of interviewing and screening folks as they're looking to make that transition?

Jason:

And that is one of the toughest parts is like, how do you find the right agent? And there's really no fun to…

Michael:

How to find Jason Bott?

Jason:

…Right, because it's kind of like saying, I don't want to call us you sale, you know, car sales. You're asking a car salesperson, like, hey, who's the best car salesperson to buy a car from, you know, and it's, the way that you want to look at it is any sort of any of the people that you see a lot of commercials on the state farms, all states, they represent the one product, and it can be good, but it's still just one product. And then when you get multiple quotes from the other companies that have just, you know, are direct riders like Allstate, nationwide, they're still gonna have that one product. So when you, when you start to call around to an independent insurance broker, now, they will either be an independent, personalized agent, or most likely independent commercial, there's not that many that do both.

At least I would say that the people are really niching out into doing well in this space. So versus like myself, I represent about 50 different insurance carriers. So when you come to me, I'll have a bill almost fix any of those problems that you might be running into. Like, you can't get the LLC added on to the policy, you know, they'll say, well, no, we don't, we want to insure it on your personal name, and then add the LLC as is an additional, you know, interest on the policy, so collectively the correct way to do it. But a lot of those other companies, they'll do it just to write the policy. So in that case, the agents kind of solving your problem, but they just don't want to lose business, you know, they probably know that it should be set up slightly different, you know… So, I would say just realize that who are selling just the single solution, you know, it's still an option, but you also want to get the second opinion from the independent brokers as well, you know…

Michael:

Okay and are all independent brokers created equal?

Jason:

No, I mean, that that is another thing that's kind of hard everybody will say, hey, we just shot all the options will that that agent might only have access to three companies. So it's like, well, it's not all the options, but it's all the options they have access to. So the way it works in our industry, the way the distribution set up is, in order to get a contract with a specific company, you have to commit to a certain amount of volume. So that's why some of the larger brokers like myself will have more contracts, and will have more options for you.

But it takes years and years and years. And if you don't produce enough volume, they will drop your contract, so that's, and then the other part of it is, that makes it difficult for investors just starting off is most people that are in my position, don't work on accounts less than 10 grand premium. So they're going to ignore the call for the one rental to rental three rental, they're just not and so when people are calling around, say, hey, no one's returned my calls, that's why they just don't want to screw around with it. So I just made a commitment to the space and I know that if somebody is buying one, that's usually not their end goal, it's just right, they usually want to get to some sort of financial freedom.

So whether that's 10 or 20, or 50, or 100, whatever the case, may be, I know if we can save all their problems up in you know, save or solve their problems on the front end, that will grow together, and we'll be able to get them set up correctly, you know, as they grow.

Michael:

I love that… you willing to help people get there, you don't just want them once they've arrived.

Jason:

Yeah, I want to see that you have all sorts of problems, going from one to 10 locations, there's a lot of growing pains, there's a lot of restructuring, again, you start to get the lending changes and everything else, you start the LLC stuff and if somebody comes to me with 50 locations, that's almost easier to do than if somebody has 15 and they want me to restructure it.

Michael:

Really?

Jason:

It's yeah, cuz it's just straight, they've already cleaned up all it... It's all commercial lending. We have now a big schedule, we just market the schedule, it's good to go versus, you know, always reworking one right now, I have a client that started with me about four years ago, you know, just one at a time and they have about 25 and he has them, I think he's got five different companies. You know, it's just, he's been in all sorts of different states. So he's an Indiana, Wisconsin, you know, Ohio, and so that we just kind of plug and play them in the best spot and now we're just restructuring them all onto a single date. One policy, and I'm you see even a little bit of money, but in this in this market, it's about apples for apples. You know, a couple years ago, you could if you consolidated everything receiving everybody about 20%. That was that was really easy to there's no selling involved there…

Michael:

And, Jason, I want to know, because it's a question I get all the time, there's three different values that people see and get really up in arms when they're not the same and that's purchase price, you know, whatever they paid for it. That's insured value and that's often taxable value at the county level. So can you talk to us, I mean, what is the insured value if I insuring this property for 200 grand, and I bought it for 100 grand, I mean, why is there such a disconnect there?

Jason:

Sure, well, the first part goes back to the beginning of our conversation about where the insurance carriers need to have a certain amount of good, the replacement cost. Well, let's call that 100 bucks per square foot, right. But the other part is, what's it going to cost in total to replace the whole entire policy? Or the building I should say, right, and unfortunately, with what happened last year, in 2020, with the escalating, you know, construction costs, in material cost, then number has grown by like 30%. So, right now we're seeing in 2021, is we're seeing that, you know, last year, they had the insurable building was 200 grand now they're saying, you know, what, we need really need 230 this year, and people are like, why still only bought it for 100, right? And but the problem is, is lumber has gone up, you can't find a contractor to get the work done. When you do have a if you have my we're rebuilding the building, so if you have a kitchen fire, you know, on and I know you've had a claim, and you've gone through a claim, personally, so you know how long this stuff can…

Michael:

Very close to home…

Jason:

Right?...

The shortage of contractors, it extends the project within obviously escalates the cost. So that's just all a byproduct and that's what's driving up the insurable building value. So what is a kitchen fire that used to be all knocked out be able to be knocked down for months, is now taking seven months, eight months, and that holding costs there for the loss of rents, payments and so forth, that's just going up.

And so that's why that insurable and building the limit is just getting kind of higher and higher. It's for labor costs and building costs. I believe that with the way that inflation and go is going and everything, if it slows down the market a little bit, I think that will level everything off a little bit, for year or two, but we're still seeing on all of our renewals from last year, we're still seeing 15%, 20%, you know, increases on what the insurance carriers we're now insured to.

Michael:

Wow, okay…

Jason:

You know, and we can, we can push back and you know, the sum, you know, if you have a big enough portfolio, and you're able to push back and just say, well, I'm willing to take a little bit of a risk. So instead of 100% of the claim being paid, maybe 95% of it gets paid and I'm going to keep the building values the same. I mean, that's another strategy to kind of keep your cost in line.

Michael:

Okay. So Jason, is it fair to say then that when you get a quote from an insurance company, or a broker that it is, you know, take it or leave it? It is, but it is, or it sounds like you're saying that you might have some negotiating room there?

Jason:

Sure. I would say that on the personalized side, there's very little negotiating power, the or flexibility, I should say, usually those agents that punch in the information to the system, and the insurance companies just saying, hey, this is what you need to insure to. On the commercial side, we do have a little bit more flexibility and you can push back on those values and maybe you're able to, instead of insuring it for you know, a property like say, for 200 grand, and now it's 230 was a note, we want to keep it at 200,000, the insurance company might say, well, that's fine, but you're now insured to about 90% of where it should be. So if there is a claim, you might only get nine, you know, 90 cents on the dollar. You know, if for some investors are okay with that, so, but personalize is difficult commercial, you do have more flexibility. So if that's, you know, if you're in the lower end market, then that's probably where you the commercial might be a better fit for you because of that.

Michael:

Yep. Okay, that makes total sense. Jason, let's transition now to talking about like actual coverages, because I love for the show to be actionable and we have, you know, give people things to go then do. So as an investor, what coverages should people expect to see standard? And then maybe what coverages do people need to ask for and should consider thinking about?

Jason:

Sure. So the three that are almost non-negotiable that you want to have on every single policy is your your property coverage, so just be the building coverage, okay. Your general liability, or premises liability be named several different things, and your loss of rents, or business income, depending on what kind of policy you have. So, the building covers, obviously, the building case of the fire, the general liability covers, in case there's a slip and fall. And I don't really recommend, again, on a personal policy, your max might be 500,000. But it's usually the go to a million, and might be another eight bucks per year. So we just write a million straight across the board and we never really go any lower than that. And then the last part is business income or loss of rents and that's if in case you do have a fire, and you have the property leased out, then you go ahead, and they will cover the loss of rents up to a year while you while that property is being repaired.

Michael:

Okay, so…

Jason:

Those are the three that you've really shouldn't weigh wrong at all, and they should be on every single policy.

Michael:

Okay and to your point previously, about the kitchen fire that used to take four months to repair is now taking seven months, eight months on the loss of rent stuff, is there the ability to get coverage beyond a year if you know, in the case, like we had those California fires and neighborhoods just got decimated off the face of the planet, those homes aren't getting rebuilt inside of the year. So is there some additional coverage that you can get if you're concerned with those events?

Jason:

It's not common on a personal policy, we'll use a capita 12 months the same with most small commercial policies. But if you're good to go, there are some portfolio policies out there and again, a portfolio might be three on a policy or five on a policy or 10. Those are usually the minimums for most of the programs. They can go up to 18 months or 24 months…

You know, it's funny, most people just say, No, I don't know, I just need six months, we can get knocked down six months, then you have those natural disasters, like even then people will realize it, but if there's a big natural disaster, like down to Florida, or any of the coasts, all those surrounding states, like all the contractors, they take off, because they're making three times as much right on the storm areas, because it's all insurance work. And then there's no way to, you know, and then your backup, you know, 500 miles from the coast and you have your kitchen on fire and there's nobody to fix it. And now that things taken more than a year, so you know, you don't want to you don't want to go too far down the rabbit hole, but that that does happen. So I recommend four months of loss of rents for sure.

You know, especially again, in your yeah, in your first one to five locations, yeah, 12 months minimum that’s what I suggest.

Michael:

Okay, love it.

Jason:

So yeah, some of the other ones that are kind of always on the fence and the one that we get the most probably most questions on is the backup of sewer and water. Because that's on your homeowners policy and it's usually not on a on a rental policy usually have to ask to get it endorsed onto your policy. So, and that is just any sort of backup sort, it can happen in the kitchen gap in the bathroom a gap in the basement. There used to be a fire of $10,000 limit on there and it usually costs you about 1500 bucks per year. And I say, it's really up to the individual investor, if they think it makes sense. The problem with those claims is if you find out once usually, they're gonna remove it off your policy the following year and I'm specifically talking personal home and auto policies, right.

They will, so you get one shot at it, and then they're gonna penalize you for filing the claim. So, all my other landlords, anybody that's got more than five locations, we just do not care that coverage on there. You know, they'll just send their crew over, they'll pay out of pocket and go, hey, if I have 20 locations, I'm saving two grand a year. But I can send Joe over there for seven or 50 bucks, we'll get it cleaned up, and I'm head for the year. That's usually how investors just try to teach how they kind of grow out of that coverage, if you will, right.

Michael:

Okay.

Jason:

Okay, the next one, which is really important for, it's probably the most overlooked one, is building law and ordinance. You know, and you have older buildings. So you're familiar with some of that, yes, but let's just say you have a, you know, a 1900 building, or a building was built in 1900 and the front door is 29 inches wide, or some odd, you could you go ahead and you have a kitchen fire and then the fire department comes over. And they they put it out, they bust out some walls and then now the building inspector for the city comes over and says, Well, that's great, we can we can do this. But in order to grant occupancy permit here, we got to bring the rest of your building up to code, okay. So in the insurance world, the fire damage is covered.

But anything that you're voluntarily destroying, and upgrading, that's not an insurance claim, unless you are below the law and ordinance. So that's what picks that up. So if you have a building, usually 1970 and above, or in younger, usually, it's not that common that you're going to need it, but for older buildings, you know, especially older parts of the country, and if you know you have a rental, it's really wonky. It's got all these goofy, you know, like the fuse boxes inside the bathroom, or, you know, we've had egress doors needing to be put in, in replace of closets. You know, I had eight units, one time where all the meters were in the basement, and they needed to be moved outside of the building that was 35 grand for that for the electrical, you know, for the gas company to do that and that was a really long Norden’s claim, you know, so you just kind of got to keep your eyes open. If you like, boy, this just doesn't seem right. I think most people will feel like, you know, you walk into the house, and then you walk down to stairs and the walk up forced, like, you know, you're probably gonna want to get building on the ordinance coverage there.

Michael:

Totally, I mean, it's interesting, you talk about kind of that 1970s vintage, I've got my very first property was 2004 build and it's something that I carry on that property too. Because in California, all residential properties, I think it's post 2008 have to have fire protection sprinklers?

Jason:

Yeah.

Michael:

So the house burns down and has to get rebuilt, there's an extra cost there that I need to incur even for, you know, newer property like that. So…

Jason:

That's, and that's very common, once you get into the multi families into I just tell people, hey, call the city see what their guidelines are. Because if you have a 16 unit or something large, and you need to retrofit that thing with a sprinkler system, it could be 200 grand, you know, to do that. So that's why I say just kind of take a look around and see if it's, if it's walking, just get thrown on there, just in case, but that's another one that could cost you a lot of money. So and then, I mean, lastly, we talked about at the beginning, but I would say the other thing is most people just keep their liability limits so low, you know, cuz some first lines, companies can go to 50,000 or 100,000 for the liability limits and, you know, that's for anybody that's slipping and falling on your property.

So if you don't have, you know, the right window, or whatever, and the kid falls out of the window, even if it's on the first store, and he breaks his arm and now he needs rehab for you know, you're doing he has some sort of permanent disability. I mean, it's that's gonna go beyond 100 grand, you know if it will be on 300 grand, and that's a very possible I mean, I had a $25,000 claim because somebody, it was a overweight woman who was too heavy on the front porch, and she crushed the porch, and then they couldn't, you know, she couldn't get herself out. So they had to call the ambulance and that was like a $25,000 claim because they claimed the porch wasn't up to par, but she was you know, she's a very large woman and so…

Michael:

Oh my gosh…

Jason:

You know, and I've had people I had a $50,000 claim about a hole in the front yard that probably one of the tenants kids just dug in and somebody went through and mean, like blew out their knee and that was a claim, you know? And again, those are very, like that stuff happens all the time, falling down the stairs. Well, you didn't secure the carpet good enough, you know, I want you to pay for all my knee damage, you know? I mean, is it that common?

No, but I mean, we have several of those per year, you know, last year, so we rarely everybody gets all excited about having an umbrella policy, you know, your general liability goes to a million that you can buy another million, I've never had a claim go over a million dollars on a single family home. So I always say a million is probably adequate, all these other little nuisance claims. You know, can get can get over those that 100,000 $300,000 mark.

Michael:

So okay. Okay, perfect and you touched on it and it's the last question that I'm gonna ask you, Jason, before I let you add here, how should people be thinking about liability limits? And I know, you just touched on it. But is there kind of a good guidance or rule, you know, ballpark to think about how much coverage someone needs?

Jason:

Sure. Well, I think the part that I didn't address was, let's say you are doing a house hack and it's a, it's a triplex, you know, and sometimes even seen people pull off a four Plex as their first their first property. Well, I would say, I don't know if Michael, I know if you believe me, but people have done it, people have done it, you know…

Michael:

It’s very impressive

Jason:

Right, right? And in those cases, now, even if you're living there, obviously, now you have three tents, right. And now you can have all those different parties, you know, suing you, right? So that's, that's first part is how many people can sue you.

The second part is, for those people, if they're injured, or whatever the case may be, there's, there's a loss of income factor that when a lawyer Suzu is like, hey, how much income can this person made, you know, and that you cause their injury. So, if you have, you know, working class people that are making 30-40 $50,000 a year, you know, those that then number doesn't get up that high. But you know, if you have, you know, or if you're in a metropolitan area where the, you know, like, you're in California, or if you're in New York, and you happen to be renting there, I, you know, people make much more, they're making 100 grand, you know, and so if you have three people making 100 grand that sue you, you know, through the 1000s not gonna, you're probably gonna be underwater, somehow. We deal with that. So that's another factor is how much what kind of clientele you have.

The third is just in the state that you're in, is it landlord friendly or is it is a tenant friendly, because if it's tenant friendly, then you probably want to go higher, um, there's some southern states that do just they're very landlord friendly. So the liability limits are really, really low. But you know, you get into certain, you know, Chicago, Miami, New York. I mean, anything happens that people just, they're suing and they're hitting the million dollar mark, pretty easy. So that's your thing is what municipality are you in? Okay and, you know, what's, where are they leading...

Yeah, that one and then I think the other thing, too, is just, are you the one maintaining the property? Are you the one renting it out? Now, obviously, if you're in your first one, you're your second one, chances are that you are, but I also work with a lot of out of state investors, you know, they're in California, and they're buying, you know, you know, in Tennessee, in Ohio, and I know, that's part of your clientele as well. In that case, I'd say if you're depending on your property manager, to do all that stuff. They may tell me maybe telling you they're doing it all? Oh, yeah. You know, I shoveled and yeah, that's good to go and, yeah, that that's fixed. But, you know, you don't know for sure. So I always say, I would always err on the higher limit limits. If you're not the one actually take care of the policy, you're the one that's got the finger on the pulse of the building.

Michael:

Okay. But if I have a professional property manager, is there some risk reduction, that now there's kind of a buffer with a property manager in between myself and the property?

Jason:

You can, but the when the claims work in the insurance world, as is one of those, the property manager always asks to be added to your policy. So like, any claim on the policy gets filed through your policy, right? So your policy is gonna, you know, so now there's a claim on the property, and the tenant sues you, and your policy is gonna pay and you have $300,000 limits, they're gonna bring in the other possibly bring in the other party, but the contract states that, that no, it's only on your policy. So now, you go beyond your $300,000 payment that's on you personally and now you got to go after the property manager for the difference. Well, that whole process is like a five to seven year process, right? So you just don't want to have to ever go on your own pocket. I mean, the whole purpose of buying is to make more money, right? Not and not to be paying out all these things. So that's why I just say, just go with a million on a single family and it just solves most of the issues I just reviewed. I mean, they're kind of just all taken care of. But sometimes people are like, hey, I'm gonna save that 15 bucks and that's 15 bucks, right?

Michael:

Where's the $15 that you have ever made?

Jason:

And you know, but they're all super excited about the water sewer backup, and I say just take that money and put it towards the liability. You may have a wet basement for a little bit, but, that's the way I would look at it.

Michael:

Okay. Jason, this has been awesome, man. Thank you so much for taking the time, there's still so much more that I want to talk to you about. I'm sure we'll have you back. But for those people that want to get in touch with you to have additional questions or want to reach out to you for your insurance needs, what's the best way for them to do that?

Jason:

Sure. You can give me a call at 494-270-6834, that's my main office line. Or you can drop me an email at: jbott, That's J Bo TT @robertsonryan, that's R O B E R T S O N R YA N.com -

jbtoo@robertsonryan.com and I currently have four team members, I mean, Michael, you're familiar with most of them. I also do is work with my real estate investors. So we try to continually stay overstaffed so that we can respond to people fast and get people through closings. Because it's always a it's always an issue well, so yeah, appreciate the time that Michael

Michael:

Absolutely, Jason, we'll be chatting soon. I'm sure.

Jason:

Sounds great.

Michael:

Alright everyone, when that was our episode, a big thank you to Jason, we look forward to having him back on to talk about all of the other things insurance related. I know I get really giddy about it, hopefully you do too. If you enjoyed the episode, please feel free to leave us a rating or review wherever it is you are listening the podcast and as always, we look forward to seeing the next one. Happy investing…

How American debt in the private sector affects wealth creation Mar 15, 2022

As the author of A Brief History of Doom (2019) and The Next Economic Disaster (2014), Richard Vague established himself as a clear and independent voice in the ongoing conversation about the role of private sector debt in the global economy. His illustrated business history of the United States offers a more general audience a clear-eyed view of 250 years of wealth creation and the people and personalities who drove that growth — and hold it today. And now, Richard's new book, The Case for a Debt Jubilee, offers a compelling case and policy recommendations for new forms of consumer debt relief. Following a career that has spanned fields as varied as banking and energy, credit, and the arts, Richard has served since 2020 as Secretary of Banking and Securities for the Commonwealth of Pennsylvania.

In this episode, Richard explains the current state of American debt in the private sector, how that affects the economy, what the government response to COVID adds to this calculation, and how investors should be looking at their relationship to debt while building their portfolios.

Episode Links:

https://www.richardvague.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Richard Vague who serves as the Pennsylvania Secretary of Banking and Securities and he's going to be talking to us today about debt and the American household. So let's get into it.

Hey, Richard, thank you so much for coming on and chatting with me today. I really appreciate you taking the time.

Richard:

Well, it's a real privilege. You guys have a great show and I'm honored to be on it.

Michael:

Thank you, appreciate that. So we are here today to talk about something that I think is on every real estate investors mind. And well, most real estate investors might…, and that's debt and you've got a really unique position to be able to talk about debt. So for anyone who doesn't know who you are, where you're come from, and what your background is, you can give us a quick intro, a quick insider's peek into what those things are.

Richard:

Well, I was in the banking industry forever and ever, which included some amount of mortgage lending a lot of consumer lending. I spent about the last 10 years in venture capital, which obviously includes more equity than debt, but includes both but kind of as an outgrowth of the Great Recession of a decade plus ago, I've written a series of books, including: The next economic disaster and a brief history of doom and more recently, the case for a debt jubilee that really get deeply into debt and both the positive and negative aspects of debt. So it's a topic that remains heavy on my mind.

Michael:

It's your… sounds like and for anyone interested, where could they find those, that book?

Richard:

Well, if you go to my own website, which is https://www.richardvague.com/ , and Vegas, spelled V as in Victor AG, UE, you can see all those books.

Michael:

Okay, fantastic. So let's dive right in and I'm curious, Richard, in your opinion, I mean, how and why is debt such an issue in in the states in this country?

Richard:

Well, you know, over the course of pretty much my own lifetime, certainly in the last couple of generations, you know, let's call it World War Two forward, household debt has tripled, you know, in 1950-ish. Household debt, if expressed as a percent of GDP was about 50% and today, it's about 160%.

So there's a lot of it around and a lot of households, you know, have accumulated debt of several types so that they really struggling we see households that have a mortgage, perhaps even a second mortgage, they have student debt of their kids, they may even have some residual student debt of their own, they may have had a surprise medical bill that they had to finance through debt. So you, you see folks with this kind of unhappy portfolio of debt that's really weighing them down and affecting their, their lives quite significantly.

Michael:

Yeah, okay and as investors we joke is the wrong word, because it's no joking matter, but talk about good debt versus bad debt. And would you agree that there is such a, such a discrepancy between the two is such a difference between the two?

Richard:

Absolutely, in fact, I'm writing a book right now called: The Paradox of debt, which gets to that very issue, because debt is necessary economies absolutely couldn't function at all, without debt. I mean, that includes, you know, your local retail store, the inventory they have in their stores, you know, done on a debt line of credit, the grocery store that you go to, their shelves are stocked by debt. Folks buying their homes, which I know is a near and dear subject for you guys couldn't really achieve that without debt. So there's any number of things that are necessary and positive about debt. But then there's the other side, normally, when it debt accumulates too rapidly or gets too high, and as all sorts of effects that are in the other direction.

Michael:

Okay and how do you make that distinguishment? I mean, if someone listening is thinking about scaling the real estate portfolio and plans to go get a ton of debt really quickly, I mean, they could be hearing what you're saying and think, oh, you know, maybe I need to pump the brakes. So how do you distinguish between the good debt and bad debt or maybe what's too rapid versus too slow?

Richard:

Well, I'd make a distinction between how I measure it for a country, which I spend a lot of time doing and how I would measure it for an individual.

I think the, the real issues are an individual relate to how much leverage you have on a particular property. You know, if you're leveraging properties at 100%, or 95%, as many folks were doing here a decade or so ago, you know, you need to have really thought it through carefully. And if you, if you have several properties like that, I mean, I, my own expectation is that here over the next couple of years, we're going to have a real flattening of evaluations of real estate, you know, almost inevitably, given the, the boom, we've seen here recently, you know, mortgage rates are going back up. So you know, anybody who's financed real estate, kind of at the hilt, if you will, need to thought that through very, very carefully, because that could, that could unwind on it pretty quickly. And then there's carrying the interest payment on it, you know, if you have a situation where your lenders being so kind as to charge interest and in the form of a bullet, which means you don't have to serve as it currently, you can get a little too optimistic. So you have to make sure that your income is sufficient to carry the interest on an ongoing basis and give it still give you plenty of room to live your life otherwise.

Folks that really want to get out there over their skis, you know, that's, they can certainly do that. They just need to be aware that they're doing that they need to have thought through the downside or the risk associated with that.

Michael:

Okay and talk to us a little bit about what some of those downsides and risks are, because there are many people that subscribe to the thought of well, if it cash flows, and it's a safe investment from a cash flow perspective, I can always afford to service that debt and so the value is going up and down, doesn't really affect the ownership of on a day to day basis. So curious to get your thoughts.

Richard:

Well, I mean, that's a wonderful situation, you know, they should be happy that they're in that situation to begin with, you have a property where the rental income covers the expense of your debt and expense of the upkeep of that real estate, more power to you.

But there's a lot of folks, there's a lot of folks that go beyond that. Beyond that level, you know, if you had a nice portfolio of income yielding net income yielding properties, you've done well.

Michael:

Great, great. And so where is it that people start to kind of get beyond and start to get themselves into trouble?

Richard:

Well, I think now is one of those periods, you know, that, you know, maybe not to the extent that hopes 2006 was, but you know, all of a sudden, everything I read is about how real estate values have gone up and are going to continue to go up and that's when they stretch, that's when they start to say, well, if they're going to be going up at this rate, I can afford to buy a property where the rental income doesn't necessarily cover it, or is it right at the razor's edge of covering it in so let me just leverage up and get a lot more property. Because I'm going to be covered by the appreciate subsequent appreciation of the property and you know, that that's just kind of the cycle. You know, I'm, I'm 66 years old, so this will be, you know, which cycle this will be this, like, really seen it. And, you know, you see, you see folks who have, you know, have their pencil out and have a green eyeshade out nevertheless, they get a little bit overly enthusiastic and don't really calculate what might happen.

Michael:

Yeah and that makes a ton of sense. So it sounds like when folks start flirting with speculation, much more so than kind of sound investing principles from a cash flow perspective, that's when you can get really burned.

Richard:

Yeah, I mean, if you're careful about what you do, can do. Real estate is a great business, real estate's the largest business in the United States, the oldest business in the United States. It's always going to be there. You know, it's, it's what makes the world go round?

Michael:

Yes, I was hoping you might say that.

Richard:

Well, I mean, let's put it in perspective. There's about $35 trillion in private sector debt in the United States, right this moment, about half that's real estate debt, that's 16 trillion.

Michael:

Wow!

Richard:

You know, it all energy lending combined is about $1 trillion. You know, all healthcare debt combined is maybe a trillion and a half. Real estate is kind of the center of the universe and has been since this country was founded.

Michael:

Oh, my God, I had no idea was so significant. And when you say private sector, I mean, does that include private businesses and corporations or is that like everyday people like you and me get mortgages on homes to live in?

Richard:

Simplistically, we just define that as households and businesses.

Michael:

Okay and you said 16 trillion, is that right?

Richard:

Yep.

Michael:

That’s such a large number.

Richard:

Well, let's talk about the Great Recession: In 2002, household mortgage debt, which is now 11 trillion was 5 trillion. By the time you got to 2007, it was 10 trillion. So in less than four years, mortgage debt doubled. It had taken, you know, 50 years to get from zero to five, it took four and a half, you know, three and a half, four and a half years, to double from five to 10 trillion. And since that time, you know, it's only grown to about 11 trillion, you know, it actually declined some, and has come back up. So, you know, it's very, I in retrospect, to some it was very, obviously, a runaway debt period. We're certainly not in that today and I don't expect we will be, but it's something we keep our home.

Michael:

Okay and so what should your kind of average everyday investor do with that kind of information? Is that something that says, hey, you know, let's kind of keep tabs on it and see if we're headed towards a recession? Do they need to be looking at such a macro level? Are they able to focus more so on kind of the micro with their local sphere of influence?

Richard:

Well, they should spend most of their time focused on the micro. The macro is a very easy thing to keep tabs on, it'll take them five minutes a month, if they want to do that the information is contained by it's on the Federal Reserve website.

Michael:

Okay.

Richard:

They come out with fresh data quarterly, the there's some folks that actually augment that monthly, it takes, and we keep charts that, you know, go back, you know, decades and the most important thing is just aggregate real estate debt, divided by GDP, and seeing how that changes over time. For this past decade, that number has actually been very flat, which should give a real estate investor an enormous amount of confidence. It's starting to trickle up a little bit now. Which should, would you say to us that we should continue to be confident, you know, forgetting the dimension of REITs, for short, it's just talking about the level of activity. And but it's not hard to tell when there's a boom or bust. It's not going to happen in a week or a month, it takes a year or two, or three and you can see it coming a mile away with the through that simple exercise.

Michael:

And so if someone goes and is tracking this and spending a couple minutes a month, as the percentage as real estate debt as a percentage of GDP goes up, that's where we started need to get concerned. Is that what you're saying?

Richard:

Yeah, it not just a little bit, it needs to go up a bunch, it went up, you know, like 20, or 30%. In that period between 2000 to 2007. It wasn't like you had to get your microscope.

Michael:

It was obvious.

Richard:

It was, it was… it was the hockey stick. So I you know, I can't, I can't see, you know, I can see rates going up putting a an effectively a curve on real estate activity right now. I cannot see runaway lending, which is an even bigger problem that we've seen in the 80s. And we saw in the 2000s. I can't see that being an issue for a while and I think that's a helpful fact.

Michael:

Okay and I'm so glad you mentioned that, Richard, because you said it so nicely into the question I wanted to ask, which is, I think so many of us, especially in the last two to three to four years who have gotten a mortgage, it feels like we've gotten a full cavity search, you know, from from lenders. And so, aren't they there and by law have to protect the consumer to a degree. I mean, they're looking at our debt to income, they're making sure we can afford these properties and so isn't that a really great backstop to preventing that that runaway lending?

Richard:

Of all the Dodd Frank did and it was a gigantic bill, that's the single most useful thing that was contained in it, the very simple concept that the lender has to be able to demonstrate that the borrower has ability to repay ATR and yes, that has been an eye eyes view it is probably the most valuable maybe the one of the very few valuable things about Dodd Frank, but yes, it does.

That doesn't mean you can't get into other areas beyond real estate and get into trouble but real estate at the moment and by the way, it also would suggest to me that you know, clever people somewhere going to figure a way out around that. So, so that you know, they're able to kind of sidestep they haven't yet but it's like in the credit card business right now. This is not real estate, but this is no people buying goods like computers and clothes and things like that. Well, you know, they've come up with things that are different from lending, they talked about, you know, that, that are kind of built into the purchase. So you can't even see that you're getting a loan, you know, it's kind of a deferred payment plan. And so that, you know, sure enough, somebody is figuring out what, kind of an end run here, and I'm sure that'll happen in real estate.

Michael:

Yeah, I could definitely see that happening, too. So talk to us a little bit about COVID. And what you've seen, the kind of average American household debt do as a result of COVID. Because I think everyone had their predictions for the real estate market. Oh, no one's gonna pay rent, it's gonna come crashing down. Everyone who owns this realty is in trouble and really, we saw the opposite effect. So I think something we've heard less about is what you're kind of household debt look like as a result of COVID. So wondering if you have any insights there?

Richard:

Yeah, we track that very carefully and it has gone up a little bit, but not nearly as much as we would have guessed. You know, I think, I think in retrospect, what Congress did, and what the Fed did, was extraordinary, it was far beyond what I would have expected, you know, we've gotten, in essence, you know, 3 trillion of support, including $1,200 checks and $1,400 checks and we've had markets, you know, from municipal markets to certain portions of the real estate market, being held up by Fed liquidity. So, I've… was stunned and impressed by what Congress in the Fed did, you know, for all their dysfunctionality in other areas, they came through there.

So I think that what they've done for that market is kept that market is as healthy as you could have ever hoped.

Now, a couple other things, one of them is a lot of that mortgage forbearance and real forbearance is just now ending.

Michael:

Right.

Richard:

So I don't think, you know, everybody's optimistic, you know, I've, I've talked to the fed regularly, and, and others, everybody's got all their fingers and toes crossed, and thinks that while there's going to be issues with that, they aren't gonna be nearly as is widespread, as we would have guessed a couple years ago, but we don't know. We don't know how that's gonna work kind of work its way out.

Michael:

Why, why are they so optimistic to set a curiosity? Because given those set of facts, if you tell told me, and which I have heard, but people didn't have, you know, didn't make their mortgage payments for X amount of time, and now they're getting tacked on, either to the end of the loan, or they're kind of accruing, there's different ways of doing it. That just sounds like a situation right for a bunch of people losing their homes.

Richard:

You know, I've been trying to figure that out for a year and a half, now. And, you know, I think most most banks, you know, this is where I will speak a little bit about my current job. But, you know, we spent a lot of time talking to folks about that. And the, the level of commitment by the lenders to successful outcomes is very high. So I can't speak for a given situation, I can't predict the future. But I knew I do know that generally, lenders are as motivated to avoid having to go through the very expensive and difficult process of foreclosure or eviction and things like that is anyone go. I hate to speak universally. But I certainly think that's the bias.

Michael:

Okay. Well, that's I'm so glad to hear it because I think a lot of folks would, would argue or have heard the opposite of the big bad bank wants to take my house back, because then they could go sell it and make a profit. But what you're saying is, again, anecdotally, that that's not been the case, from your experience.

Richard:

It's very expensive to a bank to go through that process. It's 1000s of dollars, for a bank to go through that process…

Michael:

Say more, say more on that, because I think that's a really interesting insight that people probably don't know much about.

Richard:

I mean, I don't know what more to say. Other than that, I've never met a banker, and I'm sure they're out there. I've never met a banker who preferred eviction and foreclosure, they would much rather have a gentler outcome.

I'm not those bankers. I don't I'm not in charge of those policies. So I can't speak to it. But as a general matter, in my career before I was in this position, I've never met folks that were inclined that direction. I'm sure there's plenty of them out there, I'm sure there's plenty of problems that are going to occur, but the general bias that I'm familiar with, is it folks, you know, they they view the cost of foreclosing on home, as being 1000s upon 1000s of dollars.

And by the way, not just as a On 1000s of dollars, you know, hiring a huge staff to handle it. In the process of going through the logistics, the staffing concerns, are very, very high. So I'm not gonna say there's not going to be trouble, it'd be, it'd be crazy of me to say that, but but I think that the tone that I, that I hear out there is different than that.

Michael:

Okay, that's great to hear. That's great.

Richard:

I was gonna make one other point. And that is the inventory levels of unsold houses is at an incredibly low level right now. You know, before, if we go back to 2002, 20 years ago, my recollection is the volume of unsold houses, I'm going to say was 1,000,008…

Michael:

Okay, countrywide?

Richard:

Countrywide. You know, the mortgage data that's released by the industry that, that we pick up. If you guys aren't looking at that data, you need to, this is like the mortgage banking Association now.

The inventory of unsold houses by the 0708. At a point when it was clear, we had built way, way, way too many houses, it was 2.7 million.

Michael:

Okay.

Richard:

So it went from 1.8 to 2.7. Today, it's 1.3 million, it is the lowest it's ever been on a ratio basis and that's really the issue. So you already had you know, everybody was still licking their wounds from the Great Recession. Inventory were being kept low by the caution of the industry and then COVID hit and for like, half a year or a year or more, you couldn't build houses because of the lockdown, right? You could you couldn't send an appraiser to that, right, I remember that controversy in those early months. And so you know, what was already a problem was compounded by. So I personally think the biggest driver of the sustained high valuation of homes right now, is the fact that we have such a low inventory going in and that has to be a good fact for your listener.

Michael:

That's a great fact. And so, and that probably compounded and is only exacerbated by low interest rates.

Richard:

Without a question.

Michael:

Okay and so how do you, and I'm gonna ask you to break out your crystal ball here a little bit. But so how do you foresee things changing? Because inventory isn't going to change in the foreseeable future, I mean, you just physically can't build enough homes to meet demand. But so rising interest rates is the seemingly silver bullet, if you will, to kind of curtail this, this crazy demand. How do you see those two things? I mean, how do you square those two things?

Richard:

Well, they're going in exactly the opposite direction. So you might just pretty easily come to a conclusion that it's going to be more of an equilibrium, in terms of valuations, and so forth.

I happen to believe I spent a lot of time thinking about inflation. I think this inflation is not going to last more than let's call it two years. You know, unless we have another wave of COVID, that's beyond what we expect. So, you know, let's say we have somewhat higher mortgage rates for a couple of years, then I would expect mortgage rates to abate again, because I think kind of the fundamental direction of, of economic activity is to a softer, slower level. So I think interest rates are going to go down. So I think I wouldn't be surprised to see things achieve something of a rough equilibrium over the next couple of years, and then get back on a positive path after that.

Michael:

Okay, all right. Well, I'm keeping my eyes peeled. I know that.

Richard, and I want to shift gears here and go in a very different direction with you and I'm curious to get your thoughts or recommendations for some of our younger listeners out there who are kind of just getting started maybe out in their career and we talked even on the episode today about good debt versus bad debt and consumer debt and credit card debt is often so linked to the bad debt. But it seems like that's a necessity in order to go get good debt. And so what should people be doing to set themselves up for success in this country, from a debt perspective?

Richard:

Well, I think you make a wonderful point. You know, you I couldn't remember the time my dad told me that, you know, I told, I was probably 14 years old or something like that. And I told him, you know, I'm gonna have the best credit record the world because I'm never gonna borrow for anything…

He laughed at me and said, well, you won't have any credit record whatsoever, if that's the case, you got to borrow some. So I think viewing it kind of the way you outline is a right way to view it, which is a limited use of credit that establishes that you're responsible repair of debt, you know, maybe an auto loan and one or two credit cards is, is more than sufficient.

Michael:

Okay.

Richard:

For that, and being very careful and responsible about those things, living within your means will set you up very, very nicely, because the things that work against you and a credit score is having too many what are called trades, you know, every card or car, whatever you borrow against is called a trade. So, if you had 10 credit cards, and two automobile loans, and a home loan and a vacation home loan, you would, that would be what you know, 14 trades. And you know, having 14 trades works against you somebody that has four or five or six has, you know, gets a benefit and their credit score and somebody has too many as as a detriment, the other thing that works against you is borrowing too much of your, the line that you've been provided. So if you have a line of credit of $4,000, and you're borrowing one or 2000 against it, that works in your favor, and if you're borrowing 3900 against it, that works against you. Obviously instances of delinquency and charge off work against you quite heavily. So you know, having a few sources of credit and, and managing those responsibility will put you in good shape.

Michael:

Okay and any tips, tricks, tidbits, pieces of advice for folks to help prepare their credit, if they are thinking about wanting to qualify for a mortgage for an investment property at some point down the road?

Richard:

Yeah, I think most banks will work with you. I mean, it takes time to repair your credit, right. So you know, getting curl, I mean, it's the, it's the things you would think intuitively, getting current is the biggest single thing of all, you know, laying everything down, may or may not help you that much.

But if everything you know, if any part of your data is delinquent, you're kind of out of luck. So thing having things being current, if you've have a burden of too much debt, frankly, most banks will give you some kind of relief. If you work with their collection department, they'll give you relief in the form of a more favorable interest rate or the elimination of interest rate or, in some cases even might reduce your principal or what have you.

There are a lot of sleazy credit repair entities out there, they'll advertise on TV, and they'll charge you a fee to repair your credit. I think by and large, those are the ones to be avoided there. There's a few that are not for profit, that will help you that genuinely are dedicated to the right thing. You know, there's the one that comes to mind is an outfit called in FCC, not for profit. There's not a penny drops to their bottom line. It's all, all their work is to help consumers. So I either work with the bank or with a not for profit, like an FCC, and they'll get you, they'll get you on a plan that that makes sense.

Michael:

Okay and if someone is finding themselves in trouble or trouble around the corner, it sounds like getting in touch with their lender proactively ahead of time is going to be a good move.

Richard:

Absolutely.

Michael:

Okay.

Richard:

But it's not fun.

Michael:

I was gonna say it does sound like a fun conversation.

Richard:

It's not fun and in and altering your lifestyle to spend less is complete not fun. But you kind of have to face up to it if you're in that situation.

Michael:

Yeah, yeah. Makes total sense. Richard, this has been super informative, really a lot of good stuff here. Any final thoughts for folks before I let you out of here?

Richard:

Only that you guys are terrific and your show is, is one that folks are our you know folks benefit from and I'm, I'm impressed and glad that you're doing all this good work.

Michael:

Thank you so much, for sure. Really appreciate it. If folks have additional questions for you want to get in touch with you, learn more about you. Where's the best place for them to do that?

Richard:

Same place https://www.richardvague.com/ - V A G U E.

Michael:

Easy enough. Richard, thank you again and look forward to staying in touch. We'll talk to you soon.

Richard:

Thank you.

Michael:

Alright everyone, that was our episode, a big thank you to Richard for coming on super informative, I know I learned a ton about debt and the history of debt and just kind of the whole outlook of the real estate market going forward. As always, if you enjoyed the episode, please feel free to leave us a rating or review wherever it is you get your episodes, and we look forward to seeing the next one.

Happy investing!

Is it smart to invest in single-family rentals before multi-family? Mar 12, 2022

A lot of real estate investors start out with single-family homes and soon realize that multifamily helps them scale much faster. But multifamily properties can come with more complications and many investors appreciate having learned the ropes in the single-family space before taking on this asset class. So is it smart to start small and work your way up or just dive into the deep end?

In this episode, Emil and Michael share their experience on this topic and point out the pros and cons of either strategy.

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co-host…

Emil:

Emil Shour

Michael:

…and today Emil and I are going to be chatting about does it make sense to start with single family or with multifamily? So let's get into it.

Alright, Emil, how's it going, man? It's been a minute.

Emil:

Good dude. How you doing?

Michael:

Hanging in there hanging in, I got a couple of refinances that just close today that I'm working on for a long time, so really excited about that. So I'm going to be redeploying some capital here to some short term rentals. How's, how's the triplex sailing all smooth?

Emil:

Yeah, I haven't, I haven't received an email in weeks. So that's my favorite kind of news is no news for my property manager.

Michael:

It’s a good sign.

Yeah, oftentimes I would say.

Emil:

Yeah, yeah…

We've got tenants in place, you know, they're all fresh, no bad news. So fingers crossed, it keeps staying that way.

Michael:

Sweet! Well, today, Emil and me want to talk about if it makes sense to start with single family or multifamily as you're just getting started. And you are someone that started with single families, right?

Emil:

I did! My first investment property or actually any property I purchased. It was an investment property. It was a single family in Jacksonville, Florida in 2017.

Michael:

Okay, and now you're a seasoned investor, you've got six units, I think, you've done some multifamily.

Emil:

Yes sir.

Michael:

Should you have done differently?

Emil:

I am happy I started with single family. I think starting with one tenant, one home one unit, is the ideal way to start. I don't think, I don't think this is like one of those. There's a better or worse way. I think it's what is what is your appetite for pain? Do you do want to like learn really fast and deal with a lot of craziness at first or do you want something slow and steady and just like an easy on ramp?

So for me having a full time job, at the time, starting with a single family was perfect. It was like, I got to learn how to manage a property manager different things that can go wrong. It was just an easier transition for me and I'm happy I started that way.

Michael:

Yeah, it's funny you say appetite for pain. I think we just want to be careful to not give people the impression that single families can't be a highway on ramp to pain because you know, my first, my first investor was also a single family and it was like the most painful one ever. So I think it's, it's you can have you can have it either way. You can have horrible experiences with single family, you can have amazing experiences of multifamily. So it really just depends, I think how the asset is structured and where you're buying it.

Emil:

Yeah, but you could… let's say you bought a quad Plex, right? You had the same thing, but times fours. It's just like your percentage.

No, actually, I don't know, you could look at it either way, you could say, well, I have 4 units, my likelihood of 100% pain is much, is much less likely than so I think personally it’s just easier to go with one, learn the ins and outs. Again, you're learning, especially if you're remote investing, you're learning how to do that, you're learning how to deal with a property manager. I think overall, it's just easier with one.

Michael:

Okay, and let's dive a little bit deeper. I mean, talk to talk to us a little bit about like, when you say learning the ins and outs, what does that mean? What did you learn from investing in that single family that then better prepared you to invest in that triplex and what was totally brand new? Like what caught you off guard with the triplex?

Emil:

That's a good question. I think it's just, you know, if you never if you've never owned your own home, there's all these moving parts of a home that you're not really like, I don't know how an H back works. How does plumbing work? What's uh, what's the main line? What's all these things? I've even forgotten already, as we're on this podcast, but like all, all these bars, all these parts of a home that you just you don't really know. I think that's one just getting more familiarized with all the moving parts.

Michael:

Does it matter that you didn't know how an H back works? I mean, you don't know how a car engine work. I mean, I assume I don't want to I don't want to put words in your mouth. But do you know how a car engine works?

Emil:

Here's the difference. A lot of things go wrong with your property. I don't say a lot, but things go wrong, right? And it's on you to know, how much does it cost to get that fixed, right? Like if someone said, Hey, your condenser broke? We're gonna replace it for $10,000, how would you know if that's accurate or not?

Michael:

I gotcha, I see what you're saying. Okay!

Emil:

So that's that's one thing.

Michael:

But it's the same thing with car if you take your car to the mechanic and they say, oh, you're continuing to trance function or is broken. We're gonna turn into $1,000 to fix it. So our concept, right, I guess you have to you have to chat with other people…

Emil:

Well my first car was a $6,000 used car. So I would just say, okay, you guys keep it, I'll go get a new one, you know what I mean…?

I mean, it's like, it's, it's also, in most cases, less less dollars in, right. So a multifamily is going to be more dollars in your learning on more dollars versus single families less dollars in potentially, so less dollars you potentially have on the line to learn.

Michael:

All right, all right. I will, I'm gonna I'm gonna take a… alternative position on that one and push back, I think that you can actually find multifamily in particular markets that are as inexpensive or less than some single family. I mean, they're single family all over the place in the 2,3,4- $100,000 verse multifamily, you can find properties that are less than so I think that's a very common misconception that people fall into is oh, multifamily is automatically more expensive and I don't know that that's necessarily the case for every market.

Emil:

Yeah. But then you're putting you're potentially putting the cart before the horse, right? You're saying I'm going to go find a market where it meets this versus you should find a market that you like, and then look within that market?

Michael:

Hmmm… Yep. So you're letting the deal dictate the market or letting the market dictate the deal?

Emil:

Right! I think it's like some people will just I started that way, right. I said, okay, this is how much I want to spend, which markets kind of fall into that, which is one way, but I don't know if that's the right way. I don't know if it's the wrong way. But I would, I would rather if I could start it all from scratch, say like, what is the market I want to really invest in? And then secondarily, who is the property manager, I want to invest with?

Michael:

Oh, that's very well said. And so you're someone that wants to kind of cluster their investments in the same market? It sounds like…?

Emil:

I would yeah, I think I've said that, like on previous episodes being scattered across couple different markets, I think finding one market you like, you're finding good deals, you have a good property manager, again, to me, that's the key is finding a property manager. It's tough, it's like how do you find that good property manager without trying several markets, right?

Michael:

If you get some perspective and you go other places, you realize, oh, man, my manager was amazing, or well, my property manager kind of sucked.

Emil:

Right, right. Well, that's the value of I think networking and talking to other people who are doing real estate investing rather than just going solo.

Michael:

Totally, totally. And I cut you off before to go down this rabbit hole but you were saying, you were talking about what the ins and outs were that you actually learned that prepped you to be ministers as a multifamily investor.

Emil:

I don't think I'm a successful multifamily investor. I have one drive legs and that's been a big learning experience. I don't know, it was just it was a different learning experience in that I had multiple tenants leave at the same time. You know, single family, you're not paying a lot of the utility bills, right. So you're learning on the multifamily, like, what are my actual expenses? What do I cover? And how much are they each month? So it's like, yeah, you can estimate and talk to people, but like, it's just things you're going to learn by doing and buying? I don't know…

Michael:

Yeah, I think it makes a lot of sense, I think it makes a lot of sense…

Emil:

Those are of the things that come to mind.

Michael:

Yeah.

Emil:

And then, you know, how long does your average single family tenant stay versus multifamily? Like, yes, their stats online, but it's to me another one of those things you learn by doing?

Michael:

Yes, very much so, very much so. See, it's so funny, so many of the points you brought up for single family, I agree with and I think are valid, but I have like the opposite experience and I experienced those things with multifamily. So I actually have another episode too, like my first two investments were single family. I had the tenants leave every single year, they did a ton of damage on the way out and had to go to small claims court. So I was like, oh my God, this sucks. So that's ultimately kind of what led me to multifamily, I was like, oh, I gotta do something different. This is not this is not working out. So had much better luck with multifamily and that's where I've been focusing on since.

Emil:

For the record, where are your single family, those two single families you bought?

Michael:

They were both in California, in Southern California.

Emil:

Southern California is a tough market for landlords, man…

Michael:

It very much is…

Emil:

That I think probably played some into it, potentially for you.

Michael:

I think so, I think so. But also I mean, like given that I've also purchased I purchased two flip properties. One was in Birmingham, Alabama and the other in Kansas City, KC Mo, and that's been those have been paying to the butts too and so I think it's it's not a one size fits all like you were saying and it's it's very much personal preference.

Emil:

Sure

Michael:

But some takeaways that I had from investing in small multifamily, so two, three and four units is, as he touched on earlier, was the likelihood that you have both tenants or all of the tenants having issues or vacancy or causing damage, the Cisco likelihood just goes down. And so that's why a lot of people buy multiple properties because if you have one property, the likelihood of having one vacancy is fairly high if you have two that goes down, so on and so forth as you expand your portfolio. And so you can do that and acquire more units and increase the statistical likelihood of success.

Success in this case, meaning not no vacancy and less repairs, with fewer transactions and so it just becomes, easier from a management standpoint and easier from a mental capacity standpoint, when you're thinking about, okay, I've got one address to worry about, these are all the things going on there as opposed to these five different addresses to keep track of and so I think for from a small multifamily perspective, like, again, those two to four units, it's fairly similar from a how to own and operate perspective and I think you nailed that also talking about like the expenses and so from that perspective, it can be a little bit different, and your expense load and what your operating costs look like, and who pays what and how often you might have a turn. And but the cool thing is, the financing is the same. So if you go buy a one single family or a two to four unit, and you're getting conventional financing, that's the same, which is really, really cool. It's not until you make that gap into that five plus unit space that it changes into commercial financing.

Emil:

Right. And that's probably something important to consider here as well, if you're like thinking about multifamily or single family is, well, if you have less time, let's say you wanna invest real estate, but you have less time, right?

Multifamily, we know is valued on how well can you make it perform, it's more like a business, tather than, you know, one to four unit, you're kind of writing the ups and downs of the market to value it right. It's all sales comps. So maybe if you have more time, and you can you feel like you can manipulate the NOI on that property, get it valued higher to do those things. Maybe multifamily makes more sense for you and then but maybe if you're you know, super busy and you want something a little bit more passive, I've just found that my single family has been more passive, my attendance stay longer. I haven't done the triplex for a ton of time. It's been a year and a half. But my tenants stay longer, I hear less things overall, is what I've is my personal experience with, very limited units, so…

Michael:

Yeah, I think you've made a great point talking about time, time perspective, I would just add to that, that if you're just starting out and taking on a multifamily investment, finding something that's that has a value add component might be tough. And it really comes down to like, I know, I was way in over my head with my first multifamily deal I had. Because I just feel like you don't know what you don't know and so you're jumping in, like you mentioned, to this multiple unit situation where all of these things are new, versus trying to figure it out with one tenant and one property in one door, where everything is still new.

And so I think that there it's it's often an easier pill to swallow. But if someone is super gung ho and wants to take risks and has the financial wherewithal to back it up, and is like yeah, I know I'm gonna I'm no, I'm gonna learn lessons, but I want to learn lessons hard and fast. Multifamily can be a really great way to do that. Most value add now layering that on top of that is another way to learn even harder and faster and more expensively. So if someone's just starting out, I think and they're gung ho about multifamily, I think a turnkey multifamily can be a really a really great way to go.

Emil:

Yeah. That's something interesting you kind of bring up their trauma to me not trauma, but like recollection of my this, this triplex my first multifamily is when you're wrong on your calculated repair costs and all that it compounds, right. So if you have three units, you got a turn, and you think it was 5k each and you were wrong, it multiplies faster than oh, the the kitchen on my multimeter and my single family, I thought was gonna be 5000 ended up being 6000, right. Like, you just multiply it if you're wrong multiple times.

Michael:

Yeah. No, it's such a good point, it's such a good point. I wholeheartedly agree.

Emil:

Yeah. But it's good. That's a good learning experience that, you know, people should go through.

Michael:

Yeah, well, I would argue I would have preferred to have someone else go through it and tell me about it and then I could learn from their mistakes, which is why we started the Roofstock academy. By the way, we talked about, hey, this is purpose built for investors, by investors for all the crap that we had to go through that we wish other people had told us ahead of time.

Emil:

True, true and it's also valuable in that, like, your cost will change from market to market, right? So having other people in the same market you invest in, it's just so valuable.

Michael:

Totally, totally. And oh, I forget who said it. I don't know if it's a famous quote, or it was someone I just heard talking, but they're saying like, not every dollar of rent is created equal, in that in every market you go to, just because it looks attractive on paper doesn't necessarily mean that it's going to be, you know, a rosy walk in the park and so be very particular and do your due diligence around okay, what is the market do? And what is the market doing? And why is this thing, both single family or multifamily, the price that it is both from a rental perspective, as well as a cost perspective.

So if you're like, holy crap, I can go buy these $200,000 property rents for five grand a month. Why is that? You know, what, did you find a unicorn? Maybe? And let's, you know, go figure that out, just because it's so good. It shouldn't scare you but you should definitely put up a red flag and say, okay, well, let's investigate this further and find out why this is the way it is.

Emil:

Right.

Michael:

Awesome. Any other points Emil, before we get out of here?

Emil:

No, I think I think we actually cover this one pretty well, in terms of our individual experiences, pros and cons of each thing and it was well covered.

Michael:

Love a good humblebrag… Awesome, let's get out of here.

Emil:

More so by you, you're just grilling me and I'm like, uh,…

I still remember Michael, it was four years ago.

Michael:

You tried to block it out of your mind? Forget about it.

Emil:

Yeah, I'm like, I don't know. I just it's kind of one of those things where you're like, you just put one foot in front of the other and you know, you're drinking from the firehose, so…

Michael:

Totally. Yeah. Well, but real quick, so last question, before we get out of here. How has that investment panned out for you, that first single family?

Emil:

My first one?

Michael:

Yeah.

Emil:

So yeah, it's been a cash cow and if you hear crying in the background, that's my newborn baby in, shout out in.

Michael:

My baby boy in…

baby boy…

Emil:

Baby boy…

So when I bought it, I think the rent was somewhere around 900 and we've just had steady rent increases and the same tenant for four plus years now. So I think now it's at like 10350 or somewhere like that. Yeah, and just having the same tenant is so valuable. I love it. It's so nice. That's my favorite thing was single families. They seem to stay longer.

Michael:

Love it. So what was probably a good deal at the time has now turned into if you saw it today, a great deal, it sounds like…

Emil:

Yeah, I think it was a, if I'm being objective. It was a decent deal at the time and now it's become a pretty good deal for me.

Michael:

Love, time, compounded with like good decisions. That should be like an equation time. Time plus good decisions equals, I don't know, killer deals. Hey, everyone…

Emil:

Michael Einstein, the Einstein of real estate.

Michael:

So dumb… awesome. Well, let's get out of here, Emil.

That was our episode, everyone. Thank you so much for hanging in there with us through all those rabbit hole side tracked conversations. As always, if you liked the episode, feel free to leave us a rating or review wherever it is you get your podcast, and we look forward to seeing the next one.

Happy investing.

Emil:

See you later.

Raising private capital, kids, and generational wealth with Matt Faircloth Mar 05, 2022

Matt Faircloth is the co-founder and president of the DeRosa Group, a real estate investment company that specializes in buying and renovating residential and commercial properties. Matt and his wife, Liz, started investing in real estate in 2004 with a $30,000 loan. They founded DeRosa Group in 2005 and have since grown the company to managing more than 370 units throughout the east coast. DeRosa has completed more than $30M in real estate transactions involving private capital—including fix-and-flips, single-family home rentals, mixed-use buildings, apartment buildings, office buildings, and tax lien investments. He is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’ educational webinars.

In this episode, Matt shares his background in real estate investing, and a roadmap for investors looking to raise more private capital to close more deals. Additionally, he talks about the reality of running a real estate business.

Episode Links:

https://derosagroup.com/

https://www.instagram.com/themattfaircloth/

https://www.linkedin.com/in/mdfaircloth/

https://www.biggerpockets.com/blog/contributors/mattfaircloth

---

Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have Matt Faircloth, author, podcast speaker, co-founder, president, investor, syndicator. He does a lot and we're gonna hear a ton from Matt about what he's been doing in the real estate space, and what he's currently putting together and actually closing on today. So let's get into it.

Matt Faircloth, thank you so much for coming on the show today. Really appreciate you taking the time to hang out with me.

Matt:

Michael, I appreciate your time and having me on your show, man. Thank you.

Michael:

Absolutely, absolutely. So I know a little bit about you but I would love if you could share with our listeners who maybe have never heard of you. They've been living under a rock for the last couple of years, who you are, where you come from, and what you're doing in real estate?

Matt:

Where did you come from…

Um, it's cool that my company's called the DeRosa group and I just love saying this, that we're a company dedicated to transforming lads real estate through real estate transforming lives to real estate. We can get into that in the show if you like. I… where I came from, let's see, I grew up Baltimore, bopped around the East Coast for a minute. Before I landed in Philly, met the woman of my dreams because she put Rich Dad Poor Dad in my hand, and we were still dating, that got me to read that. And that that gave got me to drink the entrepreneur Kool Aid, which I guzzled and quit my job in 2005 to start a real estate company, bumped into a lot of walls, you know, did a lot of it, made a lot of mistakes, made some money and then and then just built it and grew over time and just learned how to run an effective real estate company through the school of hard knocks. And now I've been doing it for 16 years and just apply what I've learned over the years, you know, attracted more and more the right people who work with me and build what I think to be a phenomenal brand now.

Michael:

Oh, that's awesome, man. That's awesome. You said that once or twice before I can tell it just rolled off your tongue there so nicely.

Matt:

You know, this is not my first podcast. Sometimes people ask me, let's just get real, screw it, man. Let's get real right now…

Michael:

Let's do it.

Matt:

What I get I go on a lot of podcasts and when you go on a lot of podcasts, people tend to ask the same questions, Michael, right and so when they do, it's almost like I'm that guy, I'm the DJ sing in a DJ booth and then in the in the DJ booth of Matt's brain. And then people ask like, Hey, Matt, tell me about your first deal and I'm like, okay, let's get the first deal track pull the first track.

Michael:

Go, pull the file.

Matt:

You know, yeah, go pull the file, first deal, right. Tell us about the first time that you raise money, tell us about a mistake you made. Okay, let's go ahead skip, let's go pull up mistake file eight. Okay, let's write that file out, right. So it's more fun to go curveball. You know, like…

Michael:

Totally

Matt:

Yeah, that was a good curveball in the first five seconds of the show that you and I went down right and you into it, you can't help it you end up just going to a script a lot of times you know talking about things on podcast over and over and over again and I was it that a want to be plastic like that, but you end up like, if I've told that story six times the seventh time it starts to come off the same way over and over again, right.

Michael:

I totally get it, and I hope that today is not one of those repetitive podcasts.

Matt:

You're getting not to be that show already man, you are curve balling, I love it. Keep it up!

Michael:

Well as a follow up Matt, what's your favorite mammal, man?

Matt:

It's good one, I am, okay, growing up, I have an eight year old, right, so my eight year old is always: Daddy who would win… I wish he was here because you and me, we would have a ball right now…

Daddy who would win when a colossal squid or a great white shark? And I'm like Simon, first of all like, but he'll even be like a gorilla or a colossal squid and like girl is gonna drown buddy battle…

Give me more data, that would depth are we talking about the ocean? Are we talking about like 3000 gorillas...

To you question, I probably go a gorilla, if I had to pick or, or maybe I don't know why, but growing up I loved Black Panthers.

Michael:

Mm hmm. Okay, pretty majestic animals.

Matt:

Yeah, I don't know, I don't know, the majestic, they are majestic animals. Yeah, so that would be my favorite, those are my two favorite man…

Michael:

I love it, well so real real quick change because we're already on this rabbit hole. You know that there was a show put on by I think NatGeo or discovery that answered your son's questions they would pit these two animals together in a simulation… like that exists…

Matt:

You can google and they would show cuz he would be like, daddy who would win a saltwater… It's just you can google saltwater crocodile versus great white shark…

Michael:

Great white shark, I saw that episode…

Matt:

It’s good, it’s good, right. Good job displaying well you see the saltwater croc would try and take the deathroll on this or do that...

Oh, he was my son's itch was scratched with that, you know. I don't know, why he is up to the Komodo dragons. Komodo dragon versus anything you can name, that's what you want to talk about…

Michael:

That's a battle royale this century…

Oh my god. I love it.

Matt:

Well, dragons are badasses man, these are like, there they are…

Would you know that?

Michael:

Yeah, that’s the kiss of death, yeah…

Matt:

It is! Not only the monstrous lizards like little dinosaurs, but they also the venomous bite, you know…

Michael:

It's such a ridiculous concept like, oh, let's take two of like humans worst fears, like, long tailed long tongue lizards, and then give it venom, sounds awesome.

Matt:

Right! Give it nasty teeth. Yeah, like a really weird awful roar and give them venom, too…

Michael:

Oh my god, so good.

Matt:

They're nasty creatures, man. Good thing that'll make them in North America.

Michael:

I know, I'm stoked, I'm stoked. All right, well, if we bring it slightly back towards the real estate, you know.

Do you want me to do a whole podcast on mammals like komodo dragons…

So you started a company, your real estate company in 2005 and when people hear that, I think it might be ominous to some people, you know, what is a real estate company mean? And so what was the transition, like, I mean, like, what is the DeRosa group do first and foremost and then what was that transition, like going from just owning stuff on your own to now I have a business focusing on it?

Matt:

That's interesting, you know, that man, um, interesting concept, because a lot of people out there are running real estate investing, like it's a gig, you know, like, or it's like driving Uber, you know, you could just decide to not do it at some point, you know, I mean, it's not a gig, it's a real estate investing is a business because it's a marathon, unless you're wholesaling or just doing a deal here and there something like that. Not for nothing. This business… the business of real estate investing is a business and you should treat it as such.

And we didn't always do that the first couple years, I treated it like a hobby and I bumped into walls and did a bunch of different things but like once I really got my legs underneath me, as a real estate investor and really found the calling found the purpose and got and got and got focused on real estate investing. I got clear that it's a business that is like a living animal it's a it's a living thing…

Michael:

It’s a living Komodo dragon?...

Matt:

Real estate investing is like a Komodo dragon, right, it needs food, you know… It can have a venom’s bite and can be nasty and shit and can get the fuck out of you. And a lot of people are scared of it, you know, right… Yeah. People read articles about it only exists in certain places we can keep going. But it is something that needs, you know, if you want to grow real estate investing business and sustain yourself in this, in this industry, and not just make it a hobby, you have to have a company that's got you know, clean books and has a purpose and has a mission and has roles and responsibilities and job descriptions and stuff like that, because there's sucky things in real estate you have to do and it's like, well, you know, and you could look on Instagram.

And if you look on Instagram for real estate investing, people think that it either means you close deals every day, because it's the people every time people close stuff, they put it on Instagram, or they go to it's like, Instagram thinks that for real estate investors, all you do is close deals, go to conferences and go on vacation That's what you see people doing on Instagram, the real estate investing, right? But there's actually like, this sucky part of real estate investing, which is sitting on your desk and answering emails and you know, just corresponding and looking for deals and swinging and missing and dealing with knucklehead tenants and stuff like that that want to, you know, recently Michael, we had a tenant, had his girlfriend come in and he must have done something bad because she went, put all his clothes on his bed, dumped gasoline on the bed, lit it on fire, walked out.

Michael:

Mike dropped…

Matt:

This is what happens, that's real stuff, you know…

That did not make on Instagram unfortunately, you know…

Michael:

No, that wasn't the highlight reel.

Matt:

Living my best life, look it’s amazing…

Michael:

Well, so you bring up a really great point that and that it should be treated like a business and I, I wholeheartedly agree. But so what about all the people out there that are just getting started that could never see themselves as a business owner as an entrepreneur but hear about real estate investing as a great side gig like you mentioned that what about what about all those folks? Where are they left?

Matt:

Okay, they need to decide if they want to do it full time or not, right…And there are people out there that have a day job that they love and it's, it's probably something that's very fulfilling to them, or maybe they went to school for a long time, like a doctor or an MD or whatever. I mean, Jesus, those folks go to school, God bless them for like another 12 years after they get out of college, right?

So why would they change careers, right? They want, there are people that really in their heart of hearts probably ought to go passive for real estate investing, as a side gig and as a way to build wealth. And there are people that that are doing it because they want to build up the passive income and become a business owner out of it. So you got to choose if you want to be an investor or be, let's remember Robert Kiyosaki Cashflow Quadrant book, right. Yes, ESBI, remember that thing?

Michael:

Mm hmm.

Matt:

Do you want to be a B or an I, B= business owner, I= investor. And if you're willing to put in your time and and you know, quit your day job eventually become a business owner and that's what you need to do. But unfortunately, people, a lot of people misunderstood Kiyosaki, to think that to be a real estate investor, you have to be an active operator, you have to do it full time. You can make the passive income all you want as an I-quadrate investor and just passively invest in things. And I think that that's, I think it's probably the most misunderstood function in a lot of his books, people that quit their job that really should have never done that they should have just passively invested their way to financial freedom.

Michael:

Yeah, okay. And let's talk about that for a minute because you wrote a book about raising capital and I think capital is so often the biggest obstacle for people, the biggest hurdle people overcome. So do you see the kind of this roadmap for people? Where if passivity, is it really time is the goal, right? That's what everybody is after and we get there by either usually being a B or an I, by being at B that sounds terrible, don't be a B.

So if people are capital is their obstacle, using real estate as a active vehicle to then take a backseat and invest passively?

Matt:

Yeah, well, that's I mean, my book talks about that and then it goes back to like, let's just keep walking to the B and I road, right. So if you're a B quadrant business owner, we're rising D quadrant business owner for real estate, and you either want to do it full time, you already are doing it full time, then at some point, unless you win the lottery, or unless, like, you know, you just got a silver spoon in your mouth, and you got billions of dollars waiting on the sidelines, from your friends from your family or something like that. You're going to need capital, right? You're gonna run out man you are. And so on the other side of it, you've got I quadrate investors, and they have either retirement accounts, real estate equity, cash, any of those things that they want to put to work and not have to put in the time to make that money, you make that money, do what it's supposed to do, you know, then they can those two can marry up the B quadrant business owner of real estate versus the quadrate investor that wants to make a return on their money without trading money for time. Those two can have a really happy partnership. My book talks about all those things, how those two things can get structured together and how the why in my book are called the cash provider, as SI quadrant investor.

Robert Kiyosaki is a good guy, but he probably sue the hell out of me if I use his terms of my books. I didn't use that, I did, I did the the deal provider and the cache provider. The deal provider is the D Quadra business owner, the cache provider is the I quadric investor.

Michael:

Okay, awesome and what is your book called?

Matt:

Raising private capital.

So funny Michael you asked that it happens to be right here behind… They can get it on Amazon or they can get it on biggerpockets.com.

Michael:

I was just gonna ask. Alright, so it's called raising private capital and without giving the book away. What can people expect to find in it?

Matt:

Along with a lot of my personal story on on you know how I got from guy that quit his job in oh five to you know, running a company that runs that owns, you know, multi 1000 doors of multifamily real estate. It's got that journey in there. And and that but also it's it's got a lot of tools and lessons, it's a how to really on how do you look in your own personal network as an investor, I'm sorry, as a B quadrant designer, it's how to look in your personal network to find the money, you need to do deals because you don't have to go to private lender, or you don't have to go to hard money lenders, you know, if you go and go more corporate level, or sell your soul to get the money you need for the deal that you're trying to do. You can look in your own network to find that money and raising private capital talks about how to find the money you need for deals in your own personal network.

Michael:

Okay, all right, Matt can we do something kind of a silly exercise?

Matt:

Please.

Michael:

Can you because, I think a lot of people are really nervous to have that conversation and I think they feel slimy or gross. Can you pitch me on a deal that you're putting together as someone that would be in your your kind of sphere of influence? Let's let's see. Let's see what that sounds like and feels like.

Matt:

Well, it depends if you're accredited, or not, Michael, because if you're not accredited, we have substantial relationship. But if you're accredited, I can talk to you, I can do a Facebook ad that you notice, right? All joking aside, let's pretend you and I are friends. We already know each other you already like and trust me, because I'm me, right and my book recommends that those are your first targets. You know, and that so hey, Michael, how you doing today?

Michael:

I'm doing pretty good, what about you, man?

Matt:

I'm awesome, man. Hey, listen, I happen to remember you saying that you were working over a company XYZ. You did a great job, didn’t you. It’s good. But you better get an opportunity to come up with ABC Company. And I'm really grateful for that you were able to move over to that did take on that new job. How's it going?

Michael:

It's going really well. XYZ was terrible, ABC is infinitely better. Thank you so much for man, remembering you've got a killer memory.

Matt:

No, it's great, I swear to you… I also barely remember going further, Michael, is that XYZ day as much as you hated what they did, and you know, and I'm so grateful you got out of there. But XYZ had a great comp package they did as I remember, you told me they paid you a really great 401k program.

Michael:

Yes, yeah, it was pretty.

Matt:

Those markets been taken off lately, right. So no, it's maybe maybe hit a top here and is starting to get a little squirrely and everything like that. So I want to tell you that we did you happen to know, Michael, you can take your retirement account and invested in things not Wall Street, you know, in that retirement account you have with XYZ company because you don't work there anymore that retirement account could be put to work in real estate. Did you know that?

Michael:

I had heard that. But I didn't really know that I could do anything about it…

Matt:

Well, you can now that you've left XYZ company, right, you can take that retirement account that they have, and they probably were paying you and lots of company stock, take the chips, man, take the chips off the table cash in, sell that company stock and roll that and roll that retirement account, which is now by the way was a 401k. Now it was an IRA. And you can roll that IRA over to a third party IRA custodian and you can do all kinds of cool stuff you can buy, you know, shares of companies, you can buy your own your own real estate investments, you can lend that money out and you can also invest it in deals like we have, I, we are right now Michael buying 670 units in two states, five apartment buildings in two states. That's the deal, we're in the middle of right now, produces phenomenal returns, produces, we're going to fix these buildings up and we're going to refinance them over time and as we refinance them, we're going to give some of that money back to you to your retirement account. So you can then take it and parlayed invest in another stuff. It's a great return.

I know a lot of people that we work with are really happy with work that we've done as a company. So you and I should talk further as a matter of fact, I have some Ira custodians that can handle this whole thing for you, if you'd like, I'd like to introduce you to a few of them that I love. You know, and then they we do a lot of work with them. So they give us white glove treatment. Can I introduce you to them for you?

Michael:

Yeah, that'd be great, man, thanks so much for doing that. I appreciate it.

Matt:

Yeah, and I'm going to mail you the offering. And if you don't, if you're not happy with my, if you don't like the returns, and you're you're nervous, whatever, it's okay, I get other things I can send you over to, I really want to help you build your wealth while I build my business. Because we're building a great real estate company and we're, our mission is to transform lives through real estate, I want you to help me do that. By me helping you earn money with your retirement account. Well, we do the work. So we can do that for you. And if it doesn't work out, that's okay. I have plenty of other friends for this awesome network called biggerpockets.com, you should check out and you can look on BiggerPockets to and find other things to invest in, like private loans and other cool things that can show you that are not real, like that real estate that I mentioned, even though that's a great deal. There's other things you can do to and I'll hold your hand the whole way. What do you think?

Michael:

Oh, sign me up, man, I'll be looking for your email.

Matt:

Cool, no problem.

Michael:

Man, that was awesome. That was so so so good.

Matt:

Thank you, thank you…

Michael:

So firstly, for first and first and foremost, you've now got to send me that email because I'm sold. But secondly, what I love about what you did is the conversation felt very much, let me help you, let me put provide value for you educate me around what I could do with my retirement funds, which I might have not even been aware of, and then to tell me how you're able to help me, before even the you being helped in the process, being able to your own deals be my financing was even mentioned.

Matt:

Yeah, well, so is a few facts, right, um, of the $10 trillion, that's currently in IRAs, right now, not 401k, it's just IRAs of the $10 trillion, it's out there. 4% of us invested in anything else outside of Wall Street and so if you're looking to get your capital game going, the easiest low hanging fruit, and the thing that everybody has is a retirement account that has if they've got a job, and they used to work at one company, and they now work at another company, their retirement account, they had the first company is now eligible to get rolled over to an IRA. And with the big run up the stock markets had it that's what you should be talking to people about, is like, hey, you used to work over here. Now you work here, don't you are you got laid off, you quit whatever it is, they don't have you there them a job. Now they just have to use to have a job. It's such an easy, low hanging fruit conversation and it speaks to their needs too. Because everybody's get a little squirrely and where Wall Street's going, it's just been a great run. You know, it's had a great run over the last 12 years. But now it might be time to pull a few chips back. So I think that that's something that's probably the most underutilized conversation out there. For those looking to raise money, is to talk to anybody that's got a job about investing their retirement account with them with their real estate company.

Michael:

That's so good. I think so many people when when thinking about having that conversation, think, well, I don't know anyone who has money, because they might not be in cash assets or liquid assets on the you know, in a taxable account, but the retirement side of things brings into focus a whole another option.

Matt:

Yeah. Yeah. Well, you can and there's other ways you can go about it, too. You can kind of sniff out, my book talks about like how to sniff out people that are in your network that likely have a lot of cash. What does what are the signs that a lot of cash leaves, you know, my book talks about that, my book talks about, there's another vehicle that they can they can invest with you and as those are people with free and clear real estate.

Last time I looked, Michael 30% of America owns their home, their primary residence free clear 30%. You know, but they don't. It's not it's not to get paid to ask a different color when it's paid off. It's hard to tell. Like all the purple houses in America are free and clear. Yeah, no, I don't know. So, but my book talks about the signs to look for free and clear real estate. And I also can tell you, here's the free clear real estate conversation. Here's the those with cash conversation and here's the retirement account conversation to have. I just pulled that into my playbook because it seemed like the most obvious one to go for is retirement account is probably the most, it's the most underutilized one. But I think it's the one that's most unnecessary right now, in today's world.

Michael:

That makes so much sense, that makes so much sense. Matt, you mentioned before we hit record here that you are actually in the midst of closing the biggest deal that you've ever done to date today. Can you talk to us a little bit about what that looks like?

Matt:

That was a by the way, Michael that was it bullshit. That was a real deal. I was pitching you on for your retirement account when you were working for XYZ comm your XYZ IRA could be invested in the deal that we're closing part of right now. Yeah, it's 670 units. It's in it's in two states. It is a five apartment buildings and we're closing two of those today. The other three close in a couple of weeks.

Michael:

Amazing, okay, and what attracted you to this deal?

Matt:

Um, that okay, so two of the buildings are in Winston Salem, North Carolina, and that is a company that is city we're already heavily invested in and it's a city that's showing phenomenal growth, 14% rent growth last year, RD on pace to do at least 12 this year percent rent growth and this owner hasn't increases rents in the last two. So he hasn't seen any of the rental upside that's been happening, the rent growth has been happening in that market has not been realized on those properties. So great opportunity, we already have property management in that town lined up and Lexington we own six other apartment buildings. So we are a niche down company. We're not going to just invest anywhere that is a good deal. We invest in super specific markets, so those are there were three markets Lexington, Kentucky, the Piedmont triad in North Carolina, and in Lancaster, Pennsylvania, of all places. Those are the three markets that we're in. That's it

Michael:

If it works, it works…

Matt:

So…I like about it. I also like that it's diverse meaning like it's it's different geographies, different management strategies, even different property conditions. I like all those things about it that it brings a lot of things to the table, that make it more of a stable asset.

Michael:

Okay, okay..

Matt:

But it's stable investment, like stable here, but poised to go up.

Michael:

Okay and we've had a lot of folks on the show recently talking about passive investments. And you know how you're really evaluating the operator more so than the deal itself. But can you give folks listening some tips about how to evaluate maybe the deal? I mean, what, what details of the deal itself should people be looking at to feel comfortable?

Matt:

Yeah, um, you should look at…, I'll tell you why I'll tell you, what people will do to make their deal look better than earlier is, you have to look at what their exit criteria is. That meaning like, they might be saying, okay, we're going to buy the property for this number, and then we're going to invest this and then we're going to sell it for this, like that nine times you paid for it, then you investors aren't going to make any money till we sell it, or you're not going to make very much money until we sell it, if the majority of investor returns are projected to come through the sale and the end, the syndicator is assuming that the markets gonna stay very stagnant, that cap rates are gonna stay down and streets gonna stay down, yada, yada, then they're kind of making a lot of assumptions that may or may not come true. So that's one thing to be concerned over. So make sure that they're conservative that their crystal ball is is, you know, that they're looking into has some conservatism's as it in it, because that's one thing. That's one thing, as indeed a syndicator can do is they can predict that the markets going to be super favorable at some point in the future when they go to sell and that makes the deal look really good right now.

Michael:

Right, right…

Matt:

Yeah, make sure there's a lot of there's some experience on the team that have been it's okay to have new new and to work with new people, because we're all new at some point. But make sure somewhere on their team, there's some deep, there's a deep bench of experience.

Michael:

That's great, that's great. Yeah, no, I love those points, I love those points. I think I've seen that too and a bunch of syndication deals like oh yeah, we're gonna buy it at a six cap and we're gonna exit at a three cap and it's like, really look.

Matt:

Phenomenal… 22% IRR man, what's the cash flow? Oh, it's only gonna pay like 3% cash on cash. But you know, magic fairy dust, get sprinkled on the deal, and it's gonna get sold and you're gonna make you're gonna triple your money. You know, three right now when I sell it, and that's how it's gonna go, right…

When the crypto rises, you know…

Michael:

No, that's a great point, those are great points, Matt. And I'm curious to know what do you you know, in your book, I'm sure talks about this but for anyone listening, that's thinking about starting to raise money but doesn't really have experience. They've you know, they've got the hustle, but they don't have the experience and they don't have the capital. You know, what should those people be doing right now?

Matt:

Okay, I'm getting smudge get as much exposure as you can. Some folks do that through investing some some people that I know, that are very successful, syndicators now got started investing in other people's deals to learn the ropes, right. And that's it, do that get some exposure, we know why you can to other people's deals, you know, network, do what I did. But to start small, like we're on our 50 we're closing, this is our 15th syndication that we've done. But our first syndication was a guy my wife went to college with put in 50k into it into one into a deal that we did, we bought two single family homes with his 50k, right, that was our first syndication.

So you can start small, find the one person that has some capital to work with in your in your network, and do a deal and then expand it out, do another deal, expand it out, do another deal, expand that out, do another deal. So for those that are looking to get started, it's okay to start small. It's not sexy to start small, but it's also okay and there's a lot further there's there's a lot smaller distance to fall and a lot easier to course correct on a small deal than it would be to correct on a behemoth issue first.

Michael:

Yep, I think that's such a good point, I think that's such a good point. I know I've spoken to people and I thought, well, my first deal would be a 10 year multifamily, because multifamily is the best everyone's talking about it. It's like yeah, okay, well, have you done a single family deal? Well, no…

Matt:

I'm telling you, I hear people like, oh, I'm gonna do 100 unit multifamily deal. You know, like, that's my first deal I want to do, I've never done a deal before my life. But I want to close 100 units is my first deal. I get it and I want that, too for you, you know. But you might have to bang your head against the wall a lot. Where you could just go and syndicate a duplex right or syndicate like get your Mama to go give you a couple give me a couple of dollars and you and your Mama would go buy a duplex right, you know…

Michael:

But then I can't post it on Instagram. No one wants to see me my mom and me doing deals…

Matt:

I can't fake it till I make it that right, you know, or pose next to the Lamborghini that I just bought because I've been, I've been investing in real estate for the last few months.

Michael:

So good. The last question I have for you before I let you out of here is, you were talking at the beginning of the show about how you did all these things and kind of rally different directions and then you really niche down and you got really focused. How did you do that? I mean, how did you, what did it take for you to get hyper focused?

Because I think so many of us as they get started real estate like, oh, I could do long term buy and hold or I could do flipping or I could do wholesaling or I could do burr investing. And there's so many different ways to go. How do you know when you found the right one?

Matt:

Well, first of all, Michael, I just got I just get tired to get my ass kicked, you know…

I'd like to wholesale deals going on at for fix and flips going, I was buying a bunch of rentals and everything like that, and it wasn't sleeping awake, you know and I was doing everything media doing a mediocre level, any of those three things that I was doing, I was involved in some other stuff, too. Any of those three things that I was doing could have gotten to me to my financial goals. But the mistake that I made with all this tribe was doing a bunch of things, mediocre lee versus doing one thing really well, right. And so I found that I was, you know, good at being a landlord, because with the landlord properties that we had raised very well. And it's also good at raising money and explaining what I do land lording in a very simple fashion to people and so I was like, okay, well, I'm awesome at those two things. Let me just focus on those. And the more I focused on those, guess what, Michael, the more money I made, like, money's good. I like making money. I do enjoy my family. You know, that's good. So how about anymore, though?

Yeah, I'm not good at managing contractors, some too nice that I believe them when they tell me that their car broke down. And that's why they couldn't show up on the job site, but they still need me to give them 10 grand, you know, and I believe them. Okay, here you go. And that, so I just knew I didn't have people in my network to outsource that to at the time and so it made sense. I had tried partners to run that fix and flip division, my company didn't work out. So I needed to abandon the things that weren't working, and focus on the things that were and for those that are looking to niche down and focus. It doesn't have to it doesn't have to be apartment buildings, believe me, don't listen to Instagram does not have to be apartment buildings. It can be other things, I promise.

But figure out what you were calling your core genius, right? Your God given talents, what are you gonna call it, figure that find out those and how you can best bring those to the real estate table and even better, how they are benefiting your business today. And then just easy, Michael, do more of that. How about that, there's two more of those things, if it's working, you do more of it, and less of the things that aren't, you know, it could be that simple and that's kind of how we grow in and I found people that were able to sit in the seats that I needed for me to focus more on raising money and more on the land lording , and I'd filled in those seats and I got it, you know, tight and I expand that up and I was like okay, land lording is amazing, but I could probably scale faster if I outsource that and hire third party management companies. So we did that I could focus on raising money and I could focus on building the team and enrolling and inspiring and being the leader of my team. Now that's really all I do is I lead my team and I raise money and I talk to you…

Michael:

I love it, I love it. That, this has been so much fun Matt, if people have questions for you want to reach out to you are interested in investing in some of your deals, what's the best way for people to get in touch with you?

Matt:

There's a ton of stuff on my LinkedIn bio. My LinkedIn is the Matt Faircloth, I'm sure there's plenty of other Matt Faircloth in the world but my Instagram handle…

Michael:

You stake your claim…

Matt:

I've claimed it, there also the Instagram I'm the only Matt Faircloth, @themattfaircloth and there's a there's a link in my bio on Instagram and there's a ton of stuff there you can go and invest in my and you can hear about investing in deals with us if you're an accredited investor you can join our mailing list because you do a non-accredited deal sometimes for those that are that we have a preexisting relationship with so you can join that list or you know hear more about that.

You can buy a copy of my book there you can you know join all kinds of different cool things we have going on and Masterminds webinars, all that jazz is on the link in my bio on Instagram.

Michael:

Sweet, well Matt thank you again, man, from Komodo dragons to passive investing, this has been a blast. I'm sure we'll be chatting soon.

Matt:

My family and I play a game at dinner called: True two truths and a lie and I'm going to slay it right in two true and a lie there that I was on an interview and me and this guy talked about Komodo dragons. Nobody's gonna believe that. But I totally got my family, totally gonna crush them at true two truths and a lie tonight…

Michael:

I love it, I love it. Well, I am glad I could be a part of it.

Matt:

Thank you.

Michael:

Awesome, take care man.

Alright everyone, that was our episode. A big thank you to Matt for coming on. It was super fun from Komodo dragons to real estate syndication. I didn't think we'd be able to get there but we kept it on the rails. As always, if you liked the episode, please feel free to leave us a rating or review wherever it is you get your podcasts and we look forward to seeing you on the next one.

Happy investing!

How the real estate market is changing and how to adapt to it Mar 04, 2022

The past years have seen a confluence of different factors affecting the real estate market: a global pandemic and government's responses to it; the following economic environment, with record inflation, hikes in interest rates, and significant migration; and social unrest around the world. All of this is occurring in an already extremely competitive market.

So, how do you keep up with it all? How do you continue to grow your portfolio, protect your assets, or even minimize your losses?

In this episode, Emil and Michael will share their insights how to adapt, grow, and prosper in the current environment.

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Transcript

Emil:

Hey, everyone, welcome back for another episode of the Remote Real Estate Investor. My name is Emil Shour and today I'm joined by…

Michael:

Michael Albaum.

Emil:

And on this episode, we're going to be talking about adjusting your expectations as the market changes. So something that's probably on a lot of people's minds, and we want to address it on this episode. So let's hop into it.

Emil:

Michael…

Michael:

Emil…

Emil:

Tell me, is this something that you get a lot in the academy, like people come up to you and say, hey, you know, a couple years ago, I was shooting for an eight to 10% cash on cash and now it's just not really possible with how property values have gone up and rents are growing, but not as quickly? What do I do?

Michael:

Yes, absolutely. I get the question regularly in the sentiment regularly. And my response is usually quite similar. And it's either you're looking in the wrong market. So what you're looking for exists, but just not where you're looking for it. You aren't looking hard enough. So maybe it exists in your market, but you're only looking at the MLS and maybe you need to go off market or wholesalers or change the avenue which are looking for those properties. Or maybe you just need to adjust your expectations. Maybe what you're looking for doesn't exist. And so those are usually the three options.

And the three suggestions that I give to people to go try. And and so I think it's it's absolutely, the market has changed the conversations we were having a year ago, just we're having different conversations now and so you can't go, you know, it's like when a sport that's go to a sporting event, and the rules have changed, you can't keep trying to play the same game, because you're not going to do well. And so I think we absolutely have to adjust expectations for the current conditions. What are you seeing man? Are you are you hearing similar sentiment and kind of the circles that you're running in?

Emil:

Yeah, I mean, you know, I'm a less active more maintenance real estate investor currently. So I haven't been making offers or anything recently. But you know, I follow a lot of real estate guys on Twitter, including you. And it is it's either you two things happen. You either just say I'm done doing deals, or you adjust your expectation. And I think Michael Zuber talks about this a lot, our old pal from one rental at a time, he says you have to stay active in your market to know what's going on in your market. Maybe five years ago, you were doing 10% cash on cash returns, but markets change. Maybe a good deal now is a 7% return, right. And it's it's about finding the good deals in your chosen market versus like just arbitrarily finding a number and scouring to find that.

Michael:

Yeah, I totally agree, I totally agree. And I think it is like you and I and Michael Zuber we talk about hyper hyper local, like real estate investing is hyper local. And so it's really tough if you're chatting with a friend that invest in Kansas City, and they're like, oh, I can't find, you know, I'm.., I'm trying to make 8% cash on cash return and having a difficult time doing that.

And then you're over there in Austin, Texas, like 8%, holy crap, I kill for 8%, I can't make 3% work. So I think it's it's hyperlocal. And you have to really understand your particular market. From A and I know this everyone asks like what is the return? Like, what's the number and everyone's I think a little bit gun shy, myself included because A it's not an evergreen type of situation like today, we're recording this and end to February 2022. So if you're listening to this, in the future, you might think there's no way we're getting those kinds of returns, it could be either way better way worse.

But I think on average, like the number spread of five to 7% levered. So that means like your cash on cash with debt, I think is what is realistic for a lot of people in a lot of markets these days. And a year ago, two years ago, that was just not the case. You know, like you mentioned eight to 10% was totally doable in a lot of different markets. And again, this totally is dependent on the asset class, and the neighborhood and the market and so you might be listening to this, even as we're recording this and say, oh, there's no way I could I can't possibly do that. I'm in San Francisco, California. Okay, yeah, well, that might be true. So you're someone that where the market takes a massive effect and impact on and you can't make those numbers work. So again, take this with a total grain of salt, but just know that the number expectation for me included has totally shifted, has totally, totally shifted.

Emil:

Yeah… So you mentioned you tell people, you engineer the number right or like there's different levers you can pull to get maybe one of the return metrics You're trying to aim for it. Can you talk about that more?

Michael:

Totally yeah, because I'm a reformed engineer, I still like engineering stuff and so, you know, I've learned now that you can really engineer your return. And there are just like mentioned a couple of different levers to pull. So one is obviously purchase price. And so we don't often have a big impact on what the purchase price is, because the seller does, and especially because of how competitive the market is. So we might not be able to affect that lever very much. But we might be able to for making all cash offers. And so if you're able to bring all cash to the table, you might be able to be more competitive. And therefore, you might be able to pull that lever a little bit more than your average bear.

The second lever you can pull, which you absolutely have, I would argue more control over is your down payment amount. And so if you're someone that's using an 80/ 20 mortgage, you're bringing 20% down bank or lender is giving 80%, you're gonna have some expected cash on cash return, and some expected cash flow based on your numbers and how you however you underwrite. Well, if you put down 25% or 30%, you might get not only a better interest rate, but now you're going to have a smaller mortgage amount, which is going to translate to a higher cash flow. Now, we talked about this all the time on the podcast that, in my opinion, I think you should be looking at both cash on cash return, and monthly cash flow in terms of dollars because you can have instances where your cash flows through the roof, but your cash on cash return is a metric how hard your dollars are working for you is like minuscule, right, I can show you how to buy $1,000 a month property, something that cash flowed $1,000 a month. But if you have to go spend a million bucks to get it and might not be worth your while.

And going the other way with it, I could show you how to buy a property that might yield you 50% cash on cash return. And people hear that like, oh, duh that like that would be amazing. But if it only cash flows 27 cents a month, nice property goes negative, like that might not be a good situation either.

Emil:

Right, right…

Michael:

So I think most investors want to find a balance of the two, they want a strong cash on cash return, they want their dollars working for them, but they also want to put dollars in their pocket. And so you can you just simply engineer that by your down payment amount. And a question that I always tell people to ask their lenders, if they're using a mortgage is, hey, where are the interest rate threshold breaks?

So if I'm putting 20% down, this is my interest rate. If I put down 25%, what is the interest rate do if I put down 30%? What is the interest rate to if, what if I put down 35% and go find out where those thresholds are, because you might see that there's a really big jump, or a really big change in the interest rate and depending on the loan amount, and again, depending on your particular deal getting a lower interest rate, even if you have to put more down might actually translate to a better cash on cash return. And that's kind of counterintuitive for most people, because I think a lot of us think of the less you put down, the better our returns will be overall, which isn't necessarily the case. So I've seen tons of instances where actually putting down more cash will yield you both a higher cash flow monthly cash flow number, so more dollars in your pocket, as well as a higher cash on cash return metric. So actually getting your dollars working harder for you, because they're not fighting so much interest headwind.

Emil:

That's a fantastic point to bring up and one of them is that higher down payment you're bringing that. The other point of that other benefit, I guess I would say of that is let's say you think prices are higher, right? When I think if you put your borrowing less, right, you're, you're protecting your downside a little more as well, depends on where you think we are, you could say, nope, I think prices are gonna rise for the next 5-10 years, whatever. But if you're unsure, that is one way you can provide yourself with a margin of safety is a little bit less leverage…

Michael:

Totally less leverage and more equity. Absolutely, absolutely.

And so I think it's important and we were talking a little bit before we hit record here, that in today's market, you might have to sacrifice on one metric or the other. I talked about looking at them in unison and trying to maximize both. But that's often not the case, they often tend to be competing against each other and so you know, pick a number that you're okay with and maybe you have to give a little bit up on the cash and cash return side, maybe your dollars aren't working as hard for you. But you're more excited about the amount of dollars you're putting in your pocket. Or maybe your dollars are working harder for you. And you're you know more excited about that. And you got to give up a little bit in terms of actual dollars going into your bank account. And so it just being flexible, adjusting with the times just in your expectations for where we are in the current market cycle where interest rates are and you know where, where prices are.

Emil:

Yeah. Solid, so what do you think is the let's take away market timing. What do you think is the evergreen takeaway here for just expectations around returns as things go up, down, sideways, all those?

Michael:

Yeah, I think we just have to take into account all of the things. So all of the things in my opinion are purchase prices, whatever prices doing and what are owner occupants doing because 5-10 years ago, we had, I think we saw much less demand from owner occupants and the pandemic has really shifted that, so everyone is trying to buy homes owner occupants and investors, which puts a lot of upward pressure on the market, so that's a change. So we can't, we can't no longer, we can no longer as investors go in knowing, that we're only competing with other investors, and figure out the best way to engineer our offer so that we make the best return, because now we're competing with people that are paying way less than interest, because they're owner occupants. So we've got to change our strategy out again.

So what the Evergreen takeaway is, is figure out what levers you have in your back pocket to pull and so if you can make an all cash offer, think about what that looks like and how that might affect your returns. If you could put more money down, think about what that looks like and how that affects returns and then just run the numbers and it shouldn't be an emotional decision, it should be a fact based and number based decision and like hey, how do I generate the best return for myself and again, that could be heavy on the cash flow and light on the cash on cash, it could be heavy on the cash and cash flow and cash flow or it could be maximizing both, but I think you got to do whatever it takes to get the deal done and in an acceptable like with acceptable metrics, whatever that means for you. And so again, moving those three levers tends to be the best way to that I've seen to get deals done and in today's market, but also I mean think about alternative financing options with like owner seller financing or private capital like these are other ways to give yourself an edge a competitive edge and so think about how those might be able to affect your returns as well.

Emil:

I dig it, good tips.

I will… I will leave with my evergreen tip being know your market, study your market, like Michael Zuber says, we talked about earlier, know your market, right, the market, your market your individual market will change and it's about knowing what a good deal is in your market, not what a good deal what you used to think was, right, so know your market what is the average return and try to beat that.

Michael:

Yeap…

Adapt or die, right.

Emil:

Yep, exactly.

Thank you everybody for tuning in. Hope you found this episode useful if you did, please leave us a review, a comment, we love all those it strokes our ego and it helps us find new episode ideas for you guys. So with that, we will check you on the next one. Happy investing.

Michael:

Happy investing…

Is Charleston SC one of the hottest real estate markets in the US? Mar 01, 2022

Joe Porter is a Roofstock Certified Agent and the founder of Lighthouse Real Estate LLC in Charleston SC. Joe is focused on helping clients buy and sell homes, while offering his considerable experience in construction and the large network of tradesmen he gained during his acquisition years.

In this episode, Joe shares his knowledge of the Charleston market; economic factors, demographics, neighborhood scores, geographic considerations and the current environment on the ground

Episode Links:

joe@lighthouscharleston.com

http://lighthousecharleston.com/

https://learn.roofstock.com/blog/charleston-real-estate-market

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Transcript

Michael:

Hey, everyone, and welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, we have our certified agent Joe Porter for the Charleston, South Carolina Market. He's going to be talking to us today about all the things we need to know as investors before getting involved in that space. So let's get into it.

Joe Porter, what's going on, man? Thanks for taking the time to hang out with me today.

Joe:

Hello, you're welcome. Thanks for having me.

Michael:

My pleasure. I am super excited to talk to everybody with you about Charleston, South Carolina.

Tell us a little bit Joe, first off who you are, where you come from? How long have you been an agent? And are you an investor personally, quickfire questions to get started…

Joe:

Absolutely, ready to go. So I moved to Charleston to attend the College of Charleston about 22 years ago. And like many other people, never left. I came from the Washington DC area and visited the region one time and never looked back. So shortly after graduating from the College of Charleston, I was one of the many residual recipients of ninja loans, okay, so, you know, I knew a ton of people who needed rooms for rent, and I got the bright idea, let's buy a house. And I was working at a bartender out on Folly Beach at the time, and was making tips and Wells Fargo decided to give me $200,000, which I bought my first house with that sort of kicked off my real estate career.

Once I found that house, I kind of got the bug and never stopped looking. So I went in from there and got my real estate license. I'm not a very sales oriented person. So I knew from there, I wanted to embark on sort of the investing side of things. So I signed on as a buyer for: the we buy ugly houses franchise home investor.

Michael:

Okay.

Joe:

So that sort of gave me the framework of looking how to, you know, analyze a deal, the repairs, and how to present an offer to the seller. And right about that time, I established a brokerage to sort of dovetail my, you know, investing, dealings and offers to then list retail, I experienced some success there. And then the bottom of the market fell off and I just had a bunch of listings and no buyers. At that point, I guess this was around, you know, 2000/ 7, 8, 9 I came up with a bright idea to start buying houses. So I put together a little mean, machine of a crew with the idea to have the acquisitions improvement and management all under one umbrella. And we started buying houses, okay.

So the first house I bought was in North Charleston, it was a single family detached home for $12,000.

Michael:

What?

Joe:

It pulled… Yeah, oh yeah. Someone had yanked all the copper plumbing out of it, all the copper wires. It had been, you know, sitting vacant as a foreclosure, you know, owned by, you know, the Bank of New York and so that was the first house. And we went in, renovated it, rather quickly. And, you know, rented it out and that was my proof of concept. I said, this works out great. You know, at the time, I rented it out for $800 a month. Today, I still have that house, you know, what now almost 15 years later, and it's a 1200 a month rental for me.

Michael:

And what did you spend on the rehab? Do you recall?

Joe:

You know, at this point, I did everything myself. You know, I knew enough to be dangerous, but now, I know I really didn't know anything about renovations and construction. So I cut some corners but you know, and I was buying used materials, things like that. I spent about seven grand on the rehab

Michael:

So you bought it for 12, put seven into it and then rented it for a 50. Dude…

Joe:

Yes, and didn't take an accountant to, to like those returns.

Michael:

That's incredible. I don't think I've ever heard of it like, that's like a 4% plus property.

Joe:

Yes, indeed. So after that, you know, I brought in more people on the construction side to help me out, we put… put a crew together, and I continued to participate in the labor, we bought one house after another. And then, you know, we did about 10/ 12 houses a year. And I currently own and manage about 55 rental units in the Charleston area. So they're all scattered site, single family detached. And, you know, so I spent a solid about eight years just doing that cumulating. And then, since the market has shifted, I've focused more on my brokerage activities, I brought my wife, Claire in on the business, and she helps with buying and selling. So last year, we did about 15 million in transactions, but 50 sites. Year before we did about 14 million. So right now, we are solely focused on the brokerage activity. And if you know something should present itself from an acquisition standpoint, we jump on it, our business model is, you know, will present when we go on a listing appointment, will present an array of options.

So, you know, first option is, you know, hey, I see what you got, we could sell it as is, for this price, we can also help you with some of the repairs, and we'll pitch in on the repair costs, bring our crew in to help maximize the cost of the or maximize the value, we do a cost value approach there. And then the third and final option, when it's appropriate, we can buy directly from you, no commissions, no closing costs, you know, on your timeline, whatever, whatever you want to do there. So doing that we have, we'll add a couple to the portfolio, we'll buy maybe one or two a year that will be flips, and then we'll list you know, about 50 years.

Michael:

Joe, this is amazing. Man, there's so much here that I want to unpack, we'll have to have you back on just to talk about that side of your business. But I want to, I want to shift gears here a little bit and talk about Charleston, as a market so that all of our listeners can get an idea of what they could expect why they should be excited about the market.

So can you give us just some high level overview of: Are people moving to Charleston? And if so why? You know, what companies are headquartered there? What jobs are available for folks?

Joe:

Yes, so the secret is out on Charleston. It is currently, I think ranked the 12 fastest growing metro area in the United States, we have about 38 people a day moving to the region. Especially over the past two years, we've seen a bit of a migration of both, you know, people trying to leave more crowded, you know, urban environments, or baby boomers coming to retirement age. And so those are the type of migration that we're seeing in the area. You know, Charleston, people might know it, as, you know, the historic downtown. You know, 20 years ago, our economy was based on tourism, and hospitality. So we were, you know, just in that service sector, and that was about it.

But since then, you know, our economy has exploded, we now are anchored in manufacturing. So the state of South Carolina is very sort of, you know, company friendly. We're offering incentives for companies to move here and set up shop. You know, there's not a lot of labor unions or, you know, thing it's a right to work state, so companies like that. So that's lured Boeing from Seattle, to North Charleston. Volvo's setting up here, Mercedes, Daimler, Chrysler, Bosch, new core. Those are examples of some of the companies here in the Charleston area in the manufacturing sector.

We also have a military presence. Okay, we have a joint base, that's Air Force. We have a naval, naval weapons station, and a nucular submarine school based in Goose Creek, which is just 15 minutes north of Charleston. And there's also going to be developing one of the larger Coast Guard schools here, so we have military and then education, my alma mater, College of Charleston, the Citadel and the Medical School of South Carolina. You know that along with our port activity, so Charleston, has just completed a port deepening. So that makes us the deepest port on the east coast. So lots of importing, exporting, is bringing a bunch of, you know, auxilary businesses with it to the…

Michael:

Yeah, oh my gosh, that's really interesting. I had no idea. So…okay…

Joe:

…there's a lot happening here.

Michael:

Uh, yeah, sure, sounds like it. Joe, I'm wondering if you could do a screen share and kind of give everybody who's watching this online, a visual tour of the city, if you will. And if you could share with us, where do you like to look for your investments? And where should folks be looking for there's based on if they're targeting cash flow, or some appreciation potential?

Joe:

So one of the things I like about Charleston is, you know, our sub markets, okay, this is a unique region that's geographically defined by all this water here, okay.

So if you could see my cursor, here, we have the downtown Peninsula, okay. So everybody knows, the historic Charleston downtown. There is a district within the Peninsula downtown, that's been designated for short term rentals, okay. And as a result, you know, prices are up your average property will sell for over a million dollars. But that's situated in the middle of the peninsula here where, you know, you know, vacationers guests can come and, you know, walk the city, which is very walkable, you can see it's not very big the, the downtown Peninsula, okay.

You know, one of the things that makes Charleston so unique is the fact that they've kept all their historic buildings. So there's buildings, you know, 1800s just beautiful along the battery here, which makes it a big attraction.

They also have lots of rules to what you can and can't do with properties. So, for example, we have a height restriction. The buildings cannot be higher than the large, you know, the tallest church steeple. So they call it the holy city, you look at the skyline, and you see nothing but church steeples, okay, downtown. So as a result, they have lifted the height restriction, we call this the neck area, which is part of the Peninsula, that sort of, you know… isn't very wide. And so there's a bunch of growth here in this area, where, you know, there's some high rises, some more development happening, as opposed to the downtown area, which you know, was full about 200 years ago.

Michael:

Okay.

Joe:

Then, of course, you have your barrier islands, okay. This is a great place for short term rentals. So we have Folly Beach out here, we have Kiawah Island. And to the north here, we have island homes, and Solomon's Island. These are excellent places to invest in that beach house. Okay, I got one on Folly Beach, where it's a five bedroom, three and a half bath, where we'll do $100,000 in gross rental revenue this year, from our season that's getting ready to start in mid-March and go through September.

Michael:

Holy smokes, and what do you buy it for Joe?

Joe:

I bought that house for just over a million dollars.

Michael:

That's incredible.

Joe:

And then we have our more suburban communities to the south James Island. That's where I live most of the year. John's Island, one of the largest Sea Islands on the East Coast, that's mostly residential and upcoming area. A lot of this, you know, you could drive not very far outside of Charleston, say 30 minutes to get you through Johns Island, and to more rural places like Guatemala, where you think you're in the middle of nowhere, but you're still a stone's throw away from Charleston. One area of significant growth would be the Somerville area. Okay. So some of these manufacturers that I'm talking about Volvo Chrysler, Daimler, they are setting up shop along this I-26 corridor. And so as a result, we're seeing a lot of newer developments such as: Next in, you know, nicely done, new schools that are becoming great areas to invest. For example, you might see a, you know, three bedroom, single family home, new construction in the mid three hundreds low for hundreds come available, that type of property would rent for about $2,200 a month.

Michael:

This is great, this is great. And do you have more like entry level price point neighborhoods and suburbs?

Joe:

Yes. So entry level for Charleston would be right around that mid $300,000. So there's areas Mount Pleasant would be the most sort of desirable suburb. The entry level there is about 700,000, James Island entry level about 400,000. Now John's, we still were in the three hundreds. And then areas north North Charleston, this area of Goose Creek. This outlined area in gray here is the Naval Weapons Station. So this is a great area for rentals, and buying newer homes in Goose Creek, where you can get a house in, you know, around 300 to 350,000 and have a bunch of good renter's here.

There's also some areas of North in the south end of North Charleston that are quite popular. This area is referred to as Park Circle, sort of Old North Charleston community developed in the 40s, 50s. And then these areas here where I own a bunch of rental properties, this is called Dorchester Terrace Waylon, where you could still get a house for under 200,000. This was all developed in the 30s and 40s. Because we had the naval base, huge naval base here on the Cooper River. So the houses are 80 years old, but they represent a good location and, you know, high demand for rentals.

Michael:

Fantastic and Joe, can you give everyone listening and watching an idea of some traditional things to be aware of if they are going to be thinking about investing in Charleston? So for instance, how do property taxes work? And then what kind of natural hazards or catastrophes are known to hit the Charleston area and that people should be aware of?

Joe:

Okay, well, I'll start with, with the second question here, of course, with all the water, okay, flood insurance, okay. Lots of properties, lots of areas are in flood, well, everything's in a flood zone, but a lot are in A, E, V zones, that would represent, you know, flood risk, and therefore, most properties carry flood insurance.

Michael:

Okay.

Joe:

Certainly the ones on the barrier islands do downtown, there are certain areas to be aware of where there's drainage issues. However, in the suburbs here, you get a little bit out of you know, that this 526 corridor here, your typical flood insurance policy in A zone will run you about $700 a year. So nothing, you know, cost prohibitive. However, if you get into some of these beach or low lying areas, you're looking at, you know, 2500- 5,000 a year, as well as you know, the risk of flooding. So there's always something to be aware of.

That's one of the first questions I'll ask property owners or sellers: Okay, do you have an elevation certificate detailing how high your house is in relationship to the base flood elevation? And how much is your flood insurance policy? And is that policy assumable? So that's one thing to be aware of, in this area.

Property taxes to address that are, I would say relatively affordable or cheaper than other areas. So your average price home, you know, say 350,000, which is the median price here in Charleston, your property taxes will be about $5,500 a year. So I think that's relatively pretty, you know, affordable.

Michael:

Got it, got it. So like one and a half percent 1.4%, roughly, of the purchase price,

Joe:

Correct, yeah. And so, um, we do a point of sale assessment. So a property's value is reassessed at the point of purchase and it's assessed for that amount, and then from there, there's a cap it can't, the value cannot go up more than 10% and then it's milled down from there. So it's not that you're there's a cap that it'll jump 10%, is the assessed value. So once you're there, you're locked in, basically, you know, incrementally increase if the, you know, if the market continues to do so.

Michael:

Okay, got it. And everyone's talking right now we're recording this middle of February, about how crazy and red hot the market seems to be. And we always like to remind folks that hey real estate is done locally and so well, one market might be red hot, others might be less so. So talk to us a little bit about what you're seeing in the Charleston market, how much supply do you have? How fast are these homes going for? And kind of that, what percentage of the list price are they moving at?

Joe:

So we've had a similar supply and demand dynamic as most markets, we have very little supply in high demand. Currently, in our more Tri County area in the MLS, there's about 900 properties for sale, if you strip out new construction or proposed construction, it comes closer to 500. Okay, that would represent under one month of inventory, so about three weeks. So you know, if another house doesn't come online, in three weeks, we'll be down to zero. So I've never seen it this low. So it's definitely inventory is constrained. As a result, you know, we've received, we've, you know, had basically 22% price appreciation over last year, so prices are skyrocketing.

And, you know, it is a tough market. It's, you know, but investors who are willing to, you know, take on maybe a house that needs repairs, or act quickly, or have the ability to, you know, go in on an offer cash, they certainly have a leg up in this environment.

Michael:

Okay. Okay, and where are you coaching your buyers to do to win offers?

Joe:

As quickly, of course, sometimes, will awaive appraisals, or put in appraisal buffers, stating that, you know, if we are going to use financing, you know, we'll be able to kick in extra money towards the down payment. Sometimes we'll pitch a cash offer and be able to submit proof of funds in in, you know, saying we're willing to close with cash, and then we'll substitute with financing at the closing. Other times, we'll you know, say we're, you know, based on a walkthrough inspection, or you know, you do enough due diligence upfront that will buy the house as is. Average days on market are about three. So the speed of which you act is, is very important. And then average selling price to list price is about 98%. So, you know, if you're going to, you know, make an offer, you better bring it. So that's some of the things we do to coach our buyers in this market.

Michael:

It makes total sense and great insights. Joe, I'm curious to get your opinion kind of thoughts around as you're looking at properties to post to Roofstock because you're obviously our certified agent out in the Charleston market. What is it that you're looking for what makes a great investment property, in your opinion?

Joe:

One thing I'm super excited about is, Roofstock short term rental market, okay. And we don't have Charleston online quite yet, but we're working towards it. But I think some of the higher rate of return will be in this Isla palms, Folly Beach, Keola, on the short term rental side, as well as downtown Charleston. The numbers that are being produced here are amazing. So once we get the short term rental stuff up and running, I'd love for everybody to you know, hone in on, on some of those properties. Because, you know, we have properties on Cuba, for example, that are producing over well over $350,000 a year on a short term basis.

Michael:

Holy smokes and what are the list price on some of those just to give people some perspective?

Joe:

So that particular one I'm referencing, it's called the ocean blue and it's listed on our website:

http://kiawahislandgetaways.com/ . And that was a million dollar, it was $1.4 million attached, so it's condo regime stuff, oceanfront home, that the owners spent a million on the interior. I mean, this thing looks like it's out of Southern Living…

Michael:

Holy Smokes…

Joe:

…and that's on Kiawah Island, which is a resort, I don't know if anybody saw the PGA Championship on the ocean course here. This past year Kiawah Island has five amazing golf courses, they have great amenities pools and a very nice beach. It's very walkable, there's, you know, parks and pass throughout the island. And so that's a nice spot for everybody to know about.

But back on, you know, the majority of people doing the long term, buy and hold investing, I am on the outskirts of Charleston. Okay, so I'm looking at this more entry level pricing for the area around 350 and below, I'm looking for some of the newer builds, I'm looking for houses that are not in, you know, flood zones, not within expensive HOA areas, and ones that are within the path of progress. So, for example, this Summerville area here that is continuing to grow and flourish. I'm posting things in Goose Creek by the Air Force Base Hanahan, you know, that have good school districts, I'm posting those type of properties where there's been a strong demand for that type of housing, and strong growth in that area.

Michael:

Love it, love it. Joe, this has been super insightful man, I'm curious to know, though, in your opinion, how can buyers be best prepared to work with you in the Charleston market?

Joe:

Well, I think, you know, come and visit, you know, come, come take a look for yourselves. And I'd be happy to show people around and, you know, show them the different areas, you know, back to my point about these different sub markets. Okay, so, you know, we have these islands and sub markets, and each one has its own little flavor, each one has its, you know, is unique for different reasons. So, it really depends on, you know, whether the investors, you know, purely return driven, or maybe they want to have a place they can stay sometimes when they visit, there's, there's a lot of different angles here.

So it really comes down to the investors, you know, needs, and, you know, from there, we could turn them on to different areas. So, come and visit, come hang out with me, that would be one suggestion, you know, and then, you know, get, make sure to have all your ducks in the row. And, you know, make sure of course, financing, if you're going to finance a property, you know, proof of funds ready to go and be ready to pull the trigger, you know, I'll be able to do a walk through inspection, I'm underwriting these properties for repairs, I have a strong knowledge base of, you know, the rental market, and know when it's appropriate to push on that rental price. And where we can eke out some more money and have a pretty good understanding of, you know, where the activity is, and where the growth is going to be.

So, you know, give me a call, you can get in touch with me, you know, my website: http://lighthousecharleston.com/ , or email me at: joe@lighthouscharleston.com , and we can, you know, further the conversation, but, you know, in short, you have to act fast, and throw your hat in the ring to get in.

I do think that, you know, we had a little bit of a law, as many markets did, you know, ended December, early January, but then, you know, really started pick up this first year, lots of activity, you know, more houses are being built, you know, you know, sellers now, you know, we're trying to convince, you know, people who are ready to exit the market to do so. So, you know, there'll be more opportunities coming and so just, I'm on the MLS checking every single day, you know, what's being listed, and posting those opportunities straight to Roofstock. So you're getting the, you know, up to date information because once something's posted, you'll probably see it go pending within a day or two.

You know, you'll see multiple offer scenarios. One other tool we're using, you know, we're introducing escalation clauses. So we're setting a cap on the purchase price, based on you know, what type of return you want, or you know, the deal itself where it's priced, and we're saying we'll beat the next offer by, you know, depending on the price point 1000, $5,000. And so that way you're not going in blind leaving money on the table, we're just escalating that purchase.

Michael:

That's great, that's great. Joe, this has been super insightful. I know I'm getting really excited about the Charleston market, definitely want to be in touch with you. Thanks again for coming on, I appreciate you.

Joe:

My pleasure, thank you for having me.

Michael:

You're welcome and I will talk to you, I'm sure, take care.

Okay, well, that was our episode, a big thank you to Joe for coming on. I know, I got super excited about the Charleston market, I need to do some more research on my own. Looking forward to seeing many of you out there. As always, if you liked the episode, please feel free to leave us a rating or review wherever it is, you listen to our podcasts, and we look forward to seeing the next one.

Happy investing…

How to empower the next generation in the investment world Feb 24, 2022

Dan Sheeks is one of the newest BiggerPockets Publishing authors, with his book, First to a Million: A Teenager’s Guide to Achieving Early Financial Freedom. The book introduces teenagers to the strategies, concepts, and mindset needed to achieve early financial freedom. He is a high school Business/Marketing teacher, real estate investor, and personal finance advocate in Denver, Colorado. He and his wife have a variety of real estate investments including multifamily, single-family, Airbnb, and out-of-state BRRRRs (buy, rehab, rent, refinance, repeat).

Dan’s passions include working with teenagers, advocating for personal finance education, investing in real estate, and promoting the FIRE movement. In his 19-plus years of teaching high school, he has taught various business subjects, including financial literacy, entrepreneurship, and marketing. In this episode, Dan will share with us his passionate work how he is helping teenagers in personal finance, passive income, real estate investing, and early financial freedom strategies so they can live their best lives.

Episode Links:

https://www.sheeksfreaks.com

https://www.instagram.com/dsheeks/?hl=en

https://store.biggerpockets.com/products/first-to-a-million

https://www.amazon.com/First-Million-Teenagers-Achieving-Independence/dp/1947200461

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Transcript

Michael:

What's going on everyone? Welcome to another episode of the Real Estate Investor. My name is Michael Albaum. And if you're watching this on camera, I've clearly got a shiny head tonight. I think it's my lighting.

On this episode, I will interview Dan Sheeks, author, investor, teacher, and just someone who's full of wisdom and golden nuggets. So let's get right into it.

Dan Sheeks, what's going on, man? Thanks so much for coming on the show with me. I appreciate you.

Dan:

You bet, Michael, great to be here. Thanks for having me.

Michael:

Oh, my gosh, my pleasure. So we were chatting a little bit before we recorded, we you know, hit the record button. And so I know a little bit about your story. But I would love if you could share with all of our listeners, who you are, where you came from and what it is has to do now with real estate.

Dan:

Sure. Um, it's not it's not a crazy exceptional story. It's… so I'll keep it short. It's… I've been in Colorado for a little over 20 years. My main gig currently is that I am a high school business teacher in a public high school, just south of Denver and a suburb.

This is my 19th year doing that. And I teach classes like entrepreneurship, personal finance, marketing, stuff like that. I love my job. I absolutely love my job. I have great kids and great program. All my classes are electives. And so most of the kids that are in their want to be in there. And so it's it's fun to teach them.

I bought my first property…. say 10 years ago, but I really started investing I would say about six or seven years ago, when my wife and I, at the time we weren't married, we had just started dating actually. But we both were just kind of starting to scratch the surface around real estate investing. And when, when we met, we also both found the BiggerPockets community and the Choose FIRE community and really dove like full on into those communities and their blogs and their podcasts and all that good stuff. And so luckily for us, I guess that's probably why we're married. We were really in sync with our future financial goals. And the idea of real estate investing to build wealth. So we've been hammering it ever since.

Today, we own 17 units, mostly in Colorado. We have three houses out in Detroit, Michigan, or suburb of Detroit. And a little bit of variety in there. We have single family, small multifamily, we've done some burrs, we have a couple of short term rentals. We house hack, so we rent out our basement as well.

Michael:

Love it, love it…

Dan:

Most… mostly long term buy and hold properties. So that's, that's it in a nutshell.

Michael:

Okay, man, that's awesome. I mean, I think there's a ton there that I want to unpack. But you said at the beginning of that sentence, that's not a very exceptional story. And I'm going to push back a little bit on that, because you said that you're a high school business teacher in a public school. I mean, those words don't exist, didn't exist in a sentence when I was in school. So what is a high school business teacher?

I mean, that's, that sounds incredible.

Dan:

Yeah, there's a lot of people say that, like, Oh, I didn't know they had those classes in high school.

Michael:

Yeah.

Dan:

And when I was in school, too, we did… we did have one business teacher, he taught typing and accounting. And that might have been it. I took accounting from him, and I really liked it. But business classes have been around, but nowadays, they're really started. There's a lot of them, especially in the larger urban schools where there's enough, enough of a you know, class size and students to to fill those rooms with with kids. So we have all kinds of classes at our school, we have, I think, seven business teachers…

1, 2, 3, 4, 5, 6, sorry, six full time business teachers that teach a variety of classes. So most of your bigger urban schools are going to have business classes, and even some of your rural schools will have the things I mentioned, like, you know, accounting, and maybe an intro, intro to business class, computer application, stuff like that. So, yeah, they're out there, but they are usually always elective.

Michael:

Okay. All right. Well, I know I would have for sure jumped on that when I was in school. So I'm so glad to hear now that it's being offered. But it's so cool to hear that. I mean, you're living, like you're living and breathing what it is that you're teaching these kids, right.

Dan:

I teach personal finance and I teach marketing that's… Marketing is my main, the main thing I teach marketing classes, Social Media for Business and I guess entrepreneurship, too. And so in those classes, because it's a passion of mine, I will drop in, you know, a day here a day there. I call them FIRE-days, Financial Independence Days, and we'll just talk about some random strategy. Maybe it's house hacking, maybe it's frugality. Maybe it's side hustles, maybe it's passive income. And we'll just have some good conversations around it.

In the personal finance class, of course, I can get more into that because it's more relevant to the actual curriculum. But even in that class, I still have to cover a lot of the basics. So there's that foundation, because when I get into things like, let's say, real estate investing, or these higher level FIRE-strategies, you know, they have to have that foundation first.

Michael:

Okay. And when you say the basics, what is that? Because I think so many investors, or people that are just getting into investing in general, hear that real estate's a great investment and think, okay, I gotta go, you know, I gotta go get some real estate, but maybe don't have some of those basics and those fundamentals down. So when you say that, you know, what are you referring to?

Dan:

Yeah, just the basic personal finance stuff would be things like checking accounts, savings accounts, brokerage accounts, the basic stock market investing, knowledge, credit cards, building a good credit score, using credit, having assets and not liabilities, things of that nature. Insurance…

Michael:

Okay.

Dan:

Pay stubs, good doing your taxes.

Michael:

Love it. And you recently wrote a book, right?

Dan:

Yeah, I wrote a book, came out about two months ago.

Michael:

Awesome. And what is it called? And what can people expect to find in it?

Dan:

Yes. So the book is called: “First to a Million” and the subtitle is “A Teenager's Guide to Achieving Early Financial Independence”. And so it covers, it covers a lot. It's actually pretty, it's kind of a longer book for a teenager, but it's a pretty easy read, I think. But it's not something that someone who read in it in an evening, it's, it's got, it's got some, some girth to it, I would say some a lot of good content. But when I wrote it, I wrote it for teenagers, obviously, that's in the subtitle, but really, it's a book, anybody who's just getting started in the early financial independence world, or, you know, that idea that, hey, I don't have to work till I am 65. The book has a lot of value for anybody. I don't care what, what age you are, it's really an introduction to that, that community, that strategy.

And so you know, I wrote the book, assuming the reader knew nothing, right? They were, they're starting with a clean slate, they knew very little about personal finance. The good news is though, and I always laugh about this, because there's a lot of people out there who are very passionate about teaching adults, personal finance, and early financial independence strategies, and bless them for doing that. But I think it's actually easier what I'm doing because a teenager is a blank slate, right? They, they haven't really started bad habits, they haven't tanked their credit score, they haven't incurred a bunch of debt, they don't have any debt. And they haven't engaged in lifestyle inflation. So they're, you know, you can train them from the get go to make good decisions from, from a very early age. And so I think it's kind of easier to deal with teens and to teach them right out of the gate.

So that book is really just about introducing the young person to savvy personal finance, the foundation, some of that's covered in the book, and then going into those bigger topics. Like I mentioned before it, frugality, entrepreneurship, side hustles, passive income, real estate investing, index fund investing, and there's a couple chapters in there about should you go to college? Is that a good decision or not? Obviously, teenagers, that's a big decision they have to make.

Michael:

That's a very big, I'm sure you've got some angry parents of folks reading that book? Because that's a question for so many people, right? It's like you have to go.

Dan:

Yeah. I mean, I don't have any angry parents because I don't tell anybody what to do. I just lay out the pros and cons. Like if, if you, the reader are interested in early financial independence, then here's the pros and cons of college and I ultimately say it's your choice only, you know what you should do? But a college degree isn't necessary for financial independence. And that sometimes can actually be a hindrance, because, you know, especially if you incur debt, you know, in the book I talked about if you're going to go to college, great. More power to you, but you need to find a way to do it without incurring any student loan debt.

Michael:

Yeah, yeah. I mean, you think about and just look at the math like an average college costs about 20 grand a year 25 grand a year. If you go put that on a down payment on a house, you could have four properties by the time you would have graduated college.

Dan:

Yeah, especially if you how sacked one a year you will…You'd have four properties without a doubt.

And I know guys who are financially independent with four properties and the house hack to meet, so you can parallel universe there, you have someone who's graduating at 22, let's say with 100,000 / 50,000 in credit card debt, just starting their career in parallel universe, there's their, their twin who's basically at financial independence are very close. Now. They're, they're living pretty meagerly and frugally, but they can, you know, slowly continue to buy more passive income assets and grow that over time.

Yeah, so it's, there's a choice. And I don't tell anyone what choice to make. It's everyone's got their personal path to walk. But I do believe everyone should be educated on the options.

Michael:

Totally, totally. And I mean, you're teaching this stuff day in and day out, Dan. So what inspired you to actually write a book about it?

Dan:

Um, it was, it started six or seven years ago, when when my wife and I found bigger pockets and Choose FIRE. Because before that, I really, I knew about investing. And I knew about savvy personal finance, but I didn't know about early financial independence. And so as my wife and I learned more and more and more, and I was reading books, and blogs, and listen to podcasts, and all that stuff.

I was like, Wow, this, you know, these options that are included under the financial early financial independence umbrella, nobody knows about this stuff. It's just, it's a pretty new movement, at least the last 10 or 15 years. So I, you know, teenagers being my thing, I love working with young people. I just knew that I had to write a book, specifically for that young person, about these early five strategies, because there's nothing else out there. You know, there's nothing, there's no other book out there for young people to introduce them to these other options.

Michael:

Yeah. And I mean, I love that, I love that. So many people, I think, especially if talking to a financial advisor, or financial planner, get overwhelmed with all of the different options, all the different choices, all the different possibilities out there. So how do you break it down for younger folks to really understand and digest? And, and do you think that they really do?

Dan:

Um, I know they do. Because I've worked with so many young people who are, who are using these these strategies and these tools and these tactics to be well on their way to early financial independence at a young age. Does every kid soak it up? Don't know yet, right? Because a lot of the students in my class or in my classroom, or in my… sorry, my online community, they're probably listening to stuff and they may not, they may not employ it right away. But it's always going to be in the back of their head. So maybe 15 years down the road, they hate their job. And then that's the impetus that makes them say, you know what, I cannot do this for another 30 years. But I remember that one guy, or that one book, or that one guy…

Michael:

The Dan guy…

Dan:

Yeah. Yeah. And so let me Google that and see what that's about again, I want to look into that some more, because now they're more motivated, perhaps. Yeah…

Michael:

I love that. I love that. So and let's talk about your online community. What's it called? And kind of who's it for?

Dan:

It's called SheeksFreaks, which is kind of a funny name…

Michael:

I love the name.

Dan:

Well, it's my last name plus the word freaks in the whole, you know, the first 2 million book, the whole kind of premise, or the theme of the book is around being freakish. And same with my community. And that that is, you know, it's it's the idea that very few young people are motivated enough to spend time learning and executing personal finance strategies. It's not the norm most young people don't want anything to do with that. That was me when I was younger. So the young person, like if someone reads my book, and they're a teenager, that's, that's exceptional, right? That's, that's a book about personal finance and money that a teenager just read through. Kudos to them, but that's not normal. It's freakish in a good way, right? It's exceptional.

So the SheeksFreaks community is an online community been around for about two years, it's for young people, I like to say 15 to 25, who are either beginning or, you know, maybe intermediate level around early financial independence stuff, we have several different subgroups within the community, like different topics that they can join, that they're more specifically interested in. We have like 40 of those. And so that it's just a place for young people to come together to interact and connect with likeminded young people because again, these are their freaks, they are different. And so even in their home group, there's not a lot of people like them, their best friends probably aren't engaging in the conversations that they want to have around money, but in my community, that's all that we're doing.

Michael:

I love it. I love it. And how do you find the conversation is best started. You know, for a lot of our listeners out there maybe their parents and have young, young kids or teenage age kids in their life, and this topic has never come up at the dinner table or never come up in life. So how do you start to facilitate? How do you start to have that conversation?

You give them a book and say here, go, go get learned?

Dan:

Yeah, well, I think you have the, you have the conversation at the dinner table, even you just do it, right. And I mean, it should go well, before that, I think money conversation should be held in the household from a pretty early age, you know, I mean, from the get go, and it just, it becomes part of your family culture that we are open with money, we talk about our, our incomes, and our expenses and our, our financial status in our house, and you can try to make it you know, don't tell them too much, until they're old enough to understand that some of that shouldn't be shared with everybody.

But you have the conversations at dinner, you have the conversations in the car on the way the grocery store, you, you have your child teenager, tween whatever, you have them sit down with you while you pay the bills, click the mouse and pay, you know, pay the bill here pay the bill there you show them where your money's coming in, you show them where the money is going out for the house. So every household is like a small little business, show them the profit and loss, show them the balance sheet. So then the checking account, the savings account, the brokerage account, explain to them what's going on there. If they don't have any interest, um, you know, just keep at it every few months, sit them down again. But if you're having these conversations around the table, I think it's going to happen pretty organically. I don't have kids that age yet, so I can't speak to it. But I can say as a teacher, you know, and use terms like financial freedom, not retirement, retirement, it's kind of boring and like light years in their future, but financial freedom, financial independence, those are more catchy click beatty kind of terms that they, they might gravitate to. And, you know, just pose a question like, son or daughter, if you won $100,000 in a lottery, what would you do with that money?

Here's what I would do. You know, let them explain and here's what I would do. And what do you think would be the best use of that money? Would you split it into different buckets? And why would you do that? There's a lot of things you can do to just facilitate money conversations. That's really what you got to do.

Michael:

Yeah, that's a great question, that's a great question… So Dan, I would love to shift gears here and talk a little bit about your kind of personal portfolio and journey having done, you know, a handful of different things, what's been your favorite investment asset class today?

Dan:

Short term rentals, we have ,too you know, we're not experts by any stretch, but they do crush it, man, the, the, the increased cash flow is significant. But they are a little more high maintenance, or sometimes a lot more high maintenance. My wife just… one of our short term rentals is about an hour drive south of here in Colorado Springs, and my wife just went down today for about an hour drive down, she spent about two hours down there, she came back for an hour, you know, she goes down there and checks up on the property every, every month or so. And just to make sure things are good touch base with our, with our cleaner, who's really kind of our property manager down there in a way.

Michael:

Okay…

Dan:

Umm, so I think those are my favorite, but you know, we're not, we're not real estate investors that want to own 100 properties, we will probably buy a few more, and then we'll be good. We'll probably start paying off some mortgages and, and increasing our cash flow. And we don't want to own multiple, multiple short term rentals. That's just not in our strategy for long term wealth and happiness. And that's what it's all about, right? It's about being happy. And we live pretty frugally. So we don't need a bunch. And we don't want to be having to think about a bunch of properties.

Michael:

It makes total sense. And you mentioned that you and your wife are also house hacking, which I love because my wife and I are doing the same thing. And I think so many people hear what house hacking is and think oh, it's only for, you know, a single person fresh out of school, you know, can eat Top Ramen for dinner, but I mean, you're, you're a married couple doing it. So curious to know what that's been like for you both?

Dan:

It's been awesome. It's like getting a $10,000 a year raise every year, or just a bonus, I guess. And by the way, my wife was a public school teacher elementary for 18 years before she retired a couple years ago, was able to retire because of our our real estate investments. Now she manages our portfolio, she grows our portfolio. She's a property manager.

And she has a couple of side hustles so she's home pretty much all day except when she's doing you know, managing properties and whatnot. So we have, we have a three story house and it's a three bedroom house and there's a bedroom on each floor, each each level. So in our basement, there's one bedroom, one bathroom, a living area, plenty of storage fireplace and we've kind of made a makeshift kitchen down there with the a hot plate and a microwave and a toaster oven and a medium sized fridge. And so yeah, we ran out the basement to… well, we've we just our third tenants that we've had in like four or five years, just left. So it's right now actually listed and we'll have someone moving in soon.

And yeah, they just live downstairs, there's that we share the laundry with them, we share the main entrance. For the most part, they don't use our kitchen, but they can you know, if it's, if they need to use it, that's fine. But they pay us $950 a month to live in our basement. It's a nice house, right? The downstairs is a great living area.

Michael:

Amazing.

Dan:

So it's not for everyone, my wife and I are in our 40s we have a small child. I'm at work at school, you know, every day, so we only rent to females, my wife feels and I feel much more comfortable doing just females. And it's worked out great, you know, we've had three great tenants looking for a fourth, and who doesn't want an extra 10 grand a year?

Michael:

Totally. And so it sounds like it's a long term rental than long term basis.

Dan:

Yeah, we usually start out with three to six months and then month a month after that. I think all three of our tenants have stayed for at least one year, the longest, I think was two years.

Michael:

Okay. Man, I love that, I love that. Any plans to stop that in the future at a certain… when your kids get to a certain age after you feel like, you know, just kind of over this? Do you see that in your horizon anytime?

Dan:

We've talked about it, but we'll just play it by ear, honestly. I mean it. If at some point were like, you know, this isn't working anymore. We'll just say, all right, you got you got another month, here's your months’ notice, and then we'll move on. Yeah…

Michael:

Love it. And I think, I think house hacking is like one of the best way to turbocharge just like rocket fuel for real estate investing and wealth building. I mean, it's just unbelievable what you can do with it. So any tips, tricks, recommendations to folks listening out there that are considering purchasing a house hack for themselves?

Dan:

Oh, I have tons and I agree with you.

Michael:

Awesome. I thought you might…

Michael:

Yeah.

Yeah, Michael, I 100% agree with you that house hacking is I think by far the best real estate investing strategy for young people to get started. And I write about it quite a bit in my book. There's also a workbook that goes, there's the book First 2 Million, and there's a workbook that goes with it and in that workbook it takes, it takes a teenager over like a five year, five year period of time and gives them tasks to do every four months. And if they follow the workbook, they will own their first house sack within about four years, and when they start employing all of my strategies that I lay out. And so you know, some tips and tricks, one, if you're, if you're a teenager, you got to start saving some money. You can have a low down payment with the house set because it is a primary residence, but you got to have some cash and you want to have some emergency cash. And you want to have some initial maintenance and repairs cash, which I lay all this out in the workbook in detail, you got to have a good credit score.

I tell my, the young people I work with and this is counterintuitive to I think what a lot of people say but when you the day you turn 18 I say roll out of bed, go to your laptop and apply for your first credit card. And when you turn 19, get your second one, you turn 19 and a half, get your third one and use them all, use all three, at least a little bit every month and pay him off every month. If you do that you will have an amazing credit score in no time. And I know young people who have done exactly that caveat, right. That's only if you know how to use a credit card responsibly, if you haven't been educated on that, then stay the heck away. But the young people in my community they they're very responsible with money in there. And there they are educated on how to do that. So get the good credit score, save up some money, educate yourself. That's a huge piece, read the books. I'll throw a plug in for my friend Craig Curelop, he wrote a book called: “The House Hacking Strategy”, published by BiggerPockets.

Same publisher of my book, and it is a phenomenal book for someone who wants to start house hacking, and just wants that introductory book that takes them from step one to step 100. And now you're in your third house, that kind of thing. Yeah, so the, the piece of that puzzle for house hacking that will trip most young people up is the is the income history. Um, you know, a lender isn't going to want to lend a 20 year old or 21 year old or a 22 year old $100,000 for a property unless they know that they're going to be able to pay it back. And most young people don't have you know…

Michael:

I can't, I can't show my lunch money that I got from my parents’ income. When I was in high school, that allowance doesn't count…

Dan:

The allowance doesn’t count, you know, gifts from grandma don't count all that stuff. So…

Michael:

Alright, yeah. So what do most folks do?

Dan:

Well, young people in the workbook I kind of lay out a plan of how you can look for the young person that doesn't go to college it becomes much easier you work full time for a couple years, hopefully in a good job. And depending on the value of the property you're looking to buy, that could be all you need to do. For some people, it could be as easy as graduating from college, and just getting that first job that is aligned with your major and you don't even have to work for very long after obtaining that job. They just want to see that you have a pay stub from the job that you were in school for, and then you're good to go.

But the best loophole, which doesn't work for every young person is to have a parent cosign on the mortgage. So the bank looks at their income history and credit score if needed and the young person can get in to their that first property.

Michael:

I love it. So it's interesting you mentioned the getting a job associate with your major my younger brother, actually shout out to you, Jeff went and did this, he graduated got a good paying job at the company I used to work for and then they told him yeah, you qualify for a mortgage because we will constitute your four year degree as a as basically earned, earned time, time and you're earning income. Yep. So he's like, sweet, awesome. So it's it's a pretty good life hack.

Dan:

It is, it is for sure.

Michael:

No, I love it. I love it. Dan, this has been so much fun man, I want to very respectful of your time. Where can people get your book? Where can they subscribe to your online community? And if you have additional questions want to reach out to you what's the best way for them to do so?

Dan:

Sure and thanks, thanks for having me, Michael, this has been a blast. I can talk about this stuff for hours. Yeah, if you're interested in the book: First to a Million you can get it at, at BiggerPockets.com, which is the publisher. And if, if your listeners are familiar with real estate, they've probably been to that website a few times already, if not every day. They can also find it, they can also find it on Amazon and other places. The workbook right now is exclusively at BiggerPockets.com however until I think spring of 2020.

To the community for young people. There's a free version and a paid version, I'll just transparency there but the free version has a ton of value. Just go to https://www.sheeksfreaks.com/ and there's a button that says: Join the community and it'll tell you all about it. And if people want to reach out to me, I prefer email: Dan@sheeksfreaks.com but you can also reach out to me, DM me on Instagram, that works too.

Michael:

Awesome, Dan, this was great. So much valuable in you know, what you've been talking about in the book and the online community. I can't wait to see where you go from here. We'll definitely be in touch soon, man. Thanks again.

Dan:

Thanks for having me, Michael. Thanks again.

Michael:

Hey, my pleasure. Take care.

Alright, well, that was our episode, a big thank you to Dan for coming on. And just a big shout out to Dan for educating our young people and teachers in general for all the work that you all have done. If you liked the episode, please feel free to leave us a rating or review wherever it is you listen to episodes. And as always, we look forward to seeing the next one.

Happy investing…

6 Investment mistakes we will never make again Feb 19, 2022

In real estate, small mistakes can make or break your deal. One slight oversight and your yearly cash flow can be wiped clean. For new and seasoned investors alike it is important to hear where others have messed up so that we can learn their lessons without suffering their pain.

In this episode, Tom Schneider is back with Emil and Michael to share their biggest real estate mistakes, ones that hurt so bad they’ll never make them again.

Episode Links:

https://www.roofstockacademy.com

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Tom:

Greetings and welcome to the Remote Real Estate Investor. My name is Tom Schneider and I am joined by…

Emil:

Emil Shour.

Michael:

and Michael Albaum.

Tom:

And today we got a fun topic. We're going to be talking about the six mistakes you'll never make again. Let's get into it.

I heard of a great question to ask people. You know, when you're trying to not try to understand how they're doing, you know, without leading the witness, what's on your mind?

Michael:

Uhh, uhh…

Emil:

Uh, uh, I have…

Tom:

What's on your mind, Michael?

Michael:

Ehmm…What's on my mind is got a lot of balls in the air, which I feel like is a standard thing that I've been saying over the last two years, so just got a couple refires in the works, got my rental unit upstairs for a new primary that were house hacking, going to be getting tented here shortly. So just making sure all the cookie crumbles are getting baked into cookie properly. If that's the same…

We're putting it back together and putting Humpty Dumpty back together, man.

Tom:

Why not, why not? How about Emil, what's on your mind?

Emil:

Oh, man. I was chatting with Michael this morning, actually. We have a weekly calls just talking about what's going on. And I was chatting with him about this person that I've been wanting to hire, the position I've wanted to hire but I keep putting it off. And I'm not sure if right now is the right time in the business to hire this person. And I just keep… I talked to other people who run businesses and they kind of keep nudging me to do it even before I'm ready. So that's been the biggest thing on my mind. So this week, I'm going to start putting together, documenting some processes and putting a job ad out there to at least have some conversations and hopefully find this, this unicorn of a person I'm looking for.

Michael:

In the words of The Waterboy: You can do it!

Emil:

If you're, if you're a content marketer, and you like creating briefs for writers and editing content, please, please reach out to me. I would love to chat with you. Free plug, thank you!

Michael:

At eshour@gmail?

Emil:

Emilshour@gmail. Yeah!

Michael:

Sweet. Tom, what's on your mind my friend?

Tom:

I love that question. It's just kind of you know, cuts a little deeper. So got a baby, I got like a three week old baby so not sleeping in longer since then, like two or three hours. But to be fair, the first baby was… I was it was much worse, worse than that, I don't know what the right word is it…

Anyways, so got a very good three week old baby but still a three week old baby. Besides that just yeah.

Yeah, doing it. I wish I'd taken a longer paternity leave. I think I kind of blew it on that front in the retrospect but who knows if there's a third one, I'm going to take a good two months off because that is special time, so that's what's on my mind, cruising along.

Let's…anything else, guys? Anything else in your mind before we get into the topic today?

Michael:

No, it's super exciting to hear, everyone's happy and healthy.

Tom:

Everyone's happy and healthy, that's right. All right. So this is the six mistakes you'll never make again. I love this topic. And I think some of the oddly the best way to learn about real estate is just not learning about other people's mistakes and not making them. So a really juicy helpful topic and to start today's discussion on the way we're going to divide this is we're each going to take two and Emil, you're going to go first what is a mistake? We'll do a snaking order here so Emil what is a mistake that you'll never make again?

Emil:

In my life or are we talking about real estate investing?

Tom:

This is the Remote Real Estate Investor. But you know what? Let's not put boundaries. Let's live in the open space, right, so you can take this in any direction you want Emil.

Emil:

Oh geez. Alright, let's go back to when I was five years old the first mistake I ever made

Tom:

It’s a long time without making a mistake.

Emil:

I know for… it well the first one I remember who knows all the other ones.

Okay, first one I have is buying the cheapest properties. So this was something when I think, I bought my first property I looked at, you know, I was going for the cheapest to maximize Excel cash flow and something you realize after a while or not even to maximize cashflow, Excel cashflow, maximize Excel returns, right, cash… cash on cash. And we don't realize after a while, until after a while you've been investing is that you know, 50 or $100 difference in those slim cash flow margins completely throw off your returns. So right, let's say you're looking at trying to hit a 10% cash on cash return, and you end up buying, you know, I'll throw out a property I bought years ago for $60,000 in Memphis, right…

If if there was a variance one month of 50, or $100, that destroys your, your cash on cash, it completely changed the numbers like anyone who's listening to this and runs their numbers, change your projections by like, throwing extra expensive 25 or $50 a month, just small things right, on cheap properties. They, they make such a big difference in the percentages, both ways, right? So something I didn't appreciate, for a long time was actually like nominal cash flow, not just percentages,

Michael:

Totally!

Tom:

Get the rosy glasses off, take them off.

Michael:

How long into owning that property. Did you realize like: Oh,oh…?

Emil:

It was at the turn, honestly, it was like, oh, okay, like, I mean, the turns always ruin everything. But you really see how much of a variance like, again, even $100, or like, I guess that's on a monthly like $1,000 expense, one time a year just crushes these, these cheaper properties on like a percentage basis. They can be good investments, but it's like, you got, you got to like play around with the numbers to see even a small variance from your numbers like, changes the percentages a lot.

Michael:

Yeah. I love that quote. And yeah, Emil Shour, February 14 2022, the turns always ruin everything.

Emil:

Turns are the worst man…

Michael:

Yeah…

Emil:

…just keep people in here.

Tom:

Have a lot of first time investors. It's like, just getting so excited of that, you know, $50,000 investments, are you kidding me? You know, such great returns. But yeah, hammered on that.

Michael, what is the mistake you'll never make again?

Michael:

A mistake that I'll never make again, is rushing and kind of pressuring my property manager into accepting a tenant that they don't feel really great about. That was on my very first property ever, I talked a lot about it, ended up doing tons of damage on the property and it's just a total headache. And I was so concerned because now here I have this mortgage payment and this property that has expenses associated with it and no tenant in place. And I was like, we gotta get some money, we gotta get some, we gotta get someone in. And so against her better judgment, she capitulated and said, okay, and it was the worst tenant that I've ever had. And that she may have ever had, too. I think she told me that once like, yeah, I remember that tenant, that was the worst tenant I had ever, too.

So just like, take your time and be calculated and try to be level headed with stuff because that was a very emotional decision. I had a job at the time, like a really strong paying W-two, I could afford a couple of months of vacancy, I could afford like several months of vacancy, thankfully, but I was just so kind of like a meal looking at that return, oh my God, my returns gonna get shattered. And so didn't listen to my gut, or my property manager and really ended up paying out the nose for it, for a long time, for a very very long time…

Tom:

…capitulated, that's the word…

Michael:

…that’s the word of the day?

Tom:

That’s word of the day. I love it…

I think there's, you know, there's like long term decisions and like selecting who is living in your property. Hopefully, it's a long term decision. And one of those things where, you know, you could feel the pressure boiling every month that passes if it's not occupied, but man so much more expensive to refill that that with a bad tenant.

Michael:

Yes. Yeah, totally. Totally.

Alright…

Emil:

Sounds along the theme of turn suck as well.

Michael:

Yeah, exactly. To turn through and everything.

Tom:

I'm gonna go along a similar theme as my goal. So a mistake that I’ll never make, again, is not getting into the details of my property management agreement. So usually, with like terms and conditions like, oh, cool, new phone. Oh, except this. Oh, there's 270 pages of…

Michael:

Except of…

Emil:

Yeah, apples made us very good at that.

Tom:

Yeah. And with a property manager, there are reasons that you might want to not just accept all!

So the mistake that I made: I had a property in Florida, bought it, it, it was it was good. It was occupied. I had a turn that come up, turns up, the turn the price to do the turn was kind of expensive, and it had appreciated just Mamet's that's not a good use of language.

I got to think like Michael, what would Michael say, not capitulated? What would be what's a lot, a lot of appreciation…

Michael:

That's a technical term…

Tom:

…a crap ton of appreciation. So I decided to sell the property, you know, this is one of the awesome things about real estate You can you can make moves like this fed right into a 1031. And it was like a, like a stock split, I ended up getting two properties from that one. And at the point I sold it, my property manager, they, you know, had some escrow funds that I had left in there from just in between tenants and you know, as maintenance or whatever, come up, and I emailed them, like, hey, send me give me my money, you know, on this property more, and they're like, oh, no, this is the breakup fee. And I'm like, what? The breakup fee? Are you kidding me?

So this memo, jam is bad mamma jamma date, they had a little line in their fee structure where if I sold the property, they had to retain management, or charge me like a month or two of rent and that is a mistake, that I’ll never make, again, not reading the property management, like, basically, what's all the other…What's all the ways that you can make money? What's all the different ways that you can take money from me and one of them was selling? So that's a mistake that I will not make again.

Alright, guys…

Michael:

Have you come across that language in any other pm agreements? Since now, you're on your radar?

Tom:

Ah no, I haven't. And that's like, something I will explicitly ask for is like is, you know, more or less like, what's all the different ways you can make money? And usually there's a section within the pm agreement of like breakup fees, you know, how do they charge for maintenance? How do they charge on rent? And, you know, it'd be a fun episode. I've seen more property managers charge a flat rate versus a percentage rent. Future episode idea, future episode idea, yeah, is a ruminating?

Emil:

Are you ready for the TLDR?

Don't do it!

Tom:

Don't do it. Okay.

Alright, that's mine. This is not going to be a traditional steak draft, we're going to go right back to the top of the order with a meal. I mean, what's the number four thing what's a mistake that you'll never make again?

Emil:

So this was a mistake I made on my most recent property. And it is what I call or actually, it's not what I call, it's what I heard Michael Zuber call a B-property. So he, he classifies three types of properties, he has the A, B and C.

A is turnkey, good to go, you don't have to do anything, lift a finger, it's nicely renovated, or it's in good condition, you're good to go. I see properties on the other end of the spectrum, you know, probably needs a partial got rehab, or a full gut rehab, you know, you have to do a lot of work, but you're getting a good deal. You just have to put in that the time and energy and the extra money, though, to make it look nice.

The B property is the in between, it's a property where it's a maybe the rent is a little under market, but you know, at the turn, you're gonna have to maybe replace the cabinets or some tile in the shower, you know, like a bunch of little things, little not little things like several cosmetic things, they add up so much more quickly than you think. And they aren't usually sold at that much of a discount these B-properties from what I found. So I bought this triplex. It wasn't like up, when I bought it, it wasn't like a premium price tag. But it wasn't, it wasn't a great, amazing steal of a deal either, right. But in my head, I kind of just looked at things and I was like, oh, this will probably take like $5,000 total, maybe, maybe 10,000 to fix up…

Long story short, it was more like 25-30,000 to get it all fixed up. And I don't know, I think these B properties are just like, they're not the way I think it's either you buy the thing that's, that's good to go the A or the C where you're putting in the energy and you're getting an awesome deal. So I do not like the B properties anymore.

Tom:

It's funny when we do these episodes, I try to guess like, in my head what you guys are gonna do and that's a good one. I did that did not come into my mind is like a potential one. And yeah, you could think with the little the little nicks and dents, you're able to catch a catch a deal, but it's like, yeah, go go in the deep end or go in the baby pool, I like that.

Emil:

Yeah, that’s my experience, I don't know. Other people may say, no, those properties are great for me, but just my personal experience. I won't, I won't go for those anymore.

Tom:

Yeah, I've probably done like, the majority of my deals have been more like, the ish-range and it hasn't like, you know, caught me caught me too bad. I mean, I had some terms that were like pretty ugly, where I bought occupied and then…

Michael:

And then surprise…

Emil:

I guess the question is, did you go in knowing, like your estimate for what it would require to fix? Was it on par with what it actually cost?

Tom:

No, it was it was more expensive. I think it wasn't as dramatic as your use case going from, was it like 500% over like, you know, from 5000 to 25,000. Yeah…

Emil:

Yeah, yeah, like four or five tax of that…

Tom:

But I don't know. I think that's an interesting way to think about it have like, you know, either go go in and go home.

Emil:

It's because there's, there's a lot of like these little things that you're like, oh, we might as well just replace it now or make it nice for next time right, like carpet that could go another round with a tenant or just whatever get, get vinyl in there now or something, you know, it just like, I think with these, it's like, you're gonna end up replacing a lot of things anyway, when you do a turn on, like these properties that are like so, so and they have a lot of things that are like halfway or towards the end of their life. I don't know, that was my experience…

Michael:

Okay, yeah.

And I think kind of to your point Emil, if this ended in a property and all that work had been done already, you may have paid additional 30-35,000 for the property, I'm not sure. But you also would have been able to finance that as opposed to coming out of pocket. So when you look at your return metric, it still would have been better, even though you're in it for the same amount of money.

Emil:

Exactly.

Tom:

Great point, Michael.

All right. Number five, on the mistakes you'll never make again.

Michael:

And the mistakes I'll never make again, I will never ever, ever, ever get caught in a loan with a hefty prepayment penalty without negotiating it down.

So I was working on this massive redevelopment project that I've talked a lot about on the podcast. I was leaving my job at the same time as I was looking to acquire that construction loan for it and I found a bank that would give it to me. And I was just like, so focused on getting the deal done and they're like, yeah, this is a prepayment penalty. I'm like, yeah, whatever, like, I don't care and now I'm on the back end of that. I'm just like, God, this is killing me. I want to refinance so badly. But I'm stuck in this loan, because the prepayment basically makes it cost prohibitive to refinance out of it. And so I am just kicking myself because it's expensive, and I can't stand the lender. So like, there are just so many reasons for me to want to leave. But I am stuck…

Tom:

Terms baby T's and C's…

Michael:

T's and C's, T's and C's…

Emil:

It's funny that the people who have these additional fees and things later on, right, like your prepayment, Tom mentioned, like a property manager who, who has like fees when you sell. They always end up being people you don't like love as much and you're like, it's almost like they've added these things because they churn through so many people or something I don't know…

Michael:

They know they suck and they're like, oh, we got to keep our hooks in these people versus the good ones. They're like, yeah, we don't need it, like you will stay…

Emil:

They trust their services…

Michael:

Yeah, yeah.

Tom:

Culture, bad culture. Got to… got to seek out good culture vendors.

Michael:

Yep. Yeah.

So look at what the pain is, and anyone listening out there that finds a prepayment in their loan, it's negotiable. Like that's a term you can negotiate. I think everything's negotiable. So definitely add that one to your list of things to look out for, and things to push back hard on.

Tom:

Alright, all round us out here with the final mistake you'll never make again. And this one is a close friend of mine who got involved in real estate. He bought, bought a… bought a property, bought a rental property, and it was doing pretty good. And he got to a point where he needed the money back. So it was like kind of a speed thing to get the money back. And so he listed his property to sell. He got a buyer, the buyer made some, like outrageous claims about, you know, oh, the roof, that's like, you know, $15,000 in like the house was the house was fine. Like, it was like a reasonably hot market too. But I, I guess this mistake is like not talking to my friend or I don't know, if this is more like, it kills me. But he ended up like accepting this lowball, you know, funds off the sale price. And he sold this house and it's like, man, especially at the point where you're at the exit like everyone, you know, those that big chunk of money, like, that's just gone, that's just like money just disappearing. So I guess a couple of mistakes and lessons like on the acquisition side, you know, why not, me, you know, make those kind of requests unless you're, you know, at risk to lose the deal. And on the sale side, you know, don't ever get yourself in a position where you have to sell quickly, like have the right reserves or whatever else is going on in your life. Because that's just, you know, hard money coming, coming out, you know.

I'd say the other thing is, you know, people should just list their listings a little bit longer than they think they should, you know, leave it for sale. I think it was in blink or one of those Malcolm Gladwell, there was like a survey on real estate brokers that they list their properties longer because they like know, they get it like more eyeballs, the you know, the incremental increases in potential income by more eyeballs on it. So a wide variety of a spectrum of… I don’t know from that experience that I'll share is the final mistake. But I think the big thing is if you can like don't put yourself in a position where you gotta, you gotta sell and if somebody makes a ridiculous offer back at you, be okay with walking away from the deal. So a cornucopia of things with that.

Michael:

That's a really good one, man. That's a really good one.

Tom:

Yeah. Brutal. All right, so I think that's it. Anything else you guys want to, want to cover today?

Michael:

No, I think that was all, that was on my mind.

Tom:

Yeah, it's on your mind. That's… the way to open questions. What's on your mind? It's like…

Michael:

I like that.

Tom:

It’s sincere right? And it's… you can't, you can't give a cheap little answer to that. You know say,

Michael:

Oh, yeah, good. Good. Oh, fine.

Tom:

Yeah, nothing. Oh, that's what's on your mind?

Michael:

You damn liar…

Emil:

You couldn't get a really weird answer, like the turkey sandwich, I ate for lunch.

Michael:

Yeah, but think about how interesting that is like, oh, you got cranberry sauce in that bad boy. Are we talking avocado sprouts. What kind of turkey sandwich we're talking?

Emil:

Yeah, it does at least get some small talk going.

Michael:

Yeah…

Tom:

In my experience, it's a little more sincere. You know, it's kind of coming…

Michael:

It was less rehearsed.

I like it.

Tom:

Alright, that's the six mistakes you'll never make again. Thank you for listening. If you enjoyed our episode, please share it, please like it, please subscribe. We got a YouTube channel as well and as always: Happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

How to use your primary home as the foundation of a larger portfolio Feb 17, 2022

Chris Meunier is a program manager working at Google, but one of his biggest passions is real estate investing and personal finances. Over the past 10+ years, he has worked to build a real estate portfolio with his wife, Jessica, which includes a primary residence in the SF Bay Area and rental properties in California, Indiana and Georgia. Chris believes there are many strategies to achieve your real estate goals and they can be used to accelerate and generate wealth. When not working his day job or keeping an eye on the real estate market, you can find Chris spending time with his family, hiking outside with his dog or planning his next ski trip.

In this episode, Chris will share how he started in the real estate business as an investor, some tips & insights and how he found a platform that provided a holistic approach to him.

Chris always enjoys talking real estate and personal finances, and you can reach him directly at cmeunier@ymail.com.

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Michael:

What's going on everyone? Welcome to another episode of the Remote Real Estate Investor. My name is Michael Albaum and today with me, I have Chris Meunier, who's talking to us about, what it's like to convert your primary into a rental and how he's scaling out estate and what that looks like. So let's get into it.

Hey, Chris, what's going on? Man, thanks so much for coming on and hanging out with me. I appreciate you.

Chris:

Yeah, thanks for having me, Michael.

Michael:

No, my pleasure. So in… you know, I obviously know you and we have a relationship. And so I would love if you could just give everyone listening a background of who you are, and how you got started in real estate.

Chris:

Sure!

So my name is Chris. My wife and I have, we've been married about almost 10 years now. And I work my day job at Google. My wife's a, she's an entrepreneur, a personal finance coach, which is really exciting. So we're both very passionate about helping people with their finances and real estate as well.

And going back a bit, I grew up in a family that was very focused on real estate and had a lot of family members who work in real estate. My dad was an agent, my brother's an agent, uncles and aunts who've done you know, home inspections and things like that. So I was surrounded by all of that growing up, I bought my first property back in 2009, a condo in the San Jose area of California, and, and did whatever it took to get in there, I put 3% down. Because I knew that the earlier I could get in and get my foot in the door that it would be well worth it. And sure enough, it was and I still have that property as a rental. And then I think from there, we've… we've really just kind of kept building from there and look for ways to not just focus on our primary residence, but look for ways out of state as well to build our real estate portfolio. So that's kind of a little bit of background on where we've come from and where we got into today.

Michael:

Awesome. And, and just with the goal of being fully transparent, you are a Roofstock Academy member, right?

Chris:

Yeah, we've been for I think, a year or two now we've been with the Academy. And I've really enjoyed it and got a lot of value out of the courses. I'm a program manager in my day job so I've taken I built a lot of Evernote sheets and took copious notes and action items and things like that. So we've really gotten a lot of value out of the academy. And I used it to really, like, analyze properties differently and build out like our ten year plan and things like that. We've told other people about it to say that we're big fans.

Michael:

Awesome. And how much should I pay you to say that?

Chris:

Ohh, we'll figure that out later…

Michael:

You'll send me an invoice.

Chris:

Yeah.

Michael:

All right, awesome!

So I'm curious, Chris, I mean, for… for you and your wife, what was it? And maybe it was just your family kind of being bugs in your ear, but what was it about real estate that attracted you to investing in the beginning?

Because I think people listening to this could say, oh, well, you know, he got started deals at nine, prices were… were at the bottom, so he just got lucky. I mean…

Chris:

Yeah…

Michael:

I don't think that's the case. But you know, you've done a lot since then. But what was it about real estate that initially attracted you?

Chris:

For me for a while, it's, I think a few things. One is about just the fundamentals of real estate that I've learned over time. And then going back to 2009, it was really about like finding a primary residence first and foremost, but knowing the power of buying and holding in the Bay Area, and knowing what that could do. So at the time, I did a lot of research on the tax benefits and things like that, but not so much as an investor more as a primary owner. So I think that was one was just understanding the power of from an investment standpoint of what could be what you could achieve through that.

And the second thing is diversification. So we, my wife, and I even now look at okay, what how much do we have in our real estate portfolio? How much do we have in the stock market? How much do we have in other types of investment vehicles? Diversifying, especially when inflation is going crazy, and the stock market's going up and down I think is really important. So that's also been in the back of our minds as we've thought about what can real estate do for us?

I've always seen it as a way to build long term wealth and especially now that we have two small children leaving a legacy to see and having something that can carry on, beyond our time, beyond just like inheriting some amount of money, I think is something that's really important to us too. Like, we have just an example of my wife site, her family, they some of them live in the Bay Area and own an apartment, a small apartment complex, and her aunt bought many decades ago. And now it allows them to, and her cousins, you know, to live differently, because she made that investment long ago and is able to support the family in different ways. So things like that really speak to me, I think and show the power of what real estate can do for family and extended family.

Michael:

Love it, love it…

And for you and your wife, Chris, when you first started out, you had some goals in mind. And so now you've been on this journey for over a decade, what is done look like for the two of you and for your family?

Chris:

We go back and forth on that honestly, like, there was a time where we said okay, like, let's… let's build out our 10 year plan and figure out like, how do we get active, you know, like 50, 70k of passive income a year from real estate, we want to get 100k, is that even feasible? Do we need that?

I think we both work day jobs. And we… we want our goal has always been we want to supplement what we will get from retirement, and always look for ways maybe to retire earlier. And, and, and also, like I said a minute ago, just provide kind of that that long term nest egg for us and for our children eventually. But having, having done that math, I think we've landed on like somewhere between five to 10 properties out of state, either single family rentals or duplexes or maybe triplex something like that.

But the reason being is that we can get to some amount of stable annual income through those properties. Combine that with like 401k, Ira income and get to this net amount that will allow us to live comfortably in retirement. Those numbers are, you know, they're… they're kind of made up at this point, we don't really know what amount will need to live on. And we don't really know how all of our rental properties will perform down the road. So we're trying to bake in some margin of error there and say, okay, yeah, five to 10 instead of just 10 or, you know, maybe by the time I turned 50, or something like that, I won't want to manage 10 properties, I don't want to have that mental burden of figuring out which ones are doing well or not doing well. At this point, I think I would enjoy that. But yeah, it's hard to know, right? Like, it's there's the time aspect that I think is playing a bigger role in my mind now.

About how much time do I want to put in now versus when I'm retired, it sounds really enticing to put time in later and kind of look for deals and look for ways to optimize the portfolio and things like that. So yeah, like, more tactically speaking, like our original goal was to go from like, one property to two to three, roughly every year. So right now we have, we have three, and we intend to buy another one this year, maybe next year. And then we go to, you know, five at some point after that maybe the next year. The pace kind of depends, of course, on our financial situation. But that's kind of how we're playing it right now is at least maybe get to five and then reassess how things work and what our financial situation is, and our job situation, too.

Michael:

I love that, Chris. I think we've had so many people on the podcast, and I talked to so many investors that are out to get to 100 tomorrow, I'll do it as fast as I can as quickly as possible. And you know, that might work for some people. But I think for others, you really need to take a more strategic and slow and steady approach, which is what it sounds like, you are doing exactly.

Chris:

Yeah. And I think we've when… when thinking about how can folks starting off benefit from hearing like tips or feedback from others. I think what's really resonated with us is… is just being extremely thoughtful about what your goals are and what you want to do. Because like I said, my wife, she talks to a lot of people who are working in her working to get their finances in order. They bring up real estate a lot. They say, Oh, I hear real estate, I need to I need to own sound like my family slam me down real estate and Jessica says why? And then they say well, I don't know, like, I just heard I should be owning real estate somehow and it kind of just gets to the basics like alright, what are you trying to achieve?

Some people want to do buy and hold and they can skip the cash flow every month, some people can… Some people need to live off that cash flow, some people haven't maybe done the math to know they can put a chunk of money and lock it up in real estate for a while. So just being very thoughtful about that and having concrete goals I think is, it sounds so obvious, but I think it's, it's so critical. And then once you have that goal or those goals, like stepping back and making a plan, and because my wife and I think very like project management oriented, like building out milestones throughout a year, like if you want to buy your first property, or even make your first offer, like this year, let's say, put down some, some steps you can take, like, whether it's time for Roofstock Academy, or educate yourself in other ways, or learn about certain neighborhoods, and then get pre-qualified and then get, you know, talk to…, property managers, things like that. That's what helped us a lot, is really putting down those stepping stones along the way to the point where we could feel like alright, like, maybe we can do this, maybe we can buy our first out of state investment.

Michael:

Yeah…

Chris:

It takes a while to get to that point, sometimes and that's okay.

Michael:

And Chris, what would you share with folks now having been on the other side of how do you go from zero to one? How do you know when you're either mentally or physically prepared because you could always listen to one more podcast or read one more book or take one more course?

Chris:

Yeah.

Michael:

What does that look like?

Chris:

I think it's, you know, there's always… there's always hesitation, I think I would dare compare it to like having a kid maybe in a way…

Michael:

Okay… they're just as expensive.

Chris:

You can do, all right, you can do all this studying and preparation you want, you'll never be fully, fully ready. And there's always going to be unexpected things that happen. So, you know, as an example, when we bought our first, our first property, we landed on Indiana, Indianapolis more specifically.

Now why why did we land there, we did a lot of research on, on areas that were seeing population growth and strong rent growth. And affordability was within our range of we were targeting somewhere around 100 to 120k, for our first property. And Indianapolis seemed great, but it took a while to really, like build up the confidence, like make an offer, because it… first I think is getting over the hurdle of like buying something that you don't see, at least for us, that was a big hurdle to get.

Michael:

Yeah.

Chris:

Because the other property we manage locally is only like 30 minutes from our house and we can drive there when we need to. But this was a whole different beast, right? Going, it's like going on eBay and buying something then you hope it shows up in a few weeks.

Michael:

You hope it’s real, yeah…

Chris:

Yeah. So I think that was that was a mental hurdle to get over. But, you know, going, we spent a lot of time like, researching Roofstock and other competitors and learn in, in actually talking to folks who had used it, and getting feedback that way, too. So that helped build our confidence.

And then on the financials to like we, we took a lot of what Roofstock offered in terms of like estimates for fees and maintenance costs, things like that. And we just kind of put it to the max and very conservative and making sure that we were really planning for okay, like, if, if we don't get, you know, a tenant in place for a month or two months, what would happen? Would we still cash what would we be okay, if we didn't, and just mapping out all the what ifs. I think a really good tip that… that my wife reminded me of was have somebody who's willing to push back on your assumptions, and to question, question what you're doing, whether it's like, you know, like someone like you, Michael, a coach, or your spouse, like in my case, I tended to be more optimistic and my glass half full.

Michael:

Yeah

Chris:

And she was the opposite. She would say what about tornadoes, hurricanes, like, do we have enough insurance to cover that? What about, you know, if the tenant just doesn't show up one day, they grew success, somebody there, nobody's there, you know, things like that. And yeah, it's good to have somebody to check your check your assumptions. So those are some things that helped us feel confident and feeling alright, like we can do this. Let's give it a shot. Let's make our attempt. And we have made a couple of offers, it didn't work out, the first time before we got our Indiana property. And it was a good learning experience like we… we figured out how to make a stronger offer, how to… how to look for properties that maybe we're not going to be as competitive as like some that everybody wanted, for example.

Michael:

Mm hmm.

Chris:

Yeah.

Michael:

That's great, Chris. So Chris, now that you and Jessica have owned that Indianapolis property for some time, how is it actually performing? Is it more towards where your assumptions were more towards where she was?

Chris:

So yeah, that property has done it's done well, we've actually had the same tenant there for, I think we've had the property now, almost three years or so. It's been the same tenant in place and that was there when we purchased…

So we recently raise the rent for the first time. The first time around, we did not raise the rent due to COVID. In this past, I think it was November actually, that we, we did a small rent increase, it was successful and so we're really happy about that. There's been a few maintenance issues, nothing significant.

The kind of going back to like the point about not being able to see the house that the property manager has, when they've gone into maintenance, they've made comments back to me about like, oh, there's, there's cleanliness issues, or there's like, stuff everywhere, you know, and, and it makes me nervous, it makes me nervous that like, there's probably other stuff going on in the house that nobody knows about. They might, the property manager said they have possibly like an illegal dog in there. And they're supposed to have pets and like, things like that, but they're not making a big fuss about it. So part of me worries that when this when this tenant leaves, and we have to like update the property, like we're gonna find stuff in today that we didn't expect.

Michael:

Yeah.

But for now we're here.

Chris:

Yeah, yeah… Because it's, it's so hard during COVID, especially like the tenants, they say, I don't want anybody coming in, like you can't do an inspection on the house. So very limited opportunities to like, really assess what's happening. The checks keep coming, though, and they're… they're paying and they're not complaining. So part of me is like, yeah, he said, like he were blinders on, just keep going forward. So that the property is doing well, and it's appreciated substantially. I get, like cold calls and texts, like every week from people. I don't know how they're getting my information, but they're finding it and they're saying, hey, like, we're looking to buy property in Indiana, like, what are you? Are you open to it? Like all cash? Like, come in? We'll give it to you right away?

Michael:

Yeah…

I just got one yesterday, too. It's so funny, you mentioned that…

Chris:

Oh, my God, the strangest thing, even my brother, I have three younger brothers, one of my brothers gets texts about our property, he says…

Michael:

About your properties?

Chris:

I don't know his number got out there. But it's somehow out in the wild now and people, they're just grasping it whatever they can, I guess.

Michael:

Yeah, that's wild…

Chris:

So it's done. Well, the only downside and not downside, I guess is like when we got it, we had a pretty high interest rate on it, like almost 5%. And I've been wanting to refi or cash out refi or do something with it. But I was, I was a little too slow with it last year, we were really close to doing it. And like the cost were going to be too high. And now, now rates have gone up a bit, of course. So I think we're just going to leave it there. But all our other properties are much closer to like 3 to 3.5%, which we are happy about…

Michael:

Okay…

Chris:

This one, it's, it's a little bit higher. But that's more of like a nitpick not a major issue, I would say.

Michael:

Totally!

Chris, let's shift gears here, because you've done something that I think a lot of people end up doing, and you kind of became an accidental landlord. And in your instance, I don't know if it was accidental or premeditated. But talk to me a little bit about what that was like buying your first primary and then ultimately converting it to a rental. And did you know that you were going to convert it one day?

Chris:

No, I don't think we did, honestly. I think so when, when we bought… I bought the condo initially before I was married. And my wife now she hated that I did actually because it was during like a down market. And it was, it was like 3% of my money, it was like all I could afford and like what did it go south. So that was it was a little bit scary and a bit of a risk. But I was like very sure that this was the right decision to make. And, and I didn't know… we didn't think we'd turn that house into a rental at some point. And that was after we moved out of course.

Now and then our first primary we bought together in up in Redwood City was a great house, and we loved it and it ended up becoming a little too small. So we ended up moving out of that house, but while we were there we decided, you know, hey, let's experiment with something. Let's run out part of the house. Let's, let's just see if we could find people who are interested in doing that. And because we had, we had like a kind of an awkward layout.

We had an upstairs bedroom, our master bedroom that was added on at some point. And then the downstairs was like a two bedroom, one bath, a situation where the kitchen is and all that. The downstairs bedroom this was before we had kids was kind of unoccupied. So we ended up putting it up on an Airbnb and seeing if anybody would be interested in it. It was kind of slow for a while. We got a couple people interested here and there mostly for business travel. And then after a while we found somebody who was flying into Redwood City every week for work from Chicago. I don't know why he did this, but he did job at a startup and his family was in Chicago. He, he wanted to have a regular place not a hotel, like something cheaper, I think we charge like 100 bucks, and I maybe even like 90 bucks. And he came every week for like, several months. And we were really happy, he would only come on like four nights a week, we barely see him and then he fly out before the weekend and it was great…

And we made good money from that through Airbnb and I think that just really showed us like, okay, like, this is the power of like renting, especially like, kind of hands off in a way for sure there's like cleaning and preparation involved. But we are not having to like manage a tenant or anything like that, like he was on his own pretty much. And then I think that really got us thinking like, okay, maybe we should do more of this. So when we moved out of that house, we, we kept it as a rental for I think it was two years we did. And it was that was a tough decision, because we ended up buying the primary house that we're in today, which was substantially more and we really wanted to use that equity from that previous house on the down payment. But we decided to leave it there and figure out other creative ways to get our down payment through family and such. And then we realize like after two years, we could not do that anymore.

So the rent would read…

Michael:

Was it an Airbnb or long term rent?

Chris:

It was a long term rental.

Michael:

Okay.

Chris:

Yeah, so we found a 12 month, like a family that was in there for 2-12 month leases. And, and it was fine. I paid for the mortgage. But we were just too cash poor, and we didn't feel good about that. So we ended up selling it and, and recouping a lot of the money from there. And we sold it soon enough, so we could we could utilize the home the homeowners exclusion on the gains, thankfully.

Michael:

And what is that for someone who doesn't know?

Chris:

Sure it's so for… for married couples that you sell…

Let me see if I get this right, if you do convert your primary to a rental, but if you lived in it for three out of five years, I think it is, you, you can claim an exemption up to 500k of gains, tax free exemption, on gains you would have otherwise had to pay capital gains tax on.

Did I get the number right, is it three years?

Michael:

I feel like it's two out of five.

Chris:

Two out of five…maybe…

Michael:

Consult your tax professional before doing anything, but it's either two or three, you know, one of those…

Chris:

Yeah, so that was part of our decision. We said, look, if we're going to get this, this because it was there was a significant gain there. We didn't want to pay tax on that and so that factored into our decision to but getting that exposure, I think this is you know, for folks thinking about like, is rent is being a landlord, right for me, like in my setup for this, like the stresses are the risks of it. And I know you guys on Roofstock, talk a lot about house hacking and like renting out part of your house, I think it is a good way to experiment and see if you're really interested in doing more of this without, without like committing a large chunk of money into some other property somewhere where you, you don't know if you're gonna feel okay about that and sleep at night.

Michael:

That is such a good tip, Chris and I love that. I mean, you really got to do it very tangentially, you're very kind of toe dipping as hey, let's rent out a room, if it doesn't work, we stopped renting it out. But if it does great, that's awesome. And so you really got that firsthand experience, almost risk free, because it wasn't like you needed that renter to make your mortgage payment. You bought the house, kind of without that intention at the start, right.

Chris:

Yeah, right, exactly. We didn't, we never even thought that would be possible when we started and then and then sure there's, there's even other I remember finding out about companies that allow you to run out your garage space.

Michael:

Really?

Chris:

We had a detached, we had a detached garage in our backyard. That's how a lot of the properties were in this neighborhood and we rarely use it and we never went through that. But we thought, ha like if we're ever going to ruin our house, maybe we rent out space in our garage for storage for people. And so there's you know, there's, there's ways to run out everything nowadays, I suppose…

Michael:

You can rent out your car…

Chris:

…you can rent your car, you can rent out your pool in your backyard for that summer days. So there's there's very innovative ways to make money.

Yeah, so that's been, that's been fun to learn adding some of those things.

Michael:

I love it, I love it. So now let's shift gears again, because we covered kind of zero to one. Now I would love to hear how you and Jessica have gone from one to three. And what the scaling mentality and mindset was and how did you get there. Was it was one to two to three easier than zero to one?

Chris:

I think. Yeah, I think going from from zero to one was, was significant for us. It took a while to get to that point of feeling comfortable. It probably took us a year I would say of, of the education the research that we did. Talking, talking to people figuring out areas and neighborhoods and things like that. And I think just, just to like, go back to that for a second. Like, I think that's probably the position that most folks are in who are, you know, watching this and listening to this, is going to that, that zero to one step.

Like some of the things we thought about, with what is important is we wanted, we wanted to take a less, less risky first step, like by committing first so even going and buying an out of state property as a risk for it, we wanted to derisk it as much as possible by buying into a nicer neighborhood, buying into an area we knew would appreciate in a long term, buying and what that means tactically is like, you know, a three and a half or four star plus neighborhood. With, with, with good school ratings, we wanted to prioritize that too, because we have kids and we know families will look for neighborhoods and have decent school ratings.

Cash flowing on day one was a requirement for us. And still it is, like even going from one to three properties. Putting at least 20% down to have some, some equity stakes and stability in the property should things go south. These were some of our requirements that we made sure, especially for our first property that we still carried forward to our other two that we've purchased. And we, we really looked at these and looked at different ways, like, okay, what if it's a three star? Like, what does that, what does that mean? And there's a difference, you know, there's different cap raid, there's a different level of risk you're taking on it, we just didn't really want to deal with that and open ourselves up to potential downsides of like tenants changing frequently, maintenance issues. So we tried to focus on higher quality properties. And then going from the scaling part that you're asking about, I think was really about thorough planning. And using that 10 year plan, that the the template that Roofstock Academy offers, as an example, has worked really well for us to model out. Okay, well, like how do we get the money first of all, to put down payments on, on these houses? And how much cash flow do that we expect from them? How long will it take to recoup like to bank that cash flow and buy another property.

So so that's how we arrived at like the model of putting down like, 30 to 35k a year, every year, for example, to buy a property, some of that would come from our own savings accounts, but also some of it was from from collecting 200 to 250 a month of cash flow from the other properties we had. And building out that model helped us feel confident that okay, you know, there is a there is a path to doing this. But it also involves like, just very honestly speaking a lot of time. And, you know, a lot of stress at times as well. While raising a family, while working a day job and it took, it took a while I think to build the confidence to keep going and to go beyond the one. So that's, that's something to also keep in mind, I alluded to earlier, like the time involvement is, you know, it can be big, if you want it to be big, or it can be small, like there's ways to invest completely hands off and buy a REIT or buy, buy something where you don't have to do anything.

But the middle ground of owning an actual tangible property, and feeling confident enough to go forward with it, I think. It takes you know, everybody's different, but it takes some time to get up to that point. And more specifically, there too, I'm like looking for mortgage lenders, shopping around for those property managers, insurance brokers, those are, those are the types of things to consider when you start looking at other states and other areas.

Thankfully, Roofstock provides a lot of, you know, recommended partners to work with in those areas. But you know, most you want to do your own due diligence and make sure you are checking all the boxes in your own buy box and spreadsheets section. By box, by the way, I know that's a… academy term, but I’ll… I'll explain quickly is basically it helped us a lot. It's documenting what, what are your requirements for buying a property like, what cash flow do you need, cap rate, neighborhood rating, down payment amount, etc. And you put property through that analyze it and see if it comes out with yes or no or how many no’s? How many are you comfortable with? Proceeding on so, I know that was a lot to carry, but I'm not there.

Michael:

No, it’s so good. No, so, so, so, good, Chris, I'm curious, it's kind of a follow up for those people that are interested in scaling. Because I think there are a lot of people that went from zero to one and maybe didn't have as positive as an experience as you did. Maybe they bought that less expensive property and a lesser start neighborhood because that was all they could get into. So for someone that didn't have a great experience, what do you say to them in terms of thinking about scaling?

Chris:

Yeah, I think that's a great point. And I'm, by the way, I'm fully expecting that at some point, we will, like hit bumps in the road in our real estate journey, and we have had little bumps in certain areas, and there will be bigger ones down the road. Because that's just the reality of how real estate works. And I think, yeah, starting off and having a bad first experience can be, can be demoralizing, right, and it can make people want to get out, I understand that.

But I also think it's, it's good to go back to what, what your own goals are, if your goals are focused around long term buy and hold, I think you have time on your side. Because there's plenty of data to show, you know, the long term up into the right charts of real estate and where it's going. But if, if you were hoping to do something in the short term, and that that hasn't worked out, maybe think about a different strategy, maybe think about investing in a different type of property, or with a different amount of money, different neighborhood. There, that's what's great about real estate, there's different there's so many different ways to get involved. Maybe the first approach you tried, didn't work. But there's could be nine other ways, whether it's with yourself or with partners, or with crowdfunding, or with owning, you know, pieces of property instead of the whole thing, things like that.

There's, there's different ways that you can get back in the game, so to speak. And I would just say that, you know, don't let that fully ruin your view of what real estate can do for you and your family. The other thing too, like, honestly, is, you know, you could take a break from it, I think folks could, there may be folks who invested too early and didn't have enough capital, and maybe a deal turned sideways, and now you're underwater or something like that. Maybe it's assigned away in wait till, you know, you have enough capital to reenter or the market turns around, and you can do something with that money.

But yeah, I just keep going back to how there's so many different ways. It's a great for me, I don't see myself as a very creative person. But I think real estate has allowed me and my wife to think of like, what if we did this? What if we did that like to give you that control to do things in a different way…

Michael:

Totally!

I love what you said about you know, maybe it's not the right methodology, there are these nine other routes to go, cuz I think too many people have a bad first experience like, oh real estate's bad… bills ain't, sucks for me, so it's not for me. But I think…

Chris:

Yeah…it makes me think, too, on that on that now, like my father in law, he, he lives in the Bay Area, too. And he bought a rental in Phoenix many years ago. And it was, it was great, it worked for a while. And then a few years ago, he realized that the supposedly the tenants were not paying rent, but in fact, the property manager was stealing the money or some portion of the money and pocketing it for themselves, which is crazy.

Michael:

Wow…

Chris:

I didn't even know that this can happen. So this happened for months that the money was gone. And so, he the property manager was fired, the tenants left. And he decided to sell a property, he was tired of that experience and didn't want to be a landlord property. He didn't want to own rental property anymore because of that one experience and the rest of the years before that had been great. And I can understand how that could be. It could be a pretty negative moment to be like all this hard work. And I lost all this right now. But, but also on the flip side, like if he kept that property, it'd be doing phenomenally now.

So I think it just goes to show it for everybody's situation, it's unique. He, he was he was done with it, at that point, he didn't want to do real estate anymore because of that one bad experience. Whereas for me, maybe I would I would look for, okay, maybe, maybe there's something I could do differently next time. Maybe I should that the property managers more or just try a different company and see if it happens again, something…

Michael:

Yeap, there was this poker player that wrote a book and I forget what the book is called, but she was on the Bigger Pockets Podcast and she was talking about how in life she tries to apply this, that you evaluate the process, not the outcome. Because the process is you can control the outcome oftentimes we can't and so if something goes sideways or goes poorly, I think it's so important to kind of do a post mortem and say okay, well what did I do and maybe what could I have done differently? Outcome is the outcome can't change that but the process leading up to it we might be able to influence a bit.

Chris:

Exactly, very true.

Michael:

Awesome, well Chris, this was so much fun man. I really appreciate you coming on. If people want to reach out to you have more questions about your story, want to learn from you, what's the best way for them to get a hold on you?

Chris:

Yeah, I'm definitely open to sharing more in chatting about real estate or other personal finance topics. Happy to have folks email me directly and my email address is letter C and my last name Meunier: c.meunier@ymail.com.

So again, yeah, happy for folks who reached out and I was happy to talk real estate and other finance topics.

Michael:

Awesome!

Chris:

Yeah.

Michael:

Can you spell Meunier for those who may not be familiar with the spelling?

Chris:

Yeah, it's not obvious is it?

Michael:

Depends who you ask.

Chris:

M E U N I E R

Michael:

Awesome, awesome. Well, Chris, thanks again, man. I'm looking forward to seeing how things go for you in the future.

Chris:

Thanks so much for having me, Michael. It's been a pleasure.

Michael:

You got it, talk soon.

Chris:

All right, bye.

Michael:

Alright, well, that was our episode. A big thank you to Chris for coming on and sharing his story. He's doing a lot of really cool things. And I think especially as any beginner out there listening to this should hopefully feel inspired that you can do it, too.

As always, if you liked the episode, we'd love hearing from you ratings and reviews on things we could do better or topics that you want to hear about, and we look forward to see you on the next one.

Happy investing!

How to overcome & find success in the real estate world Feb 15, 2022

Liz began her real estate journey in 2005. She co-founded DeRosa Group with her husband, Matt Faircloth where she helped the business grow for over a decade. During this time, Liz was active in management consulting where she developed an expertise in a personality assessment program, working with small and Fortune 500 companies. She has created and facilitated hundreds of trainings and workshops for universities, conferences, and executive level trainings. While earning her Masters’ degree in Social Work in her 20's, Liz developed a passion for supporting women. In 2018 she came together with her good friend Andresa to launch the Real Estate InvestHER® podcast and community. Their mission is to empower women to live a financially free and balanced life on their own terms.

In this episode, Liz will share how she started in the real estate business as an investor, some tips & insights on how she started her portfolio on her own terms after not finding a platform that provided a holistic approach.

Episode Links:

https://www.therealestateinvesther.com/

https://www.instagram.com/therealestateinvesther/

https://derosagroup.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me I have Liz Faircloth, syndicator, investor, women empowerment speaker and podcast host and she's gonna be talking to us today about all those different topics and more. So let's get right into it.

Liz Faircloth, thank you so much for joining me on the show this morning. I really appreciate you coming on.

Liz:

Yeah, thank you so much for having me, Michael, excited to be here.

Michael:

Oh, awesome. Well, I know a lot about you, I've read so much about you and so for anyone who might not be familiar with you, I would love if you could give us a little background, who you are, where you come from and what it is you're doing real estate now.

Liz:

Sure, sure. So I got my real estate start about 16 years ago, in my 20s. A long time ago, my husband and I actually started investing together. Quick story I was getting my degree in social work, wanted to be a therapist, and my husband was an engineer, at the time, get a job in engineering, so completely different fields. And we both had to share a passion for like creating a bigger life than what we had at the time. Both of us came from very middle class, wonderful families, hardworking families. But you know, we both had this shared passion of doing something bigger with our lives. And quite honestly, impacting a lot of people was a value we both had at the time rates, I still do.

Anyway, at the same time, around the same time, my brother in law, who was the only entrepreneur I knew, you know, I didn't grow up with entrepreneurship or investing or anything like that. He handed me: “Rich Dad, Poor Dad”, and I did like personal growth books. I said: What are you giving this to me for, I'm gonna be a therapist. I don't know why I'm reading this, but I'll read it. He said: You have to read it, you have to read it.

Michael:

Yeah.

Liz:

And I got really inspired by that book like many people. I think mostly because I was learning about concepts I never heard of before, you know, in passive income and creating wealth and you know, just things you don't you just really think about trading your time for money. That's how I, you know, thought of it. And so reading that book, and then changing my career right after that I actually got a job in consulting and sales because of that book. So I didn't really and at the same time, started investing, bought our first duplex after a year of study and hard work and door knocking and door slammed in our face and going into local RIA meetings like everyone else.

I borrowed $30,000 from my father who didn't have the money to buy the duo duplex, right instead of Philadelphia and got that first deal under our belts in 2004, which is quite some time ago. But we launched our business and started a twists and turns, ups and downs path for the last 16 years. And now we are you know, we are mostly focused on syndication, large multifamily. We will have about close to 1600 units under ownership and management in four states very soon. So, again, it was not a linear path by any means, our path was just our path, a lot of twists and turns and ups and downs and tons of mistakes. But when we went all in on multi family, that was a good move for us. And at the same time, as we scaled our multifamily business, I started another business and community called The Real Estate InvestHER® community, which is all about empowering women to live a financially free and balanced life with my partner and dress, so….

Michael:

Amazing, well, there's so much there that I want to unpack, getting back to that first duplex. Was that a house hack? Was that something that you guys lived in as a primary? Or was it a pure investment property?

Liz:

That was a pure investment properties actually, right around the same time. At the time, my boyfriend, Matt, he bought a single family row home and actually rented out two rooms. So getting the taste so I don't consider that my first investment because I wasn't on the deed. But it's technically his because he always likes to say he house hacked on his first property. And I'm like, I'm not going to take responsibility for that, because I did not buy that. I didn't find it and do anything to contribute to that one. So he had that after we you know, when we already met. But yeah, he had the experience of house hacking, and it's a phenomenal, phenomenal strategy. He actually made I think $30 a month when he rented out those two rooms and after the mortgage was paid so so that really gave him a lot of inspiration around you know, obviously investing on his own and his own way but yeah, the duplex was not it was not a house hack. We bought it with tenants inside and learned about how to acquire multifamily and with tenants, you know, already there and that whole mix of how you manage that.

Oh yeah, it was a… it was a district duplex.

Michael:

Love it, love it. And then I'd love to hear a little bit more about kind of what that nonlinear journey as you mentioned was because I think so many people see someone like yourself or Matt or some of these bigger names in real estate investing and think, oh my gosh, I could never do what they do because I could never get there. And so, versus buying a duplex a lot of people are really comfortable with that. So what came next for you guys?

Liz:

Yeah, a whole bunch of decisions that in hindsight, in hindsight, we're just steps on our road if I… if you are steps in the journey, like to call it because if they don't break you, they make you stronger, and you learn something from them. So you know, after that, it's funny because we start with a multifamily and we're focused on multifamily. But during that timeframe, we got involved in so many things that were not multifamily. So we decided to really focus on buying in Trenton, New Jersey.

Michael:

Okay!

Liz:

We lived, we lived close to Trenton, we lived in a little town in New Jersey. And so we really want to focus locally. So our goal is 30 mile radius. And so we said okay, what area around us can we afford, number one. And number two, can we really make a difference because I came from social work that is my background, that's my values I want to and I had that shared passion with my husband. So our mantra at that time was to transform urban environments, that was our you know, transform lives through real estate in really focused on cities, urban, you know, densely populated areas. So Trenton met the you know, goal there, so we started buying in that city.

And we you know, we started buying small multis, we started buying mixed use, then we bought a commercial building, which did not have any residential tenants, it was a 10,000 square foot commercial building.

Michael:

Was it like an office or a warehouse?

Liz:

Yeah, an office building.

Michael:

Okay.

Liz:

And you know, when you read Rich Dad, Poor Dad, and we were in our 20s, I don't want to say that everyone in their 20s doesn't make… they may all make mistakes, but we were pretty naive.

Michael:

I was right there with you.

Liz:

You know, we didn't know it was mentors. You know, we didn't have the community that were… that I'm building now. I mean, I wish we had a mentor or had a little more focus. But anyway, we bought, we looked at this building, we just ran the cash flow. I said: Okay, by square foot, what can we make? And it was like a killer deal on paper, right? It was like this. Absolutely amazing. Like, we'll be out of there, we'll be done and I was still working. He had quit his job at the time, we got married, and I was doing the sales and consulting job.

So anyway, we ran the numbers, everything looked amazing, we bought the building. We used a two lines of credit.

Michael:

Okay.

Liz:

My mother in law's house, we got a line of credit on their home. Now this is pre the crash.

Michael:

Right, right.

Liz:

So, you know, anyone…

Michael:

They're giving up money?

Liz:

Yeah, they're just literally just so you want a line of credit, okay we’ll give you like, 90% loan to value we had like zero experience and what we're doing. I mean, in hindsight, I'm like, wow, that was, I don't know, if I was the bank, I would have done it. But hey, you know, you take money where you can get it when you start ours.

Michael:

Right.

Liz:

And we did it legally, of course. But you know, in hindsight, they're not writing those loans anymore. But this was 2005. And hey, you know, they did what they did. So we bought the building, it took two lines of credit out and it was a half a million dollars.

Michael:

Okay.

Liz:

And, you know, that was a, that was one of those projects that we had to learn by making mistakes, we started renting those a little later than 2005. I want to say it was right before the crash. Great time to buy reversibility. And long story short, we ended up we couldn't find a tenant. So when you do your market analysis and say, okay, who's gonna rent this asset, right? Like we do now. We thought one tenant, one business, but we didn't actually analyze it in a... How many businesses are going to rent a 10,000 square foot building in downtown Trenton? It's not like 100, it's polyana, you know, and a handful. So we couldn't find a tenant.

Here we have a vacant building and that's not good for us, buy and hold investors, right, you know…

It’s obviously, that's your customer. So long story short, we ended up breaking it up into small offices.

Michael:

Okay.

Liz:

And that's what the vision of that building is to date still, we're actually have it under contract. We're selling that building. We've had it for 2007, so it's been a long time we've had that building and so he's been a small office about you know, 18 to 20 users have been in that building so…

Michael:

So you got tenants?

Liz:

What… we do, we got tenants, we got them.

Michael:

Awesome!

Liz:

…and learned through that process and then we flipped property we bought you know, we flipped play a couple of dozen properties over the years, so learned that side of the business. But yeah, I mean, we so we got involved in a few different niches, which most people don't, they focus, right, they're told to focus so but again, it all adds to our, our journey, and it also adds to why we said okay, 2010 let's really go all in on multifamily and that really helped really, really helped us propel us much faster than the first five years into growth.

Michael:

Okay, and what about multifamily is so attractive to you and really made you make that decision in 2010? I think a lot of people would agree that yes, multifamily is a great asset class. But if you ask them why they say, well, because that's what everyone's talking about.

So what you know, what are… what are kind of the nuts and bolts that that got you excited about multifamily?

Liz:

Well, you know, it's funny because you start to look at and I think I, I encourage a lot of the women in our community that I'm talking to all the time is people often say: I want to get involved in this niche or that niche, just like you're saying, yet, they need to look at where they've had some successes, you know, and that could be in real estate, or that could be in life, because sometimes they go and people go into this with no real estate investing experience, but they've had success somewhere. And there's, there's little nuggets in that success in my belief that can be used in this business. So what I mean by that, specifically for us, is we looked at everything, we looked at our whole portfolio, we had multifamily, we had flips going on, we had this commercial building where we were like, small office, you know, landlords.

Michael:

Yeah.

Liz:

We had a raw land deal that we were doing. I mean, we were kind of like involved in a lot of different things.

Michael:

Yeah.

Liz:

And we looked at the numbers and said: Okay, where have we had success?

What is forgiving in this business? And quite honestly, multi. We even had single family, we had a bunch of single family rentals as well.

And in our experience, multifamily is one of the most forgiving investments.

Michael:

What do you mean by that?

Liz:

Yeah, what do I mean by that?

For us, we started to say, okay, what, where we had success and then multi families have been forgiving. So we bought one of our first purchases in New Jersey, and outside of Trenton was.. were about three, four units. So we bought three, four units pretty, pretty quickly and when we moved into, you know, building our business, and we bought them too high.

Michael:

Okay.

Liz:

I spent too much money on them. So it wasn't like this homerun deal. It wasn't like this. Quite honestly, our first duplex was probably one of the best deals we did really early on.

Michael:

Really?

Liz:

Yeah and then the four, the three, four units were just we paid too much for them. And we didn't properly look at capital expenditures. There are older buildings, classy buildings, classy and, you know, community. So you're managing a whole business when you're, you know, in those in a situation where you're figuring out what is the market need.

Okay, who am I going to be serving in terms of tenants? This building needs so much, right?

Michael:

Yeah, yeah.

Liz:

So my point saying that is even though these were not homeruns, for us, and even though we weren't making the cash flow, we had intended to, we said, if we had made these tweaks, and if we had bought these properties at this amount, we would be, you know, absolutely. And then so we learned, we learned a lot from those first few, four plexes.

Then we started doing the bur strategy in Trenton, where we bought two single family homes and bought them at the right price, put, you know, added value in a sense. And then obviously, refinance them pull the cash out, did it over again. And we started doing that really successfully. And we were making cash flow, we pulled the money out. And it was like a win win win, you know, is all the wins that we all want in this business.

Michael:

Yeah.

Liz:

We didn't have them in certain ways and other, but we learned from our, our challenges, so we then had those successes. And when I say they're forgiving, you know, if you have a bad month in a multifamily property, right, the roof needs to be replaced. That's a big, that's a big one.

Michael:

That’s a bad month, yeah.

Liz:

That's a bad month.

But you know, so yes, those that wonderful cashflow may not be there that, that month, but you're adding value to the property right. So, so over time, you're in the long game, multifamily is a long game, this is not a flip, this is not an overnight success. So we knew that you know, we have a tenant move out. And you have to you have to you know, you have to dip into this or your reserves to do this. But then the next six months are really strong.

They're forgiving in the sense that it's one month is not going to now multiple months and credit but they're forgiving and in a flip you know you make a couple mistakes that's going to cost you the project…

Michael:

The whole idea, yeah…

Liz:

…as forgiving, in my sense or my opinion getting into a niche. I don't think it's forgiving you're learning a whole new business. So you know the time and money are not gonna be on your side when you're, when you're entering something.

Michael:

Yeah.

Liz:

So for us to go in to go all in on the niche that we knew and that we did have some.. we did have success with that made sense to us.

Michael:

I love that. I love that and just out of curiosity, Liz how much by how much you overpay either in dollars or percentages because everyone's heard you make money when you buy and so I think especially in today's market people are so, you know a little bit gun shy of well, the prices are sky high and I have to make money when I buy, but you're kind of living breathing walking example of yeah, you make more money when you buy but you can also make some mistakes and live to talk about it. So how much did you ever…?

Liz:

… and we sold…

Yeah, and it's funny because we sold those properties. We sold those properties in 2013 when I my son, no, I had my son so it's 2014 we everything is in years of my children. That's how I remember…

But ehmm, we held those buildings for about six or seven years. So yeah, we I would say we overspent fourplex, in different areas going to cost for my money. I want to say we paid 290 per fridge… for per fourplex, which is, which is not crazy for New Jersey.

However, in hindsight, with the capital expenditures and the deferred maintenance and all the things the seller does not tell you…

Michael:

They don't volunteer..

Liz:

…there's a reason they're selling. I don't care if it's a duplex, I don't care if it's a 400 unit apartment complex. There's always a reason. They are deferring something. And you discover that when you own when you own the property, you just hope it's not, you know, more than you could, you know, conservatively underwritten for but anyway, so yeah, I would say we pipe overpaid…

…at least 30 or 40,000 per property, I would say…

Okay, yeah.

I'd say it was pretty high. Because there were some serious things wrong, maybe not that high 520 to 30,000 minutes, still pretty. Now, in hindsight, again, even if you overpay, it's a long term hold. So every month, what are we doing, we're paying off that we're paying our mortgage, which is paying off the property. So by the time we actually sold. Now, interestingly enough with that, that street, we bought those three, four units. And we when we sold, we had bought two more buildings. So we actually sold five properties all as a portfolio.

And I always recommend that to people is that if you can really focus on an area and start to think even if it's not a 20 unit apartment building, that's very enticing to people to buy 20 units on one stream, because you're leveraging time and resources and energy, obviously, versus 20 units in different parts of state or different parts of the country, in my opinion.

So that was a good move in knowing those, I would say for us. But yeah, and then when we sold it, we… we sold it we actually did make we did make money, because you didn't get in, you're paying off the loan and, and seven years later, and the line of credit that I told you about that we used one of the parents lines of credit with that sale, we paid off that line of credit, so…

Michael:

Great.

Liz:

…and all work great.

Michael:

No, I love that I love and it's like real life monopoly, you know, buying up the whole block and then selling it. And so you bring up a really good point, because I'm a, I'm a very big believer in the portfolio kind of theory as well, and consolidation versus diversification. But what would you recommend or say to people that think well, what if something happens to that one city, I want to diversify and really spread out the risk not put all my eggs in one basket?

Liz:

Yeah, I would, I would say that that's a… it's a, you could think in that way. And I think that's a fine strategy, you know, that I wouldn't disagree with that opinion. And I agree with it in some ways in that, like, for us, we were all in on in New Jersey, we're all in in Trenton, New Jersey, and, you know, between different things that happened in the city, things that were going to be happening, we saw a really up and coming city, and we saw something we can make a difference.

And you know, a decade later, we saw some of the same things. So you know, you I always say you cannot control a market, you can only participate in one. And you meet and we didn't know that at the time. We thought we can you know this enormous difference. And we did and what we did, I wouldn't say we didn't make a difference.

But my point saying that those that we at that time we said we needed to start diversifying in different markets. Let's keep you know, we still have, we still have properties and projects we have a new development we're doing in Trenton so we're so active investors in the city, but we started diversify in other markets.

Michael:

Okay.

Liz:

…and so then we moved to Pennsylvania instead. Okay, not that that's not far from New Jersey, but we bought a building in Philadelphia, which was you know, 30 minutes till and then we bought another building, we still haven't in the Lancaster area.

We have been very focused on finding more in that area, but it's just, there's no large multifamily in the Lancaster. We have a 49 unit which is wonderful, great building Class B like just a really strong strong property.

But you know, those we just… last year, we bought two more, we bought another 40 unit and a 30 unit. So that's the type of size buildings they have in that area. We're larger, we've also larger asset so we said okay, let's keep buying there but we can't, that's not going to do it. We can't just just focus on that one market. But we have bought more recently there. So then we moved to North Carolina and Kentucky. So we're only in two markets there. We're in Winston Salem, we're in Lexington. So right now we have three focused cities: Lancaster, Lexington and, and… Winston Salem, all of which like our recent project that we're raising, raising for and we're almost at closing to here, which is a 670 unit portfolio to the buildings North Carolina and Winston Salem and three of them are in Lexington.

Let the fun that we did before one was in Lexington one was in Lancaster so you know everything we're buying are in the our tried and true markets which are three.

Michael:

Okay.

Liz:

You know, if someone said I got this amazing deal on Atlanta, Georgia, or an Austin Texas it's not that expensive. You know, of course Austin Texas is like crazy expensive. But I mean seriously, we get pitched on different areas all the time.

We say: No. And it has to be something very significant. And I'm saying we're never going to go to another market. But it has to be really good reason. We've built relationships in these three markets, property management companies, there's a an ease once you start to build that, but only you can kind of determine is it three markets is a two.

But I, you know, it was interesting to see when COVID hit two, which markets have they all kind of fared, in which buildings did our properties in Trenton actually, we had the most trouble with, but we were the buildings we were having trouble with before COVID. We continue to it was not like, oh…

Michael:

It was not a change…

Liz:

No, it wasn't really a big of a change…

And if anything, some of our buildings thrived. Most of them thrive more during COVID. Because we built… we were in workforce housing we provide these are not Class A apartment complexes, these are workforce housing. I always like to say affordable living for people.

Michael:

Yeah, yeah. No, it makes total sense. And Liz, I'm curious to know, what's it like now being on the syndication side of the business having come from the direct ownership side?

Liz:

So, so yeah, I mean, in terms of our the way, we scaled into syndication, we were buying everything ourselves, or, you know, through lines of credit, or just getting creative. And then we started to partner with people in our first private like money partners, where we would, we went in 50/ 50, with one or two people bought a couple properties, both had active roles, which is important, I gotta read, give a shameless plug for my husband's book, raising private capital. But people…

Michael:

Totally…

Liz:

…people buy properties all the wrong ways. And they… who's active, who's passive, that's really important. Because if you are bringing in a passive investor, and they're, they're not truly passive, and you're not syndicating, that's a problem, technically, with the SEC.

So we started work with active investors. And then it got to the point where that was two single family homes, they had a role, we had a role. And then we had our eyes on a 15 unit portfolio. It was a 10 unit in New Jersey, and it was like a fourplex in Trenton. And that was one of our first syndications was… which was we called DeRosa Capital four, we actually just sold that we're up to 15. So anyway, but that was more and, and yeah, we had raised about $500,000 to do that. And it just made sense. So so our ownership went from 100%, to 50%, to general partners, is the folks kind of syndicating and putting everything together tends to be about 30% is different models, but that's the model we've had. So you're limited partners, right?

The folks that are passively investing along with you in the syndication, own 70%. Control none of it, right. So you remember that. So there's an ownership, there's, those two things are different because they're limited, right and they're truly passive.

So, you know, for us, we started to really go all in and raising money and working with other people. So the scalability of our business became important. There's other people that can own 50 doors, or 10 doors and be financially free, right, because they own it 100%. So I'm a big fan of like, building the business that works for you more units doesn't mean you're making more money, I will say that, and this is someone who that's been our business model is buying larger assets. It's just the model we've chosen. And it's the, it's the train we've chosen and, and there's a lot of benefits to I mean, one of the things I love about what we do, versus just me and my husband, is I really love creating win wins with people and while you're making money, you're making the investor money.

And and these are like everyday people, you know, and these are folks that have 50,000 in their self-directed IRA or they have this so it's, it's these are just regular people looking to create legacy for their families. We have close to 300 investors we work with now. And it's just neat to like, be building our wealth, and we're building theirs. And we're, you know, really creating that that's, that's the neat part about syndicating something, right? You're just buying larger assets more with other with other people and winning together.

But yeah, it's a whole process. And you know, in terms of legal two teams, that GP side tends to can can also decrease as you bring more people on, right, because now we have a partner that focuses on…, we're doing everything. And now we have a very, we have a very solid team but a larger team. So you have to be okay with maybe not taking the full share of your GP side and maybe taking less to give up ownership to someone else, lots of different models… But that's been the model we've chosen. So we can focus on what we're good at and and build with other people. Other folks are like, I don't want to give any other ownership up. You know, and that's okay.

Michael:

Different model…

Liz:

Yes, their model. And I think it's quite honestly much simpler. Sure, when I hear people, I got 30 units and I'm just good to go. I'm like, okay, that's awesome. You know, like, that's what you chose. And that's that's wonderful. We're not…we're not our doors. You know, no one's defined by how many doors someone has, who cares about that as much as what your lifestyle you know, what's the turn you're looking for and are you doing life on your own terms?

Michael:

Yeah, no, I love that. I love that.

Do you know Chris Voss, he never split the difference..?

Liz:

Yes…

Michael:

…He talks in that book about how, as a negotiator just in life, you should look for Win-Win scenarios. It doesn't have to be this win lose, me getting over you be getting the lower end of the stick, right? So I love that you talk about Win-Win, when you win your investors win and vice versa. That's so great…

Liz, I'm curious, as people start to get more experience under their belt and do more deals, one of the things I so often hear is I'm running out of money, where do I go find more money? And so what should people be aware of be thinking about be cognizant of if they do want to start bringing in partners? Money partners, Capital Partners?

Liz:

Absolutely. So yeah, I mean, that's really how we were able to, to scale our business, and also how we were able to do a lot of flips. So different types of monies used for different types of projects.

Michael:

Okay…

Liz:

Really, simply put, you have debt, and you have equity.

Debt is a private lender, somebody literally lending you money for an agreed upon interest rate, and, you know, more short term projects, so they're gonna, their expectation is they're gonna get that money back, right, six months to 12 months. The longer the longer you have their money, the more interest you're paying, you win. And if you lose, they still win. Right? So it's not a Win-Win. I mean, it's a Win- Win in a theoretical sense. But I mean, in terms of your profit in your deal, I mean, there's been flips, depending on the partner we've had, that we've… had to bring money to closing, not a lot, but that that's terrible, right who wants to bring money to good?

Michael:

It doesn’t feel good…

Liz:

Doesn't feel good, right? Thank God, it didn't happen often.

But remember, this one project we made, our lender was made whole. But we had to take a hit as the owner. So that's one thing, you have to be mindful of the project you're getting into. These lenders, especially in the debt side, they're lending you money. That's it. And that's the agreed upon, regardless of how well you do. So you must considerably underwrite and manage, with debt investors with private lenders, that managing the project timeline is critical in the budget, because a six month project that goes to a 12 month project that goes to a two year project, the interest will kill you. And you'll be you owe that to that person right…

And there's ways to legally set that person up for success with a with a promissory note and other things that you know, it's that's the benefit, right of a private lender is that they're protecting themselves with with real estate typically.

So that's the one strategy that's that… and you paid them back. In essence, think of that as like when you buy, it's like a classic bur, you're buying it, you're renovating it, you're refinancing it. That's how you're able to know you're selling it right. So next track, you're either refinancing or selling to pay back that lender I hear so many… a lot of questions with women in our community about, oh, this person wants to lend me 100,000. And it's a seven year project. I'm like, whoa, hold on, hold on, hold on.

We don't have any lenders in our syndication, no one's lending us money. Now, these are equity partners. So really think of it like short term projects. There's a beginning middle and end whether the end is a refinance, or a or sell is really useful for private lenders for debt…

Michael:

Okay…

Liz:

…that’s the strategy. There's no tax advantages for the lenders. But in essence, they're getting usually a higher interest rate. You know, you can you can get it, you can get up to 12%. You know, we have a HELOC on our house right now. And we're paying 3% on our HELOC. We're lending that out.

Michael:

Yeah…

Liz:

We're a private lender to someone else's project, 12%, 3%, we're gaining 9%

Michael:

Your average charging…

Liz:

Good stuff, right? How do I do more…?

Michael:

I love it. I love…

Liz:

How I do more of that…?

But anyway, that's… that's we're doing that but lenders we’re doing… were that for us, too. So it's a two way street on the equity side, that's really where we focus most of our business from a multifamily perspective. So remember early on, you don't have to syndicate or use private money and syndicate and get all complex on your first, on your first private money deal. I would highly recommend you don't do that. But the key is to have two active partners. So the deal that we project that we work with one of our first non-family members, was a gentleman I actually met in college, and a man in graduate school, excuse me, and we were meeting together and he said something I want to say this because I think it'll help your listeners. He said something very interesting.

He said, I love really… he's a financial planner. It's like I love to invest in real estate, but I just don't have the time. And that is like a great thing for someone who wants to invest, doesn't have the time. Meanwhile, me my husband, that's all we had, because I quit my job at that point. We had plenty of time. Time is not a problem for us. But money right? We were tapped out financially. So we brought our you know, and again, he had an active role, he audited the books, he personally guaranteed he was a he had a great W-two job at the time, we didn't…

We didn't have enough assets even so, you know, with banks, right? We weren't as even bankable not that we weren't at all but you know, people who don't have jobs who are investors full time, who don't have a lot of assets on there, you know, to call upon banks like hold on, hold on, what's the story here?

So, so we…he personally guarantee the loan, we went in 50/ 50…Peter roll, we had a role we manage the project, we manage the contractor, reef, got the tenants, you know, secure tenants refund, you know, we're able to refinance, and then pull that his 50,000 out, and then do it over again and continue to make cash flow. So I say that because we did those type of projects, prior to syndicating and to really pull money together. I mean, raising money is active or passive, you just have to be clear on the structure and make sure you're doing it in the right way with in the right legal way.

But yeah, I think, I think working with other people, and structuring in a way that is a Win-Win for everyone is critical. Now, he didn't come in as a lender, he came in as an equity partner. So that means that you are you're 50/ 50%, owner of that of that property and in that LLC together. And so what brings along with that… being in a lender situations easier, right, lending you money, and had a partner of yours is not a long term marriage…

Michael:

They're not making decisions with you. Yeah…

Liz:

You know, but with an equity partner is a different game, you know, so so what comes along with one end of the stick on money, especially in that situation, because we are 50/ 50 partners, and you have to be really clear on what everyone's bring to the table. How are you guys going to communicate? So everyone's clear on expectations? What if one of us gets hit by a bus? What happens?

So laying all that out and operates more complex, not complex you know, don't… don't google an operating agreement, we did that with one of our earlier partners, and I was a disaster, we just use some boiler tape operating agreement that, don't do that. We did early on and as a really bad mistake, but so my point, though, is, that's how we've grown our business. Other people do it through owner financing or seller financing. There's so many creative ways to get into projects. But for us, you know, working with on the lender… that with debt and equity were the two strategies that we focused on as we, as we grew our business.

Michael:

Yeah, that makes so much sense. And it's, it's funny, someone once told me that your operating agreement with a business partner is kind of like a prenup. And so would you go get a boiler plate… plate prenup from you know, Google Sheets, but spend the money do it right? It's gonna save you in the long run?

Liz:

I absolutely will. I cannot say that enough. Do not get…agreement, please don't do that.

Michael:

Great, great tip. Well, Liz, I want to shift gears here and talk about the amazing community and podcasts that you've created and host the Real Estate InvestHER® show. Talk to us a little bit about that: What is it? Who is it for? How can people get involved?

Liz:

Sure, sure. So, you know, as I… as we start to partner with, with different people, because that's just been a strategy that my husband and I had, we wanted to start flipping properties in Philadelphia, and on Bigger Pockets, which, which we're very grateful for Bigger Pockets, because that's really how me and Joes’ just actually met…

Michael:

Oh really?

Liz:

Yeah, I saw her flipping properties in Philadelphia. And I said: That's neat. So about seven years ago, and I said, we need to we need to meet…, I just got into a conversation and said, I'd love to come by at some point we can connect. So you know, we got together on a Sunday afternoon. And you know, when you meet people, you know, when you meet people you're like, it's just like this is we talk about a lot of different things here. Like this is a deep person, like we just connected we were we just became instant friends, me and her. And then we started really just supporting each other and helping each other however we could just like friends do. And then a project came up, we started flipping, we started do one project together and then we started to… we actually start a women's mastermind at the same time for free.

Michael:

Oh, cool!

Liz:

So we always had to share passion of connecting, we didn't know it, but we had to share passion of supporting women in this business. So long story short, we did a handful of projects together. And we would be talking about those projects. So we get together for coffee, what's working, what's not, who we're gonna hire as a realtor for this project, all those sort of things that came up, and one day and like a panera bread, we're just like, where are the women in this business?

You know, like, we didn't know a lot of women in this space. And we started to Google it. And we said, would it be great to like help women that are up and coming, but also get support of things that we're working on? Because everyone, everyone's somewhere on their journey? Yeah, and no one's done. You know, and everyone has something to give, something to get. So we said, for different reasons. We saw…it is like women, women have such a, an advantage in this business. But for whatever reason, you go to these RIA meetings, go to these conferences, women, women were never keynoting at the conferences were going to, they were they were like maybe like a handful of them at the RIA meetings. Like, it's kind of more women. So we start with our podcast, we said we're gonna we're gonna change some things up here.

I was told early on, we said, we're going to interview just women. Only women. I know, that's done now. But at the times four years ago, actually, it was kind of unique to think to do that.

Michael:

Yeah.

Liz:

And so people told us that we would run out of women. Like there's a lot of… there's not that many investors. I said, I don't know if we're gonna have…

Michael:

Wow…

Liz:

…so I mean, we were told that this was not like 1955, this is like four years ago… This was like a friend of mine, a gentlemen, a woman didn't say that to me. But a gentleman said that to me…

So anyway, we started it with the… with the mission, we've always been very mission centric and very community centric. With the… with the, with the goal of empowering women to live a financially free and balanced life, you know, balanced is a made up term, you can't be bounced by itself, right? Because if you're focused on one thing you're in, you're not balanced, right?

Michael:

Right.

Liz:

We know that. But I'll say our… and women, we have, we have young kids, that time we had younger kids, women have so many hats they were. So it's very easy to get overwhelmed, just like anyone, right? But we just know, because we're women, we can only speak from our own experiences. So we said: Wow, wouldn’t it be great to create a community that only lift each other up helps one another create generational wealth, you know, on your own terms, it does it in a way that we're not killing ourselves doing it, because her and I are both very hard working, a lot of the women in our community are. And sometimes you'll do that in detriment of your own health, your own self-care.

So we have three pillars in our community. So everything we do, from our conference, to our meetups, to our podcast, we always focus on three pillars, which is real estate investing, business and self-care. And so we always create content around those three pieces. And, you know, we hold that pretty true because we don't, you know, we don't want women to just focus on the investing side and forget themselves. And that's what happens a lot, or we focus on one thing and everything else goes, goes away.

So so that was we started the podcast, and then slowly moved into like a Facebook community. We have over 10,000 women now, on that group where they're supporting each other. We have over 55 meetups across the country, two of them in Canada.

Michael:

Wow.

Liz:

And we have a membership… women start to ask us for accountability and mentorship. And we're like: Okay, what would we create that we would want to win, you know, as we were growing our portfolios, so that's what we've created in our strive membership, which is a paid membership, we have close to about 100 Women in that… in that community. So, so it's neat, you know, we've really evolved to continually ask like, whatever we do, like is this going to serve the women we're serving?

Our community serves all women from new to experienced, our strive membership tends to be a little more of an experienced women who were focused on. And when I say experience, they can have five to 10 deals, they don't have to have, you know, 1400 units under their belt, but you know, having some experience but our community, and our meetups has always been for everyone, you know. And we really want to serve all women on their journey.

Michael:

Amazing. And so where can people learn more can join and get involved?

Liz:

Yeah, absolutely. And I'll just, I'll share real quick we are, we're actually having our inaugural in person, investor con in June. So June 23, June 24, we're really excited, it’s a two day event in Charlotte, North Carolina, at the Westin and it's going to be more than just like a traditional conference, more of like a transformational experience.

Kim Kiyosaki is going to be our keynote. So we're really excited about it. It's gonna be just different than any event, we really thought about women and what they need and created a you know, an event to do that. So you can learn all about us and our podcasts at our websites. Probably the best way to get a hold of us: https://www.therealestateinvesther.com/

Michael:

Love it, love it. Liz, this has been so much fun, really insightful. I want to thank you so much for your time. If people have questions for you directly about the DeRosa group or at more about your story, where should they go to learn or get in touch with you?

Liz:

Yeah, I mean, we really we're really active in our on Instagram, too. So you can follow us: @ therealestateinvesther.

DeRosa group: Yeah, our website https://derosagroup.com . You know, the info at I think it's either either or website, you know, could always get to me, and you know, happy to happy to help any way I can. But we do a lot of free content. My husband does a lot of free content in the DeRosa side. I do a lot of free content on the investor side. So constantly trying to help add value.

Michael:

Amazing. A power couple. Thank you so much for coming on. This was really fun. I'm sure we'll chat soon.

Liz:

Thank you, Michael.

Michael:

Alright, you take care.

Okay, well, that was our episode. A big, big, big, big, big thank you to Liz. That was really insightful, tons of great nuggets in there. So definitely give it a second listen, if you weren't paying attention the first time. As always, we'd love to hear from you. So comments, ratings and reviews are super helpful for us, and we look forward to seeing the next one.

Happy investing…

Is paying for a real estate coach even worth it? Feb 12, 2022

In this episode, Devin and Michael talk about some of the most important things they have learned from their mentors, the importance of having experienced people to network with, and if coaching is actually worth paying for.

Roofstock Academy

https://www.roofstockacademy.com/

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Tranacript

Michael:

What's going on everyone?

Welcome to another episode of the Remote Real Estate Investor. Today, I'm joined by my co-host, Devin Redmond, and he's gonna be talking to us today. Actually, we're both gonna be talking to it to you all today about mentorship, getting some coaching, how we kind of got our start in the real estate space and how it's impacted our trajectory going forward. So let's get into it.

Devin, what's going on, man? Good to see you.

Devin:

Hey, Michael. How are you?

Michael:

Good, good, but not as good as you. You're out in Hawaii. Right?

Devin:

I am at the moment. Yeah, I've got a few rental properties here. So I've been here almost two weeks now, doing some renovations and got a vacancy that I just leased up, found what I think is gonna be a great tenant. So going well, so far. And every once in a while I get I get to the beach and work on the tan, too.

Michael:

Talking about aligning incentives may get to invest in rental properties in Hawaii, and then go there.

Love it. Love it.

Devin:

Yeah, yeah, absolutely.

Michael:

So Devin, let's chat today about how you kind of got guided in your real estate investing journey. Because I've got I had a personal mentor of mine. And I'll share a little bit about that. But I'm curious, did you have someone in your world and your sphere of influence that was like, really shaped how you became the investor you are today?

Devin:

Yeah, you know, I would say there's not necessarily one person in particular. But my first job after business school, this is going back 15 years now was in the commercial real estate world.

Michael:

You don't have to date yourself. No one was asking…

I said you don't have to date yourself, that was asking…

Devin:

I own you an apology.

I went to business school at 15, so…

No. No, just kidding. It was a while ago now…

But yeah, I worked for a big office, developer owner investor. And so there was, you know, a group of senior folks there who had been in the business, you know, up to 30 years, and it kind of seen a lot of cycles. And so I really learned the business from them, how to analyze deals, how to talk to investors, and get them excited about investing with you, without overselling, right.

So there was kind of that balance always to try to find. And, you know, I think most importantly, what I learned from doing both acquisitions and asset management after the fact was that, you know, on the day you close, that's great, you did a bunch of analysis, your model looks beautiful, that all goes out the window, the day close.

You start hearing from actual tenants as to what the real deal is at the property.

Michael:

Right…

Devin:

When you start to break, you have to deal with stuff, the market changes underneath you. So all those things start happening in a very real sense, once you actually own the property. So, you know, that was something I learned very, very quickly, very early through both experience. And from working with this, you know, this group of real estate folks that had been around a while.

Michael:

Now that's such a good takeaway, and how cool that you got to like, learn and kind of get your teeth cut with other people's money, kind of practicing before you and was this all this was all before he went in and personally invested? Right?

Devin:

Yeah, it was, yeah, at the time, you know, I was still kind of struggling to scrape together a down payment to actually buy something myself. I eventually was able to do that, you know, for a condo in San Francisco, that kind of got me started, in terms of actually owning something that, that then became eventually my first rental and 1031 out of that. So, so yeah, I mean, it's all it's all connected and was kind of happening around the same time.

Michael:

That's awesome. And have you taken a lot of those lessons learned? And those early days and really applied them to your personal investing? Thesis?

Devin:

Yeah, I mean, in part it makes, it gives me some, you know, perspective with the modeling when you're looking at a new deal.

Michael:

Yeah.

Devin:

And that you don't really know what's going to happen. So actually look for opportunities that specifically I think, have more potential to go bigger on the upside than, you know, negative on the downside. So this sort of like asymmetric opportunity, but it's not always something you can model either, right. So it's, so it tends to drive me towards investing in markets that have higher history of appreciation, right versus the cashflow, which is tends to be a little more reliable. So, you know, and that's just kind of like what fits my investor profile now, but I think it's different for everyone too, right?

If you're someone that's very focused on things happening the way you expect them to, and you don't like surprises, then maybe you want to focus more on cash flow, because that's a more reliable way to way to think about things.

Michael:

Yeah, that makes sense.

Devin:

This is something I've seen in just investing. When I got started in the commercial real estate side, in the Bay Area, it's very volatile market, right, there's few jobs, and there's huge downs. So you can see these great outcomes when you hit the cycle, right. And really, really kind of like tough outcomes when you when you don't, but my sense is like, when the cycle is not working, your losses are less than the big upside when it is working. So you know, it's calculated risks that you got to get comfortable with.

Michael:

Yeah, that makes a ton of sense. And so question for you, if the model breaks the day you close, why even bother running the model?

Devin:

There's a couple of reasons…

Number one is to at least have a baseline going into it, where you can sort of evaluate how you're doing against some sort of baseline, that's, you know, a function of your expectations at the time, right. But I think most importantly it's a great way to set your starting rents understand where you are on insurance, where you are on some of your big expenses. And it's also a great way to get input from others, right.

So if you do have a mentor, if you do have other folks that are investing, you can ask them to kind of take a look at the model and pressure check whether how you're thinking about things is really the right way, or if you're missing something, right.

Michael:

That makes so sense.

Devin:

…and then yeah, yeah…

And it's also like, the modeling has turned me off of a lot of deals. So it's, it often has resulted in a big stop sign for me. Because if you can't make the model work, right, then something is off with your pricing. Or they're asking too much for the property. Or maybe you're not comfortable pushing rents as far as you need to, to get the return you're looking for on this particular deal.

Michael:

Yeah.

Devin:

So like, you know, my, my computer is littered with a graveyard of models for deals that I didn't do, right, because the model doesn't support the deal. So I think it's sort of like a minimum threshold that you want to try to get over.

Okay, the model works. Now, how do I really feel about this on an emotional level? And what's the upside versus the potential downside? What do you what do you get out of your models?

Michael:

The proper answer. Duh..!

So, no, I'm exactly like you in that regard, in that it probably helps me steer clear of more bad deals than good deals. And I think you're exactly right, that for me, it's a: Hey, this is kind of a worst case scenario type of thing, because I'm super conservative, because I come from the insurance industry. So getting a handle and quantifying. Okay, how bad could it really get? And if that stomach bubble unpalatable?

Like that's great, awesome. Let's move forward, because it's probably going to be better. So my models tend to project worst case scenario. I think a lot of other people's scenario, models tend to project best case scenario. So I would, I would recommend people's take the worst case, worst case approach tends to keep you safer.

Devin:

Yeah, I think yeah, the challenge is like, how do yo… How do you balance that against? What's what the reality of the market right now where you have to be pretty aggressive to win, right?

Michael:

Yeah

Devin:

I find that that challenging.

Michael:

It's extremely challenging. And I think you could very easily and so many of us could make very easily any deal look bad, right? You just add a couple heavy expenses and the deal, all the deals are no go. And so you have to get really clever, and balance. And we talk a lot about there's the art and science of deal analysis. And this is really kind of the art piece of this is balancing reality with expectations and possibilities.

How bad could it really be? And what's the likelihood of that actually happening?

Devin:

Right! So it sounds like you sort of tend to model your worst case scenario, but then take it with a grain of salt, too that it's not necessarily how it's gonna play out. It's getting you it's doing some service and getting you comfortable with a downside scenario almost.

Michael:

Exactly. It helps me, it helps level set me.

Devin:

Yep.

Michael:

And you know, and I had a mentor who just totally reshaped and changed the trajectory of my investing career and frankly, my life because he was he was so impactful. And so he really helped me kind of get an understanding around. This is the type of modeling that makes sense, especially for him and he showed that with me, which has been super, super impactful.

Devin:

Yeah, interesting. How did you find that person?

Michael:

Strangely enough, I found him online on like a mentorship website. It wasn't paid. It was like just people helping people. And I kind of poo pooed it. But I was in like, a super bad place like my father had just passed away. And I was like, I don't know what to do and spiraling. And so my wife was super instrumental in helping get me on this website. And so I found this guy, and I was like, I don't know. And we connected, and we just really hit it off. And so it was very much so at the beginning, a mentor mentee type of relationship where I would ask him questions, and this and that, and now we chat regularly. And we're friends.

It's a bit it's turned into it's blossomed into this really cool relationship. But he just totally gave me some this incredible advice. I was investing all over the country. And he says, Michael, like, go get laser focused on one or two markets, hammer them hard. And you know, watch what happens, it'll blow your mind. And that was so counterintuitive to everything I thought I knew about investing and diversification and all this kind of thing.

But I'm like, whatever, I'll, you know, take a flyer on this. And, and it's just been unbelievably impactful. So I can't stress and I'm so thankful that I was able to get connected with him. I can't stress enough how important I think having someone who has been where you're trying to go is, you know, just in life, and it's funny, we talk about, you know, professional athletes and coaches and sort of thing, if you're gonna go the Olympics, you go get a coach. And no one, no one box at that no one questions that. But I think for doing things outside of the sports arena, like in business, or even in life, like if someone gets a coach, people kind of are looking at them odd or that's just not generally as well accepted. I think outside of the sports, which I don't understand why because it makes perfect sense. If you're trying to do something better have someone like guide you…

Devin:

Yeah, yeah, absolutely. It kind of I think for some people it takes you set your pride aside a little bit, right. And, and recognize that you don't know everything, you can't do everything on your own good at something, some things that you're that are newer to you, maybe that you're getting into it absolutely helps to have a guide and a coach.

Michael:

Yeah.

Devin:

Yeah, it makes, it can make a big difference.

Michael:

I am interested, because I mean, you got your kind of coaching and mentorship and got paid to do that, because that was a job for you. Would you be open to paying for a coach, I mean, kind of taking turning back the clock a little bit? Do you think paid coaching or paid mentorship is a reasonable thing in this space?

Devin:

Yeah, yeah, absolutely. Getting access to experience to the right people who can both guide you away from things that aren't going to work out right, or that don't have a good potential return or that are asymmetric to the downside, right.

And honestly, like most properties on the market that you can find yourself are overpriced, right, and it's hard to make them work as an investment deal. So I think paying for a coach who can guide you to the right sources, help you understand how to analyze a deal, especially in the beginning. If you're talking about dropping, you know, 30, grand down payment on a rental property, a few 100 bucks to get some expert advice, and put yourself on the right track, is I think the return is huge on that, on that outlay.

Michael:

Yeah, you know, it's funny, I agree with you, 1,000%. And I think it also applies to a couple other areas like CPAs, or tax professionals and attorneys. Like yeah, the cost might be exorbitantly high when you look on a per hour basis, but you look at what they might be saving you down the road in future headache and future costs. It's like, get done, I'm gonna pay an attorney or tax professional to do these things for me, because if I don't, I'm gonna pay out the nose later.

Devin:

Yeah, absolutely. A lot of people I think undervalue their own time, right. So like, what do you value your own ass? Is it 50 bucks or is it 250, is it 300, right?

And so like, why would you spend 17 hours trying to figure something out on your own online, in random forums, you know, where people are paying for all kinds of things that are in their own self-interest, or just, you know, inexperienced, right? When you can just go to go to someone who knows what they're talking about, for whatever it is an hour and get that, you know… get on track.. quickly.

Michael:

Yeah. It's so good, you know, and that's it!

Like when people value their time out, I used to be very anti, like hiring people to do stuff around the house, like I'm like, I'm perfectly capable of cleaning. I'm perfectly capable of gardening, right. And then it came down. I was like oh, I can pay someone for three hours to clean my house, and it cost me whatever, 30, 40, 50 bucks an hour. And that frees up my three hours to go do something that has a higher dollar per hour value, like: Oh my God, and when I made that mindset shift, I was like, oh, this makes sense. This makes total sense.

Devin:

Yeah, absolutely. I have the same issue, when I'm renovating something, and so like, you know, I can do some electrical, I can do like some minor plumbing, I can do a lot of like trim work and stuff like that in to some extent I enjoy it. So like I do, I do continue to do that stuff myself. But then I'm also like, recognizing that there's kind of a limit to how many hours I can put in on the ground doing that kind of work. And like, there's plenty of people who are faster and, and worth the money to get it done.

Michael:

Totally, totally. Well, we like to be totally agnostic on the show, we don't wanna make this a Roofstock infomercial. So Devin, I'm curious where in your opinion, people can find or get connected with mentors, or coaches, or experienced professionals? And maybe there are free resources and maybe some paid?

Devin:

Yeah, I mean, it sounds like you found a great freebie source. I don't know if that was on a on a forum, or a sort of real estate website. So there's definitely I think those types of places where you can, you know, reach out to folks that you see posting or that seem experienced. I don't know, necessarily what's in it for them on the other side. So like, that can be kind of a challenge, you can kind of have to make, make the right pitch, I think going to your network of friends, other people, you know, who are investors.

I have a couple of good friends who, you know, own like 20 to 50, kind of turn key properties. And they're really into that, that sort of world, right. And they're always happy to chat, and hang out and talk. But I've never wanted to make it sort of like a more formal thing, necessarily. So I think if you want to get like, you know, really on track, with a regular recurring kind of coaching session or engagement with a mentor, Roofstock academy is great for that. So there's a couple of different options that are available.

There's a workshop option, which is sort of our, you know, more popular tier that comes with a good block of coaching. And then even for more experienced investors, we find that some of them also like the routine of checking in with, with other investors, getting expert advice. So there's, we're also launching a mastermind program for that. So those are, those are also good options.

Michael:

Love it!

And if you decide that, hey, Roofstock academy is not the place for you, check out bigger pockets, check out Facebook groups, there are investment communities throughout the country. And I think most people are surprised to learn that. And Biggerpockets has some pretty great resources as well. And like you mentioned, like…

Devin:

Yeah, they do. I've learned a ton from bigger pockets over the years. For, you know, for more esoteric questions, it could be hard to kind of like, figure out what the right answer is, or the best answer, because there's so many people were in. But yeah, it's definitely a great place to start. I think the other challenge right now is like a lot of these meetups and things aren't happening in person. And so like, I think having a regular scheduled sort of zoom check in with someone, or a regular group of people who get together and talk is important. Otherwise, it just doesn't seem to happen.

Michael:

Right. So yeah, I have I have a couple accountability buddies, and we have regular, regularly scheduled check ins, and we just talk about whatever we're trying to accomplish. And then we ask each other: Hey, how did you do the thing you said you were gonna do? So that way we have to be accountable to more than just ourselves. Because it's so easy to be like: Oh, I'll do it tomorrow or next week?

Devin:

Yeah, yeah, absolutely. And you're not like running into people or seeing them socially necessarily right now, where a lot of that kind of check in stuff or accountability would normally happen where someone you know, someone's going to ask you about that thing you talked about last time when you see them for dinner or drinks or whatever. But yeah, those things aren't happening.

Michael:

Yeah, awesome demo.

This was great, man. Thanks for taking the time and sharing a little bit of your story with me. I really appreciate it.

Devin:

Yeah, sounds good. It was fun!

Michael:

Enjoy Hawaii, I'm sure you will.

Devin:

Cheers! Take care.

Michael:

All right, everyone. That was our episode. Big thanks to Devin for coming on, expect to see a lot more of him going forward. He's, he's gonna be a guest coming on pretty regularly. So as always, if you enjoyed the episode, feel free to leave us a rating or review, wherever it is you listen to our episodes.

Come check us out at roofstockacademy.com. And as always look forward to seeing in the next one. Happy investing…

How to tap into your retirement accounts, penalty and tax free Feb 03, 2022

Daniel is a regular contributor to Forbes.com and is the owner of Quest Education, a company that helps entrepreneurs obtain capital for their companies, pay off high-interest debt, and make money tax-free using a self-directed retirement account. Under Daniel's leadership, Quest Education has reached the seven-figure mark two years in a row and has customers in all fifty states.

In this episode, Daniel shares how to tap into your retirement accounts, penalty and tax-free, so that you can use your money to invest.

Daniel's link:

https://www.danielblue.me/

---

Transcript

Michael:

What's going on everyone?

Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and today with me, I have Daniel Blue, a Forbes, contributor, author, business owner, entrepreneur, extraordinaire. And he's gonna be talking to us today about how to tap into your retirement accounts, possibly penalty and tax free. So let's get into it.

Daniel Blue man, thanks for coming on and hanging out with me. I really appreciate you taking the time.

Daniel:

Hey, Michael, excited to be here. Thank you so much for having me on your show.

Michael:

My pleasure. My pleasure!

So for those people who aren't familiar with you give us the elevator speech of kind of who you are, where you come from, and what is it that you're doing today?

Daniel:

Yeah, I'm in the entrepreneur space. I've got a company here in Las Vegas. I have got about 13 employees. And the problem that we solve in the marketplace is helping people access money, their retirement accounts penalty and tax free. So we have a lot of fun with that, and teaching people how to liberate their 401k free of their IRAs and have them use the money the way that they want to use it and not having to rely on Wall Street and the IRS telling them what to do. So I guess I'd have a lot of fun doing that.

I kind of stumbled into entrepreneurship. I don't have this cool Gary Vee story where it's like, I was a hustler out the womb, you know. And I was running side hustling and…

Michael:

Stealing candy on the school yard…

Daniel:

….grabbing flowers from one neighbor's house and then go into the next door neighbors and then meet ringing their doorbell, telling those flowers right, like, I don't have any cool things like that.

Yeah, played sports growing up. And I think sports had a lot to do with me becoming a business owner. I think there's a lot of parallels between sports and business.

But really, when I look back at my story, when I was 12, is when adversity hit. My parents got divorced, my dad moved to Mexico and now it's just my mom and I. And we lived in California, high cost living, my mom's gone all day, working all day doing the best that she can do to provide. And that left me with a lot of time on my hands. And with my dad gone. And I didn't have answers as far as why he left and why he wasn't coming back and why he lived in a foreign country. I definitely rebelled a lot.

And I started to seek, you know, other people to kind of fill the void that my dad left, right, I was easily influenced by other people and hung out the wrong crowd. So I started ditching school, you know, smoking weed, drinking alcoholic making a lot of bad decisions. And I just stumbled along in high school, I barely graduated high school, I didn't really have a plan on what I was going to do with my life.

In 18 years old, there's a few things that happened that definitely shaped who I am, the day, ended up getting a woman pregnant, got addicted OxyContin and dropped out of college. But while this was happening, I stumbled upon sales. And sales was definitely a gateway for me to create an extra income and a way out, and also teaching me how to become a business owner. Because obviously, you got to learn how to communicate how to sell. And, you know, I didn't have again, these aspirations on being a business owner, I just saw my mom's struggle. And I was like, man, like, I don't want to be that way. I want to be able to help her, I want to be able to help myself, like I got to figure out a way to make more money. And sales was that path on being able to do that. And sales opened up a lot of networking, a lot of relationships. And that's how I was able to find the self-directed space and being able to, you know, help people, you know, really get creative with their retirement accounts.

Michael:

Man, what an incredible background and story you've had Daniel.

I'm just curious what kind of sales did you discover that really opened your eyes?

Daniel:

Yeah, it was in the real estate space. So people wanting to learn how to do you know flips, tax liens, you know, rentals and things of that nature. So was in the real estate coaching space. And that's kind of how I got introduced to the self-directed retirement account arena. I would talk to these clients and they would be saying things along the lines of I use my retirement account, to invest in real estate.

And that was so foreign to me, because I always thought IRAs and 401 ks was just for stocks and mutual funds. The idea of using a retirement account outside the stock market, and also so new to me, and, you know, that world was open to me. And I was like, man, I really like this world. I've always had a knack for wanting to learn about the financial space. So that was a… you know, definitely a seed that was planted in me.

And then, about seven years ago, I got it into the self-directed space. And it's been, you know, a fun journey since.

Michael:

Oh, man. That's amazing.

So for everyone listening to the episode, if your ears didn't perk up when Daniel said that you can use your retirement accounts and tap into those to invest in real estate. I mean, this is really really cool stuff!

So Daniel tell us, how do you do it? What's the secret sauce?

I mean, because this has been always told to so many Americans that this is untouchable money.

Daniel:

Yeah, and it's the thought process, we've been conditioned to think that this retirement account that we have this for when you get old, it's for when you retire. And if you're fortunate enough to take money out of the retirement account, you're going to pay 30% in penalties and taxes.

So that that's what we're conditioned to think is it's going to cost me an arm and a leg to touch my money. And I actually can't even touch my money until I'm retired. Right, right.

And those are myths, right? So you know, people that have a 401k, from an old job, for example, or an IRA, there's a way for you to convert that money into an account called a solo 401k. And this is a great account for the solopreneur. If you're listening to this right now and you know, maybe you want to get started in your real estate journey, maybe you're trying to get your first flip. And maybe you've got some kind of side hustle. Basically, if you have some kind of business activity, and there's no W2 employees in the picture, then you qualify for the solo 401k. And the solo 401k can do a lot of cool things:

One, it can be self-directed. So you know, you can invest into a real estate syndication deal. You can invest into, you know, a private equity play, right. But what makes a solo 401k so unique is, it has a loan feature where essentially, you can be your own bank, and pull money out of the account penalty and tax free, and use that money however you want, which includes paying off high interest rate, credit card debt, and I want to spend a little bit of time Michael talking about that subject. Because, you know, we were talking off air about you know, your audience and kind of what they're about, you know, kind of being more on the newer side of the journey, you know, maybe you're thinking about starting a business, maybe you've only been in business for a year, two years, couple years. I can relate!

I started this business three years ago, using 0% credit cards. I made a lot of mistakes in my earlier days, not valuing my credit score, not playing the credit score game. And I think anyone listening to this right now, credit is king, right?

They say cash is king! Cool, I get it. You got to have cash, but you need to have a really good, great credit score, right? Like if you're buying a property with private lending money, how are you going to exit that deal? Like, okay, cool, sell it great. But maybe want to refinance it and have it be VRBO. Right? Or rent it out, you gotta have good credit. And I used to think that I didn't need credit cards, like and I have cash, I don't even need a credit card…

I was 20/ 21 years old, and I was a dummy, I was ignorant. You know, credit score is a game, right? Like you want to have a 700 a 750, close to 800, right? Because the better your credit score is, the more you have the ability to go to a bank and get cheap money, right.

The problem with credit scores, though, Michael is credit utilization rates. And a lot of people struggle with credit card debt, if you're listening to this right now. And you've got more than $10,000 in credit card debt, and you're paying double digit interest. Like not only are you losing money to the banks, but you're also your credit score is suffering. And not having a good credit score can cost you money on your car insurance, it can cost you money on you know other kinds of car loans, a mortgage, your ability to refinance, right, like so many different connections with the credit score. And one thing that I've seen a lot of our clients do, is being able to be their own bank, where essentially they access the money from their retirement account penalty and tax free, pay off their high interest rate credit card debt in one shot. So now there is no more monthly payments to discover. And now instead of paying the credit card companies, they're just paying their retirement account back, they're paying their solo 401k back so they're their own bank, they're saving a buttload on interest, and then now their credit score goes up.

And guys, when you're a real estate investor and you're trying to lock down deals, like it's just life's make your life easier and have a really good credit score. So if you've got credit card debt, you know, solo 401k might be a play for you to you know, break free from that debt once and for all.

Michael:

That's incredible!

And you were saying for who a solo 1k, solo 401k is 4. You said there's no W2 employees in the picture but so if someone's got a side hustle, maybe they have W2 day job, but they've got a side hustle doing whatever, it's just themselves. Are you saying that they qualify for the solo 401k?

Daniel:

Yeah, let me let's just say you know, they're there in your neck of the woods, Michael. They've got a high paying tech job, W2 salary, but they've got this side hustle on the side. Yeah, they have a 401k from an old job, a previous corporate job, or maybe they have an IRA, they could technically convert that account into the solo 401k, keep working their day job make their W2 income, but because they have this business activity going on, on the side, they qualify for the solo 401k. So now they can have their own retirement account money goes in the solo 401k. And they can do a lot of cool things within that account.

Michael:

That's incredible!

So I actually took a loan from my 401k, a traditional 401k, my traditional employer of my past job, but the limit was like, I think 50,000, or half of the account balance. Is there a limit to the loan size that you can take from a solo 401k?

Daniel:

Yeah, so there is that limit, and it's 50% of the account value or 50,000, whichever number is less.

So think of that card that you have in your back pocket that you can use for different things like it's just like a Swiss army knife, maybe you want to use some of that money to pay off your personal credit card debt, so you can get a better credit score. So then you can go to the bank and get a much larger, larger loan, you know, an actual loan from the bank that allows you to take down this property that you want to buy for 400k, right, or, you know, maybe you just need a bigger down payment, right? So you use the loan feature on the solo 401k For that down payment, right?

To actually use the solo 401k the money inside of the account to purchase real estate, this is where it gets a little… what’s the right word?... so a little bit hairy…

And I talked about this in my book a lot. And I can just kind of give the brief rundown here, so I don't put your audience asleep.

But when you use your retirement account to own real estate inside of the account: set aside the loan! I'm not talking about the loan, but your retirement account owns real estate. There's two different types of real estate it can own. It can own passive or it can own active. If it's passive: easy peasy.

And when I say passive, I'm talking private lending a promissory note, right? You're just lending the money. And you're a passive investor, right? You're not actively managing that deal. That's easy peasy. The IRS lets you do that all day long. There's really not a lot of restrictions there.

If you want to do an active deal, and your retirement account owns the property, that's when the IRS is like, whoa, whoa, whoa, like, you can't do that. You can't do that. And they call those prohibited transactions. So if you just Google self-directed retirement account prohibited transactions, it'll give you the IRS code have kind of what I'll summarize. But basically, if your retirement account owns this, this property in a cul de sac that you want to flip, you can't commingle funds, like you can't use your retirement account money, and then money you have in savings to take down this deal.

If your retirement account owns the property, you can't do any of the repairs yourself, you have to hire a third party. If your retirement account owns this property, you can't live in the property. If your retirement account owns this property, you can't rent it out to your sister or your dad, you can't rent it out to a lineal descendants. So those are some of the prohibited transactions you have to be aware of, if you're going to use your retirement account to actually own a property, like if you want to flip it if you want to do a rental.

So I was just you know, we want to have people know ahead of time what they can and can't do. And that's fine education company like ours exists. So as you can see, based off just listening to what I'm saying, if you're going to use your solo 401k, or a self-directed IRA, to invest into passive deals, it's easy peasy. A tons of people do it, there's not a ton of restrictions, when you start going down the path of active deals. You know, that's where you got to think about some things like financing, how are you going to finance that property? Who's going to do the work, making sure you're not living in it and making sure you're aware of some of those restrictions.

Michael:

That is so interesting!

What are your thoughts on taking a loan from your self-directed or from your 401k, if you're paying back the interest to yourself and using those dollars to invest in a passive deal.

So that the dollars you're earning are going to be tax free and usable today?

Daniel:

Yeah. So again: disclaimer!

I'm not securities license, you know, I'm not trying to sell investments here. I'm not giving financial advice. So you know, definitely run things by you know, someone that that's qualified in that space. And that's what I love about what we do. We sell solutions. We don't sell investments. And I think that's a big problem in the financial space, especially these big massive Wall Street companies. They're just trying to shove products down your throat and make a big fat commission. And you know, people have to eat people have to make money. I respect that. But that's what I love about the self-directed spaces. You have so many options on where you want to invest your money.

You can use the money to invest in the crypto franchises private equity, private placements, ppm, promissory notes, private lending, precious metals, right like you're the captain of the ship, you know, not some financial adviser that's just using your money to make fees to cover his yacht payment. Right.

So that's enough of me beating up Wall Street but to answer your question directly, obviously, when you invest money, taxes are a big thing. And you know, that's another restriction if your retirement account owns, you know, 123 Apple Tree Road, and that's the house it owns. You don't get to write off that property right. There's no depreciation because the IRS is like:

Hey, we are not gonna give you depreciation and tax deferred or tax free if it's roth, right. So they don't give you the depreciation. And I know that's a really big deal, you know, in the real estate investing space.

So I'm a bigger proponent of you personally, my just opinion, is if you're going to do an active deal where like you're an equity member, you're getting some pass through, you know, you're it's an active deal. Like, if that's the way the deal is structured, I would rather take a loan from the plan. And now because it's cash, it's outside of the retirement account, I can use it to put into this property over here. And I don't have to deal with commingling money, I don't have to deal with restrictions from the IRS, because this asset is not held inside the account.

The asset is held outside of the account. So now I get the tax benefits, I get to call the shots, I'm just on the hook for paying back my loan, and it's a five year loan, the interest rate is typically prime plus two. So as we're doing this podcast right now, government hasn't raised interest rates just yet. But there's a chance by the time you listen to this podcast, interest rates have gone up. But right now as we're doing it, interest rate on a solo 401k loan is like 5.25%.

But that interest goes back to your retirement account. So when you're taking a loan from your solo 401k, you definitely need to think opportunity costs, right? Because you could leave that money in the solo 401k. And it could be invested into some investment that's earning you interest, it also could be losing money, right? I mean, like the NASDAQ is down right now. So a lot of people are losing money. So there's that argument, but you want to be wise with the money you take out as a loan, you know.

Whether you use the money to pay off, you know, 20% interest rate credit card debt, I always think that's a pretty good decision to think about, because if your retirement account is only making 10% a year, but your credit card debts costing you 20% a year, that math doesn't help you, doesn't serve you right, so I think that's always a good play. And then to what you just said earlier, you know, the idea of taking a loan from your solo 401k, and putting it into this real estate deal, where you get some really sweet tax benefits and way of generating income, you know, that allows you to pay back your loan. You know, I always think that's a play worth looking into for sure.

Michael:

Awesome, awesome!

What are some other ways that people can tap into their retirement accounts?

Daniel:

You know, basically, if you've got a 401k, with your current employer, you're pretty much SOL.

The 401k plan has a loan feature, and you do what Michael did, right? Basically, you call your 401k company through your job and say: Hey, do I have a loan feature in my plan documentation?

If they say yes, then you could, you can most likely do what Michael just did, right. You can take 50% of the account value, or $50,000. You know, make sure when you take that money out, you have a plan for that money, right, you're not going to use that money to go on a cruise, right. So like, make sure it makes sense for you to do that. And then really just the easiest way is if you have that 401k, you know, from an old job, or that IRA that you have, you know, converting it into either a self-directed IRA, which some of you guys may be aware of.

I think most people are aware of a self-directed IRA, compared to a solo 401k, a lot of people aren't aware of the solo 401k. So if you're an entrepreneur, and you qualify for the solo 401k, I think it's a better account than the self-directed IRA, because the solo and the self-directed IRA invest the same way, they can invest outside the stock market, they can invest in real estate, they can invest in alternative assets. But a couple big difference makers is solo 401k has the loan feature.

You can be your own bank with a solo 401k. There is no loan feature on an IRA, you can't be your own bank. So that's a big game changer. And then, you know, for the people that have some pretty good earned income coming in, you can only contribute six to $7,000 RS into an IRA, new money, whereas a solo 401k new money you can contribute, you know, really close about $60,000 per year.

Michael:

Wow!

Daniel:

That's a really good benefit, especially if you're going to start tapping into the Roth contribution. You know, we've got quite a few people out there that you know, have pretty good business income, pretty good earned income, and they're maxing out their contributions and imagine putting $50,000 a year into a Roth solo 401k. And then, you know, seeing that bad boy grow to 500,000 a million dollars over a period of time. And then now that money is 100% tax free.

Michael:

That's incredible. That's incredible!

So how does someone open a solo 401k? I mean, physically, what are the things that someone has to do other than show some side business income?

Daniel:

Yeah, so then, really just wanted to determine where you want the solo 401k held and just being transparent with your listeners, you know, fidelity…

Vanguard, TD Ameritrade, great solid company's been around for decades. They offer solo 401k. A solo 401k is still a solo 401k at the end of the day. They might have some branding marketing term, but it's still the same vehicle.

Michael:

Okay.

Daniel:

It's a, you know, a Tesla. Tesla's a test, right?

Michael:

Right.

Daniel:

It's the same vehicle. But just because it's with a different company doesn't mean it's different. But what is a distinction between a solo 401k with the Wall Street Boys and a solo 401k with a company like ours, is this:

A solo 401k with the Wall Street Boys, you're just limited to buying stocks. So Tesla mutual funds ETFs index funds, right? So if you like the idea of just of having your money just invested in the stock market: a solo 401k with those guys makes sense.

Michael:

Okay

Daniel:

The difference between a solo 401k with them and a company like ours and other competitors of our company, is we're in the self-directed space.

So our solo 401k 's are self-directed, meaning you can invest outside the stock market. You can invest into crypto, you can invest into private placements, private equity, real estate, promissory notes, things of that nature. So you want to decide, okay, you want the vehicle you want the solo 401k: What kind of gas do you want to fill that vehicle up with?

Is it stock market gas? Okay, cool, here: Are these companies legit companies fidelity Vanguard, right?

Or do you want this other kind of gas, the alternative gas, where you can invest money outside the stock market? And that's where you need a self-directed solo 401k.

Michael:

Awesome!

And as far as the business income that someone would have to show on the side in order to qualify for a self-directed, solo 401k? What does that look like? Are there any limitations?

Or if my brother pays me 25 bucks for you know, mowing his lawn, does that count?

Daniel:

Yeah, so so basically, to actually set up a solo 401k, you can take your IRA or your 401k from your old job, and get it moved over into a solo 401k. And you can do that as long as your business is set up, right. As long as that business that side hustle that doesn't have W2 employees is established, maybe you have an LLC or set up as a sole proprietorship, you can set up a solo 401k and funded from a previous retirement account 401k from a previous job or an IRA, you can do that all day long.

But what you can't do: Let's just say your business isn't made any money yet. Let's just say there's no income coming in, you just cannot contribute new money into the plan, right?

Michael:

Okay.

Daniel:

So the way to contribute new money into a solo 401k You need to have W2 wages come from your business. So your business has to have enough earnings coming in, enough income coming in, where it can pay you a W2H and then you can take some of that W2 money, and then contribute it into the solo 401k.

Michael:

So Dan, just so I understand clearly, so the business that you have has to pay you the owner, a W2 wage, but it can't pay, you can't have employees? Right?

Daniel:

Yeah. So you can have your wife, as a W2 employee with the business that is sponsoring the solo 401k, you can collect a W2 wage from your business that you know, holds the solo 401k are tied to the solo 401k. You just can't have anyone else but you or your spouse.

You can have contractors, so 1099 contractors tied to the business, they just can't be W2.

Michael:

Okay, got it. Got it!

So for all the real estate investors out there, if they own property inside of an LLC, would this be potentially a good fit for them?

Daniel:

Yeah, I mean, as long as there's no W2 employees in the picture, they can take one of those LLC, let's just say they've got an LLC, that's, that's for like, Man, I got some good income coming in, I need some tax benefits.

Let me open up a solo 401k With with this LLC, and then they can start flowing some of the money from the LLC, you know, into the solo 401k. You know, maybe they've got this 401k from their old job or this IRA and they're just like, man, I'm not a big fan of this money in the stock market. Maybe it's with fidelity or Charles Schwab or Edward Jones and they're in mutual funds and stocks and they're just like, man, like, stock market is not my thing. I'm not a big fan of it, I love the idea of just moving this money into a solo 401k and then I could have some more control over the money. So they could definitely do that. And then they could take some of the income, you know, that they're earning through their real estate investments, you know, and be able to start contributing, you know, that active income, you know, into that into that plan.

Michael:

Very, very interesting…

Well, Daniel, I know that you also wrote a book, can you share with everyone what the title of the book is called, and where they might be able to find it?

Daniel:

Yeah, so it's called the: “B.L.U.E. Print To Your Best Retirement” and you know, our company so the company I own quest education, we've got over 1000 customers in all 50 states and you know, we help solve really three main problems, you know, people that have high interest rate, credit card debt, people that need capital for their business, and people that want to invest outside the stock market and the vehicle to solve all three of those problems is helping that person tap into their 401k or IRA penalty and tax free and liberate their retirement account, right.

They can use their retirement account to pay off their high interest rate debt, they can use a retirement account to fund their business, they can use a retirement account to invest outside the stock market, I can real estate, right.

So that's what we've been doing over the years. And everything that we do is over the phone, you know, our customers are in all 50 states. So it dawned on me, I'm like, man, like we're spending hours and hours with these customers over the phone. It's awesome! But I want to impact more people, I want to be able to have a book that people can download, or they can get shipped out to them. And it's a book that is really easy to understand. You know, a lot of the financial books out there, you know, they're just super overwhelming. They use legalese. And these financial terms that just go over most people's heads. And I wanted to create a book that was just really basic and easy to connect the dots. And so that's, you know, what was my intention behind the book.

So the book teaches people how to access a retirement account penalty and tax free, how to use their retirement account in some of the ways that we just talked about paying off their debt, funding their business investing in real estate, I talked about the Roth strategy and creating that bucket of money tax free, like we mentioned, I get more into detail in the book.

So I'm pretty confident that you can pick up that book: “B.L.U.E. Print To Your Best Retirement” and get at least one nugget that you can take action on immediately. And then the book can be found at my website. It's danielblue.me.

As Daniel blue: b l u e just like the color.me and my websites got my book you know access to all of the my podcast. I got my podcasts on a few different major platforms called: how winners win.

I talk a lot about you know winning in the financial space, the entrepreneur space so that's where you can find more of me there as well. And then access to my course and a bunch of other free information. And then you know, if you have money in a retirement account, you're like, holy cow, like I did not know I could access this money penalty and tax free. I want to learn more. There's a way for you to do that on the website as well. So ton of free information on the on the site.

Michael:

Amazing.

Well, they know this was a wealth of knowledge, man. Thank you so much for sharing, and we're looking forward to chat with you soon.

Daniel:

Thank you again, Michael. appreciate being here.

Michael:

You got it. Take care.

Alrighty, well, that was our episode. A big thank you to Daniel super insightful, super informative, a lot of really good actionable takeaways. If you're interested in learning more definitely give reach out to Daniel and his company and his team. As always, if you liked the episode, feel free to leave us a rating or review wherever it is using your podcasts and we look forward to seeing the next one.

Happy investing.

Can passive investments help you build wealth in 2022? Feb 02, 2022

Andrew Davis is the Director of Investor Relations for PassiveInvesting.com, where he has helped raise over $200 million dollars for various assets. He began his career in sales, working for Fortune 500 consumer packaged goods companies, receiving multiple promotions and developing leadership, sales, marketing, and operational experience. Andrew is passionate about real estate investing since his early college years, he began the “side hustle” of investing in single-family RE in his 20’s and raised capital from friends, family, and in some cases complete strangers to acquire his first few deals. In this episode, Andrew will share insights about the passive investment strategy, how they compare to direct investing, how to participate in it, and some red flags to be aware of.

Episode Links:

https://www.passiveinvesting.com/

https://www.passiveinvesting.com/andrew-davis/

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Michael:

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today with me, I have a very special guest, Andrew Davis, who is the director of Investor Relations at passive investing.com. And today Andrew is going to be talking to us today about what you need to be aware of if you are going to participate in a passive investment, what passive investments even are, and some red flags to be aware of, if you're going to be jumping on board with these. So let's get into it.

Andrew Davis, what's going on, man, thanks so much for taking the time to hang out with me today. I really appreciate you coming on.

Andrew:

Michael, it is my pleasure. Thanks so much for having me.

Michael:

No, it's my pleasure.

So you're based on the East Coast, right?

Andrew:

That's correct. I'm in Asheville, North Carolina, not to be confused with Nashville, Tennessee. You got to menstruate the ash.

Michael:

I could see that being a very common misconception.

Andrew:

Yeah, you really gotta really gotta lean into that A.

Michael:

So tell us, give us a quick backstory on kind of who you are, where you come from, and how you got involved in the passive investing space?

Andrew:

Yeah, absolutely. So yeah, I am Andrew Davis, I'm the director of Investor Relations for passive investing.com. And we are a private equity, a commercial real estate investment group. So what we do effectively is we buy large institutional quality, multifamily and self-storage assets. And all that means is, you really kind of three factors: the market, the deal size, and the class of the investment. And so 30 to 100 plus million dollar purchase price, this is kind of our typical acquisition. So as we're wrapping up our biggest deal today in the Fort Myers market, that's 109,000,300 Plus unit deal.

It's yeah, big what the managing partners called Big Boy deal and, and then it's, uh, you know, we played just kind of higher quality asset classes, we'll probably dig into that a little bit more. So it's what's called the suburban class as that we also might be class assets. And then the markets that we play in are primarily the Sunbelt market. So those are North and South Carolina, Georgia, Florida, Texas, and Arizona. And then we're also looking in Denver, Colorado, and Boise, Idaho, as well. And so that's just kind of high level of our strategy.

And how I landed here, is, you know, started out in the single family space like many of your listeners have or are, and man, it's, it's a tremendous place to start. But a lot of wealth can be created there. And there's tons of opportunities there. And it's a great place to kick your teeth. And that's how, I started. And so I'm very much a learn by doing guy. And so I was kind of in an in a transition career wise, I grew up on the West Coast. My wife and I met, she was in Florida. And she had just started a business. So I was like, who's gonna move and I said, I'll move on, I'll have an adventure. So I moved to move to Orlando, Florida, quit my job sold my house. I had bought in the Portland market at a very good time. So I sent out some capital had some flexibility and just kind of floundering. And my wife, I think, six months into being married was getting pretty tired of kind of woe is me. And she's like, Well, you never shut up about real estate investing. So maybe you should do something with that.

Michael:

You look up from your Halo game, like alright, fine.

Andrew:

Okay, fine. All right. All right. And it was kind of funny. It was like this lightbulb moment for me. And I was like, You're right. I love this stuff. And so I just, I just dove in.

And I started going to local RIA meetups and just anybody that I knew that had anything to do with real estate, taking them out to lunch, or coffee or whatever, tons of time on bigger pockets, reading every book I could get my hands on. And really just got a got a basic idea for how to flip the house and kind of how to evaluate a rental, right? Just basic underwriting didn't really know what I was doing, but I knew enough to be dangerous. And so then in kind of reading and learning about that, I realized that oh, people go into these different meetups and things like oh, just people have capital. And there's people with deals and these people partner up and they get stuff done. And I'm like, I'm probably somebody to get into giving me money for to flip a house.

And so I found a house to flip it was a foreclosure like 87,000 which is silly to think that you could buy that in today's market and put together a little deck and found a contractor to partner with me to do the rehab and he was gonna pay for it. We were gonna split the profits and then found an investor literally on bigger pockets to come in and fund the acquisition.

Michael:

Amazing!

Andrew:

My first deal and which is amazing because I had no experience.

Michael:

Right, right!

Andrew:

You know, I was I was again I just knew enough to be dangerous. And so long story short, we broke even on that deal the contractor was not great. And you didn't do a good job on the rent no but thankfully we broke on even. Isabel and I, my wife broke even. I was able to pay the investor he made like a 17% return. But it really what that did for me is it really kind of it opened me up to the power of real estate investing, right and the power of not being limited by my own capital, of knowing that, hey, if I can provide value in these areas, then other people can provide quite literal value in other areas, there could be partnerships formed, and I can grow a lot faster that way. And so I built a little business, just buying single family homes duplexes doing a mix of flips and buy and hold rentals and got up to a point over silver years, where I had 16 units. And that was good.

But I just would get to the end of every single one of these deals. And it's a lot of work, a lot of work to put them together a lot of work to renovate them a lot of work to manage them, deal with tenant issues, all the things that go along with single family investing. And it's like, man, this is just the risk and the effort, the reward for the risk. And the effort just does not feel commensurate to me.

Michael:

Yeah, yeah!

Andrew:

And as I was in this space, and I was very fortunate to just connect with some really sharp operators in that in the commercial in the multifamily mobile home park, self-storage, just people that were buying these larger assets, and every single one of them would tell me, hey, it's the same amount of work, but the reward is exponentially higher. And so that really just continued, I really, really kept looking for ways to get into that space and connecting with different operators. And I also knew, hey, I'm really strong over here, right? I'm good on the capital raising side, I'm good with people, I'm good at building relationships, but you know, operationally details like that kind of stuff. That's just not, that's not my forte. So I really knew that I needed to have a partnership. I knew that I had, I had value and, and a skill set to bring. And then there was also, you know, a lot that that, that I needed, right to kind of operate in my zone, my circle of competence, as Warren Buffett would call it.

And so, you know, long story short, this investor relations are all opened up the passive investing.com and I have been following these guys for a while, and felt very, very highly of them, and what they were doing in the space and just heard a lot of really good things about them. And so I just jumped on it. You know, hard pitch myself and, and, like crazy for the interview, I mean, just lift, you know, got to know them inside and out. And was very fortunate to be to be awarded the role. And we just had a lot of growth as a group. So in 2021…

This is an extremely long intro.

Michael:

No, no! It's so good, so good.

Andrew:

You can cut it!

But in 2021, we raised roughly $197 million from passive investors, so individual retail investors, and you know, our typical investor is somebody who is oftentimes a tired landlord, right. And they, you know, they bought in on the principles and the fundamentals of real estate, but they're tired of dealing with tenants and toilets.

And so in that, in the course of that time period, I did the math, I had 1700, investor phone calls in 2021. So I had the privilege to talk to a lot of people and move from kind of an individual contributor role into a director role, and was just recently able to bring on two additional investor relations guys to just support me and onboarding new passive investors into our network and just informing them answering their questions, letting them know, kind of the mission and the strategy. And so that is sort of the meandering way I got to be where I am.

Michael:

Oh, that's so awesome. So Andrew, here's what was your thesis correct or accurate in that so many of your investors of the 1700 are folks that are just tired landlords. They just don't want to do the direct ownership thing anymore.

Andrew:

Yeah, I would say it is probably, it's approaching 50%. And that's anecdotal. So I would say that our investors are a mix of every single one of our investors is bought in on the idea of real estate, right? And it's a mix of like highly paid professionals. So lawyers, doctors, engineers, executives that want to diversify their portfolio, want to have an allocation of their portfolio in real estate, but quite literally don't have the time to go out and buy single family homes and renovate them and manage them or manage the managers. And then and then yes, a large chunk of them are folks who have acquired we have one investor in the Atlanta market, and he was a builder and over his career, he built, he built I mean built tons of homes for himself. He built 65 Single Family rentals. And he and his wife did very well to build their obviously did very well in building up a rental portfolio for himself. They're in their 60s. They're there kids are grown, they want to travel. They don't want to managing 65 single family home. And so he just very strategically liquidated those and rolled those in a very tax conscious way into our passive investments. So I would say, it's a good chunk of people that want one of those benefits, but just don't want to have to worry about it.

Michael:

Okay. And if someone listening to that is like raising their hand like, yes, me, I fit the bill, I fit the category. I also don't want to do the direct ownership thing. But once the exposure is bought into real estate, why wouldn't someone just go buy a REIT?

I mean, what's the difference between like, this type of passive investment or wheat or something that's traded on the open market?

Andrew:

Yeah, man, that is a tremendous question. So you've got a couple, you've got a couple just…

Michael:

Yes, that’s one for my episode.

Andrew:

You've got a couple of distinctions between a publicly traded REIT a real estate investment trust, and investing, investing passively in a syndication or in a sponsored real estate deal. And so I think REITs have their merits. However, oftentimes, what you see in REITs, is a one you don't really have direct ownership. And so one of the things that people really like about investing with us is when you invest in in a deal with us, or somebody else that's using the structure that we use this, this spital 6B or this spital 6C structure. You are becoming what's called an LP or limited partner. And so what that means is you participate in all the benefits of direct ownership, without any of the liability, or the management responsibilities or the operational responsibilities, so you still get monthly cash flows, you still get capital appreciation.

So say on a 50, or $100,000 investment, over a five year time horizon, you could potentially see a 2x of that invested capital, in addition to your monthly distributions. And then the third benefit that really a lot of that's it's really appealing to a lot of people is the pass through depreciation. And so every single one of these assets that we acquire, and the sponsors competent, there'll be executing this strategy as well, is they do a cost segregation study. And basically, what that does is it takes the depreciable life of the asset, which 27.5 years, I believe, for real estate, and it fast forwards the majority of that depreciation benefit into the first year. And then as an equity owner, or a limited partner, in that deal alongside us, the general partners operating the deal, you get that depreciation pass through you. And so you can use that to offset any passive income that you receive and the most tax professional, your tax professional. This is not tax advice, but it effectively becomes tax free income. So that's, that's you get the control. And I think when you invest in a REIT, what a lot of people like about investing real estate is the control of your capital, the different things that you can do with it with a REIT, you kind of forego those benefits, you're invested. You're invested in the asset class, but you're not getting a lot of the benefits of being invested in real estate.

Michael:

Okay, okay. But you might get some of that liquidity flexibility, so to speak, because I can buy a share today sell it tomorrow, that's gonna be very different with a with a, would you call it a direct investment? In a syndication?

Andrew:

Yeah, yeah, absolutely. Absolutely. So that is, that's the tradeoff is the liquidity piece. And so what we what we tell investors is, hey, we're underwriting these projects, for a five year hold, we've exited six deals. So far today, there's a group that's called having a full cycle deal, when you buy it, execute the business plan, you sell it, every single one of those exits has been three years or less. But that's never a guarantee. So your money is going to be locked up for a time period. And of course, we'll be receiving distributions on that during that time period. But yeah, you have to be, you have to be bought in for the short to midterm.

Michael:

Okay. And you mentioned that there's no liability with regard to being a limited partner and LP. So I just want to highlight that for folks. So if I invest or someone invest with the passive investment through syndication, I can't get sued as an owner if there's a big, big lawsuit.

Andrew:

That's exactly right. That's exactly right. So as an as a limited partner, you have no exposure to lawsuits, you have no exposure to any debt issues, if for some reason the sponsor was to be foreclosed on. So you're completely insulated. From those things.

Now, of course, all investments carry a measure of risk. And, and that I mean, it's just, it's what it has as risk just like any other investment does, from a liability perspective, versus active ownership in a single family asset where if your tenant takes a fall or doesn't like you or something like that, they can sue you. You're completely insulated from that type of liability.

Michael:

That's great. Whenever I hear that type of thing I think about…

Have you seen Arrested Development?

Andrew:

Of course.

Michael:

…and then when he says, you know, there's these limited liability companies, we should start a no liability company. The bah blah, blah, attorney, so good!

Andrew:

blah, blah, blah, Blog.

Michael:

That’s it!

So this is literally that it's perfect. It's a no life living company! Yeah, I love that.

Andrew:

That's what I love. Our attorneys are slightly more competent than blah, blah, blah.

Michael:

Right, right. I would, one would hope.

So, Andrew, talk to me about returns, because I think a lot of investors, especially in the direct ownership space, and even maybe in the REIT space can look and say, okay, stock market does about seven to 8%. Roughly, I know what my cash on cash return could be like in a direct ownership model and understand what the appreciation potential might be. I know you said, you know, potentially, maybe two acts on your money.

Talk to us a little bit about what those might look like. And some of your investments are a typical syndication investment.

Andrew:

You bet you bet. So I'll give you kind of our typical returns profile. And I think, then I'll highlight one really important distinction in comparing direct single family ownership with investment and syndication.

So typical returns profile, basically, what you have is you have what's called the preferred return, which is what you receive during the whole period, some sponsors pay semiannual distributions, some pay quarterly distributions, we pay monthly distributions.

We feel that's really, really important, because it's a way of ongoing communication about the performance of the asset. So every month, our investors get a monthly update, they get a monthly distribution. And then we also share the financials for every asset, they're invested with us and quarterly, so they can see exactly how that assets performing. So the exposure to the performance of the asset. So our typical returns in terms of cash flows during the whole period, are going to be anywhere from seven to 9%.

So that's gonna be target. And then that's just what those monthly distributions would be right to say $100,000 investment 9%, 9000 divided by 12, you're getting 750 bucks a month.

Michael:

That was really an example, so fast!

Andrew:

I use that example once or twice.

I'm no savant, you can ask another question. And I'll bust out my calculator.

You've got the upside, right. And so every single asset that we acquire, right, we're buying it at a good basis, and then we're executing a value add strategy on that asset. In some cases, that's purely operational, where we're just buying it where the current operator or in many cases, the developer has just, for whatever reason, leased the units up way under market rent, have not optimized expenses have not taken advantages, or not taken advantage of opportunities in the marketplace to maximize the revenues for that property. So oftentimes, just by coming in acquiring an asset at a good price and operating it well, we can achieve dramatic increases in value.

And the distinction one of the distinctions about investing in a multifamily asset with us or with another sponsor, versus investing as a single family assets is the values of commercial assets and multifamily assets are not determined by comps, they're determined by what's called the net operating income and the cap rate. And so we can vary with a great deal of certainty, know that for every dollar that we increase the income in that property, that's going to translate to an increase in value and an increase of exit price. And so when we're doing our calculation, say we buy an asset, at $8 million, that we can look five years down the road and say, Hey, we're gonna increase the net operating income of this asset by $1.5 million, or $2 million over the whole period. And then when we go to sell that asset, based on the cap rate, we know that we'll be able to sell it for 120 $130 million. And then obviously, the difference between those two things is the profits. And then we get to distribute those profits to our limited partners. And so you've got the cash flows during the whole period. You have the opportunity to take your initial investment and see really significant return. So what we target on the very, very low end is around a 15% internal rate of return, which is just another metric for annualized returns and on the high end 20% Plus, and on the deals that we have gone full cycle on the six deals that we have acquired, taken through their business plan and sold, we have averaged a net return to our investors of 27%. So very, very strong returns there.

Not to mention the depreciation so much of that income, as long as you have a competent CPA, much of that income is tax free. So I think the one important distinction to highlight there is when you are comparing us the returns on single family asset I get this question a lot.

Well, I can go out and get 15% cash on cash returns and buying a single family or duplex.

Why would I? Why would I not just do that?

Well, what you get in investing in multifamily real estate is scale. And I experienced this firsthand multiple times where I underwrote a deal. The cash on cash returns were fantastic. They were like 30% but then guess what?

I had one tenant that quit paying rent, I one tenant that beat the place up and I'm in three months with no income, so you've got pro forma and then you've got reality. In multifamily asset when you've got 300 Plus units, we underwrite these deals. So 1050 Tene 20% of the tenants could move out which in the markets that we're investing in, and the quality of assets that we're buying is historically unprecedented, we would still be able to maintain distributions, maintain the integrity of the asset, and execute a strategy to turn that around and bring that bring that occupancy and value back up.

So I think that's a really important distinction. It's not an apples to apples comparison, because you with with the scale and the size of multifamily assets, you get that protection.

Michael:

Yep, that makes so much sense. It makes so much sense.

I mean, and I think one other distinction that's important to make, too, is that a single operator, an individual operator, owning direct ownership, single family, homes, whatever it is, you could be really good at that. But there are like companies like yours, and others that are dedicated to profession that have teams professionals dedicated to making sure that thing goes well. And so a lone wolf are a part of a wolf pack.

Andrew:

That's right! Hey, Oh, excellent. Excellent analogy.

Michael:

Thank you! Now, there's other flights. Yeah, I gotta give myself profit.

Andrew:

Perfect, really solid!

Michael:

That's awesome!

Andrew, you said something that I kind of want to come back to. And you said, you can you execute your value add strategy, and you know, what you're able to increase the net operating income by, and you're pretty confident about what your exit cap rate is going to be? How do you determine that?

I mean, so many people are seeing cap rates change. And right now we're seeing them compressed, but people are talking about interest rates changing, so maybe they're gonna expand? How do you forecast cap rates? So far in advance?

Andrew:

Yeah, yeah. No, that's, that's a very, very good question!

And so one of the things that we do is, you'll see, you'll see a lot of operators give a very, very specific set of returns like, this is going to be a 27% IRR with a 2.5x equity multiple. And my question is always how you know that?

Because you don't know what interest rates are going to do. And you don't know what cap rates are going to do you know how markets going to perform.

So what we do when we underwrite a deal, and when we do our when put together, offering memorandums for investors and walk them through the returns, is what you'll see is a range of cap rates.

And so we have best case scenario and kind of a worst case scenario. And part of the reason that we play in this space that we play in in terms of both the geographies that we purchase in as well as the asset types that we buy, is historically. They have had far less cap rate fluctuation and a down economic cycle, right. So I was just chatting with somebody yesterday, and it was like, man, this equities markets and interest rates are rising, and people are starting to get a little skittish, and I don't know what's gonna happen. Nobody knows what's gonna happen.

But what we've seen is that because we're investing in markets with strong fundamentals with double the national average and population growth, with a diversified base of strong employers, with favorable supply demand ratios, right. We're in markets that are under supplied for this type of product. What we see is those markets have the fundamentals to weather the storms better than like a tertiary market that's very dependent on one industry or one employer, or it's heavily dependent on a tourism. And then also because we invest in these higher quality assets, we have just a more income stable tenant base.

So this year, the average household income of the actual, the less C's, and in the asset that we acquired, was well over $90,000 a year. And so what that tells us is, yeah, which is crazy, right? Like, you'd think that'd be buying houses, but the single family housing market is crazy. So a lot of people just opting tickets direct. And, and so what that tells us right, and what that tells the market is that these assets are more stable, because you have more stable income. And so when you look at Cap rates, and you see our cap rates fluctuate across different asset classes, and the higher quality assets, you might enter down economic cycle, you might see a little bit of a like a dance, or I'm sorry, an up wave or a cap rate expansion and the back end of the compression, whereas maybe C and D class assets, you're gonna see 300 400 basis point cap rate expansion, and all that means is those assets lose significantly more value and take longer to recover.

And so the reason that we're in the space that we're in, it's a more conservative space, but it also is more risk adjusted for those events that happen, right, these cyclical economic events.

And so do we know what's going to happen?

No, but we have really good historical data, and we're buying strong assets and good markets.

Michael:

Yeah, that makes total sense. It makes total sense.

Going back to something you also said earlier about investing via attacks, responsible or tax conscious way via passive investments. I mean, well, how can people invest in these passive investments? Can they 1031 out of direct ownership and take the proceeds and put them into passive and what does that look like?

Andrew:

Yeah, excellent, excellent question.

So, yes, and if you can 1031 into a passive investment, most sponsors are going to have a minimum. The reason for that is when you were 1030 wanting out of direct ownership into a syndication structure like ours, the structure becomes a little bit more complicated, you end up setting a tenant and setting up a tenant in common structure. And I've got all kinds of diagrams and explanations of this. But long story short, it becomes a bit more complex.

And so our group which is actually one of the more kind of favorable minimums. Generally, we're looking for a minimum of $1 million being exchanged in order to accommodate a 1031 exchange. But you've got other options. There's things like deferred sales trusts and Delaware statutory trust, but then you can also do what's called a lazy man's 1031 exchange.

Michael:

Whoo, really the whole time!

Andrew:

Yeah, see! Put this on the episode highlights, right.

So what that is, right is that is the reason people are wanting to execute a 1031 exchanges, they don't want to pay capital gains taxes. So if you invest your gains, and your proceeds from that sale strategically, in investments that have high degrees, or high amounts of depreciation, like opportunity's own funds, or just strong assets that are that the operator is going to do a cost segregation study is going to do some value add that you can write off, then you can get enough depreciation to largely offset or completely offset those gains without the constraint of the 1031. Because the 1031 is a beautiful thing.

But there's also a lot of constraints around that you've got your 45 day identification window, you've got 180 days to close.

I've got to call, like an hour, like two hours with an investment group who's whose identification window ends on 129. And they're like: We, you know, we need something we need something identify, and we just don't have anything that we're closing on it. It's I think it's gonna fit their timeframe, unfortunately, so. So there's ways to mitigate or, or completely avoid those taxes without, I think 1030 ones amazing, but you have options outside of that, if you want to, if you want to reduce those capital gains taxes.

Michael:

Interesting. I never heard about the laser intensity one. And that's a good point. Like if you have the gains, or it's give me the losses to offset the income or the game, you might not need to make yourself crazy. That's a good point.

Andrew, tell us, how should we be evaluating operators or sponsors? I mean, what should be on someone's BS detector? What you thought red flags when looking at potential deals, sponsors?

Andrew:

Yeah, so excellent, excellent question.

I'd be happy to share a piece of content with the listeners. We actually have our red flags dock that we've prepared for investors to look out for. And the reason behind that is:

Dan, one of our managing partners, before he ever became an active operator, he was passively invested very, very heavily. So he's in I think, right now he's in 50, different sponsored real estate deals with like 16 or 17, different operators, I mean, very heavily invested, right. And so of course, develop some criteria about who he would and wouldn't invest with, and why. And we've just kind of turned that into a doc that investors can make up can add their due diligence process as they're evaluating different deals and sponsors.

But I think a couple of high level things are some principles for folks that are looking to get into this. Number one, the operator, or the who you're investing with, is as important if not more important than what you're investing in. Right.

And this space, there's a lot of opportunity in the space. And right now, there's a lot of capital in the markets, both in the institutional markets as well as individual markets, right, single family home, I was looking at the Case Shiller Index this morning, just got launched. Single family home prices have gone shoot, right, there's a lot of people with a lot of equity, whether they be financing, whether they're selling and looking to deploy it. And so anytime there's a lot of there's a lot of capital moving into a space. There's a lot of people that are going to want to step in and get their get their slice of that. And so I think you have a lot of folks that very well may be well intentioned, but don't have the operational experience, don't have the time. Most of there's a lot of folks that aren't full time that are doing this as a side hustle or something supplemental to their day job, and don't have the track record of the experience. And so I think really, when you're talking to different sponsors, I mean, any anybody's list you get on right, and set up a call with them, you can talk to somebody like me, like my team, with us or with any other sponsor, right?

And really knowing who they are, why are they qualified to operate a very, very expensive business. And that's what these are, these are businesses that just happen to have real estate attached to them. So operational experience is very, very important, track records are very, very important.

You want to know, hey, have they ever lost money? Have they ever done a capital call where they've gone back to their investors and asked for more money because they didn't underwrite the deal?

Well, is their strategy dependent on a refi mid hold in order to make it work, which is risky because you don't know where interest rates are going to go? So there's questions there's that there's a handful of questions like that and like I said, I'd be happy to share them. But really, I think the key principles are who you're investing with, right?

This is so so so important because the end of the day, they're the ones operating that deal. And if you can, you can have a great operator that has, you know, a challenging deal. And because they have business experience, because they have maturity and wisdom, they can, they can turn that around. And you can have a crummy operator that gets a great deal and doesn't know how to operate. It doesn't know how to maximize the upside, cap the downside, and it can, it can perform far worse than it should. So I think that that's really, really what I would want to highlight there.

Michael:

Okay, okay, that makes total sense.

And are most passive investments yet you need to be an accredited investor for are there passive investments that people can participate in without being an accredited investor?

Andrew:

Yes, so totally depends. And just like a really quick kind of key educational piece.

Primarily, what you'll see here is two different structures. You have a 506 B, or Bravo, you have a 506 C or a Charlie five or six seeds are for accredited investors only.

An accredited investor… Just very quickly, is somebody that makes their filing individually $200,000 a year jointly with their spouse or significant other $300,000 a year. And or they have a net worth of $1 million, excluding any equity in their primary residence. So you've got to check one of those two boxes.

There's a couple other nuances like if you're a registered securities professional, or if you're a key principal at a real estate firm or something like that, but those are the two primary distinction is the income and net worth. So there are a lot of opportunities there for accredited investors only. But there also are a lot of operators that do open up quite a number of opportunities for non-accredited investors. So with a little due diligence and research in the space, you can find opportunities on both sides.

Michael:

Okay, awesome!

Andrew this was so enlightening. So good and fun.

Where can people reach out to you get in touch with you if you have questions for passive investing specifically, or want to reach out to you?

Andrew:

Tick tock.

No, yeah, I know. No, I won't.

LinkedIn, that's primarily where you can find me social, like on the on the social channels. I'm pretty LinkedIn, just Andrew Davis or passiveinvesting.com. You'll find me or you can just shoot me a note Andrew at passiveinvesting.com.

And if your listeners want to send me a note, and I'd be just more than happy to kick them that that red flags document I mentioned that just kind of add to their due diligence checklist for betting operators.

Michael:

Amazing. Thank you so much.

And any final words, thoughts, pieces of wisdom that folks should know about as they're considering passive investing?

Andrew:

Hmm, good question.

Michael:

Do it! Just do it.

Andrew:

Just do it, just do it!

I mean, I think that's a big part of it. Right? So I think for a lot of folks that we talked to, it's, they're new to the space, they like the idea of it right?

But anything, when you're doing it for the first time is going to feel a little bit uncomfortable or risky. So what I always tell people, right is, is you know, make a minimum investment, you know, find a syndication where you can put, I don't know 25k Right, and see how it goes. And the beautiful thing about real estate right is if you if you need to comfort your nerves, or calm your nerves if you're investing with a good sponsor, and a good market US real estate has performed very, very well since kind of the inception of the country. And so, of course, do your due diligence, you know, be educated on the process on the market on the sponsor, but I think it is a very wise place to diversify your portfolio.

Michael:

Love it, love it. Awesome! Andrew, this was so much fun. Thank you again for coming on and hanging out with me. Really appreciate you and I'm sure we'll chat soon, man.

Andrew:

I hope so. Thanks so much for having me on. I really enjoyed it.

Michael:

You got it. Alright, thank you!

Already when that was our episode, a big big big thank you to Andrew. Thanks again for coming on. We definitely look forward to having him back to do some more deep dives into some really cool things that are going on a passiveinvesting.com. As always, if you'd like the episode, feel free to leave us a rating or review. They are super, super, super helpful for us can't overemphasize that enough. And as always looking forward for the next one. Happy investing

4 important tips for underwriting accurate property taxes Jan 29, 2022

Getting your assumptions right on your proforma is crucial. Having one number off can be the difference between a home run deal and an alligator - costing you big. One of those crucial numbers is property taxes and getting that right isn't always straightforward. In this video, Michael explains how to get it right and properly underwrite your deals.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions, and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

What's going on everyone, Michael Albaum here from Roofstock, Roofstock Academy. And I want to talk to everybody today about how to actually calculate your property taxes.

So anyone who's purchased real estate might know that calculating property taxes, nailing them down with are actually going to be can be really difficult because they're not always gonna say the same from when you purchase the property, now you own it, they could absolutely change. So here are a couple things that I always recommend to do in order to really nail down into your pro forma what your property taxes are going to be.

So first and foremost, number one thing you should do is call the county assessor, make sure that you actually pick up the phone, I know it's kind of crazy in today's modern tech world, but pick up the phone and call the county assessor of whatever county the property you're interested is in. So if I'm interested in a property in Riverside County in California, I'll pick up the phone, call the county assessor and just ask to speak to someone who can tell you about how property taxes are calculated, because the interesting thing is that they vary from county to county, even within the same state. So we could be in California, California has a statewide law that says the property tax is no less than 1% of the property's purchase price. Now, Riverside County might do a little bit different than Yolo County or Alameda County, so you want to understand what those differences are. So figure out where it is you're interested in property, pick up the phone, call the county assessor, now.

They're probably gonna throw a bunch of different terms at you, they might say assessed value, appraised value, market value, purchase value, all of these numbers can be different. And they could also be used differently. And so not only do you want to talk to someone who can walk you through how to calculate how to calculate the property taxes and what values they're using, but actually have them walk you through how to do the math, because it can be really overwhelming very quickly, something to keep in mind is that there are three values that tend to be totally independent of one another one can be the assessed value, that's what the county is using to determine property taxes, your second is your purchase price. That's whatever the fair market determines your property is worth, or you determine its worth, because you bought it for that. And the third one is usually from the insurance company, that's the replacement value. And so these are three values that might never ever align, that's okay. So don't worry that the county is assessing your property way lower than you paid for it. That doesn't mean it's it's worth less than you paid for. And same thing with the insurance company, they tell you, Hey, this is the assessed value are the replacement value of your home and you're like, wait a minute, that's 100 grand less than I paid for it again, don't freak out, you want to understand what number the insurance company is using on a rebuild cost per square foot to get to that number and make sure you're not under insured. But it's not a big deal.

If the property value assessed value, which you paid for it are totally different. That's often very normal. So again, getting back to talking with the county assessor, talk to them and actually have them walk you through say, hey, if I bought this property on 123 Main Street for $150,000, how do I calculate my after sale property taxes as an investor, because something else that's really important to keep in mind is that there are often different tax rates for investors versus owner occupants or homesteaders. And so you want to be very, very, very clear with the person you're speaking to that this is a pure investment. Because if they understand or misunderstand you that this is a owner occupant rate, they could give you a lower rate, you calculate it, you're like, awesome, I'm in business, and then turns out your tax rates actually going to be double what you calculate going into it. So again, you want to be very, very clear that the person you're speaking to that this is an investment, hopefully, they're able to walk you through exactly how to calculate your property taxes.

But again, it's going to be different in every county you go through in the country, even within the same state. So don't make the mistake of thinking, Oh, I spoke to this county in Georgia, and now I'm good for the entire state. No, if you decide not to purchase in that particular county, you want to call a county that the property you're interested is located in to determine exactly how you calculate property taxes.

Some counties will just do a new assessment whenever there's a sale and say, Okay, this is our millage rate, that's usually a multiplier that they're using to calculate property taxes times some value, whether it's the purchase price or some assessed value that a county assessor determines the property's worth times the millage rate, that's your property tax for the year. It might be that simple. They might tell you something like Oh, we actually do a reassessment every five years or two years at some sort of regular frequency, independent of a sale. And if that's the case, you want to understand what that future property tax rate or value is, but know that until they do their reassessment you're going to be paying whatever the previous year's taxes were.

Now that's a very common case in a lot of places in the Midwest. So again, just really understand get a high level, but also very specific understanding of how to calculate property taxes. And I would say you should be able to explain it to someone else. Because that's how we in the education world find the best way to learn is actually to teach to someone else. So if you can explain it to a spouse, or a co worker, or a friend or partner, how the how the property taxes are calculated for that particular property, and what your projected tax rate and tax amount is going to be, then I'd say you're in good shape to move forward. But until you can do that, I would say keep having those conversations as awkward as it is, ask them to walk you through how to do it.

So those were a couple tips I have for everyone on calculating property taxes, and it's super, super important. It's one of it's often one of the biggest expenses associated with a property and so you really want to get it right, because getting it wrong could mean the difference between a home run of a property and a potential alligator that's dragging you down with it. So hope you enjoyed this video. Feel free to leave us a comment down below. We love hearing from you all and as always see on the next one, Happy investing.

The best U.S. cities to invest in a rental property Jan 27, 2022

This episode looks at a recent article (linked below) in the Stessa blog that rates the top 15 US markets to invest in rental property based on a series of metrics. We give our thoughts on the metrics chosen in the study, how relevant we think they are, and note some other market attributes we like to consider when evaluating a market to invest in.

Blog post:

https://www.stessa.com/blog/best-cities-to-invest-in-rental-property/

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Transcripts

Emil:

Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and I am joined by

Tom:

Tom Schneider

Michael:

And Michael Albaum.

Emil:

And in today's episode, we're going to be talking about a blog posts that was recently published on the Stessa blog titled The best US cities to invest in a rental property. So let's dive into this episode

Alright guys, so we recently published an article on the Stessa blog called The Best US Cities to Invest in a Rental Property. So this is looking at data from 2020 to 2021. And the idea behind it is to help people see which markets have performed the best, obviously not an indicator of which will perform the best in the future but always interesting to look at. And it details 15 Small metros, 15, midsize metros and then the 15 large metros that real estate investors should take note of and so this is a cool article, I want to go through it with you guys get your feedback. Do you agree with the way that the list was come up with how would you look at it as actual rental property investors? So you guys ready?

Michael:

Yeah, let's do it.

Emil:

I'm going to read from the article and we're going to link to this article in the show notes. So anyone who wants to go check it out and read it in detail can do so. So it says to identify the best locations for buying a rental property, our researchers created a composite index based on five key factors real estate investors consider when evaluating a market. These factors include the gross rent multiplier, recent and forecasts at home price growth, effective property tax rates, and population growth. Data Sources include the US Census Bureau, Zillow and the Department of Housing and Urban Development to improve relevance only locations with at least 100,000 residents and available data from all sources were including the analysis.

So that's all the boring stuff to get out of the way. But so those key factors, right, so So this team of researchers, they create a composite index based on gross rent multiplier recent and forecasts at home price growth, property tax population growth, without diving into like, the actual list yet. What do you guys think? Are those are those factors that you care about as real estate investor A? And B, what do you think is potentially missing from that score? If you were to try to rank a list?

Michael:

Yeah, I'm gonna go first, because Tom always leaves me with the scraps!

Tom:

My mouth was open, when you sort of hit the button, you hit the buzzer first, go ahead.

Michael:

So one metric that I see a lot like gross rent multiplier grm, it's just not a metric that I find very useful. So for anybody listening, gross GRM gross rent multiplier is basically a measure of the gross annual rent as compared to the property purchase price. And so it's just a number, it's a ratio. And usually, it's a decimal, because unless your property is renting for like a crap ton on an annual basis, you're going to be renting it for less than you bought it for. So it just doesn't give you like a really good indication of what your expenses look like in that market. So probably, like, you could have an amazing gross rent multiplier, but your property taxes are through the roof and so your cap rates are still really low, or your cash on cash return is still really low, so that I don't find very useful.

And one metric I would add to the pot would be the like, what the economy looks like, in terms of the diversification. So if we take Detroit, for example, turn the clock back 10 years, that was an industry or an economy that was really propped up by the auto manufacturing industry. And when that went kaput, we saw the whole metro really suffer as a result of that. And so I'm always trying to look at what are the legs that are propping up this local economy, and factor that into my decision making.

Tom:

Michael I'm gonna come out and just, you know, while grm gross rent multiplier is not the full picture. I think it's bread crumbs, Michael and I don't think you can throw it away in the trash like you just did that little spiel you did.

Michael:

I'm going to scrape it off with a little fancy silver thing off the off the tablecloth and just throw it over the floor.

Tom:

I think it's just a slice the GRM, while, sure there you know it's there are some really important components. I think it can directly kind of give you some baseline expectations with regards to cap rate and whatnot. And I'm not arguing with you that it's it's not a complete metric. But I mean, what are you looking for Michael? The like, buy not buy metric? It? Yeah, but…

Michael:

I want someone to give me the answer.

Tom:

I think it's it's I think it's a helpful just general metric to look at, when evaluating markets at that really high level. You're not making your acquisition decision. And this is, I mean, a fun thing about buying real estate is that there's funnels, right, you're evaluating markets, then you're evaluating neighborhoods, and you're evaluating properties. And I think the the GRM, it could be an initial Good, good one to start with. So…

Michael:

Let me let me take a shot in the dark here. Let me I feel like you also love gross yield as a metric.

Tom:

Love me some gross yield… No, come on, Michael. Here's what you do. Here’s what you're doing with GRM is, you can, you can use that value at a market level to start to kind of benchmark individual properties in that overall area. But you know, again, not the end al be all, I'll go ahead and throw my little thought on the other metrics you like how I changed the topic before like letting you get any any more words in but that

Emil:

This isn't a showdown guys come on, and you’re treating it like one

Michael:

Tom made it into one.

Tom:

Come on. Tom. Come on.

Michael:

Emil, life's a competition. I don't know if you got that memo.

Emil:

Yeah, right. All right. I like the fire. Keep it going, guys.

Tom:

Okay, so I'm going to talk about I liked that they have a minimum population of 100,000. People like in the metros they're looking at. But what I will say is, it's different. If you're looking at a, an area that has 100,000 population, and like that's it surrounding it. It's another thing, if you're looking at a pocket of 100,000, that's right next to a pocket of 200,000 or 300,000. So I personally really like population dense areas, I think, for some of the reasons that Michael talked about, and they generally have more diverse economies. I would add that as another top level metric when evaluating these not just kind of giving it a floor of saying it's greater than $100,000, excuse me, 100,000 people, that's the number.

So I think that like clustering, general MSA is like really important in the way that I would evaluate, okay, what's the best rental market? So…

Emil:

I agree with what you guys said, my two cents, I would ideally like to see something like insurance costs, right? That's another big important costs for real estate investors. Really hard to do that, like blanket and insurance costs. And I'm sure that's why it wasn't included here. But something to consider. And then, you know, harshness of environment, I think is is an important one as well, right? If you have a place that gets very hot and very cold, your capex over the long run is going to be higher than somewhere like Southern California that has more like milder temperature all year, right.

So these are all things I think, in a perfect world, you wave your wand, and you could like, have the data for these and plug them in very difficult to come up with. So I think what was used is what's really available and, and easy to collect for this.

Tom:

I thought of one more thing I would I would want to add on this. So they're giving like percentage changes in home price, you know, year over year, like comparing that to the baseline is really important. Like if you have an area where the average home price is $60,000. And it goes up by $5,000. Right, you know, that that looks like a gigantic jump in and it is but you know, if you're looking at that same area and the average whatever home price is 200,000 and jumps up $20,000 You know, like that baseline is a really is a helpful breadcrumb in the evaluation process. So

Michael:

Oh, so now you're into breadcrumbs.

Tom:

Are you kidding me I love bread crumbs.

Michael:

Big bread come guy.

Emil getting back to your thing about insurance kind of the cool thing about it is I would be shocked if you did an overlay with the highest insurance costs over natural catastrophes zones. throughout the US, you'd see a pretty strong correlation. And so in parts of California will parts of the practically the whole state is in a wildland fire zone. And so you see your dwelling fire insurance costs through the roof. Same thing in hurricane zones. earthquake zones is a little bit different because you're getting specific coverage for that. But just for your standard, like dwelling homeowner policy. I would be surprised if it wasn't a really strong correlation with with the natural hazard zones.

Emil:

Good point insurance guy.

Tom:

Insurance Guy one more question for you. This is unrelated.

Michael:

How can I help?

Tom:

Earthquake insurance? So you are a new new homeowner I believe in California.

Michael:

Yeah. Can't you see all my earthquakes strapping on my two water heaters?

Tom:

We were complimenting him balling out and having to double water heater.

Michael:

One for the sink and one for the bath, you know.

Emil:

Get a tankless man!

Michael:

What do you think, I am made f money?

Tom:

My question before earthquake insurance. Totally unrelated. Do you? Are you? Are you uh? Are you a buyer of earthquake insurance?

Michael:

Yeah, I am. And there's like so much flak out there for people that get earthquake insurance. And here's the real, like hard pill that people have a hard time swallowing is the deductibles are normally, you know, five, seven and a half 10 15%. But it's of the dwelling limit. So if you have a $500,000 house with a 10% deductible, you're on the hook for the first 50,000. And so for a lot of people that ends up being more than their downpayment, or their equity in the home. And so they figure, if they got to come up with 50 grand, and they only put 30 into the property, they'll just walk away, like and let it go back to the bank.

So that's kind of the argument for not getting it for getting it is if you have equity in a property, if you have a lot of cash sitting in the property, then it could very well be worth it. But again, your your deductible is set based on the dwelling limit. So if you've got an expensive property, you're gonna have to come out of pocket a lot of money for the insurance even kick in. And the insurance itself is still really expensive on top of that, even with these high deductibles.

Tom:

Makes a lot of sense. I’m Sorry Emil, let's get back on track. I'm, I've always interested with these type of insurance questions with Michael.

Emil:

I'm sure listeners are too. So good question. All right, let's let's get to the list, because that's why people are here. So we'll start at 15. And we'll go to number one, Tom, you actually brought up such a good point. And that the the percentage is not as important as you know, like if I own a home in California, and my property increase is 5%. Versus if I owned a home in Kansas, and it went up 10%. Because my property started out so much more like my actual dollar increase in net worth or equity wherever you however you want to look at it is going to be so much higher. So that would probably be a more interesting way to look at it. But anyway, any guesses on number 15?

Tom:

Oh, I'm gonna admit I looked at it, but I forgot.

Emil:

You saw it in the article and don’t remember from five minutes ago.

Michael:

I think it was somewhere in Florida.

Tom:

Wait, no, you're jumping ahead.

Emil:

Wrong, Michael.

Michael:

Classic.

Tom:

Wait, it's in the southeast?

Emil:

Kind of? Yes.

Tom:

Is it Nashville? It is Nashville.

Emil:

Good job, Tom. He just he totally just opened up the link and look back at it.

Tom:

I purposely put in a blank tab just to make sure that…

Michael:

Because you have no self control, no self control.

Tom:

Yeah.

Emil:

Alright. So for this first one for number 15. We'll go through again, the the Composite Index score. And then all the metrics that were used to compile this index, and we'll talk about them. And then for the rest of them, we'll just talk about the Composite Index. But we'll link to this article in the show notes for anyone who wants to take a deep dive on this article.

So our composite index on Nashville came in at 53.27. And we'll start with the gross rent multiplier 21.4. So again, that is property value over gross yearly rental income. Median monthly rent 1422 median home price 365,573. Year over year change in home price 20.9%. forecasted home price growth, I believe this is over the next 12 months is 19%. Our effective property tax 0.56%. And a year over year change in population 1.4%.

Michael:

Your average price point is north of 350. Yet your average rent is about 1500. So man, if you look at the price to rent ratio on these properties, we're in that point five area. So I think if you're looking for a cash flow, these types of properties might be tough to to make the numbers work. What do you guys think?

Tom:

Totally agree. I mean, I think this is one of those investments where you kind of like believe in the market and the kind of the underpinning economics and I know a lot of people do. Nashville is a very popular place, I think, for people to move to. I was visiting over there recently. And yeah, it is a very cool city.

Emil:

I was just gonna say north of 1% year of your population growth, that's that's a big chunk for just 12 months. So a lot of people move in there.

Micheal:

I was gonna say I think something that I've started to do now much more so than I've done in the past is when looking at markets, evaluating the potential for short term rentals as well. And that's something that Roofstock actually just recently rolled out as part of the marketplace, which is super exciting. And so if before you like write off Nashville as a non possible cashflow market, think about some of the other tools in the tool belt, there are other ways you can approach this. And I think you can very easily turn a non capital market into a significant cash flow market via short term rental.

Emil:

Great point and good plug.

Tom:

So it's been kind of a, like, not super hot on like vacation rentals, but I think I'm changing. I think my attitudes are changing. I mean, it's not…

Michael:

Dude, I'm right there with you, though. I was just so like, I didn't understand it for so long. And I was always so scared and gun shy of it. That was like, Oh, well, if it doesn't work out, or like a regulations change, then I'm left holding the bag kind of thing. And if it doesn't work out, like if there's not a strong, long term market, then you could be in big trouble. But we did a podcast and subsequent book club with Avery Carl. And we had her on in the Roofstock Academy. And she was talking about in these historic vacation markets, like the regulators are changing the they don't have the hotel lobbyists, they don't have the community aspect. People have always rented homes in these markets for vacations. Her thought is that that will continue.

Tom:

I heard a great analogy in talking about vacation homes, like I always think of like, the Op, OPEX is being like, significantly higher, which I think like it is, but there's an aspect of OPEX and good friend, also investor, Mitch Davidson said, you know, think of them almost like a fire engine, you know, where it's constantly getting washed, like constantly, you know, shorts being used, but it's just like, at every kind of time around the Turner turn around the whatever, new person like it's getting a full like vetted, you know, evaluation. So like, while there is some like overhead and those costs, the fire engine analogy, I like that one, where it's like constantly used.

Michael:

Yeah, that's good. I mean, it hits a little close to home for me with the whole fire thing, but whatever time I see what you did, I can still appreciate that

Tom:

My comments are layered, Michael.

Michael;

That's deep. I like your onion comments today.

Tom:

Oh, yeah.

Michael:

Cuz they're stinky.

Emil:

Oh, all right. Moving on. You too. Moving on. Number 14. Someone said Florida. We are in Florida for number. I think that was Michael. Yeah. We are in Florida. For number two. Any guesses on which city in Florida?

Tom:

I'm not even going to act like it didn't look because I have it up right in front of me.

Emil:

So Tom can't say so Michael, what's your guess?

Michael;

Oh, man, Tampa.

Emil:

It's the market that every tech person on Twitter is talking about? Come on. I'm not on Twitter.

Michael:

I know. I'm not in the feed so much though. Cocoa Beach. I don't know. I have no idea.

Emil:

This guy's living under a rock, Miami, Florida.

Michael:

Oh, Miami. All right. All right.

Emil:

Miami, Miami, our composite index score in Miami. 53.81. Just as a quick reference, Nashville, again, was 53.27. So the higher the Composite Index, this article is claiming the higher the better. Potential for a rental property investor.

Tom:

Big difference between those two, you're talking about how significant the population growth is Nashville at 1.5%. Yeah, Miami's just you know,.1% which is still like, you know, up north, but just kind of a point to Nashville, like, Wow, just massive influx?

Emil:

Yeah, I wonder what that number will be when it looks at full 2021 data because I Twitter's a bubble, but a lot of people in tech Twitter talking about how many people have moved to Miami, you know, from Silicon Valley and other parts of the country.

So Alright, moving on to 13 We got Charlotte, North Carolina, our composite index 54.74 for Charlotte's some interesting stats, we can just cherry pick here year over year change in home price 23.8% In a year over year change in population 1.7%. So I'm sure if you've read articles like this one, Charlotte has made many lists and no different here.

Tom:

Cool, cool market. Yeah, I mean, it's kind of similar to Nashville and just booming, booming growth.

Michael:

Yeah, another thing another short term Haven, tons of bachelor bachelorette parties he talked about quite regularly as a destination.

Emil:

Alright, moving on to number 12 We have Las Vegas Nevada, another another boom and bust markets. So Vegas has composite index 55.19 Let's find some interesting stats here year over year change in home price 24.1% year over year change in population 1.8% pretty solid.

Tom:

I thought of something else I'd like to see in this report is the these the popular the median rent and the median home price and broken out into quartile? And also having volume for that core toil core current quadrado. I feel like Las Vegas is one where there's probably pretty big swings in price and maybe these other cities as well. Like I think that would be interesting because I mean I don't know if this segments out like properties that are typically used as rental or is it like globally of like all properties? You know, like I think that would be interesting to know.

Emil:

Yeah, it's probably just median rents and median price across the board. I don't think they're segmenting or anything. Alright, so moving on to number 11. We have sin Antonio. So San Antonio's composite index 55.41 The gross rent multiplier here starts to tick down, we've been in the mid to low 20s. So far, this one drops down to 16.6. But with the caveat of our effective property tax rate in Texas is much higher. So San Antonio, we have 1.62 Versus if I look back to Nevada, or Las Vegas 0.58 So almost three times the property tax rates. Any comments there guys? Moving on. Alright, guys.

Michael:

That’s a lot of property tax.

Emil:

That is a lot of property tax. All right, number 10. We are staying in Texas, we got Houston coming in with a composite index of 55.76 their gross rent multiplier 15.8. But again, effective property tax rate 1.67. In in Houston.

Our next one on the list is a little bit different. So everything we've covered so far home prices have been, let's see, Houston, I think was the lowest around 260,000. So number nine on the list is Oklahoma City, and the median or the author of the composite index 57.21 The median home price in Oklahoma City, much more affordable 190,559 And so your median monthly rent there is 1056. So this one's a little bit different on the list, you know your your change in home price, not as high 13.7%. Year over year, population 1.1%. But overall, the numbers look good for Oklahoma City on this list.

Michael:

Alright, alright. Alright.

Emil:

Alright, number eight, a very popular one. In addition to the North Carolina and Texas markets. Can you guys guess it? It's on every list. What is it?

Think think More West.

Tom:

Already give San Antonio so it's not in Texas? Probably not in Cal

Michael:

West of Oklahoma.

Tom:

Not California. Could it be he either Tucson or Phoenix or so?

Emil:

Yeah, Phoenix. Look at the wheels turn in there. I love it. Tom. Alright, Phoenix coming in at number eight, probably on every list composite index at 57.45. Our year, crazy year over year change in home price. 32.2%.

Michael:

So nuts.

Emil:

If you had a home in Phoenix probably didn't do anything in one year, you've gained 1/3 of the value. That's insane.

Michael:

That's insane.

Emil:

And according according to the data sources here forecasted home price growth 23.8% Over the next year,

Michael:

So over two years you can have 50% between the forecasted and actual

Emil:

Yep.

Tom:

Another example of a Yeah, vacation. Vacation Rental was kind of being created to cash.

Emil:

Yeah. Yeah. And another interesting stat here to pull out your your change in populations are first where we hit over 2% 2.1% for Phoenix.

Michael:

So everybody who's out there this year is going to stay there for one summer and then move right back to where they came from.

Emil:

Oh, man, I have a friend who lives out there. And when I talk to him in the summer, a client of mine he just tells me it's like 120 every single day and if your car is not parked in garage, you can't even get into your car. It's like everything's on your steering wheels on fire. See Bell it's crazy. Guys MOVING ON.

Michael:

Enough with the fire references. Come on, let the wound heal.

Emil:

The world is getting hot, man.

Michael:

I know.

Emil:

Okay, number seven, Memphis, Tennessee, we got a composite index. 59.35 This is another more affordable market median home price. 198,369. Year over year, population growth hasn't been huge. 0.2% But your your change in home price. 17.7%. So Memphis looking good.

Tom:

I like how diverse this list is in that, you know, there are some more assets, you know, kind of like cash preservation, you know, maybe more appreciation and then you have markets that are definitely more bent on some cash flow like Memphis and you know, no, not a fun strategy and then there's multiple poles to run into. Yep.

Michael:

Sticking with a rabbit theme.

Tom:

because I remember I think it might have been Gary or Gregor one of our one of the co founders with Roofstock was talking about how real estate is such a great investment because you have two holes to run to, there's the yield aspect and there's the appreciation or you can go into the more dominant hole but anyways okay enough of that Tom.

Emil:

We'll see if anyone else is Did anyone else's mind with two holes and dominant hole?

Tom:

Okay, whatever we can take it out whatever.

Emil:

I might just go in straight. Okay

Michael:

Love it.

Emil:

Number six on the list this is going to be I think if we're using grm gross rent multiplier as the the loose benchmark for cash flow market, it's going to be our lowest grm which would loosely say our best potential cash flow market. We got Tulsa Oklahoma or composite index 59.55 and our gross rent multiplier 14.8. So median home price there is 181,919 and our median monthly rent is 1028.

Tom:

I like Tulsa, Tulsa is pretty close to Oklahoma City to like, not too far away.

Michael:

What do you like about Tulsa?

Tom:

Oh, I did a road trip across the United States. And when I was living in Alabama and I made a stop in Tulsa and spent the night there. It's great city very friendly. Are there stuff to do? Yeah, I don't know. Not giving a lot of details there. That was beautiful. There were like parks and stuff.

Michael:

Nice.

Emil:

Do they have any professional sports teams? I know that's like, I remember from our webinars back in the day, that's like one of your investment criteria is at least one professional sports team.

Tom:

Yeah, I think there's some triple A teams there. It's hotbed hotbed a triple I love it. I love a triple A team. That's a great experience. Nashville great triple A baseball team.

Michael:

Is I think I think it's so interesting like the jump from triple A to the majors is so astronomically prevalent in like baseball. Aren't they baseball players like the highest paid professional athletes?

Tom:

They typically have long pretty long careers.

Emil:

Yeah, they can I think so. I think the average baseball contract is the highest.

Michael:

I think so. Yeah. And like yet the like triple A and minor leagues are like some of the lowest paid athletes I think. I used to know a guy that his son played triple A's like he didn't have enough money make enough money to put food on the table. And they're traveling like all the time. It's I think it's a lot of work.

Tom:

I think yeah, it's it's crazy. You do it for like five years and then if you make it it's like oh, wow, you're like, you know,

Michael:

It's crazy. But if you don't, MAN Yeah. Anyway.

Emil:

Baseball factoids.

Michael:

Transition into baseball major and minor. Glad we got that part in this episode.

Emil:

So many important lessons for our listeners. We get real estate investing. I'm gonna go come and present a baseball player.

Tom:

Wait a minute, and baseball players.

Michael:

I've had it wrong this whole time.

Emil:

Onward and forward. Yeah, number five. Back to Florida. We got any guesses?

Michael:

Jacksonville?

Emil:

So you're looking at the list?

Michael:

No.

Emil:

Well, good job because you got it right.

Michael:

I knew it would have to be on the list at some point if I threw out enough.

Emil:

Yeah, Jacksonville. Okay, so Jacksonville composite index 61.17. Year over year change in home price 23.5% forecasted home price growth of 23.8. And year over year change in population 1.7%. Jacksonville.

Number four is the market that has been on a tear for a long time market that Tom I believe you're investing in

Tom:

Atlanta, Georgia.

Emil:

Yeah. Oh, man. Look at you. You knew it. Alright, so we got a composite index 61.7. Year over year change in home price a solid 23% forecasted home price growth 23.9% Wow. Population growth year over year 1% And our effective property tax rate 0.88 Still pretty solid. Nice.

Michael:

Tom, you still have your Atlanta rental?

Tom:

I do. Yeah. All of them and the other question is like, Okay, is it like, now you know, they've seen such great appreciation Do I like take it out and go buy somewhere else with that I feel like I'm at a time like timewise I can't commit to doing effective diligence on like redeploying all that you know that that capital but it's fun thing about investing you get some options,

Michael:

Couple different holes!

Tom:

You know, you know, you know what I did? Was it Tommy Boy that like analogy of like putting the head up a butcher, like, that's basically what I did with that quote. You know what I'm talking about? Tommy Boy trying to use his dad’s analogies. A mouse has lots of holes to run to.

Michael:

Such a great movie.

Tom:

I totally accidentally did that. So anyways, yeah Atlanta great market

Michael:

Okay full circle

Emil:

All right, I think I think we're running long so I'm gonna just go quick fire with our top three. We got number three Birmingham, Alabama composite index 62.03. Number two we had Orlando, Florida Florida's got a couple of hands three or four on the list already. Orlando's composite index 63. And number one drumroll please. Another Florida market Tampa Tampa is number one with a composite score of 65.26.

Michael:

Florida for the win as a state Yeah, holding it down.

Emil:

At 27.7%. Year over year change in home price another 27.2% forecasted your your population change 1.4% effective property tax rate 0.9 grm of 17. So template and good.

Tom:

The effective prop property tax rate seems like almost kind of low like for Florida being you know, no income taxes all property taxes. That seems Yeah. Very reasonable for

Michael:

Especially compared to Texas. Yeah, right. Yeah. Yes, yes.

Emil:

All right. Well, that's our list. And again, anyone wants to check out the full list, read the full methodology. Look at all the numbers. If you're looking for a market and want some help, I think this article is a great starting point. Check it out. We'll link to it in the show notes or you can go to the Stessa blog and look for the title: The best US cities to invest in rental property. I think that's it guys ready to take us home.

Michael:

Yeah, let's get out of here.

Tom:

Gotta go back to the dungeon.

Emil:

Alright, everyone, thanks for tuning in. hope you learn something about a market or if you're invested in these markets, hopefully you were able to give yourself a little pat on the back. And with that, we will check you out on the next episode. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

What investors should know about the passive investing strategy Jan 25, 2022

Whitney is a real estate maven who, after purchasing her first rental in 2002, and hitting a homerun, then nearly losing it all on her second deal, took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use.

In this episode, Whitney shares her approach to passive investing, the differences between this strategy and direct ownership, a typical deal structure, and what investors starting out in the space should know about this investment vehicle.

Whitney's Links:

passiveinvestingwithwhitney.com

Ashwealth.com

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Transcript

Michael:

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today with me, I have a very special returning guest, Whitney Elkins-Hutton with Ash Wealth, and she's gonna be talking to us today about passive investing, and what we should be aware of before we get involved. So let's get into it.

Whitney, thank you so much for coming back on the podcast and hanging out with me again today. I really appreciate you taking the time.

Whitney:

Absolutely. Thank you so much for having me back. I'm looking forward to our conversation today.

Michael:

Now Me too. Me too. So today, we're gonna be talking about passive investments, which is something that you've got a lot of experience in. And so I'm just curious to know, from your experience, what do you recommend people do? I mean, how do people get involved in passive investments? Because we hear about it, but maybe I don't really know how to do it. So what are some concrete steps people can take?

Whitney:

Yeah, well, I would love let's back up a little bit and actually kind of define what a passive investment is. And, you know, really, what a passive investment is, is group investing, you know, it seems, you know, especially with any financial situation, or you know, getting into the financial education world, there's a lot of terms that tend to confound and confuse people. But really, at the end of the day, yes, you know, syndication, passive investing, this is all group investing, how can you pull people's monies together, their talent, their expertise, their networks in order to take down a larger asset? That's simply it.

And so when we talk about passive investing in let's just pick it, you know, an area like multifamily passive investing. It can be self storage, mobile, home, parks, Bitcoin, crypto, I mean, like crypto mining ATMs, but let you know, if we're sticking to real estate fast back to assets, typically, what you're gonna have is the structure of general partner and limited partners,

Michael:

Okay.

Whitney:

And so in this arrangement, the general partners are the active investors, and the limited partners are bringing the down payment to the asset. Okay, so the general partners, they've got all the knowledge, expertise, the market resources, they've put together the team of the brokers, the lenders, the agents, everything that's needed to acquire the deal, run the deal, and rehab the deal even. And then they're also able to bring to the table of credit and lending as well as other investors money. So the limited partner can participate in the rewards of the asset simply by contributing capital. So that was a lad that really it's pretty simple, right? It's like, you know, Hey, Michael, you want to go buy an apartment building together?

Michael:

Yeah.

Whitney:

Yeah. Great. Let's go do with 500 other people makes total sense.

Michael:

Makes total sense. And so that's where the terms GP and LP come from? Is that general partner limited partner? Right?

Whitney:

Yeah, the general partner is the active role in the investment. I mean, think about it, you don't want to 500 investors, you know, taking on day to day duties of the asset, or even voting on to date day to day operations of the asset. It was just, I mean, that's herding cats.

Michael:

Yeah.

Whitney:

So when an investor goes into a general partnership, or excuse me into a syndication, they're looking for the opportunity to relinquish some of that day to day operational control, in exchange for taking advantage of all this massive leverage, and getting their time back. I can tell you, for me, like, um, you know, we talked last time how I built up a portfolio of over 30 single family homes and was doing flipping on the side, right, that was a lot of time, I was making a lot of moving decisions. On all my I can tell you now, I have 38 passive investments. I spend maybe an hour a month reading through the reports and you know, you know, making sure that the distributions hit my bank account, I spend far more time on my single family assets.

Michael:

Much more active.

Whitney:

Yes. But, um, it's leveraged, what you're trying to do is create leverage in order to get that return.

Michael:

Okay. Okay.

Whitney:

But the steps are, we're flip flopping the steps, right? Because if somebody is, you know, the listener here is like, dang it, I would love to get into passive investing, but I don't know how I have experience in real estate. So I could be considered a sophisticated investor. Maybe they can be considered even an accredited investor, because they have the net worth or the the income to be accredited, but they just don’t know the logical steps, we have to flip their investing model on their head. Because up until this point, they probably have been looking at the asset itself, there's they've been searching for single family homes that have make a really good return. And is that home in a good market? And who's the day to day operator, it's them. They're calling all the shots and making the decisions. Now they might have property management, okay. But they're still very much in control of asset.

When we go into the syndication model, we're flipping that on its head, the investors actually investing it in operating business. Okay, so they need to, as we were talking, before we got on, they need to learn how to bet on the jockey, not the horse. So if the horse is the deal, that's fine. And all we still want to get into assets that have good returns and numbers. But we want to make sure that we have an operator that knows what they're doing. Because at the end of the day, an operator that is very seasoned, has a good track record in good business sense, they're going to be able to take any deal and navigate it through the rough waters of our economic environment right now.

Michael:

Okay. All right, that makes total sense. So how do you evaluate an operator? Is it similar to how you would vet a property manager? You getting on the phone calling these these people and saying, hey, you know, what's your favorite kind of food? Are we gonna jive? You know, we are we a good fit? What does that look like?

Whitney:

Yeah, are you a leo a virgo? I mean, you could answer that question, but you might get a few chuckles out of it. But

Michael:

I'm sure.

Whitney:

Yeah, really, whenever you're learning to bet operators, you want to think of it as a sales funnel, anybody that's been in sales, right? You're trying to cast the widest net possible. But we want to make sure that that that operator that you're talking to is actually already somewhat aligned with your goals. So there's actually a couple steps that we need to take before then. One, is you sitting down and understanding what your investing goals are first, do you believe that real estate is actually a viable asset to invest in? If you can't say yes to that question?

Michael:

Kind of a non starter?

Whitney:

Yeah, well, I mean, not necessarily, right. Like you can there's, like I said, there's other assets, like, you know, crypto mining, and solar and all that they're also passive investments, but you know, for our conversation, we're talking real estate, you know, do you believe in the fundamentals of real estate? You can check that box move on?

What do you need? Do you need cash flow, do need give you the appreciative gains of the asset. Now, it doesn't have to be an either or there are investments that offer both, but you need to get super clear with what you actually need, not what you want. And I run into the struggle, you know, investors that have the struggle all the time, is there like, oh, I don't need the cashflow. Right now, that's fine. I just want the gains. Well, the, the gains are kind of like the icing on the cake, the cash flow tells me that the investment has is profitable right now, even if you don't need the cash flow, put it in your bank account, save up for your next investment. Okay.

Also, when you decide that flip that switch and start living off that cashflow, it's there, okay, you're not having to wait for these investments to cycle out. So I really like encouraging investors to look at balanced cashflow and gains type strategies, then we also want to understand what your risk tolerance is, okay, there's, you know, just like with single family homes or small multi-family, you can get into a development ground up deal or you can invest in a class a suburban, you know, structure that are apartment building or a complex that is, you know, you know, affordable housing but is very, you know, recently built no deferred maintenance, and you're just kind of clipping a distribution for five or seven years. So there's a continuum there, we need to understand which side of the continuum, once you know those, those pieces, now is the time to go find the operator.

Michael:

Okay. And am I just hopping on Google and typing in syndication operator? Is it that simple?

Whitney:

You can? Yeah, I mean, a lot of operators right now are online and so they have an incredible web presence. And that is one way to start sourcing operators. I also like and encourage investors to talk to each other get into a group where good because you know, like minded investors actually gather in places. There's websites like CrowdfundingDD, Left Field Investors in their sharing their investing knowledge and who they know love and trust. That's a great way to to kind of create a list you You can attend conferences as well, you know, to that I'm going to be at with passive investing calm this year, I'm going to be the Intelligent Investor here in a couple of weeks and out in LA. And then also, in my own backyard, we'll be at the best ever conference as well.

Michael:

Right on.

Whitney:

That's another place where investors and operators gather. Okay, yes, Google searches are fantastic. And but you know, I encourage people, you know, to get a little, you know, put themselves out there, if this is really a strategy they want to go after

Michael:

Totally.

Whitney:

Well, yeah, then it's a matter of, you know, betting on these operators. Now, you're going to search them out on their website, and they're going to have some sort of like, investor club that you can apply to, in general, generally, the next step is that you can hop on the phone with them for like, 1520 30 minutes to get some high level questions answered about their company, and also what other open deals that they might have.

So take care to read through the information that they're putting out there. Because that can really answer a lot of questions to see if you're, you guys are really aligned with each other. And then you can spend that precious time on the phone get in some of the deeper questions that you couldn't find answers to.

Michael:

Okay.

Whitney:

And when you're talking on the phone, I mean, you're wanting to evaluate them, like, do you? Are they genuine? Do? Are they transparent? Do like them? How? What is their background and experience? How many deals have they done? Have they taken on full cycle? Are they doing this full time? Are they part time operators, some of these things throw off a red flag for me, you know, I want somebody to take care of my money as if it's my money, not theirs. And so I want them working on the asset full time, not just part time.

And, you know, are there more than one operator? Okay, are they a one one horse show? Or I, you know, there's power in numbers, you know, there's just no way one operator can certainly run the entire deal. So I like to look for two three partners or more, that are operating as assets.

Michael:

Okay, I was just gonna ask, Is it reasonable to actually get the actual operators on the phone? Or is it going to be someone on their sales team that's gonna tell you everything you want to hear? And then, you know, so and so is so busy running these multibillion dollar assets? They can't, they can't help on a 15 minute call with me.

Whitney:

So it depends on the size of the investment group. So typically, like if you know, a larger investor group, think about it, you know, some of these deals, say it's a 60 or $80 million deal, there's going to be three to 400 investors individually going into that deal. So it's really in its right, and every time you deal opens, investors have specific questions. So it's pretty, you know, just to get everybody, like on the same page, we're going to try to use a lot of manpower initially to get investors questions, you know, answered.

Now, it's a it's a yes and, okay, so initially, if the group's small, you're probably going to be talking to the direct operator, but that might give you an indication of the size of the company. As they grow, they're going to add on an investor relations team, because they have more deals running, they have more questions coming in, they have they want to have an element of scale to the business. Okay.

Personally, I want my operator working on the deal, not necessarily talking to hundreds of investors every day, I want them focused on how they can make me money. Okay, so I don't see that as a detriment. Now,

Michael:

You see that as a pro?

Whitney:

Yeah, very much as a pro very much as a pro. Okay, now, okay. If I had, say, I'm going to throw down, you know, a $500,000, check, or a million dollar check. Yeah, I would love to talk to the operator to talk to the operator. So there's a balance here. And so you can ask to talk to the operator, there might depending on the group, there might be some, you know, guidelines on a, you know, what stage in, you know, the process of getting into a deal that it's, you know, beneficial for everybody to get on the phone. But, yeah, I mean, if you're going to be investing, you know, you know, any substantial amount of money, absolutely, you should be able to get on the line with the operator, it just might not be until you actually identify the deal that you want to go into. So everybody's gonna have different rules on that.

Michael:

Okay. All right. Got it. Well, that might undo years of therapy for my middle child syndrome, always being forgotten about never getting anyone to talk to me, but I'll work through it. I'll work through it. I've got a great therapist. All right. Well, that's really good to know. That's good to know. And set expectations.

Whitney:

Yeah, I mean, isn't seven the big guys that you know, are doing billions and billions of dollars a year of investments, you're not you're probably not going to get the the CEO of that company on the phone and let you know, unless you're writing a pretty large Check. I mean, if you're just writing, you know, and I shouldn't say just right, it's scary to write that first $50,000 check to get into a deal. Or even 20 or 25, like, you know, if it's with a smaller organization, but really, it's it's a matter of size and scale and the organization where everybody is in their, either their investing journey or in the scaling journey of the company.

Michael:

Okay. All right. And yeah, I'm gonna put you on the spot a little bit. We're recording this early Jan of 2022. I'm curious Whitney to know from what you've seen thus far, specifically talking about multifamily. Let's talk numbers. Let's talk minimum requirements. Let's talk you're what projection cash on cash returns are. And let's talk equity multiples. And what's again, being projected in the multifamily space early Jan 2022.

Whiteny:

Well, you know, I, the group that I'm with passive investing.com, we specialize in the class a suburban asset. So really, those numbers are going to vary by the business plan and the asset totally. So for us, we're really looking for that stabilized asset. We're not talking about class a luxury or Class A urban infill, we're not talking about we're talking about affordable class A, rents are still about $1,500 a month, we're not talking about three $4,000 a month friends, gated communities, nothing like that. So this is very urban, you know, suburban, you know, housing situations now, and the returns on this in this is going to vary group to group. Right now, what I'm seeing across majority of operators is about a 7% preferred return. Now, guys, I hate to say that preferred return doesn't actually mean return, it just says the first 7% of the profits go to the limited partner investor.

So the the first year of the hold and might be 5%. And then it works its way up to 8%. Right, but the first 7% of the profits will go to the limited partner investor, and IRR on that, you know, probably going to be somewhere between 12 to 16%. Again, deal dependent depends on the market, you're going in the size of the asset, and equity multiples, probably hovering somewhere between 1.5 to 1.75. On that type of asset. However, in some markets, we can actually because rents are now taking off, we can expect on I shouldn't say expect. That's a…

Michael:

Dangerous word! We can hopefully expect.

Whitney:

Yeah, hopefully expect but it I don't think it's unrealistic to see, you know, equity. So there's what's on the pro forma. And then though, there's what's being delivered, you know, you I know operators that are conservatively underwriting to x multiples, on class a suburban assets, but again, that's more of a product of them, or an outcome of the market that you're in. Because you can't expect that in every single market, you know, we're not seeing that, you know, five to 10% rent growth or higher in every market.

Michael:

Right, right. Okay. And for anyone that's brand new to passive investing, they might, I mean, I think be totally unfamiliar with the term equity multiple, or maybe even IRR. So if we take just one step back, can you give us a high level definition of what that is? And maybe what that means in dollars and cents?

Whitney:

Yeah, definitely. Okay. So, um, let's start with equity multiple, because this is the one that I am getting, especially if you're new to passive investing, it's pretty easy to get your head around. So if I invest $100,000, in a deal, and the equity multiple is 2x, that means at the end of the whole period, I'm projected to get take my $100,000 and double it to $200,000 between the distributions have the cash flow on a monthly or quarterly basis, and the capital gain event at the end of the sale.

So I might get distributed $40,000 over the course of five years in a cash flow distribution, and then I might get a lump sum check at the capital gain, or at the sale of the asset for $60,000. Okay, so I've taken my 100k it's grown now to 200k. I can take that and now go invest that into the next deal. That is the power of the scale of this, and I didn't have to do anything. Do the initial due diligence, and just, you know, maybe answer a survey at the sale of the asset of whether I want to, you know, consume that, you know, take it all back into my possession or roll it into a 1031 exchange.

Michael:

Ah, so you have the ability to 1031 with passive investments as well?

Whitney:

You do within the same LLC structure. So it's not like you get to say okay, great. Now My asset with Operator A is selling I'm going to 1031 into operator B or even into deal B with Operator A you can, that's not, you're not able to do that, what you are able to do is the collective entity that invested in that initial asset stays together and purchase this another asset, okay, they essentially or they can or they move into what they call a tenant in common relationship into another asset. So they can either take down fully another asset themselves, or they're going to stay collectively and go partner on another deal.

But that's kind of hard. I mean, I look for operators that have every indication that they're they want to do that, because it's such a powerful multi generational wealth building strategy. But it's certainly not a guarantee. I mean, it's difficult to do that the timing, the regulation behind it. It's a little element of herding cats, with the investors that they had to get them to, like, make a decision. But yeah, that's also where, you know, we're talking about that investor intro call the operators trying to get a sense of the investor if they are a good fit for the deal as well. And the investing goals are aligned.

Michael:

Okay. So it's a little bit like everyone's evaluating everyone better be on your best behavior.

Whitney:

To a certain extent, yeah.

Michael:

And then can you talk a little bit about IRR. And so how investors should be thinking about that when they see a number thrown at them?

Whitney:

Yeah, it's a calculus term. So it's, I, it's funny, I do weekly webinars to help kind of demystify these terms and the whole process and, you know, move people through the seven steps in. One of the things that people ask me about quite often are the IRR, like, what does that really mean? And really, what the IRR allows us to do is to, what is the return when we take into account when we get our capital back? So the example I like using is Michael, how likely are you into invest in a deal? If I said the return is 20%?

Michael:

I would be interested, cautiously optimistic.

Whitney:

Oh, what's the natural? Next question?

Michael:

It’s 20% over how long a time period?

Whitney:

Aha, how long of a time period? When do I get my capital back? If I say, Well, hold on, I gave you the answer to the next question. Okay. I say, Oh, it's 20% over 10 years.

Michel:

Okay. And yeah, when do I get my investment back?

Whitney:

When do I get my investment back, that's what the IRR allows us to, you know, help calculate. So because I'm maybe I say you get 20% or the first 10 years, but you don't exit for, or excuse me the first 10 years and you don't exit until you're 20. You're kind of like, whoa, hold on, like what happened here. And the IRR just takes into account, it's usually a little bit lower like two or three, especially when we're talking five to seven year holds, it's going to be a couple of percentage points lower than the ARR the average annual return, but it actually takes into account when I get my money back.

So the IRR for shorter deals tends to be higher, because you're getting your money back quicker the IRR drops, the longer that you hold the asset because it's taking longer for you to get your initial capital back. It is somewhat of a good number to to use to compare deal the deal. So if you're looking at two deals that have both a five year hold, which what is your i potential IRR. Now, there there are people out there that are going to just say, Hey, why are we even looking at IRR because the performance is an educated best guess on to the business plan of asset.

So, you know, it's it's one data point to look at, you need to look at all the other data points and in. One thing to look at within the Investment Summary is to see if the operator puts in what we call a sensitivity analysis. So in the sensitivity analysis, they're not going to just give you one IRR, they're going to give you a range of IRRs that could possibly happen within that whole period. And based on the net operating income that's going to be generated on the asset and how cap rates move. Okay, so they're projecting they're going to make let's just throw out a number like $10 million dollar profit on the asset and that the sensitivity analysis would calculate and let's say the going in cap rate was 4%.

Okay, the sensitivity analysis should probably run what happens if cap rates at the exit is three and a half percent, and all the way floating up to save 4.5 or 5%. Now when Cap rates go down, we're all like doing high fives with each other because me all means we made more money. Okay, so 10 million divided by 3%. Okay, that's, that's essentially I don't have the calculator in front of me, but that's how much you would make on the gain, right? versus the other way, if cap rates float up to say four and a half or 5%, you're dividing by a larger number, so you're not going to make as much. But you're still making money because you're producing value on that asset.

Michael:

Okay. All right. And another question for you is, I know that there is multiple ways that you can earn money on a or make money in a passive investment. And there's some terms that I think are out there that anyone who's probably reading an OM or offering memorandum may have come across. So can you talk to us about hurdles and waterfalls, and what a preferred return is versus any other kind of return? That's available in some of these investments?

Whitney:

Yeah, absolutely. Okay. So, preferred return, we we've touched on that a little bit, the preferred return is not a guarantee. Think about it. If I'm the general partner, and Michael, you're the limited partner. Okay. I'm just saying, Michael, I'm going to give you that I'm, I still believe so much in this deal, I'm going to give you a preferred return of 7%, meaning I'm going to give you the first 7% in the cut in profits on that deal, whether they come from cash flow or equity, but you and I are partners, okay, so that's 7%. preferred return is not an expense on the deal. And I think this is where, you know, new limited partners get a little confused. They were like, where's my distribution? where's the where's the line and saying that I get 7%? Okay. You're not debt on the right. Okay, we're splitting equity. Okay, very different. Okay.

Now, we were talking about some higher level, I don't want to call it like, you know, limited partner investing like to one because these are concepts you really need should understand before you go into your first investment. They will you need to say that. Sometimes they're hard for people to get their head around. But when we talk about the waterfall, we're just saying, who gets paid what and when? That's simply what we're doing. Okay. The first and now think about it in terms of like your own house. Okay, what is the first bill that you're going to pay every month on your house? If you have a specially if you bought it with a loan? What are you going to pay?

Michael:

Mortgage?

Whitney:

The debt, you're going to pay the debt on the property, right? Because otherwise the lender is going to foreclose on you. Right. Okay. So the lender is sits first and what we call the capital stack, they get paid first, their number one their top dog in the waterfall, then we've got, you know, any sort of secondary debt on the property, if there's a second loan or a mezzanine loan, okay, then right behind that if there's a preferred equity investor, you know, somebody that wrote a super large check, like $1,000,000.05 million dollars $10 million, they have the power to probably negotiate some better terms within the deal. So we've got our debt. Now we've got our preferred equity investor, right? And not only can they get better terms, but they're probably negotiating a higher position in the capital stack.

Behind that, now we're talking about, okay, we've got our limited partner class, and then we've got our general partner class. Now, I'm not going to give them A's and B's because it'll confuse people because, you know, ppms, the legal documentation has all different letters to them, let's just call it an LP GP, the LP, the next part of the waterfall, they're going to get their preferred return. Remember me as the GP I said, I'm so confident my deal that you're going to get the first 7% Right, so that's the preferred return. Okay. Now, the waterfall might split out between cash flow and game like what happens there, but one of the structures that we love using is 7% preferred return and then 70-30 split on all of their profits, okay. 70% goes to the limited partner 30% comes to the general partner.

Okay. Now, you threw in a term there IRR hurdle. Okay, now we're gonna slap the criteria is this is we're going to split 7030 until you reach a 15% IRR as the limited partner, okay. And then we're going to change and we're going to split things 50-50

Michael:

Okay. All right.

Whitney:

So that's what the hurdle is. It's a it's an incentive for me as a general partner to perform better in order to get a larger split of the deal.

Michael:

Okay, that makes that makes total sense. I mean, I think that that's intuitively a smart thing to have inside of these deals. But let me ask a question for all the little people out there, the little guys, the little fish? What if someone could easily say, Well, you know, when you're very experienced, and you know, the numbers inside and out, and I don't really know the number, so you could likely sandbag these numbers and show a lesser return, knowing full well that you're gonna hit cross that waterfall far above and away. Right. So how do we evaluate the reality of the numbers that we're seeing? Or the reasonableness of the numbers we're seeing?

Whitney:

That is so interesting. And I would say I understand the sentiment and I don't I usually I hear it the other way people are like, prove to me you're going to actually make this not so much like, how are you sandbagging? I mean, here's a perfect example. You know, anybody that was trying to sell a multifamily asset and April or May last year of 20-20, we didn't know what cap rates were, we didn't know the true value of the asset. We didn't know net operating incomes on some of these assets we're going to take because tenants weren't paying. So my question I kind of throw it back to you. Like, I don't have a crystal ball do you?

Michael:

I don't know.

Whitney:

I'm going to mitigate my downside, right? Because think about it as the general partner, I'm getting the first 7% to you, or a preferred return. And then I'm like, give me the lion's share of the of the split. And I get, you know, the bottom barrel? Yeah. And either fees along the way and stuff like that. But I think a lot of, um, you know, they can, they're not as lucrative, I think, as limited partners would like to think they are for the general partnership. I mean, think about it. There's a lot of expenses that go into acquiring a deal. And I just did a webinar yesterday with my acquisitions team. And there, they were like we underwrote 500 deals last year, closed on, like, 11.

Michael:

Wow.

Whitney:

I mean, how much manpower Are you putting behind that?

Michael:

That's huge.

Whitney:

Um, there's a lot of there's a lot that goes into this. Um, but, um, I want to mitigate my risk, too, right? I want to I don't, as a general partner, I don't want to, you know, go into a deal where I don't think I'm going to make any money. And think about it this way. We haven't stopped splitting. It's not like after at 15% IRR, I'm capping, you know, the limited partner investor and that waterfall example. No, we both continue to make money.

Michael:

Love it.

Whitney:

we're just splitting it 5050. Right.

Michael:

Makes total sense. Makes total sense. We need the last question I have for you, before we get out of here is we've talked how to evaluate the jockey, the operators, we've talked how to think about the numbers. Where do people draw the line? Or how should people think about where to draw a line with getting into the weeds on the numbers and evaluating and kind of looking to get an understanding of what all the different numbers mean, versus saying, Hey, I've evaluated the operator, I'm good, let's just let's do the thing.

Whitney:

Awesome. Well, there's a few other steps in here, we didn't get to cover and I just want to invite everybody, if I may, to a website because we won't be able to get into all the steps. But I actually have a download there at passiveinvestingwithwhitney.com. And you can go there and sign up and get this free download. It goes through all seven steps to of what you tangibly need to do tactically need to do to get into your first or next investment.

Michael:

Awesome.

Whitney:

I'll also have a ebook that will walk you through in greater detail. And it expands on this cheat sheet that I have available for everybody to operators, one piece you can control, you can control your goals, you can control the operator that you invest with, you can control the strategy you go into, you can also control as a limited partner, the market you invest in, and the deal that you can go into you have an you know, you should evaluate the market. And the numbers. I'll have, I'll give you some questions in that ebook that you can, you know, run through and you know, kind of double check things for yourself.

And they'll also be in a checklist of how to underwrite a deal, actually, just, I'll give you the link to the webinar that I did last week, that will walk people through, you know, step 1-2-3-4-5 of how to underwrite a market or excuse me, underwrite a deal from the limited partner perspective. Okay, it's different than you know if you've ever purchased a single family house before, and so, like the numbers like we didn't, we didn't have to talk about IRR before probably you were just looking at cash on cash or, you know, equity growth.

Then what Do you need to do to that all the legal documentation? That would be like one of the, you know, you know, step four or five and six, so,

Michael:

Okay. All right. Well, yeah, we will definitely link to the show notes. link to that in the show notes. Thanks so much for sharing. Yeah. And for people that didn't catch the last episode, how can people learn more about you reach out to you get in touch with you?

Whitney:

Yeah, if you're interested in passive investing, reach out to me at passiveinvestingwithwhitney.com. And if you're interested in building your own personal single family rental portfolio, you can also you know, reach out to me and Ashwealth.com.

Michael:

Awesome. Whitney, this was yet again another fantastic episode. Thank you again for hanging out with me. And I'm sure we'll be chatting again soon because you're a wealth of knowledge.

Whitney:

Awesome. Thank you so much. And I'm so thankful to share all this powerful investment strategy with your listeners.

Michael:

Awesome. Love it talk to you soon.

Already everyone that was our episode a big big big thank you to Whitney. She is so much fun to have on just a wealth of knowledge. I got a ton of my personal questions answered, because some of these episodes are very self serving. So as always, if you'd like the episode, feel free to leave us a rating or review wherever it is in your podcasts. We look forward to seeing you next one. Happy investing

The 4 pillars of building long-term wealth with Ryan Lee Jan 22, 2022

For the last seven years, Ryan Lee has helped people build wealth by debunking bogus financial plans based on hope. Instead of hoping the stock market performed, that taxes would stay low, and hoping that his investments would perform as advertised, he developed something infinitely more valuable than hope: Control. Ryan has unlocked a personal path to achieving financial independence as well as a system of money management that he is passionate about sharing.

In this episode, Ryan shares his investment strategy and the 4 pillars that you can use to evaluate a potential investment an determine if it is going to bring you the most reliable returns.

Ryan's links:

https://cashflowtactics.com/

https://podcasts.apple.com/us/podcast/rise-up-live-free/id1500021021

---

Transcript

Michael:

What's going on everybody? Michael Albaum here. Welcome to another episode of the remote real estate investor. Today with me, I've got Ryan Lee with Cash Flow tactics. And Ryan's gonna be talking to us about his background, how he became financially free, and what are some tips and tricks that you can maybe do the same? So let's get right into it.

Alright, Ryan, so you were saying before that you figured it out? Because you had to? And so I'm curious to know, what was it that you figured out? What were some of the tips and tricks and tactics that you figured out along the way?

Ryan:

Yeah, man. So again, kind of going back to Rich Dad, Poor Dad, you know, first he like slapped me in the face and said, Hey, you, everything you think you know about money is wrong,

Michael:

You're doing it wrong.

Ryan:

Yeah, you're doing it wrong. And you're an idiot, right? And then the next thing that he said was, hey, the definition of financial success. And this radically revolutionized my thought process. It's not how much your net worth is, like, at the end of the day? No, it doesn't matter how much money we have, no matter how much income your assets generate. And so I started measuring my success off of how much income can my assets generate? And how long is it going to last? And how predictable is it going to be?

And this really exposed the lie of the 401k. Because even if I had quote unquote, enough money in the 401k, I couldn't get it right, it was stuck, it was gonna be taxable. And I couldn't take it out before 59 and a half. And so I realized, man, that's that's a trap. So I went down the world of real estate, and real estate is the most powerful wealth creator out there. But it's also a pretty dangerous tool, right? And I went into it super naive. I'm grateful that I did it because I made a lot of mistakes. But you know, I went into the game of real estate trying to do it all on my own. Right, I thought may I'm gonna go out and find the property. And then once I find it, I'm gonna rehab it, and I'm gonna renovate it, and I'm gonna put a renter in there, then I'm gonna collect the rent. And I did that three times, right?

And the first time I did it, walked around with my chest all puffed out, right? I'm a real estate investor, you know, and I wanted to tell everybody about it. The second time I did it, I was little bit nervous. And the third time I did it, I almost had a panic attack. Because here's what was happening, right? I mean, every property that I bought, I was actually getting further away from financial freedom. Because I had to find it, I had to renovate it, I had to put a tenant in it, I had to manage it. And man, man, if there's anything that you know about me, I am the worst, the absolute worst property manager in the entire world. And every time my tenant would call me up with whatever sob story they had, I would sob right along with them and say, Hey, don't worry about it, I'll pay your rent for you.

And, you know, this happened for a good six or seven months, where I was just bleeding money. And I was bleeding time. And I realized, man, the only way that I can do this is if I start plugging into other people's expertise, right? I can't try to do it on my own, because I'm losing time that way. But if I can find people that love real estate, they wake up in the morning, they're like, Man, I love real estate, because that's not my definition of financial freedom. I love real estate for what it does for me. But I don't want to do real estate. So if I can plug into teams and people that have expertise in real estate, and finding rehabbing, renovating, managing all of that stuff with real estate, then my life, my life gets a lot easier. And I become the CEO managing to outcomes.

So the difficult lessons that I learned along the way was don't try to do real estate on your own right? Plug into other people's networks and teams and have them do the real estate. And yes, they make money. But guess what, I get what I want, I get passive cash flow. And I have to manage outcomes.

Michael:

Yeah, that's so good. That's so good. So now having done that three times, and coming to that conclusion of okay, I want to be the CEO, I don't want to be the person in the trenches, so to speak. Do you think that that's a good place to start? Or do you think that people actually have to go through those first three, or whatever amount of properties it takes for them to get that hands on experience to recognize, well, I don't like this, or maybe I do like this?

Ryan:

Yeah, dude, that's such a great question. And man, I think everyone has their own individual ways that they learn. Some people are really good by learning from other people's people's experiences. Some people can learn from books and podcasts, some people just learn by getting their hands dirty. So understand who you are and how you learn. But for sure doing it gives you way more appreciation. Because if I hadn't done it, then I would come to turnkey providers and other people that are doing real estate. And I'll probably be a little bit more demanding because I didn't understand the process. I don't understand what's required in the work involved in it.

So me doing it. That gave me two perspectives. It gave me a very, very clear understanding of what I don't want. I don't want to be a real estate professional. But it also gave me a clear understanding of what I do want and real estate was the same tool. It was just a matter of how I decided to pick up that tool. So doing it helped me understand, number one, hey, I can do real estates and I can do it to get the outcomes that I want but I don't have to do the do all of the work along the way.

The next thing that it helped me understand was, you know, I lived in at the time I lived in a still do I live in an area where it's a lot harder to do single family homes, I mean, the median price where I'm living, man, it's several $100,000. And if I wanted to buy real estate and start in my geographic area, I'd have to have a lot of money set aside to be able to do that. So also, not doing it on my own allowed me to plug into networks like yours and say, look, what if I bought properties in the Midwest? What if I live where I want to live, but I buy where the numbers make sense. That opened up a whole new game for me. And that allowed me to start moving start from you know, rather than moving slow, and what's in my geographic area, it started to open up my expansion to say, what if I look in other areas and buy the right property in the right area with the right team?

Michael:

That's so good. So something that I hear all the time inside of Roofstock Academy and from this other investors investors in general is how do you do in remote investing? I can't make that mental mindset. I'm too scared to give relinquish control. So I can't go touch and see it and check it on my property managers was it sounds like the drive for you. Because the numbers made sense overcame that fear and relinquishing control is that what happened for you?

Ryan:

To a certain extent, you know, I still am kind of a control freak. And so every area that I bought real estate, I've gone to that area, right, I've literally gone to the area and that way, like it's kind of fun, because if I go out there, for example, Memphis, Tennessee, you know, Memphis, Tennessee, when I very first one out there, I had no idea I did my research beforehand and kind of understood, maybe some of the areas in that area that I wanted to invest in, took a plane out there, rented a car, got a map, and I just drove up and down the neighborhood's up and down, up and down. And I circled areas I liked, I exed the ones that I was nervous about. But here more than anything, is what I did, I developed a relationship with the team that I wanted to use out there. Because at the end of the day, real estate, isn't the objective real estate is the tool to exchange, that's all it is, I own real estate, someone is going to want to rent that real estate. But if I'm going to do it passively, I have to develop a really good relationship with my property manager, the people who are finding the properties for me my acquisition is and so that's what I spend, spent, and still do spend most of my time on, is developing really, really good relationships, one of the best things I've done, it's such a small thing, but man, it makes the biggest difference.

You know, in in the team that I use instead of Memphis, for example. I've been using them for almost a decade now. And I've been out there a couple of times, I did most of my research in the beginning. And now I can manage it from my, you know, quarterback here from Utah. But every single year, I send them a Christmas card, and a gift card. Right, Tom, thank you for all the work they've done for me for my life for my family, I send them a picture of hey, this is what you're helping me do and accomplishments out of my life, please go enjoy dinner on me, right. And it's such a small thing, dude, it's such a small thing. But as I invest in relationships, man, I can't tell you how many times that team has gone above and beyond for me. I mean, they out of all the people, they manage properties for guests whose name they know, they know my name, right? Because I invest in that relationship.

On the other side, if I didn't appreciate that team, you know, when I had a vacancy, like, I might just call them up and shoot them out and yell at them, and, you know, cuss at them. And you know, that in the long run is not going to help me be free, that's not going to help me get what I want. And so having done it myself, I understand the difficulty, the brain numbing work that that takes and the expertise that's required to do it the effectively and do it the right way. So I appreciate it more. And I honor the people that I work with.

Michael:

It's such an important you makes I do the exact same thing, actually, for all of the professionals in my life, all the teams I work with, I do the exact same thing. And you're right, when when I pick up the phone and give them a call, they also pick up the phone and they know who I am, and they appreciate. So I think I think that's a great tip. If nothing else to pour into the relationships that you have in your life, whether it be your lenders, target managers, insurance reps, whoever, but just show them that you care. So when you're thinking about them show the value the relationship I think goes a long way.

Ryan:

Man it so does, because at the end of the day, here's the crazy part, a house, a rental property has never written me personally a check. It's a person that's written me that says that, yeah, the house is just the lawyer. It's just alert to get people to do business with each other. And so at the end of the day, remember that you're investing in relationships more than anything.

Michael:

That's great. That's great. Okay, so we figured out and you figured out that remote real estate investing was going to be the tool that you were going to leverage. So what then what was the next step was the next thing that you figured out?

Ryan:

Yeah, man. And here's kind of a funny thing. And I think a lot of, you know, I'm assuming you're probably a lot like me in this way. You know, I'm very entrepreneurial, right? I like I'm creative. I like to see new opportunities and go chase down those opportunities. So in the beginning, I was like, well, if one type of Cash Flows great, what about all the types of cash flow? And so I bought a couple single family homes, and then I'm like, Well, what maybe I should buy an apartment complex. And maybe I should buy a long term care facility and maybe I should buy this and I was looking at everything through the lens of cash flow, which is a good lens to measure success by but at the end of the day, I still I wanted my time. Right. And I forgot that lesson along the way because the reality is every type of real estate is going to require a certain level of expertise inside of that real estate.

And what I found is it's very, very hard to duplicate results inside of multifamily properties inside of long term care facilities that requires so much expertise that it's hard to duplicate those results. And it's hard to plug into teams that do that. So for me, I kind of went a little bit crazy and tried to buy everything. And then I've realized at the end of the day, I'm gonna just go back down and simplify back down to the type of real estate that makes sense for me, single family, three bedroom, two bath Type homes, bread and butter. Because the reality of it is, there's always demand for that type of property always. It's the easiest property for a guy like me just getting involved to understand because man, I've lived in a three bedroom, two bath home, I know exactly what it's like to live there. I know what areas that are good areas, I intuitively know how that works. It's the easiest type of property to get financing for. It's the easiest type of property to scale inside of a portfolio. And it's the easiest type of property to use to become financially free.

So that was really kind of in the mid part of my game plan that was a major lesson learned is not all cashflow is created equally. And if I want to, you know, build a niche inside of long term care facilities, then I need to focus on long term care facilities. But if I want to be financially free, find a niche and get rich in that niche and just focus. So once I learned that once I learned the ability with my personal finances to focus, and it made my life so much easier now because it doubled down and duplicate those results. And the more I focus, guess what the better results I get, the better sophistication I get, the better I become an investing and I can get results fast now almost with my eyes closed because I focus on it for so long.

Michael:

Yeah. Oh, that's so good. Get Rich in your niche. I love that. So Ryan, a question for you though, is when real estate investors first start learning about real estate investing. Their purview is kind of like this. And for everyone listening, I have my hands kind of over my eyes like blinders. All we can see is an inch wide. Yeah. But as you become more involved in the space, you start learning about oh, well, I can partner Oh, there's multifamily. Oh, this fixes that all there's a BRRRR. And so how do people know once they've truly found their niche? Or if they've just done something enough times to be good and comfortable at it? How should they know when to grow into something else?

Ryan:

Yeah, man, That's a great question. Here's the way I like to look at it. You know, at the end of the day, this kind of goes back to money. And I think we kind of project onto money, all of our hopes and dreams thinking that money is going to give us what we want money will never give us what we want, right money is simply a tool. So at the end of the day, what I had to get really clear on and I still revisit this over and over because you don't find it and then it's that same thing forever. But I had to get clear on what I wanted. Okay, so once I was really, really clear on what I wanted, and why I wanted it, then I had to realize the only thing that was standing in the way of what I wanted and why I wanted it was me who do I have to become?

Okay, so for me, when I first started my game plan, I wanted to have more time, I wanted to have more control of my time. And I wanted to be able to walk away from a corporate job. I've always been the only income earner in my family, my wife and I, when we first got married my oldest son who had the heart surgery, and he was born with just some major complications and requires a lot of attentive care. So from the very beginning, my wife has stayed home to care for our children. I'm grateful for that. But I was put a lot of pressure on me, right. I mean, I couldn't just walk away from a six figure job without having a way to replace that. So I wanted to be financially free. And if I wanted that, then I had to focus on using my money as a tool to get that thing, right to get that thing to get my time back.

Now over time, my WHY has changed, you know, quite a few times, right? I wanted to walk away from a corporate job, I did that it was awesome. Then I found myself I wanted to teach other people how to do this. I mean, I have so many people asking me questions. Why don't I start a company and a business around this? Why don't I build my skills and expertise to teach other people how to do it. And so my WHY has changed along the way. But all along the way. I've been very, very clear on what I want. And when I know what I want, I can go back to money. And as a tool, I can say how do I use this tool of money to get what I want. Now, if I come to the table and I say hey, I don't have enough money, I want to go faster in my game plan maybe I now need to use money as a tool and develop some more expertise. Maybe burr is the right method for me because now I can inject some of my expertise to make more money and accelerate my game plan ultimately to what I want. So that's really for me, I think a lot of us we think money is what we want. Money is never what we want. So get clear on what you want. Then go back to Money and see how money can serve you in the purposes that you have.

Michael:

Oh, that's so good. That's so good. Off the Cuff Ryan Lee in the flesh. Love it, man.

Ryan:

Yeah, buddy.

Michael:

That's great. So right. I'm curious to know, because you've interacted with so many people, you've coached so many people through money mistakes to financial freedom. What are some of the biggest hurdles that you see trip people up with regard to personal finance?

Ryan:

Yeah, man. Um, you know, I think the hardest thing for me in the beginning was to realize that what had been taught wasn't just not working. It was dangerous is one of the biggest statements that we have inside of our community is one thing 97% of traditional financial advice is dangerous, misleading or outright wrong. Okay. And once I can look at money through that lens now, our definition of success is financial freedom in 10 years or less. Okay, so Anything that's not going to get me financially free in 10 years or less, if I look at it through the lens of 97% of traditional financial advice is dangerous, misleading or wrong, then everything out there is simply how to make something that's not working a little bit better.

But if I can put down 97%, of traditional financial advisors put it down, and I can look on the other side, the 3%, that is literally the exact opposite. And if you look at every self made X, you know, someone who's become self made wealthy in a short period of time, they haven't done mutual funds, they haven't done 401k, they haven't done diversification a little bit better than the average person, they've literally done the exact opposite. And that, in my opinion, is the first step towards financial freedom. Right? If I can let go of most of the noise and distractions out there, and solely focus on the few things that actually work and develop expertise and a system around those, then I can start to accelerate my results.

So that's one of the biggest things and that's kind of hard to realize whether it was done by deceit, whether it was done by default, whether it's just kind of the social conditioning, I don't know. Yeah, I don't know if there's some grand master plan to keep the, you know, American public trapped. But at the end of the day, once I let go of traditional stuff, and fully said, Hey, I'm going to walk away from average, in pursuit of extraordinary, man, that's what really, really started to open up my path to financial freedom. And so that's inside of our community, we're not for everyone, we're not trying to make you better. We're trying to truly help you rise up so that you can ultimately live free, that's going to require you to walk away from average,

Michael:

That’s so good. What was the hardest thing for you to spread yourself away from for you to give up from what you'd learned? Probably 97%.

Ryan:

Yeah, I think even still to this day, right? I mean, it seems like the world that we live in is becoming increasingly more chaotic, and increasingly more complex, like, if I get on Google, today, I can find the 10 newest, greatest best investments that will make me a multi mega millionaire, but you know, Bitcoin, you know, online businesses, whatever it might be, right, all these different things. And they, they're all they all might be great. Or they all might just be simple distractions, right. And if we look back, historically, from the very beginning of like, economies, what has made people wealthy period, it's always been ownership of land. In fact, the American Constitution, the Declaration of Independence was formed around life, liberty, and property, the ownership of property. And so understanding that, man, if we understand that there's historical background of 1000s of years of success, instead of real estate, why not just focus on

Michael:

Why reinvent the wheel?

Ryan:

No doubt man, just, like, let go of the distractions. And then here's the here's the fun part. Financial freedom is kind of like a pathway, right? If I can get on this pathway, and start building consistent and predictable results, then financial freedom, unlike retirement isn't a destination, I don't have to wait until one day, I can actually start giving myself permission to live free today. And over time, over time, maybe once I've established a base level of cash flow that I'm comfortable with maybe then I can go dabble in Bitcoin and be a multi mega millionaire tomorrow or not, right. But I've built my financial freedom that gives me the permission to go gamble and play if I want to, because that's what I want to do.

Michael:

That's great. That's great. So what's something that you would share with our listeners, one thing that everybody could do today, or starting tomorrow, to start them on the correct path towards learning more about the 3%, or towards learning about what truly is, in your estimation, the way to financial freedom?

Ryan:

Cool, cool. I'm going to give you our formula. So we literally have a financial freedom formula. And this is because I partnered with a dude, when I when I first started this, I'm the guy that just goes and does it right. And I kind of figured out from a gut feel more than anything. And then I partnered up with this guy, he came from Wall Street's he literally, this is the funniest thing about my business partner. When he was getting married, when he was dating, he had a spreadsheets, right, and he would plug all of the people that he was dating into the spreadsheet, and he had a ranking criteria in a spreadsheet. And so math helped him choose his one,

Michael:

Oh, my god,

Ryan:

Math helped him choose which car to buy, Matt helps him, like this guy sees the world through numbers, and I kind of look at them, kind of like Neo in the Matrix, like Neo could look into the world of the matrix and kind of see all the rest of us like, I don't see I see the numbers. So when I partnered up with this guy, he helped bring math to what I was doing, and we use math to clarify and to help us focus. And so we built a financial freedom formula, and it literally gives people a systematic way to move forward. And I'm gonna give you one element of this financial freedom formula, and it's called the four pillars. And here's the crazy part. Every asset no matter what it is, every asset under the sun has four potential ways you can make money. It all depends on how you participate in Okay, so if you want to move faster, instead of your game plan instead of your financial, you know, journey, you need to align your money with assets that give you all four elements in the four pillars.

So let's do a quick case study. Let's take the stock market, okay, mutual funds, maybe I'll buy some stock and Apple whatever it is, and take the stock market and we're going to put up real estate side by side. Okay, so here's the four pillars. I can make money when I invest through appreciation. I can make money when I invest through cash flow. I can make money when I invest through tax advantages or tax deductions. And I can make money when I invest through leverage. Those are the four pillars. Every investment has all four, it just matters how I participate. So if I, as a, you know, just off the streets type of guy, go buy a stock an apple, how do I make money?

Michael:

You'll make money through appreciation, you'll make it…

Ryan:

That’s it. Right appreciation, I buy the stock at Apple at one price, I hope I hold it for long enough. And overtime, it's gonna go up right out. I don't control that outcome. Right, I can't impact that outcome, all I can do is wait. And the only friend I have in the appreciation game is time, how much time has to pass before it goes up enough that I'm willing to sell them. Now, a lot of people got burned in the game of real estate back in 2006, and 2007, because they bought real estate using the same mindset, real estate goes up in value. And over time, it generally does. But sometimes things go down in value, right? So if all I'm getting inside of my investing is appreciation, I don't control it, I have to wait. And I'm just kind of along for the ride.

Now, if I buy a piece of real estate that I'm going to, you know, buy through you guys, and I'm going to have the real estate owned the real estate control it, I can have it go up in value. But more than anything, I'm probably buying it for a stream of cash flow, right? I'm gonna have positive rental income coming in every single month. Now, here's the cool thing. If I take that rental income and put it in my bank account, does that affect the appreciation of the value of the property? No, they're not correlated, right? It can go up in value, and I can take rental income.

And I believe the IRS came the very first statement in the IRS tax code. You know what it is? Everything you make is taxable. Sorry. But then like the 1000s of pages after that, you know what those 1000s of pages are written for?

Michael:

Real estate investors

Ryan:

To tell you all the ways that you don't have to pay taxes. And the IRS just uses the the tax code as a carrot to incentivize behavior. They know that everyone needs a place to live. So they say, Hey, if you go buy that place to live or rent it to someone else, you get lots of tax deductions. Not not deferrals like a 401k, but literally tax deductions. So if I can own a piece of real estate, I can earn a return through appreciation, I can earn a return through cash flow, and I can earn a return through tax deductions.

Last but not least, one of the most powerful tools and the most dangerous tools is leverage, right? If I want to go buy that piece of real estate, do I have to I don't have to have $100,000 in my bank account, I can, you know, put a downpayment down and go get that real estate, use bank money and get a high enough return to cover my debt, and to still give me a positive return. And so those are the four pillars, cashflow, appreciation, tax deductions and leverage. And so anytime an investment comes across my table, I just get to run it through that lens and say, okay, Bitcoin cool. How do I make money? Oh, I don't get cash flow. Okay, there's no tax advantages, and there's no ability to use leverage. It's just appreciation. And right now that appreciation game looks super fun. But that's the only game I'm playing or, you know, if someone brings me whatever, right, I can just run it through those four pillars and say, Guess what, if I'm not getting all four pillars, I'm not playing the game.

Michael:

Yeah. Yeah. No, I totally agree. It's something I've touted for years about some of the benefits and power of real estate. So, between you and me, have you found any other investment vehicle that meets all four of those pillars other than real estate?

Ryan:

Yeah man. So everything in our world has a reason behind it. The reason we say 97% of traditional financial advice is dangerous, misleading or wrong, is when I first learned about the four pillars. I was like, Yes, I found the Holy Grail. Now, what are all the assets that have all four pillars and here's the crazy part. The first two we all know about came number one real estate's number two is a business. Now, here's the crazy part came. If I go buy stock in Apple, okay, let's think about Tim Cook, the owner. And let's think about me, I'm a retail investor, I go buy stock in Amazon or an apple. So I'm just getting appreciate right, Tim on the other side, he's an owner of Apple, right? So he gets appreciation, he gets cash flow, he gets massive tax deductions, and he gets all different kinds of forms of leverage, right from people to processes and all that other stuff.

So business and real estate, those are two forms of four pillars. Now the third one is a uniquely designed high cash value life insurance policy. And when I first learned about that, I'm like, Dude, there's no what is crazy, but man, here's the crazy part. Go google it right now. Go Google bully and find out how much money banks keeping these type of policies they keep billions of dollars go Google Kohli CEO li find out how much corporations like Jim Harbaugh, like Michigan, University Michigan, they're number two ranked right now, right? Like Jim Harbaugh when he took the job when he left the NFL to come to coach the University of Michigan, you know how 35% of his compensation was structured, inside of contributions to a high cash value, life insurance policy, oh my god, what the heck is going on? It was nuts. And so these policies This is where politicians keep their money. This is where banks keep their money. This is where highly compensated executives keep their money. It's hiding in plain sight. It's been used for hundreds of years. It's a way to eliminate taxes, get Jay you know, gain, leverage, all of that kind of stuff, but the only three assets have all four pillars are a business that you own and operate, real estate which you have to operate somewhat like a business, and a Vault, which allows you to keep the money that you're making safe from taxes. Oh, we call it a vault, but it's a high cash value life insurance.

Michael:

Okay. Okay. Oh, that's great. This has been super, super great, Ryan.

Ryan:

Wow, that's so fun. Man. I love talking about this stuff. I do

Michael:

That makes two of us make two of us. You also have a podcast, right?

Ryan:

We do, man. So, you know, this kind of goes back to we joke a little bit. You know, those, there's three questions that we invite people to ask when they come into our world, I think it's gonna be all about investing in rates of return on this versus that. And it is right to a certain extent, we're talking to people about how to operate a system. But I truly believe that the only thing that's separating you from the reality that you want is you have to become a different person. Right? This is where the idea of rising up came from, right? You've done the best you can do with the mindsets and skill sets that you have your results are the best results that you personally could generate as of today.

So if you dream and see a new reality for yourself, you have to become a new person, you have to develop new mindsets and skill sets to bridge the gap from who you are today. And who you have to become to be a successful real estate investor or to become financially free. Right. And so our podcast more than anything, is designed to help people have a sense of courage and confidence that they can do it that they can truly rise up. So yes, we go through the framework, we go through the financial freedom formula, all that kind of stuff. But honestly, men are our financial freedom formulas boring. Like once you learn how to do it, it's just we tell you push the repeat button, do it over and over and over and over and over again, as simple boring.

So what we try to help people do is generate the confidence to understand how to live a life that matters because financial freedom and this is where I got stuck to. I mean, when I even got into the game of real estate, I still lost my way because I still kept thinking when I have enough real estate when I have enough cash flow that I'll give myself permission. So along the way, I had to learn how to become free how to act free how to use money as a tool, not for one day, but how to have a game plan that's gonna help me get to the results that I want long term, but live a life that matters today. So it's personal development wrapped up in financial freedom all delivered through the Rise Up Live Free podcast.

Michael:

Sounds like a personal finance burrito.

Ryan:

That is it dude I love, I love burritos. That's exactly what it is. It's a burrito with guacamole. I'll pay extra.

Michael:

Oh, that's great. Ryan, this was so much fun, man. If people want to learn more about you reach out to you learn more about Cash Flow Tactics. What's the best Where Where can they do that?

Ryan:

Yeah, first off, Michael, before I say that, man, I want to just thank you for what you do. You know, we talk a lot about this idea of being able to plug into teams and networks. And guys, whether you're a longtime listener of this podcast, a first time listener to this podcast, what Michael does, through his company, and through, you know, through the real estate that you provide a man, I think our, our clients are probably about hundreds of properties through you, right. And so we actually did a training probably a year ago, where we actually pulled up your website and show people exactly how to find the right properties, using your your inventory using what you guys do.

So number one, you guys are awesome. And I want to say thank you, because you've helped our people, our empire builders inside of our community achieve their their goals and dreams. So thank you for that

Michael:

So glad to hear it. Thank you,

Ryan:

All right. And then number two, if you want to get plugged into our game, you know everything for us centers on a game plan, okay, so we talk about the principles, and the principles are universal, it doesn't matter if you're, you know, it's just getting started out, you've been in the game of finance for a long time, the principles are, what the principles are, but then you have to understand how to tactically apply those principles to you using your goals, your resources, your desires, all that kind of stuff. And so, for us, the easiest way to understand what we talked about, is we have a five day five day financial freedom challenge, okay, that will help you understand how to apply the principles to you how to rank your investments through the four pillars, and another thing that we call the core four, and help you see how far or how close financial freedom is to you, and how to apply the 3% formula to your financial plan. So cashflowtactics.com/challenge. That's probably the easiest way for people to understand what we do and how it applies to them.

Michael:

Love it. Love it. Ryan. This was really great, man. Thank you again for coming on. And I'm sure our paths will cross again soon.

Ryan:

Man. Such an honor. I appreciate you.

Michael:

Thanks. Take care. Already everybody that was our episode a big big big thank you to Ryan. This was a lot of fun. He dropped a lot of nuggets of wisdom in there. So as always, if you liked the episode, feel free to leave us a rating or review wherever you listen your podcast. We look forward to seeing the next one and Happy investing

This is the reality of owning multi-family property Jan 20, 2022

We often hear investors tell the story about starting in single-family rentals and then quickly changing to multi-family properties to kick their growth into hyper-speed. But that transition is not always perfectly seamless.

In this episode, Emil shares his struggle with one of his multi-family properties, and Michael helps him come up with a plan to solve his problem.

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Transcript

Michael:

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor. I'm Michael album and today I'm joined by my co host,

Emil:

Emil Shour.

Michael:

And today, Emil and I gonna be talking about his real life debacle that he's in with his triplex and how he's going to be getting himself out of it. So let's get into it.

All right, well, a meal first and foremost, and to all of our listeners and watchers. Happy New Year. We're recording this a couple days after the first, you have a good celebration?

Emil:

Happy New Years, my friend. Yes. I had some delicious I made some wagyu steak at home. We fired up the hot tub at our new house. So it was very mellow, but very relaxing and awesome new year. How about you, man?

Michael:

Nice. It was great. I went with my wife to a friend's house out in Stinson Beach. California was just right on the water hanging out through the beach walking doing some paddle boarding so no complaints very relaxing.

Emil:

Very good man.

Michael:
So today earlier before this episode, you and I were chatting and you've got this triplex and it's given you some headache. And I know you've talked about the this particular triplex in the past but maybe never in this capacity. So if you could bring all of our listeners up to speed what's going on with this triplex?

Emil:

Oh, man, so for anyone who's probably been listening to the show for a while they know the infamous triplex I'm sure you're tired of hearing about it. But this was a triplex I bought is my first foray into small multifamily. I bought this the end of 2020, November 2020. middle of last year, we had as planned some tenants move out, which was great. We wanted to do some work because it was pretty far under market rent. And so long story short, took us a couple months got the work done. And this one unit of mine has just been sitting vacant for a very long time.

I had a my previous pm who wasn't very good. They came to me and they said, all right. It's very diplomatic of you. We have it I have a new property manager as of late so we're seeing how they're doing. But this property manager, we finished everything, the leasing agent. I thought this this property could probably rent for or this unit would rent for somewhere in like the $600 neighborhood. He's like, No, the market has gone up a ton. It's really hot in St. Louis right now. I'm going to shoot for $850 and kind of raise a red flag, but I'm like, You know what, I think this will be a good test of this leasing agent. If they're confident it they can make it happen. I mean, who's gonna say no to 200-250 bucks more rent per month, right? Like, I was like,

Michael:

Okay, and this was, this was the old pm?

Emil:

This is the old property manager. Correct. Okay, so sir, a 50. Crickets, I think a month later. Yeah, go ahead.

Michael:

Sorry. Emil, what was the rent when you bought it?

Emil:

The rent on this unit was I think 485 or something.

Michael:

Okay, so you did the Reno and then your projection of six to 650 was already a big jump, but they're saying, Okay, now maybe almost double.

Emil:

Right. Right. They're saying, you know, okay, we've seen rents go up across the country. They, I think they just overshot it. But I was, again, testing, right property manager I've been working with for about six months, new leasing agent, let's see what they can do. Right, let's see if they can, I think these are all just things to test, right. I try to trust and enable my property manager as much as possible. So I just let them run with it sits there for about a month, nothing, not getting really any applications with decided lower to 800 nothing for another two, three weeks, we lower it to 725 as Keep going Keep going. We get down to I think 675 650. And it had been months and months. And it was just the same old story, you know, property. The leasing agent coming back to me every week, telling me oh, I'm confident we're gonna get it this week. And it's just crickets every week.

And so, at that point, you know, this property with with getting it rehabbed and being marketed, were at like, five, six months of no rents. And to me it was just a major, major red flag. Like we're in a hot market, it's true rent is going up, but they just can't execute. And so for me, it was a time to pull the trigger and find a new property manager. I like to move fast. I don't want to wait too long. I think I gave them enough chance and I just wasn't really happy with what they were doing. So I have since then moved to a new property manager, the beginning of December. We've been Marketing at 650. And we're getting kind of similar stuff.

What's interesting though, what the difference is here, this property manager, they no longer accepting voucher tenants, and they just have higher qualifications, which I'm okay with. I'm okay if we wait a little.

Michael:

And what's a voucher tenant?

Emil:

Voucher is Section Eight, someone who meets a certain income threshold where the city the local authority is helping them pay their rent.

Michael:

Okay, so this Pm is not accepting those tenants.

Emil:

Yeah, they've decided, I think this is recent, they decided they're no longer filling vacant units with voucher tenants. So okay, which is fine. I want them to manage, you know, I want them to do whatever they're comfortable with, they have 1200 plus units, they manage they know this game, so I'm letting them handle it.

So it's a new year, you know, December was slow the holidays, we didn't get much. And so now it's like, my leasing agent comes to me, he's like, I think we should be at 600. That seems where the market is, is telling us to be. And so, you know, this is just a rough spot for me where I'm like, What do I do here? I've tried multiple property managers. Is it my location? Is it the property like what's going on? And I, you know, I get different answers every week. But it's like, Man, I don't know. I'm curious if you've been in positions like this, what do you what have you done to get a tenant in place? Some additional background, I'd call this a classy property over 100 years old, you know, it's been, there's things have been fixed, but it hasn't gone like I didn't got rehab this place or anything special. So okay. That's the context.

Michael:

All right. Well, I've got an answer for your question. But I'm gonna first answer it with a couple of more quality questions for you, my friend. So this Pm that you got rid of, because I think I know, I've been hearing a lot of stories like this from people both in the academy, and then just people, fellow investor, friends and colleagues that they're frustrated with their PM, and they don't know what to do, and they don't know how to approach a situation. So was this lack of getting a proper at least, like the final straw? The, the, the, the property manager had been kind of screwing up up to this point. And this was the straw that broke the camel's back, or, or was this kind of that first, second and third strike for you that said, Hey, I gotta I gotta make a move.

Emil:

The rehab, I think was it went a lot longer than originally anticipated. I think that's every rehab, right? Like, every time you hear about that, it was just like, you know, I got pictures back. And the quality of my property managers telling me, oh, work was great, blah, blah, blah, I'm looking at the work. I'm like, yeah, it's okay. And it looks like we you know, we didn't pay. It wasn't the cheapest, but it wasn't the highest. I don't know, just, it was a couple things for me. But I would say the majority of it, it's the if you can't lease my place, like, how can I continue working with you? That was the majority of it, like, your leasing agent isn't doing their job? I can just keep a property with you. That's sitting two thirds vacant?

Michael:

Yeah. Now it makes total sense. And so what was the physical process that you went through to get a new property manager? Was it a, let's have a discussion with the existing pm saying kind of an ultimatum, hey, if you can't do this, then this is the consequence? Or was it you know what I'm so fed up. And now I did this other stuff. So walk me through what you did.

Emil:

I thought about saying, Guys, if you don't get this place rented by the end of whatever, like, I need to move on. My fear there is then I'm basically forcing their hand to find a terrible tenant, just to fill the place and keep my business. So I refused. I didn't want to set an ultimatum and then be in a worse situation a couple months down the road, I try to work with them. You know, I'm following up. I'm not like playing on the sidelines, like I'm getting regular updates. I'm trying to just hold them accountable as much as I can. And just seeing how they do things. And I I wasn't happy with it for months. And so for me, it was just time to move on. Try something new.

Michael:

And so were you interviewing other PMS? Did you cut the cord before you found a new one? What was that process? Like?

Emil:

You know, I talked to this was my second property manager in St. Louis. So I had been talking to some other property managers, there's people in the academy who you know, I chat with in Slack, and they tell me, Hey, you should check out so and so. It's funny, you talk to two different investors who've used the same property manager and you get a different story. And so I hadn't, I hadn't there was one backup I was thinking of, but I had mixed reviews about them. And then actually, you had a friend who was raving about a property manager they use in St. Louis. And I, you know, I was getting fed up like, Hey, man, just give them a call. So I called them we had a good conversation. They seem like they really knew their stuff and so, so further out has been great.

You know, the last property manager, I was using smaller team, which I was curious to see, like, you know, do I get a little bit more sway with them because they don't have 1000 plus units. But I think sometimes you find that their operations are lacking, or as this company 1200 Plus units, their operations are much tighter, I get answers faster. They have a person who like they have people who master a certain domain, not like you're wearing seven hats within the company, which is actually yeah, I think better personally.

Michael:

Yeah. Makes total sense. Just, you know, why did you say you're so surprised? Like, can you have a friend like, what are you just like, pick? I don't have friends.

Emil:

And what was funny, because you asked, and I'm like, Well, you know how this story ends? She told me about the property manager. You're asking me like, you don't know. But you know,

Michael:

It's it's part of the ship, man, you know, it's for the pod. Alright, cool. That makes sense. And I think that's really good takeaway from from like a process standpoint, for anyone who is in a similar situation or feels like they might be in a similar situation with the property manager of being kind of fed up or having the the demerits accumulate. This is a pretty repeatable process that anyone can go through. And frankly, I think you should be interviewing property managers, as soon as you get an inkling of yours not working out, because you don't want to wait till after the fact you don't wanna be playing catch up, you want to be proactive and have a plan B, and possibly even C, for if and when that day ever does come that you're like, I'm done.

Emil:

Yeah, I can tell you personally, every time I've started to have doubts about a person, a vendor, or whatever, and I try to work through it, it almost always doesn't work out. So I feel like once you have that gut feeling like things aren't working out. Like you said, you should be talking to other people as a backup, because I found it rarely works out.

Michael:

Yeah. But so do you think then now having had that experience, you as soon as your next vendor, or relationship you get that gut feel? Are you going to cut the cord sooner? Or are you still going to try to kind of work through it to give people the benefit of the doubt?

Emil:

I stupidly still give people benefit of the doubt and try to work through it. Because you know, I'm, I'm not like going to fire somebody at the first. A mess up is different to me than like, I don't feel like this is going to work out. Everyone messes up its account, a bit like, are they accountable? Do they have a plan for how to fix this? It's a matter of like, when people mess up and there's no accountability, and they're not. They don't have a game plan for how we're going to fix this or anything. Or they're just being vague. That's when I'm like, Okay, this is starting to give me red flags.

Michael:

Yeah, makes total sense. And then just out of curiosity, when you ran this, the numbers on this property, how did it cash flow? I mean, what was your expected monthly cash flow?

Emil:

I don't remember the number I can probably go dig it up. It was probably gonna, I think it was gonna be once we rehabbed it, you know, if I include all the rehab costs, as like, my cash in the property, we were probably going to cash on cash around 10%. I think it was

Michael:

Okay. And so now the fact that this property or this unit, the middle or whatever, the the unit is vacant, are you negative cash flow every month? Are you still able to cover your costs?

Emil:

Uh, that one we were okay with when it was offline, we have the bigger townhouse style of the triplex vacant. That's the moneymaker. Right? That one's like 1000 Plus that we're marketing it for right now. It was at like 850 or 900. Before. So with just the one bedroom that we were talking about just now, offline or vacant, we were okay. But now that two are are vacant. Yeah, we're, I'm coming out of pocket every month. Right now.

Michael:

Okay. All right. And so is your property manager seeming confident that I can get the bigger unit rented out just as easily as the smaller one.

Emil:

They I mean, when I'm looking around my like, on Zillow for in the area for a three bedroom apartment. There's nothing right now. So for me, it's a rough time because it's the new year. It's cold, usually in colder climates, tougher to get people moving, like people don't move as much during the winter. Plus, you also just had the holidays. So not a lot of people, not as many people are moving. But in looking at the landscape. Like within a half mile mile radius. There's literally no three bedrooms for rent. So anyone who needs some bigger space, we're looking pretty good. I just think it was a time of year. So I'm more optimistic about that one. I'm just this this one bed one bath is like, Man, when are we going to figure this one out?

Michael:

Yeah. All right. Well, that's super good perspective and good background. So getting back to the crux of your question with you know, advice tips have ever been a situation before? Yes to all three. In April of 2020. So right when COVID was really hitting hard in the States, I was trying to rent out a freshly rehabbed four unit that I talked a lot about on prior episodes, which is like, Oh, my God, could you have picked a worse time to have four units have to come online. And like at a at a premium, they were really expensive units, because I put a ton of money into them, they're very high end, because when I started the rehab in 2019, that's the way things were going. And so things would have worked out quite well.

And so we just could not get these things rented for the life of us, my property manager, somebody your started high, and then brought them down low, which I was fine with, because they've been vacant for so long. So it's an extra three, four or five weeks to try to get them leased up. So it would came to a point where we were kind of at our bottom threshold of where we could be. And I said, Hey, let's start doing some some moving specials. 200 bucks off, 300 bucks off 400 bucks off per month to get someone to move in, just so it made that easier for them to get in the door.

Because I think that I think a lot of people forget myself included, is when you physically go move into a new property. There are a lot of expenses associated with doing that. So first and foremost, there's the physical cost of moving, if you're going to rent, some kind of assistance, whether that's movers or a truck, whatever, then there's a security deposit, which is usually at a minimum, one month's rent could be one and a half month's rent. And then you have first month's rent, and sometimes last month's rent. So depending on what the lease structure looks like, I mean, so for that $600 A month unit, you're looking at a minimum of 1200 bucks if they move themselves 600 bucks and in deposit 600 bucks for the first month's rent. And so if you could just make it a little bit easier on someone to move in, it can often go a long way towards actually getting the needle moving, so to speak.

And so we did this on, I think three of the four units. And we had people in there, I think within a month, which was pretty awesome. And so what I did is basically I just said, Okay, how much is this each unit? How much is it costing me on a daily basis in like last opportunity costs essentially. And so what I figured out is, look, if I can get someone here in here in two weeks versus a month, and I'm giving them 400 bucks off, I'm kind of picking numbers here at random. That's actually cheaper than if the thing sat vacant for an additional two weeks. And so I would encourage you to do the same thing and sit down and say, Okay, what can I stomach from a financial perspective? Forget the ego side. But put that aside, your ego is not your Amigo. And you know, what can you financially stomach and say, Okay, well, if I can get if I give that to a discount, and somebody just to get them in here is you know, that can often be a really good move.

Emil:

Yeah. I have a question. Did you find that you guys weren't getting a lot of activity? And then you did that special? And you were? Because we're we're getting interest? We're just not getting qualified applicants. So did you guys have a like a traffic problem? Or was there a quality problem as well that your PM was like, No, we don't want these types of this tenant doesn't qualify before you?

Michael:

I, I think it was both, I think but because they handle all the inbound leads. That's not something that I get too involved in. So I don't I don't really remember specifically. But I think it was both a traffic and a quality issue. But try it. I mean, worst case scenario, you still don't get any qualified tenants inside two weeks, and you take it down, and you go back to what you're doing originally. I don't think it it hurts to try.

Emil:

Yeah, yeah, I should. I should just email my leasing agent. Honestly, I'm gonna do that right after this episode be like, Hey, let's do a $200 off special. And we should just time bound it right. Did you guys time bound to like move in before the end of January or? Yeah,

Michael:

Exactly. Yep. To encourage encourage people to stuff like, Hey, here's a carrot to do something.

Emil:

Right. Cool. I'm doing that right after we hit pause on this. Yeah, stop record. Right.

Michael:

Yeah. Can you post it? I think little things to differentiate yourself too. Because I mean, there might be a bunch of other ones in the area for 600 bucks a month. Right? But if you can be different. And we all like to think that we're different because of whatever we did to the property physically, that we put in granite countertop, whatever, why couldn't someone see the value here, like, of course is a good deal. But we need to remove ourselves from the situation. And so yeah, often just giving a monetary instead of like money talks.

Emil:

From these experiences, do you when you go into a vacancy, and when you're going to rent it out? Where do you like to be? Do you go market do you start a little high and come down if it doesn't work out? Where do you how do you start the game?

Michael:

Yeah. So on these ones, we started definitely top of market because they were brand new. And so that didn't work out. So then we kept lowering and lowering and lowering. So I think that especially for for some of the markets that I'm in and in the price points for the rents that I'm in the difference between market and under market, like isn't a huge deal, right? You know, 50 bucks, maybe maybe 100 bucks versus what does that vacancy cost? In, in the amount of time it takes you to get that unit leased?

Emil:

Right.

Michael:

So it tends to be nominal. And so I'm happy being slightly under market, just to get bodies into the property qualified bodies into the property. But that's how I think about it. And then once someone's in there, I mean, it's much easier to keep someone and incrementally incrementally increase the rent, as opposed to trying to get someone in at a much higher rent. And so that's what we did on the on that four Plex is I knew that we were well under market. And so I got seven to 9% rent increases almost across the board on those units, because the rent went up, but it was still a great deal. So that's kind of how I think about it.

Emil:

Yeah, I'm, I'm starting to feel the same way. Like if my property manager ever wants to go above, I'm going to say, no, I'd rather be at or slightly below and get someone who men turns are the worst vacancies are the, like, they crush you. So if you can be a little bit under I mean, I get it for commercial stuff. You know, every extra dollar you get of NOI it changes the value of the property, I get that. But in the single family and small multifamily space where things are run on comps, right? Like, I think getting rid of your vacant like having less vacancy, having someone just stay longer. I mean, I've seen it in my own portfolio, like the best performers are the ones where the tenants just don't move, and you slowly increase their rent, you know, maybe, maybe it's even small moves, nothing, maybe it's 2%, whatever it is, but like, making sure you don't have vacancies is like so key.

Michael:

It's so so key. It's so key. And I mean to that point, too. And when it comes time for renewals, like you mentioned, think about even maybe not raising my rent, if someone's a really great tenant, what's it worth, it's you to keep them, right, 25 bucks a month, 30 bucks a month of what you might get in an increase. I think we need to sometimes get outside the spreadsheet, and just look holistically and say, okay, is this truly worth it?

Emil:

No, Michael, my cash on cash will only be 8% instead of nine. And I'm not happy with that.

Michael:

And my pro forma said nine.

Emil:

That's right. And I want to tell people about my percentage on the spreadsheet. But let me tell you the percentages blow up real fast when you have a three to six month vacancy.

Michael:

Yeah. So yeah, very, very fast.

Emli:

So anyway, that's, that's what I've learned.

Michael:

Awesome. We'll do this was like super insightful and great, I think, for a number of different reasons to talk about problems with PMS problems with leasing problems with rent setting. This is all really real world stuff. And it's not always butterflies and rosebuds, so I appreciate you being vulnerable and sharing with us.

Emil:

Absolutely. I mean, I like when people talk about this stuff, like the actual stuff going on instead of

Michael:

The real stuff.

Emil:

Yeah, instead of just, you know, it's always this we talk about all the time, this is this is part of the business, like you have to be good at dealing with problems. It's not, you know, just mailbox money all the time. That's not how it works. So I think people have more realistic expectations. It's easier to when you have those challenges to just work through them so…

Michael:

Well, already when that was our episode, a big thanks to a meal for sharing. This was great, man. really insightful, really humanizing, you know, this is good. This is good. This is therapeutic. This is cathartic. It's good to talk about the crap stuff.

Emil:

That's right. You gotta you gotta.

Michael:

As always, if you liked the episode, feel free to leave us a rating or review wherever it is that you listen to podcast. We look forward to seeing on the next one. Happy investing.

Emil:

Happy investing everyone.

What investors need to know about buying in Galveston TX Jan 18, 2022

Ariana White is part of the Roofstock Certified Agent Network and serves in the Galveston TX area. In this episode, she shares what investors need to be looking at if they are considering investing in the Galveston market. We cover both the short term and longterm rental markets, property taxes, zoning, climate and much more.

Ariana's contact info:

arianawhitesellstx@gmail.com - @arianasellstexas

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Transcript

Michael:

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Ariana and Larry White. And they're gonna be talking to us today both about the long term and short term rental markets out in Houston and Galveston, Texas. So let's get right into it.

Ariana and Larry White, thank you both so much for joining me today. I really appreciate you taking the time.

Ariana:

Yeah.

Larry:

Pleasure to be here, man.

Michael:

I'm so excited. You two are kicking butt in the short term rental space out in the Houston and Galveston markets. And I'm wondering if you can give our listeners just a really quick background on who you two are as power couple.

Ariana:

Oh, power couple. Wow, that's nice.

Larry:

Crazy. Yeah. All right, Jay Z and Beyonce over here.

Michael:

That's it.

Ariana:

But you're Beyonce, and I’m Jay Z!

So um, so my name is Ariana. I've been a real estate agent for eight years. And I originally started in Vegas, I managed a team out there. Larry drags me to Houston, and actually took like a year off of real estate while I got my license here. And now I manage a team out in Houston. And so we specialize primarily in first time homebuyers and investors. And now going deep into the short term rental market.

Michael:

Awesome. Love it. And Beyonce. I mean, Larry?

Larry:

Yeah. And so I have a little bit different. I started about 1516 years ago, and convinced her to get into real estate, about halfway through my career. And so I've been a pretty successful solo agent, ran some very large teams grew a national real estate brokerage around foreclosures and REOs, which took me into the investor space to begin with. And so now we really have some of the most successful groups of Realtors across the country that we teach to duplicate what we did. And we focus and Ariana has a very successful team here in Houston. And as she mentioned, we're actually in the short term rental space personally. And so we're teaching other people, you know, investors that come to us quite often teaching them how to kind of duplicate what we've done and learn from our mistakes as well.

Michael:

Oh, my God, amazing. Well, we are going to have a lot of fun with this episode. I can't wait to hear about what you two are doing personally, in the short term rental space. But to kick things off, I would love to just get a high level overview of the Houston and kind of Galveston markets. Ariana, as you see them, like what should investors What do investors need to know if I'm totally unfamiliar with those markets?

Ariana:

Yeah, so Houston is really interesting, because we're one of the only cities where there is no zoning in Houston.

Michael:

So multi family, commercial single family, there's no…

Ariana:

Whatever you want.

Michael:

A whole smorgasbord.

Ariana:

Yes, and it changes as it goes out into the suburbs. But um, what's really every street is different in Houston. And there's certain little, little neighborhoods that have been, you know, people have moved in and fixed up old homes, and it's really developed, each little area of Houston has really developed its own adorable community. And I will say that the most, for the most part, my investors typically end up being either somewhere around the Med Center, which is a community here it is full of like young professional renters. And there many people in grad school, you have ages down there, Rice University is down there. And there's lots of young professionals that are all working in the hospitals. And so that area is a big area for renters and very high rents, and that is located in the heart of Houston.

And also, one of the biggest areas that we're currently seeing is the Spring Tomball Humble. It's looks like humble, you pronounce it Um, okay, so, um, that neighborhood, the all of those neighborhoods, and great low tax rates, that's going to be like the major. That's the key piece. You're looking for a low tax rate in Texas, because property taxes can fluctuate a lot. Yeah. And all of those areas seem to have like young, single family homes that are consistently rented and low property taxes, which is a double win. So those are up and coming areas. Right now we're seeing a lot of our investors kind of go towards

Michael:

Love it.

Larry:

And then on the you know, it shifts a little bit when you start getting into the short term rental market, right? Because the taxes, I mean, you always want the lowest taxes. But if you are able to, you know, they talk about in real estate, location, location, location, right. So if you have a high demand because your next Minute Maid Park, because you're in Galveston, and it's a beach destination, not just for people coming in from out of town, but from people in Houston going and renting beach houses and stuff, their taxes can be offset that way. And so that's where you start getting into what is the drive? What is the demand? And like, what are our occupancy ratios, you know, for the entire month.

And so that's where you start looking at seasonality and what's driving traffic, are there sporting events, or they're this or they're that. And that's where a lot of our investors can start buying maybe a little bit more expensive properties, right, like, maybe they go down to Edo, which is kind of East downtown, which is one of the top four markets and neighborhoods. And if you were doing a long term rental, it wouldn't make sense, it has high tax rates, you have to minimum prices, probably around 430. And it probably only rents for $3,000 a month. So most of the time, that's not going to pencil out for a long term.

But you switch that to a short term, that it's close proximity to everything, and you can get three or $400 that night, and it's occupied 50% of the month, you start doing those, those numbers and you're like, Oh, hold on, this makes sense. So this is really where, you know, when you're looking at an investor, what is your strategy? What is your goal this year, and then we try and create a portfolio or a plan that aligns with their goals. And the numbers will tell us if we're on the right track or not.

Michael:

I love it. I love it. So and I think this is great, the conversation kind of naturally bifurcated into the long term side and the short term side, which is I think exactly where I want to take it anyhow. So getting back to the long term side for just a minute. And then I wanted to back to the short term side. What should people be aware of in terms of like, big companies that are headquartered out there? Like, why are people moving to the Houston Galveston area? And then for the short term side? Why are they visiting the area? I know you mentioned the beach, but curious to know, what other attractions are drawing people to the area?

Ariana:

Yeah, so in Houston, and what's real, we have seen what I'm lovingly referring to as the great migration. So we have had a lot of people move here from out of state, their number one draw is low cost of living, right, much lower than many other states that we're going to see either on the East Coast or on the West Coast. And, and what people are really looking for, and what I'm seeing mostly is, um, they're having, like the biggest draw is space. And we see a lot of people moving here from like, very populated areas. And granted, you can get a city feel here, but you can also go 30 minutes out and have an acre of land if you want to and have a full garden and farm and some cows like I mean, and you can have all kinds of tax exemptions, too.

So if for any of our military clients, you get a huge tax tax exemption, particularly if you're a disabled vet, you have a homestead exemption here for property taxes. If this is your main living area, you can also have a senior citizen tax exemption. So Texas is really they love tax exemption. So a lot of our clients will use them.

To draw that's a huge draw to Texas, people are looking for a little bit more space to either like a personal or business. I'm out here. short term rental wise in Galveston area. We have Moody Gardens. It's the closest beach the water's warm, and it's like a really great place to go take young like children because it doesn't get super deep. And

Larry:

Yeah, the NASA you have the space center, right and so all of that starts to come into play, which gives you a pretty good occupancy. And what we've seen during kind of this pandemic, right is that people have been wanting to get away and have more staycations and stuff as well. So you know when we get into our we have a short term rental we have a 20 acre ranch out in Fredericksburg and we saw our vacancies like drop drastically because everybody was able to work from home. So as long as we had a decent Wi Fi, they were like, Well, man, why don't I go out in Texas wine country, you know, versus my house and let's go on and the kids can go play outside and do this.

So it you know, the market is changing, and we just have to keep stepping along with it. And the customers will tell us exactly what they're looking for.

Ariana:

Yeah, I actually had a client today call me today. She's gonna be moving here from California. And she's a nurse. And she's like, and I was like, you know, what's your timeline look like? When do you want to be here, and she said, You know, I can really move anytime I'm just planning on flying back. She's in the Bay Area in California. And she's like, I'm just planning on flying back to work. And then I'll live in Texas,

Michael:

She's gonna commute.

Ariana:

Mm hmm. And that was a very common thing that we see. So if you're able to remote work, or maybe you don't have to be in the office only, like one or two days a week, people are just buying a little, you know, having a little studio wherever they are based out of renting that out when they're not they're coming back living their main life in Texas and doing you know, flip flopping the opposite. So yeah, so it's, it's provided a lot of this new way of looking at how to be efficient in your workforce has provided a lot of opportunities for a lot of people, as well, in their, you know, in looking looking at your business in a different way.

Michael:

Oh, that's incredible. Gonna be racking up those frequent flyer miles for sure. Yeah. That's awesome. So Arianna, you were mentioning a couple of the neighborhoods up and coming neighborhoods? Yeah. That you were seeing curious if you can give everyone listening and watching an idea of kind of price points. And what you mean when you say low taxes?

Ariana:

Yes. Okay. So taxes here in Texas can range differently depending on every every little city has a different tax rate. And so we're known for having our property taxes be a little bit higher than some other states. And so that was definitely something that we have to consider when you're going into an investment property, right, the taxes can either make you or break you. And so when we're looking at properties that we're submitting to Roofstock, and for our investors, I am looking specifically for areas that have lower tax rates, because those are the ones that are giving us our best ROI. So one city here is Missouri City, it's south of the heart of Houston. And that city has notoriously low tax rates, which is great. It's also like a high, it's not a city feel. And it is a suburbia field. So there's lots of single family residences there. That area typically commutes to Houston for work. So there's lots of renters in that area. We've seen great success there.

And Rosenberg, Tomball, Spring, and Humble. Those are all of those areas have had really low tax rates in certain pockets and have given our investors like a really good opportunity to get a home up there.

Larry:

And also what you're seeing is that Houston is expanding, right? If you look at from Dallas, to Houston over to Austin, San Antonio is called the Texas triangle. Okay, it's the fastest growing region in the country. And so what happened? What's happening? You have Dallas expanding, you have Austin, San Antonio, expanding, you have Houston expanding? And so everything's kind of like merging together together. Yeah. Uh huh. And so these suburbs, right, like, especially when you start getting this increase in prices, you know, people start going outside of the metro area, because the metro area, the median price point might be 400 500, etc. Now they can move out and pay 200 300 and get, you know, just a lot more bang for your buck.

And so those cities that that she's talking about there are starting to see that and so they're still have a lot of population, a lot of people going to them, you have the difference in the prices, which could help you drastically if you're in that long term rental space.

Michael:

Totally. And what are some of those medium price points and associated rents that you'd expect to see in some of these markets?

Ariana:

So for the suburbia area of Houston, and what I'm typically seeing median price points, you can find a for the ideal property, right? The ideal property is a four bedroom. Single Story, maybe two story home, two and a half bath. And right now we're seeing those rents typically, well, we're seeing those sales, typically between 280,000 to 400,000, depending on the community, somewhere in that I just got one of my Roofstock investors into a new home community actually, this one particular new home community, a lot of 10% investors. And so we were one of the last homes to get in there. And he bought a beautiful four bedroom, two and a half bath in a great neighborhood brand new home. And he got that one for 330. And so that was yeah, it was it was a great, great deal. And we're expecting to rent it out for right around $3,000.

Michael:

Holy smokes. I mean, you're just flirting with that 1% rule.

Ariana:

Yes, we're right. We can get like right in there. If I get like one person, I get really super excited. So we're like, right there.

Michael:

Yeah, awesome. Well, something I think people like either fail to recognize or don't want to recognize is like, you might not buy it at 1%. But in five years, it could absolutely be a 1% property and all your expenses should remain relatively unchanged or increased slightly. But if your rent can outpace your expense increase, you got to meet in the shade.

Larry:

Yeah. And here's one of the things for Texas, specifically that you have to think about in 2008. And nine, the market got crushed, right. I mean, we like we came from Las Vegas, we saw homes depreciate 60 to 70%. Yeah, right, like just crush, you did not see that same price depreciation here in Texas for a reason, right? You also didn't see it go up 90%, like you saw really good appreciation, you didn't see the counter the effects of the depreciation. And part of that is because to do a cash out refi, like the state of Texas requires that if you're going to pull money out, you have to keep 80% in your home, so you still had some you still had a cushion there.

So they might have lost their equity. Right, but they weren't upside down on their homes. And I'm not saying that Texas wasn't affected or anything like that. It just wasn't as affected as much as some of the other areas. And so, you know, there's an appreciation, because there's this built in stability factor here in Texas, that you're going to get some appreciation play. It's not going to be 90%. But it's going to be healthy, it's going to be sustainable, which is what we saw in the last cycle.

Michael:

Interesting. Okay. Very good to know. Very good to know. And from a short term rental perspective, what is it that you look for? Because you taught you spoke about your ideal, you know, for two and a half single story for your long term? What is it that you're looking for when you're putting short term stuff on Rootstock?

Ariana:

So specifically to Galveston, we like to have something that's close to beach access, that's going to be number one, it doesn't have to be exactly on the water, either. It can be a couple streets back as long as you're able to get there. There's also some services in Galveston, if you do get once a little bit farther away, you can rent a golf cart for the week. So those are fun services that you can have awesome with your rentals as well. And access to the look, there's like maybe like one gigantic strip going down Galveston, so access to that, but not so close that it's going to impede or you have to cross it to get to the water. And that's ideal. And then what we're always looking for is a space that has enough to at least have one of the bedrooms have a couple bunk beds in it.

So an ideal situation is that you could fit, you know, at least two bedrooms, preferably three bedrooms, and a big living area. And a lot of the houses and Galson. I know you said you'd never been up here. They're up high. So they're up high to make way for the water to come in. So they're built on stilts. And so it's called a pier and beam, but they're up high. And so a lot of times there is like an outdoor activity where that people can add that to the house, under under the under the actual house. So there's like badminton and some people put pool tables down there and make use of the space. It's a very, it's super fun to drive through because all the houses are really tall. They all look like they're walking.

So yeah. So if you've never been to I mean, it's really, really it's an Galveston, my girlfriend was just there this weekend, they rented a big old house for her. Typically, it's like at least two families people have to travel together to Galveston. So um, so she wanted a big ol house and the people that were next to her were from Fort Worth, and they had you know, they had six kids and for adults with them and people like to go because when you go to the beach you don't have to be the only one in charge of your children right so

Michael:

Built in babysitters

Ariana:

But it's so accessible to so many parts of Texas you know it's just a it's the closest beach to most people in Texas so and no to everybody in Texas I gotta Yeah, I'm on the road down south to like Corpus Christi, right. But it's it's The closest beach to so many of us, yeah, that it's, um, it's just so accessible. So one of the big things is just obviously like, making sure it's super clean, outdoor showers are a big plus. So that you can stand inside your house, these are all kind of things you have to think about to be Galveston specific. And, and then water rental situations, you know, you can have that extra up, you can have your clients pay extra in order to have that and that's all part of the property management takes care of that. But you know, if you wanted paddleboards, or other things that you wanted accessible to be special for your client.

And then also, one of the biggest benefits is that this isn't a one and done situation for the people that are renting out this area, which is why it's not necessarily seasonal. And there are in the summer, obviously super booked 100% capacity all the time. But even in December, November, January, February, people go even if it's cold, because they the water never gets like freezing. So today it's like 45 degrees, which is like a one off. But last week it was it was 85.

Michael:

So Holy smokes

Ariana:

And like I can speak in, in my own experience. If there's a house that you liked when you went to Galveston and it's in the you know Surfside community or Pirates Cove, or, you know any of the little communities inside Galveston, you go back to the same house. Like if you like that house, you'll go back to the same house. And so like, like my girlfriend who just went this past weekend, she has stayed at that house three times already. And she likes that house. So she will continue to go to that house. Yeah, and so that's really one of the benefits of Galveston is a It isn't like an aspen where you only go, you know, once a year, or you can only go you know, it's easily accessible. And it's really used very often. Interesting. Yeah, you create recurring recurring clients.

Larry:

And people want also, you know, when you start talking about Airbnb, people want that hotel feel, right, they want it to be crisp, they want it to be clean, right? So the furniture, the aesthetics that that you put into it, right? They want it to be like, Oh, if they have this dream vacation home, what would this look like? Even if it's small, right? They want that aesthetic to it, which is important to make sure that you decorate it correctly, that you have the right furniture and stuff to it, because there's a lot of competition now. And so reviews are super important. Who you have managing it? Is it super important? Are you responsive? are you handling issues and stuff. And that's been an entire learning experience for ourselves as we just entirely remodel this 20 acre ranch, right? All of the units on it, and we're coming up with a lot, man, it's a 30 year old home and you know, it has a pump house and these things that we're not used to dealing with.

And, you know, it's it's a very different experience, but all things that need to be thought about to make sure that you're at the top of the list, you're getting the most exposure. And, you know, you have, you know, the highest, you know, occupancy as possible, because I mean, do the math, right, like I've just pulled up Airbnb over here right now and looking at Galveston. And I mean, probably the average, you know, for this weekend is $300 a night there's some going up to six $700 A night, but $300 A night average. Now, it's not going to be 100% occupancy all the time. But man, that's a potential of $9,000 a month in cash flow, right like you have one or two good months and like you're paying for your entire year off of off of one good season there.

Michael:

That's incredible. That's incredible. So we've talked about so many of the benefits and Lewers of the Texas market. Now let's talk about the dark underbelly because there's got to be one there can only be this great heaven on earth. So talk to us about what should investors especially remote investors who might not be familiar with the Texas market, be aware of what's some of the the hair that some of these deals might have.

Ariana:

So number one, you need to and and to cover that when we're looking at Roofstock properties. I'm specifically picking for myself and my team properties to show investors that do not have this okay. So you have to look at the flood maps. That is like in Houston and Galveston, that is the number one deal killer. Because as an investor, you don't want renters in there, they're going to be in a 100 year floodplain that's going to create a lot of problems for you. It's going to create a lot of money for you. And on top of that flood insurance can really take, make it or break it in this in this deal. There are some properties where you can get, you know, your flood insurance for $400 a year.

Also, just a little side note, as a real estate agent in the Houston market, it doesn't matter if that area has ever flooded or not buy the flood insurance, it's a good investment. So um,

Michael:

Even if it's outside of a flood zone?

Ariana:

Even if it's outside of a flood zone as a real estate agent, I would highly recommend because you never know, we moved here nine months before Harvey we are not in a floodplain. We asked her real estate agent at the time and our insurance provider at the time do we need flood insurance? They said no. Nine months later, we flooded in Harvey, so do not take it from our pain. Let us like learn off our pain. And that is a very expensive fix when you don't have flood insurance,

Larry:

the 400 and it literally because we weren't in a floodplain because our home had never flooded the flood insurance was $425 for the year.

Ariana:

Yeah, right. And we did it. We're like, No, we don't need it. It's fine. We've come from the desert, like who really floods? I didn't really know. No. So I tell everybody just do it. I mean, just just by the flood insurance, you never know what's going to happen. Houston has crazy weather. So that's number one. That's definitely the one when you're looking at properties. See if you're in a floodplain, see if the property has ever flooded before, ask your agent. If it has, that's not necessarily a deal killer if it was a one off, but we need to look at your flood insurance, if you can be grandfathered into these flood insurance rates, if the flood insurance is going to be extraordinarily high, it's a good opportunity during your option period to maybe look at other properties that fit what you're looking for specifically. Um, yeah, so that's number one.

And number two, what else is weather?

Larry:

Weather is by far the biggest one. I mean, as we've seen, winter freezes, right? Like all the pipes rusting, like, hurricanes, like weather is number one. Two, I would say is the is the taxes as the property taxes that was kind of eye opening and shocking. As we started diving into this market, it was much higher than anything that we were used to. I mean, yeah, tax rates can be upwards of 3% of a home's value. And so that drastically changes some of your numbers and stuff when you're looking at that investment.

Michael:

Yeah, yeah, that makes total sense.

Ariana:

And then anything else parking if you're looking in Houston parking is a necessary thing you need to look at, you need to make sure that you know, there's lots of teeny tiny, you know, three story homes, that would be great rental homes, but they're parking on the street. And that will really it'll it'll be very hard to get, you know, some renters in there that want to be able to drive into a driveway and so that that is definitely something to look at specifically that is for inside Houston.

Larry:

And one other thing, especially as we're talking about short term, Airbnb, is deed restrictions, community restrictions. And this isn't just for Houston and Galveston, this is a cross the country for instance, Fredericksburg, right, they have, they're trying to pass like no short term Airbnb. Now we're outside of the city. And so it doesn't really affect us. But this is what some of the other Airbnb owners are going through that they're having to fight legislation. They're having to register properties, which is additional expense, paying taxes and stuff, additional taxes.

So based on the municipality, you have to look at some of these details and know what you're looking for to make sure that that it's again fitting your short term and your long term goal, right.

Michael:

Yeah, but I thought you said that Texas love tax exemptions, what's what's with the bait and switch?

Ariana:

Now we do love tax exemptions. So you just got to find the right one that fits what your look all right.

Michael:

Makes sense. It makes sense.

Larry:

In Fredericksburg, we have an agricultural exemption, we have Longhorns and donkeys and stuff on the property. And so literally, our taxes are almost nil. There's wildlife tax exemptions, there's a lot of things. But again, this is where you have to do some research. If the numbers work as status quo and now you start digging and it just elevates that return on investment. Now we're we're really into the money.

Michael:

So what you're saying is I need to go buy a property downtown Houston and get a couple cattle for the backyard.

Ariana:

You There are many places in Houston you will see I mean you will be right off i 10 And there will be building building building building empty lot cows on it building building building. And the reason is because the builders when they're going in there, and they bought the land they put cows on the property in order to bypass the exemptions, or I'm sorry, bypass the taxes and have an exemption until they're ready to build. So

Michael:

Oh my gosh,

Ariana:

You can also do that with goats. You can also have bees. So that's wild. Yeah. And so they leave, they leave the cows there, they get the exemption, the cows eat the grass, they chill for a couple months. And then when they're ready to build, they move their cows to the next place that they bought. So

Michael:

Oh, my What a trip. That's awesome.

Something I wanted to mention that you were you were talking about flood insurance, is I think it's so important for investors to be thinking about too, as we do start to see more and more storms, more aggressive storms, like flood zones change. And so I think that's something that people need to be aware of is just because you're not in a flood zone today doesn't mean you won't be tomorrow or next year, or whatever the case may be. And so just be cognizant of that, if it's an investment that you might be selling at some point down the road. That's a hurdle that any buyer who buys your investment property is going to have to deal with. So just be thinking about that, putting it out there for whatever that's worth.

Ariana:

Yep, that was that is very, you're absolutely. After any major storm, if FEMA came out, they'll redo the flood maps. And so you should get an update of that like from your agent. Or you can always inquire about a property and ask and we'd be able to pull that real easily.

Michael:

Awesome. Okay, I want to shift gears here really quick with the last few minutes with y'all and find out what it is that you're all doing with this 20 acre ranch and short term rentals. That is friggin awesome.

Ariana:

Yes, yeah. So it was a COVID purchase. Actually, I had found the property we had been looking all over, we just really wanted something we didn't know where we wanted it. And we wanted it originally closer to us, because we want it to be able to manage it. Fredericksburg is about three and a half hours away from us. But then we have a certain budget in place. But then you know, there I am wandering the internet at night looking for whatever I'm looking for. And here comes this 20 acre property that shows up with this old 1970s Looking ranch style on it. And it was double our bedrooms. And double the size without looking for the double was hired early, double, double everything.

Larry:

The time is there like I was like no way.

Ariana:

No way. Yeah, it really was exactly double everything because we're looking at an hour and a half from us. And this is three and a half hours from us. And it's twice as vague and it's twice as expensive. And he's like, I don't know. And I was like, I'm very intuitive. You know, some people just feel things. I don't know, this is it. I was like you got to find an extra $1,000

Michael:

Start looking at couch cushions.

Ariana:

So we found that. Yeah, so we went we bought it. It was a single owner. She was she was her husband, but she owned the vineyard next door to it. And she's like, you know, it was just too much. And I have all this other land. And so I just want to I really wanted to give it to somebody who would do something interesting with it. And so and she had, you know, there's some people who want to go in there and do an RV park. There are some people who wanted to go in there and do some other I don't remember what it was something else. She didn't like them. She was like, No, this is this is like my baby. And then we went in there and said, you know, we'd really like to short term rental it and then eventually, as we continue to grow build tiny homes, that's my ultimate dream is I want to have a tiny home condo for people to just like get off the grid and just detox and you know, like, just have some solitude. And that's really important to us. And so she was like, Yeah, let's go for it. As longest escrow lives.

Larry:

Yeah. Took appraisal issues.

Ariana:

Like I mean, it was so it was like things were you know, appraisals are taking forever and getting a 20 acre property appraised and surveyed.

Michael:

Yeah, took a long time.

Ariana:

Yeah. And you know, we work in cities so the whole ranch and like the dirt lots were they called ranch land and land and ranch.

Larry:

Oh farm and land

Ariana:

I don't do I don't do farming land. So we had to bring somebody else from our company who does farming land to come help us with our own deal because I didn't know about farming land and septics you know, I know city septics I don't know about these subjects in the middle of nowhere and the properties on a well you know, there's it's been fun and, and quite a learning experience. Navigating all of this but um,

Larry:

We call we fully remodeled it like we took it down to the studs, remodeled everything because we bought it it was a 1600 square foot, one bedroom, one bath, which is why it was still on the market, because there weren't a lot of families but we knew that that's not what we wanted it for. So we converted the laundry room into a second bathroom, and the living area into a second bedroom. So now we have a 1600 square foot, two bedroom, two bath rents for four to $600 a night with a pool. And then it has a 600 square foot guest house that we fully remodeled as well, which rents for 150 to 250 a night. And then we've already purchased our first Airstream that we're rehabbing. And we'll build a deck around it. And that will be our first additional unit that we add on.

Michael:

So cool.

Ariana:

And then we're talking. So we're talking to some people who want to do goat yoga, in Fredericksburg, and they want to hold their goats on our land. And so that's, you know, where Larry and I are, kind of hippies. And so

Larry:

We're like, let's do this. Let's use all 20 acres.

Ariana:

So cool. But really, it's because it's outside the city. It's got dark sky. So it is incredible to be out there in the middle. I mean, it is dark,

Larry:

You can see the Milky Way actually running through

Ariana:

It’s beautiful. And we call it wild soul sanctuary. Love that. So we've just started doing some retreats out there and bringing in some people who do you know, Healing Retreats on the weekends, they'll rent it from us and you know, can sleep a good amount of people and we're open to people like camping on our land and stuff. So

Michael:

Yeah, I was gonna ask, have you ever heard of hipcamp?

Ariana:

Yeah, so we haven't quite dealt. We had people personally ask us if they can camp on our land, which we're open to. But we haven't quite. I haven't gotten into that yet. That's kind of next on our list to see. You know, how much of this we can rent out. Yeah. To camping. So tonight.

Michael:

I bet a ton, I have been to some some hipcamps and they don’t provide jack squat and like, seriously, I'm paying whatever, 60 bucks a night for like plastic Adirondack chairs and a dirt piece of lots of foot, my head, whatever. So there's definitely a market for it.

Ariana:

Okay, well, that definitely writing you said hip camp camp.

Michael:

Yep, yep, hipcamp.

Ariana:

Okay. I knew there was a name for it. But you know, I'm also not much of a camper. And

Larry:

She's more of that city. Like,

Ariana:

Like, I let me take my shoes off, but like, let me get into a shower. So like,

Michael:

There you go. Well set up glamping tents to?

Arianna:

Well, that wasn't a yurts are a possibility. Yes, I think what I really want is like a one bedroom a frame. Like that's what I that's like, that's like mine, and no one's gonna be allowed in it. It's just gonna be for me.

Michael:

That's so good. Oh, that's so good. Well, just the last question I have for you both, is how do you run your expense numbers on short term rentals? I think that's what throws a lot of investors for a loop. They hear like, holy crap, I can make nine grand a month, and then they're comparing that against their long term rental expenses. And that doesn't always jive. So how should people be thinking about expenses?

Larry:

Yeah, so um, that is definitely it is the expenses are going to be increased, right? Because you have more turnover, you have cleaning crews, you have maintenance, you have handyman, etc. And

so we're, we're paying about 10% a month for property management, but we take on a lot of the communication. There's other, like, it's not uncommon to see 20 or 30%. You know, property management fees. Yeah. But they're also they're renting, they're renting it out. They're handling the calls, they're doing everything. So really depends. As our first one we wanted to be kind of hands on, see how this worked, and then evaluate, like, do we want to manage this this much, or do we want to outsource? And so that's where we're testing right now. So we can give people feedback on our experience.

But I would say I would estimate 30-35% I think that you can get it down a lot lower than that. Okay, but I would estimate that I'm a big fan of under promise over deliver. And so if you estimate it 35% and ends up at 25% You're like bonus, right? Yeah, I'm on that side. But again, even if you take, you know, $9,000 Uh, you know, if we just did $9,000 a month, and you minus 35%. I mean, you're that's still almost $6,000 a month, right now, you got to start looking at occupancy rates and things like that. And now seasonality comes into play, like after summertime, it will almost be like for three or four months 100% occupied. And so those months will really make up for some of the slower months right now. It's pretty much every weekend, like weekend warriors kind of get aways, but we haven't had anybody stay there during the weekend. Yeah.

Michael:

Okay. Okay. Yeah. See, I guess it's really very much market specific around what your occupancy and then associated expenses are because those two are related. How much cleaning you're gonna do, how much turnover you're going to have is a function of your occupancy.

Ariana:

Exactly.

Larry:

I would say Galveston, you know, right now, when you're looking at the school seasons and stuff like that, you won't see as many weekday rentals. Okay, so that's, that's one thing to kind of look at. Christmas, spring breaks, like Thanksgiving, you start to get kind of the weekdays when people can travel with their families and stuff is what we've noticed so far.

Michael:

Okay. Well, that makes sense. Well, you two have been so generous with your time. Thank you so much, again, for hanging out with me and sharing all this wisdom. If people have more questions for you, or want to get a hold of you, what's the best way for them to do that?

Ariana:

You can email me at Arianawhitesellstx@gmail.com. Or you can also find me on Instagram: Ariana Sells Texas. And yeah, I'm more than happy to speak with anybody about the current market.

Ariana:

So she's like she's licensed here in Texas runs the entire team. So she's the go to for anything here. Yeah, if I can connect or just add value to people anywhere else across the country, I would say connect with me on any social media platform. And my handles the same on all of them @LarryMFWhite.

Michael:

So good. You too will thank you again and I can't wait to see where this ranch takes you both.

Ariana:

Yes. Yeah, we'd love to have you out someday.

Larry:

Yeah, come on down. Come at come fly into Austin or San Antonio and come out to the ranch. Let us know we'll do some wine tours.

Michael:

Do some goat yoga. Careful what you wish for.

Larry:

Yeah. Awesome.

Michael:

Thank you to take care and enjoy the new year.

Ariana:

Oh, thank you so much.

Michael:

Alrighty everyone that was our episode a big big big thank you to Larry and Arianna. It was so much fun having them on. We chit chatted after the show after we finished recording here and they are hilarious if you didn't already catch that from the show. Definitely a market worth checking out Houston Galveston both for short and long term rentals. Exciting stuff. As always, if you like the episode, feel free to leave us a rating or review wherever it is you will see your episodes. And as always, we look forward to seeing the next one. Happy investing

Rent prices are going up. How should investors be thinking about this? Jan 04, 2022

Inflation is here, housing supply is in a crunch, and supply chain shortages, among other factors, are affecting the construction of new starter homes. In this episode, we dissect a recent article from CNBC documenting rental rates and weigh in on what we think this means for real estate investors.

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Transcripts

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor Podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor . I'm Michael Albaum and today I'm joined by my co host,

Emil:

the lovely Emil Shour,

Michael:

the lovely self proclaimed lovely Emil Shour. And today we're gonna be talking about rents. Where are they going? What are they doing? What can you expect in the near future? So let's get into it.

Alrighty, Emil, what do you think I've got an article here from CNBC. Talking about where rents are going in the near future, what they've been seeing what the markets been doing. Why do you think they're going up? Down? Sideways? No, change your prediction?

Emil:

I think they're going up. I don't think they're going to go up as fast as we've seen in the last year, which has been pretty astronomical. But I think they're going up, inflation is here, rents have been going up with it, there is a supply crunch in housing, all those things to me mean, rents will continue going up because takes a while to build new housing supply is slow to come to the market builders aren't building like crazy, like they did before 2008. So you know, all those signs to me point that rents are going to continue going up, although I don't think it's as quick of a pace of as they have over the last 12 months.

Michael:

Yeah. When you say that home take a while to build and you're clearly someone that has never played the Sims before, because we just got like all those construction crews out here like you just pop them up all over the place. Right?

Emil:

That's right. I wish it was that easy. Maybe like prefab homes, they can just start plopping them down. But you know, even those built around community, everything I've read, and again, you know, you're reading stuff take with a grain of salt, but everything I've read, it sounds like builders are much slower and hesitant this time around, because a lot of them still remember the after effects of leading up to 2008, where they overbuilt and then they were left holding the bag with all these all these developments. So what I keep reading is demand is high. And they are very, very slow and methodical building new supply. Plus, there's a lot of regulation and restrictions, I think, in a lot of places that are preventing new housing preventing it from going up quickly.

I think all those factors. Again, I'm not an expert, but just based on what I've read. Supply is not going up as quickly as people hope it would.

Michael:

Yeah, that makes sense. And I mean, I know that you're a very well read person. I'm curious to get your thoughts shaking your head. I'm curious to get your thoughts on how did we get here? I mean, how did we get to such I was talking with um, I forget who I was speaking with. But they were saying like, we're 5.5 million homes shy of where we need to be. How did we How did we get here?

Emil:

Again, I am no expert. I I read stuff on, you know, my Apple news app. I read it on Twitter.

Michael:

Reddit, Facebook

Emil:

I think it's the same thing I'm talking about right? I think after 2008 When there was a lot of overdevelopment support, like all these charts, you see, you see like building building, building new supply going up fast leading up to 2007 2008. And then it just falls off a cliff. And since then it hasn't, it hasn't caught up. It's been a very slow build. I don't think we've even caught up to those 2007 levels of building of do build. So it's just been really slow. Again, I think it's just builder a lot. A lot of builders probably got wiped out. A lot of people still remember that time. So it's just been it's been slow. Is my understanding.

Michael:

Yeah, I totally agree. I think that we're seeing that lag. There's like the lead and lag measures and we're totally This is our lag measure of like, stuff isn't being built fast enough. Nor was it being built fast enough over the last decade or so. And so now we're feeling the squeeze. And I think that's compounded with supply chain issues like and lumber issues. I mean, lumber has gone up like 300% Over the last 18 months I think something outrageous and I know I felt that

Emil:

Did it do I thought it I went up high and then it dipped is it back up?

Michael:

I think that it is back up. I'm I don't want to be quoted. But I think that it's it's definitely higher than it was pre pandemic level. So while you're doing that, I mean that just that just goes and adds additional stress and costs to new builds. And so the prices, the end prices of those just tend to be higher. or

Emil:

So okay, May 2021. It peaked at, I don't know, whatever this this index on nasdaq.com is looking at 1600 Peak, and then it dipped to in the summer to like 456. And now it's it's back up to 950. So done a little U shaped not quite back up to that level it was last year. But yeah, you're right.

Michael:

I know when I get my material bills for my development project, that's still expensive as I get up.

Emil:

You're like, I know. You're in it.

Michael:

Yeah, yeah. General Contractor, Emil told me that the lumber prices have actually come back down. So yeah, we'll just work that in the budget. So in this article that CNBC came out with, they they quoted a core logic study that that CoreLogic did, and they surveyed single family rents over the course of the year across the country. And in August 2021, they jumped, and more than 9%, on average from your prior, which if you think about it, is like outrageous. If you think about getting 9% 10% 8% Rent bumps, I mean, in the restock Academy, we have our pro forma a calculator that we use, and I think we use like two or 3% for rent bumps, in terms of year over year increase. And so we're just keeping up with inflation, or just beating inflation, because we don't normally use two to 3% for inflation.

So we're just outpacing I mean, this is blowing the socks off inflation, even at five 6% What inflation has been last couple of months. This is still significantly better. So Emil, you and I were talking before we started recording here about what this says for the future of investors for investing in the space. I mean, what is this signal to you? 9% rent growth? Granted, we've seen prices climb like crazy. What are you thinking about the future? You're kind of near to mid term investment horizon.

Emil:

I mean, to me, if I was investing now, I'd be feeling really excited. I feel very excited, having had bought real estate years ago, and now it's gone up. That's the best time to buy was years ago. And when's the next time best time to buy is now? Which can always be said over a long enough time horizon. But right, yeah, man, if I if I'm an investor, and I see the rates are increasing, and they're doing these studies, and you know, reputable sites like CNBC are talking about this stuff. No one ever really knows where it's going. But if I was an investor, I'd be I'd be pretty excited knowing rents going up.

Michael:

Yeah, I feel the same. And I mean, I think this is also not a fad. And this is not a short, this does not seem like it's going to be short lived. If we are millions of properties shy of word demand is both on you know, on the home owner side, that just means that people are going to continue to rent for a long time until that that is caught up with and 9% is nothing to scoff at. And

Emil:

So let's talk about our I'm curious use you still own you and some single family still. Have you had any come up for lease recently versus your multifamily? Like, I have a triplex and it's been a little bit harder than expected to rent recently. And all my single family stuff, like we've been able to get rent bumps and renewals like fast. No problem.

Michael:

Yeah. So my single, my single family that I have on a long term lease in Southern California has not come up for renewal, they're dealing with some COVID issues still. So we're working with a tenant there, but they're month to month right now. But my primary residence that I converted to a short term rental during COVID, that we were getting awesome rents are on a short term basis. And then we actually got that rented out on a year long lease at the same rent we were getting from the short term renters for our long term renters for long term contract. And now we just put utilities on them as well.

So we were just over the moon, about that. And so the demand is seemingly through the roof, which is awesome. Yeah. And so again, I think that speaks to your point of like, it's still a great time to invest demand is still really strong, even if you have to compete and kind of elbow your way into the space. It seems like the rent growth is there to support it. And I'm curious to be able to get your thoughts if you're evaluating a property, and it is just about cash flow neutral, maybe a little bit of cash flow, but you with a 9% or even 8% or even 7% rent growth, you would it would kick you over into the cash flow positive fairly significantly. Is that speculative? In your opinion? Is that is that counting on appreciation or counting on a trend to continue for it to make sense? Are you okay? Because we have because of all the data supporting that?

Emil:

Yeah, I personally wouldn't. I would never Personally purchase a property where I'm either cash flow neutral or negative today in hopes that things go up. I'm only buying something that's going to cash flow and then hoping we get more cash flow right not not the other way around. I know investors, we've done webinars and stuff who completely have banked on appreciation, or not even appreciation buying in areas that have appreciated and looking for missed priced homes right below the median in that area. That's a great, I mean, honestly, if you really look at like, it's way easier to make a larger sum of money going that route, then cash flow, cash flows, like a slow trickle. But for me, I never want to come out of pocket on a monthly basis on any property. Consistently come out of pocket.

Michael:

All right, what if it was like 25 bucks, you know, you do your conservative underwriting, you're gonna make 25 bucks a month. And then with the rent growth, or potential rent hike for next year, you'd be at, call it 150.

Emil:

Only if I knew a renewal, like let's say it was a property. I did this with the triplex. I knew it was cashflow positive when I bought it, but I knew we were under market rent, yeah, we'd have to spend some money, but even factoring that in, we had some nice room to raise rents from where the market was at. And this is a year ago. And so like we've had, you know, rent growth, so it's now it's, it's going up even higher. So if you're buying it under that assumption, right? Not that it's at market rent, you think, okay, it's gonna go up another eight 9% Next year, I'd say if you're looking for a little something that has like a little more of value add on it or whatever, under market rent, then that's a different game. Sure. That makes sense to me.

Michael:

All right. Good to know.

Emil:

What about you?

Michael:

Yeah, I don't I don't know, as I asked the question here. I am thinking like, Oh, crap, I hope Emil doesn't ask me, I think that I would be probably more okay with it than it sounds like you would be. Because why the thing, the thing that I think people often forget about is like all of the benefits that owning real estate have for you and tax benefits is, is massively impactful. And especially for me at this stage in my investing career, and so cash flow, I mean, I'm so fortunate and so thankful that $150 a month, cash flow is not going to change my life, I spent the last 10 years building up cash flowing properties to be at this stage in my investing career in my life. And I I never tried to lose sight of that.

And so the difference between 150 versus 25 bucks for the potential of appreciation, and for the potential of rental increase, I think I'd be okay with that. And this just kind of goes to show you to all of our listeners, like it really depends on where you are in your investing career, what your investment thesis is that a Emil and I can be talking about the exact same property, it could be a go for me and a no go for him. And so just, again, I think this is a great a great kind of teachable moment of like, think about what your investment goals are not about what your neighbors are, what mine are, what Tom's or what Emil’s are. But think about what makes sense for you and your family when you're thinking about investing.

So I'll get off my soapbox now. But I when I go to calculate, like the total return on that type of property where there is good appreciation potential. There's maybe a little bit of cash flow. I think that could often that can make a lot of sense for me right now.

Emil:

Yeah, that's fair. I mean, that's the I think the awesome thing we've seen with this podcast is you know, bringing on different guests doing different things is like there's a lot of ways to win in real estate.

Michael:

Totally.

That was our episode everybody. Thank you so much for listening. Hope you enjoyed it. We love hearing comments, feedback from you all other episode ideas, things that you want to learn more about hear more about, so leave us a note in the comment section. And as always, we look forward to seeing the next one. Happy investing.

Emil:

Happy investing.

Is it smart to wait for the market to cool off? Dec 30, 2021

In this episode, we run the numbers on a few different scenarios. We look at the monthly and lifetime payment on a loan at different interest rates to highlight the differences in cost. This exercise illustrates that sometimes waiting for the market to cool might not save you as much money as you might think.

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Transcript

Michael:

What's going on everybody? Welcome to another episode of The Remote Real Estate Investor. My name is Michael album and today I'm joined by my co host,

Emil:

Emil Shour.

Michael:

And we're gonna be talking today about a hot topic that if you live not under a rock, you've probably heard about, people are talking about rising interest rates and a potential market crash. So let's get into it.

Alright, Emil, we're gonna get talking here in just a minute. But curious to know it's been a while man what's going on with you? Quick 30 second update.

Emil:

In November, we moved to a new house and we had a new baby. So it's been a very, very boring month. It was a very boring month of November. Not very big, huge life updates. You know, for anyone listening. I do not recommend having a baby and moving in the same month. That was a that was really hard and stressful. So

Michael:

Or are you just getting it all out of the way on one swoop?

Emil:

Yes. But no, no, don't do it. Don't do it. So went to sleep anxious woke up anxious. It is. It's a lot of stuff. So spaced out, like six months or something at least.

Michael:

All right. Well, I will for everyone listening. I've seen both meals, new baby and house both in person, which was awesome. And they are both gorgeous. He does good work.

Emil:

Thanks. My wife made the baby. So yeah, it's a team effort.

Michael:

Total team effort on both fronts.

Emil:

Yes, sir. How about you, man, what's what's new.

Michael:

All kinds of things like last week basically has been a financial gut punch, I had a bunch of issues with a sale that I did a while back and put some money up in escrow. And some things went sideways with the city. So that's in trouble now. And I'm trying to also close on a new primary purchase on in a day for now, two days from now. And I was supposed to send some money over from a financial institution. And they call me and says, Oh, our servers crashed, we couldn't send that money. And that was delayed by about a week or so. And so this morning, it just came in, in the nick of time. But I was like, how did you not think to tell me that the Amazon server hosting servers crashed and you couldn't send my money, you're holding it hostage for a week. So it's just been a real whirlwind. And then my construction project has gone a little bit off the rails yet again. So dealing with that banks, issues as well. So it's been a lot, it's been a lot, but as they say, when it rains it pours so hoping, um, through the worst of it.

Emil:

Has anything in real estate gone smoothly for you in the last six months?

Michael:

Yeah, actually. I was gonna say Yeah, cuz we bought that short term rental. It's been awesome. But they also found out that it needs a new deck, which is gonna be like eight to nine grand, which wasn't found during the inspection. So no, I can say with a resounding no, it's been good, but not smooth.

Emil:

I think there's a takeaway there is you should expect in real estate that things are not going to go smoothly. Like there's always little things. I think if you expect them, they don't feel so bad. And, you know, I think you've been doing this long enough where you know, it's just, it's just par for the course, like that's, that's how real estate works. It's a physical thing. It has things that break that need replacement. So I don't know, maybe maybe there's a nugget of wisdom there for people.

Michael:

Totally, totally, I think the hard thing for me is that I may I, my friend has this term, hopeless optimist. Yeah, you are, you know, and so I just hope things and expect things to go well, and when they don't, it's like, oh, man, but then the other side of me is like coming from the insurance world, I'm a total pessimist. And so I have this like angel and devil on my show. Like, it'll be fine. Like, no, it's gotten to be terrible. So it gets exhausting.

Emil:

Yeah.

Michael:

But in any case, let's talk today about something that's been on everyone's mind. I think he's been all over the news, rising interest rates, and the potential for the housing market to cool off a little bit looking into 2022. So, I mean, I'm curious to break out the crystal ball. What do you see happening here in the next six 8-12 months?

Emil:

I don't pay attention to too much news. But I think the Fed has basically said yes, it's inflation, they've no longer use the term transitory. And so I think they've signaled that in 2022, they're going to move rates. How much higher? I don't know that I think it depends on you know, if they move it up a little bit, does inflation start to get in check, or does it keep running wild? I think for sure, in 2022, it goes up somewhat. I don't know how high it could be. But I think it was going to be really eye opening. You know, you and I were talking before we recorded what does like what percentage change in interest rates and what resulting change in price like how does that change your monthly so if you're really Real Estate Investor on the sidelines thinking should I wait should I buy now? We're going to actually run you through the numbers of like, how does this change your payment? And what is waiting potentially do so? You, might be surprised

Michael:

And curious? It because there's been speculation out there talking that even if interest rates do rise a little bit, or potentially maybe even a lot, that the market won't really care, because there's so much pent up demand. Do you see that there's do you expect there to be a pretty elastic correlation between interest rates changing and ultimate purchase price? being reduced? It kind of in in lockstep?

Emil:

Yeah, it's funny, there's a, everyone's kind of expecting a crash. So you hear a lot of people saying they have money on the sidelines. So it's like, you know, we're talking about this, when there's a lot of cash sitting there. How much can prices really, for how much of a crash? Can there be if there's usually a crash happens when no one's expecting it? And you know, there's not a lot of money to kind of act as this safety net. But if things start falling, do a lot of investors come rushing in and prop it up? I think that's your question. Right?

Michael:

Yeah. So that's my question to a degree, but also, maybe because people are chasing yield so much, because things have gotten so much more competitive. When we see interest rates rise, we tend to see prices fall because people's purchasing power is diminished. But maybe people won't care as much this time. Maybe they're so hungry for yield and return that yeah, while the interest rate may have gone up a little bit, diluting their purchasing power, they're like, I don't care. I'm still you know, what was a six cap is now a five and three quarters or five and a half cap, that's still acceptable to me.

Emil:

No idea, man, I am no good at at guessing. I mean, I think part of it is when you have such cheap money. It's like why not take out a bunch of debt and go use it to get any yield? You can. So I think if interest rate, interest rates go up, I think it should check a little bit of that. But I don't know I'm not smart enough. Nor do I play a person smart enough on TV to tell you what's going to happen. Yeah. So I don't know. What do you think,

Michael:

Oh, man, I was hoping you weren't gonna ask me that you were supposed to answer. That's why I asked the question like, Oh, if I can get it up first. Yes, the answer.

Emil:

It's funny, I studied econ in in college, but I have no answer for you.

Michael:

Yeah. I mean, I'm of the opinion. And again, like you, I don't claim to be this genius person, or even very smart person that has a real grasp on economics, global, macro, and micro. But I do think that there does seem to be so much money. And people are overpaying for properties so regularly, that even if the interest rate goes up a little bit, I don't know if prices are going to dip very much. Because they might just come back to offering full list price or slightly below list price. Because instead of overpaying, they'll pay whatever the list price is. So I just think that there is so much money out there right now, both in the institutional world and people on the sidelines that I have a similar thesis to you that people are just gonna rush in at the first sign of a downturn, or a pullback or a crash, whatever you want to call it, and kind of prop up the market. So yeah, it'll be interesting to see.

Emil:

As long as there's still a lot of rental demand. And there's a supply shortage, right? There's high demand for single family. rents are going up there. You know, we've talked about it. So I think as long as there's that increasing demand and rents are going up and things are rosy, I think you're right, people are just gonna keep piling in. So yeah, that kind of creates a price floor in my mind.

Michael:

Yeah, I'm right there with you. I'm right there with you. Alright, well, let's talk about some numbers. Because you and I were running this calculation right before we started recording. And I don't know about you, but I was pretty shocked to see these results,

Emil:

Same.

Michael:

And so what we did for everyone listening, I guess everyone watching too. We did some calculations. And we said, Okay, we took a price point of $250,000 for a single family home. And this could be a rental, this could be a primary owner occupant doesn't really matter, because all we changed was the purchase price and the interest rate. And what we said is for $250,000, at 3% interest rate today is fairly reasonable. And we were recording this mid December of 2021. So if you're listening to this and a different time, and you're like the interest rates are nowhere near that, that's my disclaimer, disclosure that when we recorded it, this is where they were at. Watch. We're gonna listen to this in two years, but I can remember the good old days you get a 3% interest rate on a house.

Emil:

I think we are going to be saying that

Michael:

I think they're I mean they're so low like this is historic lows. So 250 1000 50,000 at 3% with a 20% down payment on a 30 year fixed mortgage. So that principal and interest payment on a monthly basis is $843. And the total amount paid over the life of that 30 year loan is 303,554. And so this Here's our benchmark, this is the number we use 250K at 3%. So then we said, Okay, what if there's a 10%, pullback in price, and interest rates jumped 1%.

So our new purchase price would be 225,000 at 4%. And so we came up with the same calculation what our principal and interest payment would be, and then what the total amount paid over the life of that 30 year fixed loan would be. So the difference in principal and interest payment, drumroll please. This number is $859, which represents a $16 a month difference, you're paying actually $16 a month more than if you bought the property for 250,000. And the total money paid over the life of that loan is $309,365, which represents a difference of $5,811 over the total life of that loan. And so if we are looking at just the property itself, you are actually it actually makes more financial sense to buy it at 250,000 at a lower interest rate, which like blew my mind, I was pretty surprised that that was that significant of a difference on a higher purchase price at a lower interest rate.

Emil:

One caveat I just remembered, and we didn't talk about before we hit record, your property tax, obviously is going to be a little bit. I guess it depends. It depends on by on where you buy, and how they assess it. Is it on sale price? Is it their own assessment? So that's one caveat, you know, in case people were like, yelling at us in the comments, Oh, you forgot property tax. It's true. True. You'll have to figure that out. Because it depends on where you buy.

Michael:

Right? That there's it's that's multivariable calculus. I didn't gentlemen, we're not getting into that today. I mean, the other thing that you would want to consider too is is your downpayment, if you're talking about an investment, so from a cash on cash return perspective of on 250, you're putting down 50k on a $225,000 property or putting down for I think 45. So there's there's differences there too, but from a pure money paid over the life of the loan, monthly payment, there's definitely a difference. And it's actually more expensive, on a lower purchase price to 25 at 4%.

So now we took that even further and said, Okay, what if there's a 20% drop in the market, and so from instead of 250, we're going to be getting that same property for 200,000. And we left the interest rate again at 4%. And so in this instance.

Emil:

By the way, 20% drop in real estate, I know 2008 skewed our reality of real estate crashes. 20% is a pretty large crash in real estate prices.

Michael:

It's pretty significant. Yep. So that monthly payment is 763, which is a difference of 80 bucks cheaper than our base case of 250 3%. And then a total money paid over the life of that loan is like 275,000. So represents like a $28,000 Delta.

And then last but not least, we said, Okay, if there's going to be a 20% pullback in the market, maybe interest rates are going to move up more than 1%. So we did 200,000 purchase at four and a half percent, the monthly payment on that is 810, which is a $33 a month cheaper difference than our base case. And our total money paid over the life of the loan, like 292,000. So it's slightly cheaper by like 13,000 12,000, than our than our base case. So we saw a pretty massive reduction in purchase price, a one and a half percent swing and interest rate. And we're only saving 33 bucks a month in our payment, and only like 12,000 over the life of the loan.

So if you're someone sitting here thinking like, Oh, I'm gonna wait for that 20% pullback, it's gonna be so impactful for me on a monthly basis and looking at the life of the loan, it might not be as impactful as you might think. But again, I'm yield to your point, property taxes, is important to think about all the other expenses might not be as impacted by purchase price, insurance, you know, maybe a little bit if we see a pullback in the market, if we see a bit of a recession, the cost to build might change a little bit. And so we could see some insurance premiums change a little bit, right. But as far as all the other expenses, your your repairs, and maintenance or capex and all these other things, your rental income potential likely won't change significantly. And so we want to look at the purchase price, your debt service is really that variable here. Debt service and property taxes are probably your biggest variables when it comes to this sort of thing.

Emil:

Right? And, you know, this probably explains why big institutions are our land rushing to grab real estate, right? Like they've probably done all this math to say, Okay, what happened?

Michael:

They get this.

Emil:

Right, you see, it's not huge. The other thing is, we're seeing a 20% drop from prices now. Meaning it's a top right right now, right? What if, you know you buy now price is still go up? 10% And then maybe it falls another then maybe interest rates change and then it falls 10 20% Right? So it's like, you still have some padding there. If you're not buying at the top, top top, but anyway, doing simple math trying to show people like the numbers, it could potentially not be a huge difference in your monthly payment, even with a 20% drop, which is huge.

Michael:

Yep, absolutely. And something else, I mean, kind of to that point, when you're making offers on properties, I just went through this exercise. And it wasn't an exercise. It was I mean, an exercise with live fire live ammunition is offering over ask, I had to go over ask on the new primary purchase that my wife and I are making here in the next couple days. And I was like, the investor, and he was like, Oh, God, no, like, can't do that. Like, that's just so like, it totally irked me. And then I ran the numbers, I'm like, okay, the monthly payment difference is nominal. And the down payment difference, because I only have to come up with 20% of that I put we put 20% down is nominal. And so if if you fall into that category, and the return still makes sense, think about, you might have to be really competitive in your offers. And something that I always do is I try to imagine there is no list price, and I try to come up with it on my own. And then I'll like look at what it is. And this this game I play like if I come up with a number that's higher than the list price, I'm like, Ah, this is awesome. Like I can afford to pay more. And if I come up with a number that's less than I'm like, Okay, well, that's gonna, that's how my offer is going to be dictated is based on the numbers.

Emil:

So this was I was I was really surprised by these numbers. Honestly.

Michael:

I was too I was expecting a much bigger difference between our base case to 53%. And then our most extreme at 200k at four and a half percent. I mean, for all intents and purposes, 33 bucks a month. Eat out at Chipotle, you know to less times and get don't get guacamole and that's that's your payment differential right there.

Thanks everyone so much for listening. That was our episode. I hope this was helpful. Shed some light some insight on to where the market might be going and how you might want to think about responding. As always, if you like if so feel free to leave us a rating or review wherever you listen your podcasts. They are super helpful for us. We look forward to seeing the next one. Happy investing.

Emil:

Happy investing.

5 simple steps to raise capital for your next deal Dec 21, 2021

Dave Dubeau is the creator of the Money Partner Formula, and he works with mom ‘n pop
real estate investors and helps them to get started with raising capital. He’s a best-selling author and speaker based in Beautiful British Columbia, Canada. He began his real estate investing career in 2003 doing 18 deals in 18 months and nowadays he invests passively in multi-family properties.

In this episode, Dave walks us through his 5 step process for raising capital for real estate. If you have run out of capital and credit, or can't get others to invest with you you might want to listen to this.

Get a complimentary copy of Dave's newest book, Money Partner Formula at:
https://moneypartnerformula.com/

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Transcript

Michael:

What's going on everyone? Welcome to another episode of remote real estate investor. I'm Michael album. And today with me, I have Dave Dubeau, who is a Canadian capital raising expert. And he's going to be talking to us today about what we as real estate investors should know about raising capital and how to raise capital for our next deal. So let's get into it.

Dave Dubeau, thank you for taking the time at your schedule this morning to hang out with me really appreciate you coming on.

Dave:

Big Mike. It's my pleasure.

Michael:

So you and I know each other from before recording, but for all of our listeners out there, can you give us a quick rundown of who you are and what it is that you're doing in real estate?

Dave:

Yeah, well, I am a fellow real estate weirdo. I'm into this wild and wonky world of real estate investing. I've been doing it one way or the other since about 2001. Actually started when I was living down in San Jose, Costa Rica of all places Michael has spent a decade

Michael:

Oh my God.

Dave:

Living in Costa Rica and had a language training down there a company and language training company bought the small building that ran the business out of did ended up doing a couple of what we would call Pre Foreclosure deals down there. Didn't know what the heck I was doing. Didn't even know what they were called or whatever. But they they worked out all right. And then I packed up my Costa Rican family, my Costa Rican wife and our two little Costa Rican kids. And we moved back to the frozen hinterlands of Canada, where I come from originally.

Everybody goes, especially Canadians to go, Dave. Dude, what's going on? You're living down in tropical paradise. Your life and you packed everybody up and you move back to Canada. What the heck was going through your brain? Well, here's the thing Michael, we don't realize what we got till we leave it for a while. And as lovely as Costa Rica is being the rather fair complexion person I am in other words, paste the paste white guy in the pasty face white guy I am whether you got money or not in Latin America, everybody assumes that you do. So there's a target on your back. And that of your family now, thank goodness, nothing ever happened to us. But I know two people that got kidnapped and held for ransom down there and thought, hey, oh my gosh, small town Canada. That hardly ever happens. Never.

Michael:

Go figure.

Dave:

Yeah, our kids were getting towards school age. So I said, Hey, you know what? Let's start all that start over again in Canada. And so we moved back, but that was in 2003. And then I had to figure out what the heck am I going to do? Right? Because I'd left a business in Costa Rica. I hadn't been able to sell it. So I didn't have very much money. I've been gone for so long. I didn't have bad credit. I had a big fat zero. For credit. I've been self employed for 10 years. So it's pretty much unemployable. So it's like okay, hey, what next? And you're probably way too young to remember these things but I saw one of those late night infomercials but something like this you too can get rich with real estate with little or no money down. So I said perfect little or no money so I stayed away from the course and brushed it off and I think back then it was a bunch of binders and there might have been a Big VHS cassette or two in there

Michael:

And A track tapes.

Dave:

Yeah not quite that bad but getting there and put it to use. And I did 18 Creative deals in 18 months and that's that's what I got started real estate took took a few years off helped to up and coming real estate guru up here kind of grow his his company for a few years got back into it started doing not so creative type deals where actually had to come up with money for down payments and quickly ran out of cash and credit like most people do, I hit that wall and I said hey, I've heard of this thing, OPM other people's money. So maybe I should get myself some of that. So I can grow my portfolio.

So I rushed out flounder around and failed miserably at raising capital and I remember it i this beautiful deal on the go. I needed $85,000 to close on it. I tried everything that you know people told me you're supposed to dial for dollars, network. schmoozed spammed everybody I knew and bottom line turned off a lot of really good prospective investors. did not raise the money, lost the deal. Got some major egg on my face. And after the dust settled, I said, You know what? That sucked. I don't I don't like dialing for dollars. I don't like networking and schmoozing and turning every conversation into a real estate conversation. Why don't I apply what I understand about marketing, see if I can make that work to attract investors, instead of always chasing after them.

So by hook and by crook, I came up with this process that I call, the money partner formula worked pretty well for me. When I was doing those single family home type deals, I raised not a heck of a lot, but probably in the in the range of 700,000 or so for those kinds of deals. And then since then, I've scaled up into multifamily properties raised millions for for those kinds of deals. But more importantly, I've helped other what I call Mom and Pop real estate investors really get things rolling, and cumulatively help people raise well over $300 million in counting for their deals. So it works pretty good.

Michael:

That's incredible. So yeah, Dave, I think you hit the nail on the head that so many people either hit that wall as they're growing their portfolio, or even folks who are just looking to get started, don't have the capital to start on their own. So how do people How should people think about raising capital? Is it something that only is reserved for the experience? Or is it someone that who, if they're just getting started would also be a good candidate for?

Dave:

Well, you know, it's kind of one of those catch 22 things, right? So hey, I want to get going in real estate, but I don't have any money. I need money to buy a deal. But I don't have any money. You know, so how do I get if I don't have the experience? Or getting get the money? All that kind of thing? Here's the bottom line, Michael, it's a lot easier to raise capital, if you've got some experience. Do you need to have a ton of experience? No. But I would suggest, if you have even one successful deal under your belt, that's enough to give you the credibility to go out and start using other people's money to grow your portfolio.

So what do you do if you if if you don't have money or experience? Well, there's a few different things that you do? Well, if you do have money, then obviously sell finance your first deal, that would be really smart, you got skin in the game, you're going to pay close attention to how that goes, if you got some money, but not all the money. And if you can partner up with somebody else, as a joint venture partner, you both put in some cash, you do all the work, and you still split the profits 50-50 With your investor partner, that's cool that gets you started. If you don't have any money, but you've got some experience of some sort, you can bring value to the table, go find somebody who's doing what you want to do partner up with them, not for a paycheck, but for a tiny slice of equity in the deal.

And whatever that requires. If you're good at social media, if you help the person over social media, or you bird dog for them, or you whatever it is that you do, say, hey, I want to be involved in this, I want to learn what you're doing. I want to b e able to use this deal as a case study. And again, you only need to have one deal. And if you do it that way, you've got some legitimate experience behind it. So there's some ways to get involved if you don't have a heck of a lot of cash.

Michael:

Okay, great. And then so for people that maybe do have a couple of deals under their belt, and are looking to take that next step that are running on capital, how do they position themselves? How do they market themselves? How do they not dial for dollars? Does this help to start raise capital?

Dave:

Yeah, good question, because I think most of us would rather stick a needle in our eyeballs. No fun whatsoever. Yes. Oh, here's, here's what it's, I'll give you the big 30,000 foot perspective of this five step process, Michael. So step number one is instead of just shotgunning it and thinking everybody in anybody with a pulse and a checkbook could be an investor, what we want to do instead is you want to laser focus in on people that you already have a pre existing relationship with people who you know, and who know you friends, family members, co workers, business associates, people, you know, from the PTA, your sporting associations, civic associations, whatever, you've got a pre existing relationship with these people.

So what we do with our clients is we help them come up with a list of about 150 to 200 of these folks, we think, Oh, my goodness, I don't know that many people, chances are you do. All you have to do is export all your contacts from your cell phone, your email address, and social media, all those different places, and then get them all into one place. Chances are there's a couple of 1000 there, and then just quickly whittle it down to people that you actually do know. Okay, so that's step number one, come up with that target group of potential investors.

Now, if you got 150 or 200 people in there, they're not all going to become investors, of course, but typically, there's a significant number in there. And what we find with our clients is there's usually between one and $2 million, where the capital within your sphere of influence already, we just have to figure out who's got it, and how can we get them to get ready, willing and able to invest with us, right, so So the good news here is when we focus on this prediction thing group of people that you have that relationship with, you got two out of the three things you need taken care of.

In order for somebody to invest with you, they need to know you like you and trust you, this group of people, they already know you. Hopefully they already like you. And they might trust you to babysit the house or the dog for the weekend, but not their 100 grand. But we can work on that. Does that make sense?

So we got two out of the three taken care of there. Plus, this really helps you keep compliant with your local securities regulators. So I'm up here in Canada, we've got our own our own securities regulators are no nicer than the SEC, just as nasty. You guys in the state, you got the Securities Exchange Commission, I believe each state has some sort of regulatory body as well. So we got a double whammy. But bottom line is, there's this area that we are allowed to play in. And that is with good people that we have that pre existing relationship with. So let's start with him there.

And then, instead of doing what Dumb Dumb Dave did, which is just charging in, like a bull in a china shop and saying, Hey, it's Dave, I got deals, you got cash. Let's be a little classier about it. So Let's reconnect with that target group of people on a personal level first, before we start talking business. Does that make sense, Michael?

Michael:

Absolutely.

Dave:
So what we do is we do a very simple, automated, partially automated, Warm Up campaign. So we we do this by email, we can set this all up in a CRM system, so it goes out all at the same time. And then your job is when people reply back to you actually have a genuine reconnection go back and forth a little bit by email with them, because there is capital in those connections. Plus, if you do it, right, it sets the stage for everything that's going to be coming down with the other four steps in this process.

Does that making sense coming up with that target group of people first, Michael?

Michael:

Yep. With you so far?

Dave:

Yeah. All right, then the second step is now that we got this target group, and now we kind of broken the ice with them. Some of those people might actually put up their hand and say, Hey, Michael, this real estate thing sounds kind of interesting. Why don't you tell me a little bit about it. So now we got to be ready to have an effective investor meeting, right? Most people don't have the faintest clue about how to present their investment opportunities to a non real estate person, like we can get together realtors, and real estate investment clubs. And we could all nerd out and talk ROI. And you know, IRR is and analyze and all this kind of jargon, that the average person they're going to zone out. They're going to feel dumb, and they're going to shut down right? So we got to make sure that we've got a good I recommend a slideshow presentation like a PowerPoint or Keynote or whatever Google slides that walks people through at Reader's Digest level, about what you're doing with real estate.

So what does Reader's Digest level mean? Well, that Reader's Digest is a magazine still exists, that's written for grownups, however, it's written at a 13 year old comprehension level. Right? So any average great 8er can pick up this, this magazine and read it and understand everything, okay? We want to do the same thing for our investor presentation. Not that your investors are dumb. They're just not real estate weirdos like us. So we got to, we got to dumb it down for them, we got to keep it really simple. We got to keep it focused on what's in it for them. We got to go through what our process is, what the pros are, what the cons are the rewards, the risks, how we mitigate those risks, overcome objections, answer all their questions, and do this in a fairly short presentation that you can go through with somebody at a coffee shop, or on Zoom or what have you, and about 25 to 30 minutes, with a lot of q&a in between there.

So step number two is creating what we call your million dollar investor presentation, and being ready, willing and able to use it. So that's step number one, come up with a list. Step number two, create this presentation and get comfortable using it.

Step number three is where we really kick things into gear with a marketing, constant and consistent communication. This all starts with having an investor focused website. So having a website that's completely focused on communicating with your prospective investors. And this is gonna be your online marketing hub, all your all of your marketing is going to be there it's going to be we're going to be attracting people to your site via email marketing. We're going to get them to consume your your edutainment communication, we're going to be keeping in touch with them at least on a weekly basis.

Some of the things that are working really well for our clients these days are our video logs, short, little three, four minute video snippets. They're kind of again, edutainment a little bit educational, not too much. Hopefully a little bit entertaining, and with a clear call to action Hey, you'd like to find out more about this go ahead, click on the button below book a call. Let's see if this makes sense for you. So video logs, blog posts, short little articles again, keeping them entertaining, easy scenes, electronic newsletters, one So every single week, they're getting something different from you. That's educating them a little bit, hopefully entertaining them a little bit, and encouraging them to reach out to you instead of you chasing after them.

You follow along with me here, Michael.

Michael:

Gotcha.

Dave:

Yeah. So this is what we do to get things rolling. So that you get inbound investor inquiries instead of having to chase after the investor. So this is getting people to self identify, put up their hand and say, Hey, this real estate thing, Michael, it looks kind of cool. I'd like to find out more. And then that conversation is a complete 180 from us chasing them down, picking up the phone, dialing for dollars, schmoozing, turning every conversation into real estate conversation. This way, we're peeking curiosity, we're peaking interest, and we're getting them to reach out to us. So that is, I believe that was step number three of this, this five step process. Yeah.

And then step number four, is being seen as trustworthy being seen as a real estate authority in the eyes of our target group of a couple of 100 prospective investors. So here's the good news, Michael, you don't have to be the next, you know, Robert Kiyosaki, and sell a gazillion purple books to be happy, you know, Michael, with his own podcast and all this kind of this kind of platform, there's lots of simple ways that you can do this. And again, we really want to work out, we've already got the know factor that these people already know us, they like us, now we have to work on that trust factor. So it's about being seen as knowing what the heck you're doing with real estate.

So a lot of the marketing stuff that you're doing the website, all of that stuff that's going to set you up that's going to set you up for success, it's going to make you look like a professional. Other things you can do. Dress up a little bit. Alright. So if you're meeting with somebody, and you're talking with them about investing with you, I highly encourage you to, you know, gentlemen, put on the blazer, dress business casual, right, it's going to show the other person respect. And even if, if your aunt Hilda used to change your diapers when you're a baby, you're going to get a little bit of respect from them as well because you have you have dressed the part does that make sense? talk intelligently about your strategy. talk intelligently about your market, have sharp looking materials. Don't go cheap on the business cards. Get some good looking business cards. Invest in in some headshots, professional headshots, not the Walmart ones, not the selfies, professional headshots, things like that go along way to, you know, inexpensive ways to be seen as an authority in your field.

Michael:

Message received Dave me over here on my T shirt as we're recording this podcast.

Dave:

Well I’m not giving you money here!

Michael:

Okay, good, good, good, good.

Dave:

All right, then step number five before I forget, because I get kind of forgetful in my old age. Step number five, is all about starting the snowball effect. And Michael, I'm sure you've seen this because you've been in the game for a while, right? Is once you've got an investor on board, and you're doing a good job for them, it's so much easier to get more of them because these people tend to know other people with money. If we're proactive about it, we can get really good testimonials from them. My favorite are video testimonials. You can use them all sorts of different ways you can create written testimonials from them. So video testimonials are great and warm introductions to their sphere to their people, right.

So if you're doing a good job and you're proactive about it, it's very, very easy to start growing your investor base with that second ring of people that your investors know. So that in a nutshell is the five step money partner formula. Start with a target group of prospective investors and break the ice with them first, have your second step is have your investor presentation ready to go. So when people do put up their hand you you don't panic like a deer in the headlights. Step number three kick things into gear with the marketing constant consistent edutaining marketing coming out on a weekly basis, something different every single week with a clear call to action. Hey, if you'd like to find out more, click on the button book a call. And let's have a chat. See if this can make sense for you. Step number four kick things into gear with your credibility be seen as an expert authority. In the eyes again, of your target group of investors is Step five, once you got one or two investors on board, start the snowball effect with referrals and testimonials. Oh, my goodness, I've spoken so fast. Like My cheeks hurt.

Dave:

No, that's great, David and it's it makes so much sense that it's interesting to kind of sit back and see the true marketing effect because I never would have thought the two the two go hand in hand which is really interesting to see.

Dave:

Well you know I'm a marketer from way back and and any time you can get somebody to self identify it or reach out to you. That means that persons already coming to you, to a certain extent pre educated they are to another certain extent pre-qualified They're already predisposed to invest with you, because they see you as the logical choice. They see you as the expert. So if you get all this stuff, right, it works like gangbusters.

Michael:

I love it. One question I have for you, Dave is with regard to step one. So one of the many things that I hear from a lot of folks that joined the Roofstock Academy is I don't know anyone in my sphere that is interested in investing in real estate. Everyone I talked to about it thinks I'm crazy. My parents, my cousins, my family, they all poopoo it. So what do you have to say to those folks that really don't know anybody that would be interested in investing in real estate within that first sphere?

Dave:

I would say, bologna. I'd say something else. Let's let's keep it PG. Here's what happened. Here's what happened in that scenario, Michael, is the person has run out like a crazy person said, Hey, I'm doing this real estate thing. It's great. It's awesome. You should do with me. Have you got any money? All right, that's maybe not that tacky. But that's kind of how they're coming across. They're coming across like a network marketer. You know what I mean? Right?

Michael:

Yeah, absolutely.

Dave:

They are coming across as an MLM, or it. And it just seems like another one of these things, maybe it's a phase they're going through, or whatever. So you can't blame people for being a little bit cautious. If you come in that strong that way. That's, that's what I did back in the day. That's why I can, I can joke about it, because this guy did the exact same thing, right, with disastrous results. So it's not that your friends and family members are interested or can't be educated into becoming interested, it's just that you tried to ram it down their throats in a clumsy fashion, right, versus educating people, creating that curiosity, getting them to put up their hand, take baby steps, and go in that way.

Because here's the thing, right? If you do this, right, if you do this process, right, you're gonna be able to accomplish two things, you're gonna be able to get the low hanging financial fruit, and get your first few investors in as little as four to six weeks. That's, that's quite common. But here's the beautiful thing, if you keep things rolling, those first few investors only represent about literally the tip of the iceberg, because that might represent the top 10 to 15% of all of the capital that you can raise from your contacts, the other 85%, it's going to take them a little bit of time to get comfortable and confident and be ready, willing and invest, ready, willing and able to invest with you at that time.

So that might take six months for some folks, 12 months for other folks 18 to 24 months for other people. So that's why the constant consistent communication is so important. Because you're going to be able to do both, you're gonna be able to get the the quick capital and the long term capital. And if you're in real estate for the long term, you'll want both because the lion's share comes over time. So again, if you've, if you think you've tapped out your friends and family, and nobody has any interest, or everybody you know, is broke, I'm going to gently suggest you're you're wrong.

And just statistically speaking, I mean, I don't know if you, you're familiar with the book, The Millionaire Next Door? Have you heard of that book?

Michael:

Yeah.

Dave:

Yeah, they wrote this book a while ago. And they studied millionaires in North American, they found out the vast majority of millionaires don't look like Hollywood says millionaires. You'd look they are right, hanging out on yachts, with bikini clad babes decorated with jewelry and all this kind of make it rain with dollar bills all over the place. That ain't there everyday people living in everyday houses driving everyday vehicles, who happen to be extremely good with their money. That's why they've got it right so yeah.

Don't assume that's the biggest, you know, danger. A lot of people have they assume nobody has any money. They assume that the people are all flash, you've got cash, it's quite often not the case. Right? They're all flash. And that's, that's about it. So never make assumptions. If you haven't been successful in raising capital from friends and family yet. It's because you don't know how to do it properly. Don't Don't don't think it doesn't work. You just don't know how to work it yet. And then here's the other thing, we have to sit back and we have to look at Mike, we have to, you know, I'm going to splash some cold water on people here. Because I see this all the time.

Well, you know, I don't want to raise money from my friends and family. You know, I've heard neither a borrower nor a lender be don't mix friendship and family with with business. Right? And you're right. If you do it wrong, it can be a recipe for disaster if you do it right. It's absolutely no problem. But here's we got to be logical when you're first starting to work with investors, who the heck else is going to invest with you? Quite frankly, I know you don't have a track record working with them. Why would an accredited investor even give you the time of day? If you don't have a track record? So where else are you going to get started? Nowhere else right? It's that's that's the rock bottom reality.

So you got two choices. You can continue to sell finance your deals, and save up money for down payments and deals and and do onesie twosie deals every five to 10 years. Or you can tap into your sphere of influence, and really crank things into gear and start raising capital and doing a lot more deals. And here's the other thing. We need to get our heads around the fact that it's not them doing us a favor. Right? We think our investor partners are doing us in this huge favor by investing with us. But yeah, they are. But it goes two ways. We're helping them do something they cannot or will not do on their own which is investing in real property.

And the statistic I've heard out Michael, and take it for what it's worth, right statistics, the statistic I've heard is that 5% of the general population has invested in a revenue property, only 5%. Okay. So again, we hang out with our real estate weirdo. So we think everybody invests in real estate, your house doesn't count, by the way. So only 5% is actually invested in a revenue property. So if you've got one successful deal under your belt, chances are, you're ahead of 95% of the non real estate people that you know, in your sphere, so it's up to us, to show people educate people about what we're up to, and offer them the opportunity without being salesy without being high pressure, without twisting anybody's arm without cold calling. Put it out there, educate them, get the people to self identify come to you. And I tell you what, it works really, really well.

Michael:

I love it. Dave, I'm curious to get your thoughts and your teachings on how you structure partnerships in terms of percentage percentage ownership. So that's a question I get all the time in the academy.

Dave:

So again, what kind of deals are we talking about here? Give me an example.

Michael:

Let's talk about a five unit multifamily property. A small multifamily property, let's call it 300,000.

Dave:

So $300,000, so all in let's, let's say we need about $80,000 to get into this deal, maybe do 100 With a few rentals and stuff like that? Yeah. Okay. So that might be one or two investor partners on board. And I won't talk about how you structure this, if you're going to do it in a in a corporate structure, why not? I'll just talk about numbers,

Michael:

generalities. Yeah,

Dave:

for those kinds of small deals, I would suggest 50-50. Okay, so your investor partners bring the capital, ideally, in these kind of small deals, they're even bringing the qualifications for the financing to the table, that may or may not be necessary in this particular situation, but they're coming on board as joint venture partners, their responsibility is to bring the cash and the credit, your responsibility is to do all the work. Alright, and then you share the profits 50-50, after they are covered first. Does that make sense? So they're, their capital is assured first, if you're gonna be doing a refi on this property, you're going to be selling whatever it is, they get paid first, and then you split the rest 50-50. Okay. Same thing with the cash flow, you're splitting the covering all of the expenses, and you're sharing the cash flow 50-50. So that's probably the simplest way to do it for smaller deals.

Michael:

Okay. And as the deal size goes up, are you thinking that the cash partners should be getting more or less of the percentage of the deal.

Dave:

Typically, the larger the deal, the larger number of investor partners you're going to have on board, you're probably going to start syndicating things. And in that case, you're probably going to have to take a smaller percentage of ownership and profit in the deal. Give more to your investor partners, just to get them the kind of ROI that they need to make it attractive.

Michael:

Dave, this has been great man, you have a training course. And I know you've written a book, can you tell us a little bit about what where those are, where people can find out more about them and you?

Dave:

Sure so I got this book back here called Money partner formula, you can get a PDF copy of that. My treat in exchange for your name and your email address, just go to my website, moneypartnerformula.com. You can poke around there, see what we're up to. I think there's a tab on there that says free book or something like that. So go ahead, click on that. And that will get you the book.

If you're interested. Every once in a while we do a full day virtual workshop, taking a deep dive into this whole money partner formula thing, you're welcome to join us via zoom for one of those. Or if you just want to have a chat and see how this is gonna work for you. You can book a call and we can have a capital consultation and see how this can all work for you.

Michael:

Fantastic and fit that can be done on the website as well.

Dave:

Yeah, all of that moneypartnerformula.com

Michael:

Love it. And you also have your own podcast as well. Can you share with folks the name and where they can find that?

Dave:

Yeah, so I on my podcast I interview some really smart folks like you know, Michael and the podcast is called Property Profits Real Estate Podcast found on all platforms where great podcasts reside. So iTunes or what have you. It's all over the place.

Michael:

Love it. Well, Dave, thanks again for coming on. Man. This was a lot of fun, really interesting stuff and looking forward to chatting again soon.

Dave:

My pleasure. Thank you so much, Michael.

Michael:

You got to take care of Dave.

Okay, everyone, that was our episode of Big thanks today for coming on. It was a lot a lot of fun. I learned a ton about raising capital and things to be thinking about and be aware of as you're putting together your next deal if you are looking to raise capital. As always, if you liked the episode, feel free to leave us a rating or review wherever it is. You listen to your podcasts, and we look forward to seeing on the next one. Happy investing

These 10 states have the lowest property taxes Dec 18, 2021

We recently did an episode on the 10 cheapest cities to buy property in so we wanted to follow that up with a look at property taxes across the country. We pulled up a list compiled by Business Insider on the states with the lowest property taxes. In this episode, we go through the list and comment on what this means, and point out potential shortcomings of a list like this. This episode will answer questions, but it is really a starting point of where to do your own homework on this topic. And like Michael always says, "make sure to call the local county tax assessor".

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Etsate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Emil:

Hey, everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shore. And today I'm joined by Michael Albaum,

Pierre:

Pierre Carrillo

Emil:

And today's episode we're going to be do some similar as we did on a recent episode, which was the if you guys remember the episode 10 most affordable states to buy a home, we're actually going to be covering the top 10 states with the lowest property taxes and this will be 2021 data that we're going to go over to help you you know, as you're looking for markets looking for states invest, hopefully all this data will help you in that journey. So let's hop into this one.

Alright guys, so we are sans Tom today. But we got we got Michael and Pierre, which Dynamic Duo here. Very excited for this episode. Last time, we did some fun where I have the list in front of me. And you guys guessed, I think you each took three guesses and see if you made it in the top 10 list. So let's follow that same style. Pierre, you get to start this time. So we'll go we'll go back and forth. So Pierre, you'll go one, Michael, you'll go one and we'll just flip flop back and forth. And I will tell you guys, if that state is in the top 10 list of lowest property taxes,

Michael:

Love it.

Pierre:

All right.

Michael:

Good luck Pierre. You're gonna need it.

Pierre:

Yeah, I'm just trying to remember all the different agents we've had on over the over the last year so definitely not Texas because they don't have income tax.

Emil:

That is correct.

Pierre:

I'll say Alabama because that was one of the reasons we chose Alabama because…

Michael:

Dirty dog

Pierre:

Man was it low.

Emil:

Alabama. Ding ding ding That is correct.

Michael:

Nice.

Emil:

Alabama is one of the top 10 Lowest property tax states good job Pierre. Alright, Michael, what you got?

Michael:

All right. I'm gonna take a flier here and I'm going to go and say Tennessee is going to be in the top 10

Emil:

Tennessee… Eeen. Tennessee is not in the top 10 Lowest property tech states. Sorry, Michael.

Michael:

Ah, swing in a miss.

Emil:

Pierre looking good, dude. All right. What you got for your second guess.

Pierre:

Can Kentucky

Emil:

Kentucky is not on the top 10 list. Sorry.

Pierre:

Oh man.

Michael:

All right.

Michael:

Virginia. Show me Virginia.

Emil:

Show me Virginia. EEEn. not on the list. Sorry Michael.

Pierre:

Oh man we’re strugglin.

Emil:

Mike you’re struggling. You guys did so much better on the other episode. I feel like it was you guys were doing really well on that one. Come on guys. All right Pierre.

Michael:

Alabama, Arizona Arkansas, California Colorado. Remember that fifth grade project the state's project and school you have to remember every state every capital.

Emil:

Yeah. Those are some…

Pierre:

Oklahoma

Emil:

Oklahoma final guess. Oklahoma is not on the list. Alright Michael chance to tie it here or just go down in terrible blaze

Michael:

Of glory. Like a like a phoenix rise from the ashes of embarrassment. Show me Mississippi.

Emil:

Ding ding ding Mississippi.

Michael:

Yes. Eat it Pierre.

Emil:

Redeems himself. Hold on you guys.

Pierre:

Just not Jackson, Mississippi.

Emil:

You guys died. Good job. One a piece. You know, you have 33% You both failed. But you both at least got one on the board.

Michael:

I went to engineering school 33 is passing for sure. Passing like that's like the highest grade oftentimes.

Emil:

I get it. Yeah, if it's based on a curve, you guys both pass.

Michael:

Sweet. This is a list compiled by Business Insider. And again, this is for 2021.

Michael:

So top 10 states with the lowest property tax. We'll start at number 10 move our way to number one, or so like this is 10th least expensive. Number one is going to be the least expensive in the country. Right? How this list works?

Emil:

Yes. So counting number one will be the lowest on a percentage basis property tax. Starting with number 10 We got New Mexico at 0.55% of assessed home value.

Michael:

I just gotta say already this list is garbage. Because the way homes are assessed is so different in every state. So I guess that's just something to highlight and point out is like, look to understand and every county does differently, by the way. So like understand how your county that you're interested in purchasing property calculates property taxes. So is it assessed value is it sale price, sometimes those two numbers are the same. So it's really important to go do a little bit more digging after this episode. And these 10 places can be a great place to start. But I just had to get I had to get that off my chest. Assessed value is a bunch of garbage like they two assessors for different states who like the same property, and it says it differently. So whatever that's worth.

Emil:

I've been the beneficiary of this on on my triplex in Missouri, the assessed value they gave was insanely low. So I've been the beneficiary of that. But yeah.

Pierre:

You're just bitter that you're a veteran that tied with a newbie here, so.

Michael:

Looking for any excuse to just to claw back some knowledge, some knowledge share.

Michael:

What’s number nine Emil?

Emil:

I'm curious, Michael, if you know this so assessed home value, is that literally the structure? Does that include land? Does it not include the value of the land? Do you know how that works?

Michael:

It's usually broken down between land and building is how I've seen it.

Emil:

Yep.

Michael:

And then I think oftentimes, the assessed value is the sum of those two. And so you're not depreciating the land on your taxes. But I do believe that the land is still taxed, because if you just go buy raw land, I think you'll still have property taxes to pay on that. It's going to be significantly less than but that's, that's my understanding.

Emil:

Okay, so that's interesting. I just really quickly looked up an article on what is the assessed value of a house. So I'm just gonna read this. This is from a website called Value penguin by lending tree. So it says officials review other relevant information such as neighboring property values and the sales history of the property to determine the assessment value. This estimate is generally made without actually inspecting the home which can lead to an inaccurate valuation, which is a testament to what you were saying, Michael. If the assessed value is higher than the fair market value, the property has most likely been over assessed by the town and the owner is probably paying too much in taxes, which is one reason you know, you can actually fight your property taxes.

The assessed value of a home usually lags in comparison to the market since the valuations are only adjusted annually. While market values can change multiple times per year, the home that has recently been resold tends to be closer to the assessed value than a home that has not sold in a long time. Depending on the area's legal restrictions. Most assessed values cannot increase more than certain percentage each year. So interesting. Okay.

Michael:

And I mean, that's another question to ask your cat like local county assessor is how often is the property reassessed because there are some jurisdictions where it's like once every three years or once every regular, some kind of frequency so it's not always an annual thing?

Emil:

Yep. Yeah, I remember when I was recently buying that treeplex, triplex I just mentioned in

Michael:

The treeplex!

Emil:

You know, what, we have a new kid at home, I'm allowed to have brain farts like that. I called the assessor and they gave me like, the Calculate the formula that they use to calculate it. So a lot of times again, if you're looking anywhere, you can call the county assessor, they'll either give you the formula, or they'll give you a breakdown of how they kind of calculate these things. But anyway, back to our list. Number nine, we got Mississippi which is 0.52% of the assessed home value. Good old Mississippi, and.

Michael:
MI SSI SSI PPI.

Emil:

You like geography, didn't you? You're getting geography class,

Michael:

Dude. I love geography. Yeah, I really like geography. My wife and I will sometimes play the geography game where she'll you know, we'll go back and forth naming countries and you gotta name the capitals. The good fun brain brain game.

Pierre:

Have you guys ever played the National Geographic board game?

Emil:

No. Tell us. Oh, it's, it is awesome. So I found this at the Goodwill. The Goodwill here has an entire row of board games. So we went there. And they're like, 3.50 each. So in board games are like 50 bucks each sometimes. So anyways, this is like a game from 1986 or something. And it's anyways, you build a globe flat out. So you have a bunch of hexagons and you you build a globe, and then you answer things about markets and people, geographic or planet planet Earth and you have like four categories and you get points based on it's a real fun game. So as a geography lover, you might really enjoy that game.

Michael:

I’ll Check it out. And that's cool that you build the earth flat because that's how it actually is in reality, so I mean.

Emil:

That's right.

Pierre:

Yeah. Well, because you make it flat you can make 4 Earth's because it's like when you unpeel an orange peel, it doesn't lay perfectly flat it leaves up open surfaces. Anyways, National Geographic plug right there.

Emil:

Nice. There's, there's this app I downloaded a couple years ago and it like helps you learn continent geography so it'll pull up Europe and you know, it'll have the outline of each a bunch of countries and then I'll like list 10 And you have to like tap where you think that country is. So it helps you like are there in different continents. So it's cool to alright, that's cool. Number eight.

Michael:

Back on the rails.

Emil:

Back on the rails number eight, we got Arkansas at the same as Mississippi 0.52% of assessed home value. So we got to a tie between Arkansas and Mississippi. Moving up the list. This is a very popular hot state for for Mark for rental property and investing right now South Carolina at 0.5% of assessed on value.

Michael:

Interesting. All right. All right.

Pierre:

Yeah. Interesting, because we've had both Jackson, Mississippi and Columbia, South Carolina, Columbia, South Carolina, right. Yeah. And those were both very high in taxes. So this is just kind of an average of the states. And no necessarily those metropolitan centers.

Emil:

Correct.

Pierre:

Or metropolitan.

Michaela:
Right cause every county can do it different.

Emil:

Alright, moving up the list we got I think somebody mentioned Virginia but number six on the list was West Virginia.

Michael:

Ooo man.

Emil:

Was that you Michael?

Michael:

That should totally count Yeah.

Pierre:

If that counts, Kansas counts for me. I'll just the add the Ar!

Emil:

On Jeopardy. What is Virginia would not be the same as what is West Virginia. Sorry, Michael.

Michael:

Alright, seems reasonable.

Emil:

0.49% of assessed home value on West Virginia.

Michael:

West Virginia was actually I think the number one state that was on the top 10 list of most important places to buy. That's interesting. And get a cheap house and pay very little property taxes.

Emil:

There you go. Alright, moving up. We got the District of Columbia DC at 0.46% of assessed home value. Obviously, homes are very expensive there. So you're still paying a lot in terms of nominal dollars, but percentage wise on the list of top 10.

Alright, number four, Delaware, we got 0.43% of assessed value. So business friendly, right. Some people like incorporate a lot in Delaware and then looks like low property tax there as well.

Number three, this was Pierre’s guess Alabama 0.33% of assessed home values. Tiny.

Michael:

Nice.

Emil:

Go Alabama. Number two, this one was surprising to me. Hawaii, Hawaii 0.26% of assessed home value.

Michael:

What? That I guess I figure you're paying so much for the purchase. You're still giving them like you said a lot of nominal dollars.

Emil:

Exactly. And then number one, can I get a drumroll please guys?

Louisiana 0.18%. Nothing's 0.18% of assessed on value. Crazy.

Piere:

Beautiful.

Michael:

Makes total sense.

Emil:

And that is our top 10 list of states with the lowest property tax.

Michael:

We should do another episode ranking the best school districts or the best school systems in the country and see if there's any any over overlap or direct correlation or parallels we could draw between high property tax states and very good school systems since that's so much of what those dollars go to fund. That's I think, like looking at the property tax breakdown, that's often the biggest portion of the bill in terms of like dollars and percent goes to the school system.

Emil:

Right. It'd be interesting, though, because again, even though you could have, like California, I think is probably the bottom third, or it's definitely in the lower group, the bottom 50% In terms of percent, I think, but just because home values are so high here, again, like just so much property tax revenue. So I wonder if it's like, you know, this percentage matter? Does it just matter of like overall dollars being pumped into the system?

Michael:

That's a good question, too. So for California, it's I think it was Prop Eight, I think I'm talking.

Emil:

Michael:

Prop 13. That's it, where you have 1% of the sale price at a minimum

Emil:

Forever and then never gets reassessed.

Michael:

Well, it does it goes up with time. But like your base value, your base assessed value is at 1% of the sale price. And so

Emil:

I thought either prop 13 in California was like your basically your property tax never changes. I thought that was the whole thing behind prop 13 is like once it sells it's calculated that value forever. I thought that was the thing with Prop 13. Otherwise, you know, you have someone who bought a home in California 30 years ago. And now their property taxes like astronomical compared to when they bought it because their values have gone up so much.

Michael:

Well, I think it goes up nominally every year like, look at your last two years of property tax payments on your house. Like it will have likely gone up a nominal amount.

Emil:

Okay, yeah, you're okay. So proposition 13, declared property taxes were to be assessed by their 1976 value and restricted annual increases of the tax to an inflation factor, not 62% per year. Okay, you're right.

Pierre:

And don't some areas charge more on property taxes based on whether or not you're going to be investing or whether or not you live in the property?

Emil:

Yes, I have a home in Indianapolis and you pay a higher rate if you're an investor, rather than if you're a owner occupant buying that home?

Michael:

Yeah, I think it's like point 2% of the assessed value versus 1% For investor versus owner occupied. So like doubles?

Emil:

Yeah, I think that's right. There's a there's a exemption to in California homeowners exempt or a home homestead exemption. It's pretty, it's pretty minimal. It's pretty nominal. But in other markets, it can be pretty impactful.

Emil:

Yeah.

Pierre:

Do you know if any of the states that we covered on this list are subject to that?

Michael:

I don't.

Pierre:

Okay. So that might be something to look into. You know, you might think it's the lowest place but then you go to invest.

Emil:

That’s right? This is only a starting point. We're leaving our our listeners with a lot of homework.

Michael:

Yeah, well, it's just I think it's such a good place to start. And especially if you go listen to the other episode and overlay. Okay, where are their affordable homes to purchase and also affordable property tax rates? Could be a new new market for you.

Pierre:

If you listen to more than two episodes, you will have heard Michael say more than more than five times call your county tax assessor.

Emil:

Michael “call your local county tax assessor” Albaum.

Michael:

Well, it's just one of those things like people are like, Oh my god, I totally burned by the property tax. It's like well, you didn't do the one thing that you should have done. It's so easy.

Emil:

Raise your hand if you fell victim to that on like your first or second property. That's me.

Michael:

Yeah, see?

Pierre:

I heard it. I heard it too a million times.

Emil:

Well, that's when was more so like the home in Indianapolis? I didn't again I didn't call the tax assessor I just looked at okay, what is it as a percentage? And I didn't look into Oh, for an investor it's higher so it's like you know during escrow I figured all that out. All in all still fine. Indianapolis is been a solid market could appreciate all those things. But again, you know, just got to go in eyes wide open.

Michael:

Yeah, it could have not been.

Emil:

Exactly It could have not been. The the joys of a bull market. Make Mistakes

Michael:

Still win.

Emil:

Feel the impact of a lot less. Alright, thank you everyone for tuning in. Hope this was a helpful episode for you. And we will catch you all on the next one. Happy investing.

Michael:

Happy investing.

Pierre:

Happy investing.

Let‘s talk about the single-family rental market and fractional ownership Dec 15, 2021

In this episode, she provides us with an update on the state of the single-family rental market. We dive into the data and learn about this sector's performance since the financial crisis of 2008-09. Additionally, we cover Roofstock's exciting new investment, Roofstock One, a fractional ownership option for accredited investors.

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Michael:

Hey, everyone, welcome to another episode of the real estate investor. I'm Michael Albaum and today I'm joined by Daria Davydenko, who leads sales and operations for Roofstock One, she's gonna be talking to us about the state of the single family rental market as a whole, as well as what Roofstock one as an offering is. So let's get into it

Daria, thanks so much for taking the time out of your day to come hang with me.

Daria:

Thank you for having me, Mike. It's always a pleasure to chat and especially about single family rental space, we are so passionate about it. And always, you know, good to talk about the space.

Michael:

Absolutely now. I'm thrilled to talk about it. I'm thrilled to have you on and so obviously, you and I know who each other are, we go way, way, way back. But I was wondering if you could share with our listeners a little bit about who you are, what is it that you're doing at Roofstock? And what are we going to be talking about today?

Daria:

Yeah, absolutely. So my name is Daria, Davydenko, I am part of the Roofstock One team. Prior to restock, I was in Goldman Sachs, Vice President of Goldman Sachs and I decided to switch and join an exciting and growing company like Roofstock. And I am even more excited to talk about the Roofstock One, which is a new product that we have just launched a couple weeks ago. And I can't wait to tell you more about it.

Michael:

Awesome. So I would love if you could talk to us a little bit about how Roofstock One got it started and why does it exist?

Daria:

Yeah, so we actually it was a very interesting story. Our co founder, he was on a phone with one of the investors and Roofstock is a marketplace where we sell single family rental space to potential investors. And so we got on the phone with one of the investors and we were just curious, like, hey, you know, what can we do differently to, you know, maybe, maybe improve something on our website, so you can purchase, you know, some single family rental homes for yourself and grow your portfolio. And it was very interesting, because investor came and say, you know, I feel like that the minimum is really high, because you will literally need to commit 100,000 $200,000 Just to get like a one single family rental home. And I'm not very, you know, I have never done this before. So I'm a little bit nervous about it.

And so we kind of got off the phone. And I think, you know, that kind of started the whole idea of, you know, after talking to the investor about fractional shares of homes ownership, so we were kind of the first company out there who started that, and Roofstock. One is the result of our intensive research in this space, how to make this work, how to make the single family rental, fractional ownership work, and how to make the single family rental space, more accessible, like so we are really looking to democratize a space and make it available to investors who have never done it, who are looking to add single family rental space to their portfolio. But maybe they don't want to be involved on day to day basis. So that's kind of where the Roofstock One comes in and helps to fill that gap.

Michael:

Awesome. Awesome. What an interesting backstory. So anyone who's listened to the podcast for long enough might be saying, Michael, you're a multifamily guy, I talk about it regularly. What are you doing with a single family home company? So I'm curious to know, for all of our listeners are, are interested in investing in rental real estate, some might be leaning towards multifamily, because I've indoctrinated them over the years. Why? And can you give us some background into the single family space over the last decade or so?

Daria:

Absolutely. And I'm very excited to share some information because 2021 has been an exciting year for single family rental space in general. And I think just kind of seeing some of the numbers. You know, I feel like it's on everybody's ears. Like Everybody Hurts single family rental space has been very much on mind of every investor out there. But I feel like once you kind of get it into your mind, and you actually see the numbers, it just puts everything into perspective in terms of exactly how much is it growing and how much opportunity is there.

So before I go into the details, I just want to kind of throw it out there that you know, please remember that past performance may not be indicative of future results and different types of investments involve varying degrees of risk and there can be no assurance that future performance, you know, we'll be profitable. And you should not assume that any discussion or information we provide in this podcast serves as as a personalized investment advice. And, you know, we just want to make sure that all our listeners consult their own accounting legal, you know, tax advisers to evaluate the risks and consequences and suitability of you know, of any investments for their personal needs. Without reliance on, you know, what can I guess we are providing here, this is more for information only.

Michael:

Perfect, perfect. Well, thanks for sharing that.

Daria:

So putting that aside, let's dive in. So I think, I think it's very important to just kind of start from the beginning that, you know, after the financial crisis, I think the, the home prices kind of went down. And I think that's where some of the large institutional investors kind of realized that, you know, the home prices are, you know, really low at the moment, and it could be a good place to kind of start jumping in, one of the things that was not available is cheap, cheap debt. So, and it was really hard for, I guess, single family rental spaces. So, you know, it could be like this homes could be in different regions or in different states. And it's really hard operationally.

So I think that it's been a very good run for the industry, starting from the, I guess, the financial crisis up until now, where, you know, thanks to the technology, thanks to companies like Roofstock, who allow that, yes, for some technology to solve some of those issues that I guess many are facing with having to manage single family rental homes. By being in a different state, so technology kind of makes it more visible more real time, you know, now maybe you can take pictures of you know, your home's when turns are going through and kind of see all this results in real time. So thanks to the technology, like I think that that's kind of attribute it to the in this huge growth in single family rental space. And you know, the investment that goes in here.

So if you look, historically, I think from 2006, to 2018, the number of detached single family rentals in the US grew by 30.1%. So to nearly 14 point 7 million, that's according to the Urban Institute, and that's a significant amount. And then I think if you take into consideration all the different types of single family rentals, and that includes a one to four unit, that's actually a 23 million single family homes market in the US today, and only around 2%, are owned by large institutional investors. And that's according to the National rental home Council. That's kind of the data they have done some research and they have measured out, you know, out of all the single family rental homes in the US how much is actually owned by large institution investors, and it's actually very little.

Surprisingly, single family rental homes have performed really well during the COVID. So some investors would come in and say, Well, you know, in COVID times, you know, because the stock market went down, and you know, there's a lot of uncertainty. So how were the occupancy rates in single family rental space, and surprisingly enough, but actually, in COVID, the occupancy rate stayed really high was like high 90%. I think there could be two reasons for it, and one is know large, you know, families now need more space, given that everyone is, you know, you and me are working from home at the moment. And you know, given that some people have kids and, you know, other family members as well. So there is kind of just now a need for more space.

So people are moving out actually have larger homes, or larger cities, I'm sorry, in Apartments Living in smaller apartments into like, maybe somewhere in the suburbs, but living in the larger home where you can have, you know, your family lived there and have enough space to do, you know, your work from home, take phone calls, etc. And in addition to that, I think that, again, to the uncertainty that's providing by the current situation, some people are not really, really ready to purchase a home and say, you know, this is exactly where I want to be for the next 10 years in my life. So a lot of people actually opt out to rent single family rental homes. So that's kind of some of the contributions why, you know, we see that occupancy rate actually have been in the high 90s.

Michael:

And Daria, a question for you. And, you know, there's kind of two ways that occupancy as measured what is physical occupancies? Are there physically people in the home, and then there's economic occupancy? So are there people in the home that are actually paying rent? And during COVID, we saw that there was an eviction moratorium and So we've heard story horror stories of tenants not paying rent for months on end. Do we know if this high 90s figure is for physical occupancy? Or is that for economic occupancy?

Daria:

So this is for the economic occupancy. But I also do know that even though there was a moratorium, we still have seen the collection rates in the high 90s as well.

Michael:

Okay, so for anybody out there that said, Oh, everybody stopped paying rent, and it was just living for free. It might not have been the reality case. All right, cool. Well, I mean, yeah, that's those are great indicators.

Daria:

Yeah, that's kind of the data that is out there in the market, about the single family rental space. And I think that's another reason why we have seen such a huge inflow of institutional investors into single family rental investments of all kinds, you know, some are investing in built to rent space, because they believe that that's going to solve some of the issues that we are currently facing, which is, you know, right now, I think we have 5.5 million homes, short, where, you know, we should be in the US, and which is actually contributing to, you know, there's a shortage of housing, obviously, and that kind of contributes to the home prices, appreciation that we have seen, especially in this year, I think it was, like, on average, you could have seen your home price grow, you know, 10% this year alone, which I think, you know, we probably have seen in some other years, but it has never been this much. And one of the reasons is because there is a shortage of homes, millennial, millennials are keep on, you know, having families now, you know,

Michael:

Those dang millennials, love having kids

Daria:

Now have, you know, larger families, they need more space. So everyone, you know, need kind of a home for themselves. And I think that we just don't have enough homes in the country right now. And I think that there is a, you know, lumber shortage, you know, that attributes to kind of the slowing contribution of like a newer homes building, then there is like this workforce shortage. So there's a lot of different kind of contributions that all add together to the shortage of homes in the country. And that also contributes to home price appreciation is going higher.

And of course, it hasn't been unnoticed. And so we have seen a lot of kind of institutional investors start like announcing, you know, different funds, especially for single family rental space. So they are out there looking for, you know, getting into the space and owning a rental home, given the occupancy rates are so high collection rates are so high home prices are going up. And, you know, given where we are at right now, there is kind of no sign of slowing down in this market. Yeah. So, you know, there is kind of this opportunity. And given that there is only 2% owned by large institutional investors, there is just a Mearns kind of potential growth in the space, and it's really just adding by all the syndicators.

Michael:

That's incredible. So one thing I just want to kind of come back to, at the beginning of this have this kind of data outlay, you were saying that over from 2006-2018, the number of single family rentals grew by 30.1%, to like 14 point 7 million or something like

Daria:

Yeah,

Michael:

But and then you said, we're still five and a half million short of where we need to be?

Daria:

Yeah, very still short. And this is according to a report that was done by Rosen Consulting Group, they have done a report that as of June 2021, they just basically compare it against the population grows, the number of new families being formed in the country, versus like the number of homes available, you know, for people to occupy. And it's just, there's a shortage.

Michael:

Holy smokes.

Daria:

Yeah.

Michael:

All right. Well, I know we came here today to talk about Roofstock One.

Daria:

Yeah,

Michael:

We're gonna get there in just a minute. But all of this to say you just mentioned that you don't you don't see the data suggesting that this is going to be slowing down any anytime soon. So what I want you to do is break out your crystal ball. We've done this on the show before with other guests. And I want you to tell me in our listeners, do you think we are due for another 2008 housing crash? If so, why or why not?

Daria:

I don't like to do crystal balls. But again, the data that I have at the tips of my hands that we constantly analyze, especially at Roofstock we constantly look at single family rental space at the market that different economic things, you know, anything that kind of might influence the space? And I think traditionally, you know, like any other real estate asset class single family rentals have a relatively low correlation to stock market. And you probably have seen With this new variant of COVID, the stock market, you know, went down pretty significantly, a lot of people started panicking. So you see all this kind of fluctuation and stock market, but you know, comparatively to that single family rental spaces, you know, kind of more stable, I guess, by the nature of this particular asset class, but it can help to diversify your investment portfolio, you know that you have one portion of your portfolio sit in the stock market that fluctuates here and there. But then another one that's a bit more stable just kind of keeps on providing you some rental income that keeps and keeps on appreciating and values.

In terms of the, I guess, another kind of thing that was recently on everybody's mind is inflation. And I'm sure you've heard about it, it's all over the news. But, again, what traditionally have been, you know, people think of real estate in traditional sense that it's also considered to be a good inflation hedge. And one of the reasons is that during the inflationary period, when all the you know, prices are rising, the real real estate asset class has an opportunity to adjust and in some cases, outpace inflation through the rent growth. And then there is another aspect of the real real estate investment is that this home price appreciation, it almost acts like an equity kicker.

So you've got your, you know, rent growth, that kind of helps you outpace inflation, and then you have this home price appreciation that kind of increases your equity. I mean, I think it's I just current kind of more like a trend in traditional sense how single family rental space has helped, you know, investors to diversify and hedge against inflation. But it also kind of just given some of the data that we have seen during the COVID. And kind of just even around, like, recent years, I feel like we are like in a better space now that given that there is a lot more control over the banks, and how much, you know, they have to keep in their reserves for you know, cash reserves, and kind of there is a lot more stringent regulations, when you are getting a mortgage on your home, like there's just so much more that goes into it, I was getting a home, like mortgage for my house, and it's just the amount of, you know, scrutiny that goes into there. Like the amount of analysis that's been performed, I just feel like it's completely at a different level where it used to be back in, you know, when the financial crisis happened.

So, of course, you know, I think that there's, it's really hard to say, you know, never say never right, but I feel like that all this kind of indicators that we are seeing, you know, we are not really seeing that this kind of current environment is going to slow down. And given that we do have such a huge amount of shortage in, in homes, and the population continues to grow. You know, people need space to live in.

And I also want to kind of just tell you that there was a study that was actually conducted by John John Byrne's real estate consulting, NRHC, who they have created something that's a single family rental market index. And it's basic, basically like a quarterly survey that gorgeous industry, Hell's by measuring some factors such as median rent, lease and activity occupancy. So what they found is that this kind of market index rose to 90.3 out of 100 in the first quarter of 2021, from you know, 62.5 out 100 From a year earlier. So we just kind of continue to see that, I guess, probably, you know, some of the things there's COVID there's just people kind of looking for more space, in your families looking for places to live in, and shortage of homes, like all contributing to people need to, they want to go into single family rentals, they want to find a place to live and they want some space where they can live as their family and you know, traditionally maybe people who couldn't afford to purchase a home maybe they were people who had some maybe some issue is their credit history. Maybe they were just kind of traveling for work, you know, the work due to their work, they had to go from place to place and that's kind of the reason why they chose to rent.

In this kind of environment. We are seeing that actually people who traditionally might have bought a home now they chose choose to rent because maybe they want to, you know, try out different areas different state and see if that particular lifestyle, you know, works for them.

Michael:

Rent a van perhaps.

Daria:

Yes, exactly. And so like we are just seeing a different type of people who choose to rent versus buy homes and those people usually have a much different I guess like different reasons for choosing to rent versus buying a home and some of it is contributed to COVID some of it is their work and Some of it is just like lifestyle changes, you know, California is notoriously expensive, and lots of people are looking for a new place to live. But now they're not sure which beach state might be suitable for them. So they, you know, they try to live in one place than another one than some other state until they maybe they find a place that they truly feel comfortable living in.

And maybe, you know, they've got a great school system, kind of you name it all this kind of different considerations before they actually put like a large amount of money on their house and say, Yes, this is where I'm going to stay for the rest of my life. And I want to buy this really expensive home and pay a mortgage on it. So.

Michael:

Good to know. And you heard it here, first, folks that story his take on where the economy is going. No, that's, that's great. That's great. I want to shift gears here a little bit, and really get into the meat of what we came here to talk about. And that's Roofstock. One as an offering. And so can you talk to our listeners about what Roofstock one actually is, and how they might be able to utilize it to their benefit?

Daria:

Yeah, so Roofstock One is an innovative real estate investment platform that gives investors an easy and cost effective way to add single family rental asset class to their portfolio, I do want to mention that at the moment, this particular product is only available to accredited investors. One of the reasons is, you know, due to the regulations, we are only allowed to admit like accredited investors into the program. But we are actively looking to find new ways to make this available to a larger public.

Michael:

Okay, and for those who maybe aren't familiar, what is an accredited investor,

Daria:

So there are four ways you can become an accredited investor or, you know, if you're an accredited investor, one is if you are making $200,000 per year, and you are making $200,000 In the past two years, and you are set to make $200,000 This year, as well, you are considered to be an accredited investor. You If you and your spouse together make over $300,000 this year and in the past two years, then you're also considered to be an accredited investor. Maybe you're you also will be accredited if you have a $1 million of net worth. And that could, you know, you could include in there, your 401k, IRA accounts, any your bank accounts, investment portfolio, anything that's outside of your primary residence, can count toward your net worth.

And in order for us to accredit someone, you know, we usually will just require either like you could provide us a letter from your CPA and your CPA or investment advisor could issue just a very simple letter that says, you know, I'm a CPA of this particular person, and I confirm that that he is or she is accredited. And that's all we need to, you know, can accept you into the program. Some people, they do kind of provide us with their W2 information or tax returns or just bank statements just to kind of qualify, you know, based on their net worth or income.

So, we do kind of work with different types of documents, but if you know anyone has any questions, we are always happy to answer and help to figure out what would be the easiest way for you to get your accreditation verification results.

So, as we have discussed earlier, you have seen that this this year, and I think in the past few years, you have seen a large inflow of institutional investors into the space given that they have seen how well single family rental rentals have performed during COVID We want to make this available to individual investors out there as well. So Roofstock One is designed precisely for that. So now, you know you as an investor is able to create your own strategy is Roofstock One, you know, without having to put a lot of money into this asset class. So we are as a program, you can come in with $5,000 and you can purchase, we call this kind of common stock and tracking stock and tracking stock kind of income and stock combined. They all kind of allow you to create your own strategy. So it's It depends if you want to be kind of exposed to all of the homes inside the Roofstock One or you prefer some certain strategies, maybe you like certain regions or type of homes, you can come into the website and you can customize to whatever fits your own needs and kind of strategy and create your own customized portfolio that will be completely managed by Roofstock One.

So we take care of all of the day to day. Communication with property managers tenants, pay for taxes, pay for insurance, HOA and You as an investor, just enjoy the kind of distributions on quarterly basis from the rental income, and potentially also have some appreciation of your homes in the future.

Michael:

Interesting. So I'm going to paraphrase back to you and explain how I understood that and then you can help correct me if I get off the rails here. Okay.

Daria:

Yeah.

MIchael:

Okay, so Roofstock One is a privately held REITs, basically, like a real estate investment trust. And within the REIT, I can, if I'm an accredited investor, I can bring $5,000 And I have my choice of tracking stocks or common stocks. And the tracking stocks are specific to maybe a region or to a group of properties. And the common stock is all of the properties that restock one owns. And I can decide how much money of that $5,000 minimum investment goes into tracking stocks or versus common stocks. And I don't have to do anything after that. I mean, you restock one just manages all those properties. For me, I'm not calling the property manager telling them, Hey, we got to screen this tenant better. We got to coordinate this repair, Roofstock. does that for me? Is that right?

Daria:

Yes, precisely, you got it absolutely correct. I think the beauty of that we haven't seen I guess other platforms do the same. The same offering out there for other users is that you can come in and visit the same, I guess product you can design and customize your own strategy pick and choose. And one of the kind of interesting things that we came up is that our tracking stock, it is a security offering that returns these returns that reflect the economics of the fully managed single family rental properties. So usually, tracking stock is comprised of a you can think of it as like a mini portfolio, it usually consists of eight to 10 Different single family rental homes, that are pre assembled based on their attributes, like regional, like you have mentioned, investments, right your home type. And once those kind of homes are assembled in the inside the tracking stock, we will not be switching them from that tracking stock. So they will stay there as is.

An investor can, you know, we, we try to provide as much information as any investor would need to make their investment decision. So we provide the address of every home, you can go online and search and take a look at the pictures of those homes or we provide you know, information about how much was you know the cost of those home and how much we had to put in to renovate it to make it available for rent. And we also allow investors to play around with some of the assumptions that we have put in to really understand how we came up as the we do provide some target financial information about how if you were to invest into this particular set of tracking stock, and then this particular set of homes inside the tracking stock, you know, how it could potentially how much you know, yield, you could potentially receive or what could be an IRR after five years of you kind of holding this investment.

And of course, some of the assumptions that we have used are actually so we have done an analysis of every single home inside this tracking stock on zip level. And we kind of we looked at the past information and measured Okay, on average how much the home price appreciation went up for this particular zip code or homes in this particular zip code. And then that's how we kind of measured in the past five years, on average, how much was the home price growth in this zip code. And then in the past 10 years, what the what was the home price growth. And that's kind of how we came up with some target IRR information for investors.

But given the tremendous run in 2021, some investors could come in and say, I think you guys are too conservative. I think that this you know this amazing cycle that very soon in single family rental space will continue in the next five years. And I think on average, just like what we have seen today, maybe the you know, home price appreciation will go up 8% 10% Like you name it. So we do allow investors to play around with those assumptions. And, you know, see how that will impact their potential investment outcome from from you know, this particular Roofstock, one investment.

Michael:

Interesting. So I can take my $5,000 I can pick a tracking stock, I can change the performance, and I could change the assumptions of the performance and then see what my return looks like for that particular set of homes and inside that tracking stock.

Daria:

That's precisely that. Yeah, we allow you to play around with kind of all the important information like you can change. I think the gross yield on this tracking stock, you can play around with rent gross, you can play around his home price appreciation numbers. You can also play around to his expense ratio. Maybe you feel that given the vintage of the homes in this particular tracking stock. Maybe you believe it will cost more to maintain this home. So maybe you can factor that in.

But we are trying to make this investment transparent. Give all the tools that investor would need in traditionally to do maybe research. If they were to acquire this, this particular set of homes on their own, you know, we believe that there will be a lot of research that goes inside that kind of decision making process, but we kind of try to break it down into simple terms and try to give all the tools to investors. So you know, analyze it, and then make an informative decision. And I think that by buying a single share of tracking stock or common stock investors, I get an instant diversification. So just with one share of a tracking stock, you get exposure to all of those homes inside that tracking stock.

Michael:

That makes total sense. So I'm curious start, aside from the requirement of being an accredited investor, who would be a really good candidate for Roofstock One? Who does this make sense for?

Daria:

Yeah, so I think asides the accredited investor, right now, we are only allowed to sell this particular product to people who reside in the US, we do hope to again, make this available to anyone who might be residing in other countries in Europe or Canada, but we are not there yet. So at the moment, it's only for US residents. And also, if you enjoy like a landlord experience, you really like the day to day aspects of managing single family rental portfolio, Roofstock One is truly designed to be a passive investment for, you know, for you. So you truly can just put in your $5,000. And, you know, kind of you can anytime log in into the dashboard and see what's your overall portfolio allocation is how much diversification you are getting. You can see what's what was your distributions here today, this quarter, to kind of get enough information for you to know how you're doing. But you know, you wouldn't be able to interact with the property managers, because that's all done behind the scenes by us.

So that's truly is. I feel like it's a very innovative platform, because we are trying to kind of give you that diversity diversification that every investor is looking for, I think, because it will, one of the another reasons we kind of created this as a mini portfolios and said the tracking stocks is that it can help you to reduce your risk of exposure to like a single family rental home that you you know, you might have, if you only have just one home. So if there is a turn on that home, you know, your your rental income might be affected. But if you are getting this instant exposure to eight to 10 different homes, you know, even if one of the homes currently has a turn, you know, you're still getting, you're still getting exposure to to the rest of the homes and rental income from the rest of the home. So hopefully that kind of solves for that issue for the investor.

Michael:

So Daria, I'm curious to know too about like, what the time horizon of the investment is, is this something if I'm an accredited investor, and I want to be passive, but I want to day trade my shares is, I mean, is that something that I can do as part of Roofstock one?

Daria:

Yeah, so given that it's a private REIT offering right now, we, the Ask investors to come in with five years in mind for investment horizon, we do have some limited, limited redemption program for investors who have some emergency situation, they really need to redeem the funds from the investment. But in general, it's very limited. And I think we are looking to create a secondary market trading platform in the future for this program. At the moment, we don't have a just yet. So that's why we can guarantee that anyone who come in, you know, began to have that platform in the future. But we do want, you know, to let investors know that we do have it in our roadmap. So we do want to make it available in the future. But we don't know just how quickly it will become available.

So in general, five years in mind, and there is an additional, I guess, aspect of five years, right, like usually takes one to two years for you to stabilize your rental home. And then I think it usually takes around five years for you to see decent amount of home price appreciation, appreciation. So kind of it seems like a really good timeline to keep your investment in the program, especially in asset class, like single family rental space. Of course, anyone could argue that, you know, if we are to have the same homerun as we had in 2021 in 2020 to 23 and up to 25, then no, some investors might want to withdraw their funds earlier. But you know, you could argue, you know, who knows what's going to happen in the next five years, it could slow down or it could keep its pace. But in general, I think five years seems like a good time to keep your investment in Singapore. From the rental space,

Michael:

Okay, and then so what happens at the end of the five year period? If we look at a particular tracking stock, let's say, is Roofstock going to sell those homes? Are they going to refinance those homes and then pay off the investors that want out? What's the mechanics look like?

Daria:

Yeah, I think, in any case, the investors will receive their liquidity at the end of the five years, we do have some investors who have reached out and they have mentioned, they want to continue to hold their investment. So I think once this five year, time horizon kind of happens, and depending on what's the situation in the, you know, in the market, you know, most might, some investors might want to continue to keep it because it's just been such a tremendous run for them. But for those who do, or seek liquidity will definitely kind of provide them that liquidity and redeem their investment, meaning that they'll get their, you know, whatever the principle that they have initially put into the program, and they could potentially also get that home price appreciation. If you know, the the market continues to be the way it is.

Michael:

Okay. Awesome. Well, Daria, this has been so much fun, super informative. Anything else investors should know about the program?

Daria:

Yeah, I think the one of the kind of most frequently asked questions we receive is kind of what is the difference between common and tracking stock. And I think you can think of common stock as that kind of overall exposure to rate. And then tracking stock is that you can, of course, this is not legal terms, but you can slice and dice REIT and only get exposure to certain parts of the REIT or certain regions or certain type of homes. So that's what tracking stock is, you know, common stock is really good, because it offers investors a broad based diversification opportunity, among all of the properties and Roofstock One, so it's really makes it fun, anyone can find something that they're looking for when they come to Roofstock One website and really build their own strategy and focus high level on kind of where they want to be in where's that next growth opportunity will be at and kind of focus on building that out. And we are going to continue to release some new tracking stocks on our website so investors can have fun and, you know, kind of check out maybe some new markets become released or new type of properties and see if you know, they can add to their portfolio if they wish so or they can wait for maybe another opportunity that will come along.

Michael:

Okay. And if people want to learn more about risk one, invest in the platform, have additional questions. What's the best way for them to either get a hold of you or your team? Or learn more about it?

Daria:

Yeah, they can always email us at one@roofstock.com

Michael:

And we do they spell one or the number.

Daria:

It’s o n e @roofstock.com. And we will be happy to assist that or even just chit chat about single family rental space. We love it. We follow it and we are always available to talk about it

Michael:

Awesome and does Roofstock One have its own website as well.

Daria:

Yes, it's www.roofstock.com/one. And for anyone who would like to check out our website, and you know, register and see, you know what investment opportunities we provide.

Michael:

Awesome. Well, there again, this has been great. Thank you so much for coming on and nerding out with me and sharing with all of our listeners what Roofstock One is, really appreciate you.

Daria:

It's a pleasure. Thank you so much, Michael, thank you for having me. And thank you for the listeners who joined us today.

Michael:

Awesome. Take care, we'll talk to you soon. Bye.

Daria:

Thank you so much for listening and tuning and tuning in with us today. We just want to provide you a reminder before we leave is that Roofstock One Inc is not registered as a broker dealer, investment advisor, investment manager under the US Securities Act. Roofstock ones offering are made in reliance on the exemptions from the registration requirements. Right now you can look at the private placement memorandum on our website and we do advise that every investor read through the private memorandum carefully to understand all of the risks that are involved with investing into the this particular program. You should not rely on any past performance or forward looking statements when evaluating an investment opportunity. And we always recommend that our investors consult with their own accountants, legal financial advisors, or just evaluate all the risks, consequences and suitability of any investment for your particular needs. And with that, thank you so much for listening, and we look forward to see you into the program.

Okay, everyone that was our episode. A big thank you to Daria for coming out and sharing with us a ton of knowledge and really, really excited to see what Roofstock One as an offering does from here. As always, if you liked the episode, feel free to leave us a rating or review. They are really helpful for us wherever it is, Listen, your podcasts and as always, we look forward to seeing you on the next one and Happy investing

The most important real estate terms and how to use them Dec 11, 2021

In the real estate investing world we throw around a lot of terms, but what do they mean and how do you use them?

In this episode, we cover the most useful real estate terms. We break down what they mean, how to calculate them, and when to use them. After this episode, you can hold your own in a real estate discussion with the pros, or look cool dropping jargon bombs on newbie investors!

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Transcript

Michael:

What's up everyone? Welcome to another episode of the remote real estate investor. I'm Michael album and today I'm joined by

Emil:

Emil Shour.

Michael:

And today I'm Neil and I are going to be talking about some of the hot vocab words you may have heard about as a real estate investor, we'd like to sound fancier and smarter than we are. So we use silly fancy words for kind of some everyday things. So we're going to be dissecting those and talking through what they mean and how to use them. So let's get into it.

Alright, Emil, there's like all kinds of fancy words thrown around. People love talking, very high brow as real estate investors very pinky out, if you will. So let's dive into a couple of these. And I'm wondering if we can start with cap rate. And I think it's a very common term that a lot of folks may be familiar with some of our newer listeners might not be so can you give us a definition of what a cap rate is, and how you actually use it when determining whether or not an investment makes sense for you,

Emil:

Yessir. So I am. I'm on Roofstock site. And luckily, there's a bunch of, you know, these are calculated on every property listed on the site. And you get a nice little icon next to each one of these that explain what each term means. So I'm just going to read it from the Roofstock site, and then we'll dive into a little bit more.

So the cap rate is the percentage return calculated by dividing net operating income in your one by the property purchase price, your net operating cash flow excludes your loan costs. So cap rate is basically all of your income minus all of your expenses, except for the cost of the loan. So this assumes you're paying all cash, it's useful in comparing properties, apples to apples, right, we'll get into cash on cash in a minute. But cap rate can be more useful in analyzing properties, without the use of leverage to compare them more easily to see what kind of return you get.

Michael:

Yeah,

Emil:

Because oftentimes with with a loan with financing, you can juice returns. But cap rate again, just allows you to do more apples to apples.

Michael:

Perfect. And another way that that I've kind of taught cap rate and what it is inside the resarch Academy is basically it's your cash on cash return for an all cash purchase. So if you see a property that's listed for 100 grand advertised at a 5% cap rate, you would expect a 5% return on your $100,000 purchase, ie a $5,000 NOI, or put $5,000 in your pocket. Now, just like you mentioned, as soon as you put leverage on it, things can change. And so if you and I both bought a five cap property for 100 grand, and you use 80% leverage on 60% leverage, we would have different cash on cash returns. But from a performance standpoint, we would expect the same cap rate.

Emil:

Very well said I think I'm just gonna take a backseat On this episode, you are doing a much better job of explaining things. So see you later, Michael.

Michael:

It's been a lot of fun. Take care, bye. No, so what when using cap rates? I mean, how do you think about it when determining whether or not an investment makes sense for you?

Emil:

I am a very simple man, I basically

Michael:

Simple pleasures.

Emil:

Look at cash flow and cash on cash when I am making investment decisions. But again, the cap rate is useful in comparing properties without the use of leverage to potentially juice your returns. So it is a very common metric that investors use. I just don't use it that much. I mean, I'm more of a cash like what is my actual cash flow? And what is my cash on cash?

Michael:

Yeah, makes total sense. I think cap rate is I use it for kind of like surveying the market and seeing okay, this type of property is selling for an eight cap all across town. So why is this particular property listed at a seven cap are a six cap or a 10 Cap? Right? Why is this property? What is it one of these things is not like the others? So using it as kind of a benchmarking tool and determining what is appropriate for the market. Because that's also what a cap rate can tell us. So that's something else that a cap rate can tell us so that's that's how I've used them in the past just to get a flavor for a market.

Emil:

Yep. I mean, if you assume the same like downpayment and Financing percentage can, you can do the same thing with your cash on cash, right? Like, here's what this market produces in terms of cash on cash, if I assume 20% down on every property I look at,

Michael:

Sort of, but I think cap rate is a better indicator because the better equalizer because you, it's basically an indication of what kind of return someone is willing to accept for that given property. So for the risk in rent, I mean, price aside, right, because 8% is 8%. So for the quality and location of this property, someone is is demanding a 6% return, versus a much higher end property in a much better part of town, someone should be willing to accept a lesser return. And then, of course, go the opposite with the opposite.

So I think I think when you put leverage and cash on cash and cash flow, it introduces kind of the second or third variable that makes it a little bit more confusing. So if you just look at cap rate, it's kind of a nice way to say, Okay, well, this is the return, I would expect, now I put leverage on it, I should I should hopefully get a better return. If not, then might not be a great candidate for leverage.

Emil:

That's a good way to explain it.

Michael:

Sweet. Alright, so let's transition here to a metric that you mentioned, you use a lot cash on cash return. What is it? And how do you use it, Mr. Eyebrows?

Emil:

So again, I'm gonna I'm gonna read it directly the definition and then we'll get into a little bit more. So cash on cash is a measure of return on your initial investment, after your first full year of ownership is equal to your net cash flow after all expenses and loan payments divided by your initial investment amount.

So that basically this looks at okay, let's say I make, after paying all my expenses, loan property tax vacancy, every single thing, I end up with 12,000 $1,200, at the end of the year, right? If I put in $20,000 as my down payment plus closing costs, plus all those things, the way I'd find my cash on cash as I would divide that 1200 By my initial investment of $20,000 to find my cash on cash return, which my brain is a little slow, but what is that?

Michael:

I think it is 6%.

Emil:

I think you're right, but I didn't want to see it and sounds stupid. 6% It is, there you go. So that would be a 6% cash on cash return. So it's basically looking at of the money I put in, how much am I actually profiting, right, what percentage.

Michael:

Alright, so here's a question for you. Your pro forma says you should end up with 1200 bucks a year because of your vacancy, your capex, your pair maintenance, but you had maybe a really good year and you didn't have vacancy, and you didn't have a leasing fee, and you didn't have as much capex as you anticipated. So you end up with actually two grand, okay, are you touting to the world? Hey, I made a what is that a 10%? Yeah, cash on cash return? Are you earmarking those dollars and like setting them aside and saying, I've already quote unquote, spent them, because if it's not today, it'll be next year,

Emil:

What I actually do is, I've talked about this on a prior episode, all the all the profit, all the cash flow receive goes into a separate real estate checking account, which I don't touch, it's only used for reinvestment or paying for capex, or whatever reserves all that stuff. So we don't touch our cash flow now. So it's, it's all sitting there. We're gonna assume if we have a good year, we're waiting for something to happen. Like, we know, I never assume that, oh, it's going to be like this every single year. I think the longer you do this, you realize things break all the time, it's part of the business, you're gonna have capital expenses, even if you have, you know, five years without it, you're gonna have a vacancy, you're gonna have all these things. And once you go through them, you know, that real estate investing requires money, and you need to have reserves. So we don't touch any of that stuff. It just sits in its own account.

Michael:

Okay. So from when you look at your historic performance, you would say, again, even if you ended up with two grand, you would say that you actually profited. 1200?

Emil:

No. So at the end of every year, we actually look at like our our actual performance, but I just sum it up, right? i Yes, great. I did great year one. But what I'm looking at more so is like, I'm adding all those up, you know, let's say my first property I bought in 2017. So like the last four years, how have we actually perform?

Michael:

Got it? So you're looking at it over time, not just isolated year by year?

Emil:

Right? I mean, I have this spreadsheet where we do look at it on a year by year basis, but also summed up together and that's more so what I care about.

Michael:

Sweet. All right. And are you including your closing costs, your you know, the cost of the loan and the cost of the title and the escrow in your cash on cash return calculation.

Emil:

I am. The only thing I don't include is so a lot of times If you impound your property tax and your insurance, like when you close on a property, you're going to pay like the first year of that. So it looks like those are additional closing costs. I separate those out. And those are just insurance and property tax line items. Right. So I avoid double counting those things. Because it can be easy to like, you know, I'm telling you, like, it looks like it's closing costs, but it's just you're prepaying for those rings. So I exclude those.

Michael:

Yeah, it makes total sense. All right, cool. Yeah. Nicely done. All right. Well, let's move on now to cash flow. All right, how do you calculate cash flow on a property? And what is cash flow.

Emil:

So cash flow is the profit you end up with at the end of the year after paying all your expenses. So you have rental income that comes in, right, that's what your tenant pays you. And then all your expenses, your financing your so that's your mortgage, your property taxes, your insurance, any repairs and maintenance, you paid for right vacancy that's lost revenue or, and then turns, you know, if you got to pay to fix it and rent it out, if you have a property manager, paying them their management fee, so it's literally your profit and loss, right? How much did you make at the end of the year?

That is your cash flow. And we actually did an episode earlier, which will have either in the show notes or if you're watching on YouTube, there might be like a card, you can click on it. Basically, we talked about how you should actually look at your cash flow, because a lot of times people will say, you know, it's it's your rental income minus your mortgage, and maybe your property tax and insurance. It's like, no, no, no, no, you gotta, there's so many other things that go into this, especially as you're looking at, you know, it's your forecast your pro forma, what can you expect on a property, there's all these things you need to be including on that. So we cover that in at length that that full episode.

Michael:

So if I'm hearing you, right, what you're saying is on my $2,000, a month rental, my mortgage is $500 a month, I'm not cash flowing $1,500 a month?

Emil:

No, contrary to what you may see on YouTube and Twitter and some other forums, that is not how cash flow works. You're gonna have a lot more expenses than that, trust me.

Michael:

But, but in that month, I ended up with $1,500. So I don't understand.

Emil:

Oh, you silly man, Michael.

Michael:

I hear that question. You know, all the time. And what I always explain to people is like we have in the way that we model real estate investments and cash flow, specifically, we we level everything out. And so we assume every month you'll have $50 repair maintenance. Every month, you pay $100 in property tax every month, you pay 50 bucks in insurance, and it becomes this nice uniform income and expense calculation.

When in reality, I think you coined the term, maybe not coined it, but you said it here first, that it's lumpy. So you might pay property taxes once a year, and that might be your $1,200. And so in that given month, you're going to have a very negative, you might have a negative cash flow. But to model it out to make some assumptions, we smooth everything and assume that it's uniform, which is just not the case. Right. So I always like you go back and kind of earmark those dollars and yeah, this month, end up with 1500 bucks, but that's to pay for the property taxes that are going to be due in six months from now. And the expenses, you know, the plumber, or electrician call out that I'm gonna have two months from now.

Emil:

Yeah, and even on a yearly basis, forget monthly for a second like, again, you could have a great year, and then your to your vacancy. And you may be negative that year, like you may have come out of pocket in terms of cash flow for the year, but you want to look at this over a longer time horizon. Right. That's why we in our proformas we just yeah, we set a standard rate even if we don't have it in that month to just kind of smooth things out.

Michael:

Love it. I man, let's move on now to IRR.

Emil:

IRR annualized return, also known as internal rate of return is a measure of annualized net return on an equity investment in equals the discount rate at which the sum of the present value of all cash flows is zero. calculation is based on actual and budgeted values. So what does that all mean?

Michael:

Sounds like a lot of Greek to me.

Emil:

I have no idea. I have never used IRR. I know it's important. I know a lot of finance people talk about it. Again, I'm a very simple man. I have never calculated an IRR for a property I've bought. But Michael, I'm hoping you can shed more light here.

Michael:

Yeah, totally. It's it's a very complicated calculation for anyone that's done it by hand, there's a pretty easy way to do it in Excel. There's an IRR function in Excel. And so basically, it's a way of calculating future cash flows, oftentimes including a sale and determining what that looks like over time. Because if you can imagine like in year one, if you buy a property, you're going to have these cash flows and then If you sold it at the end of the year, you're gonna have a return on your investment. And we can very easily calculate that because it's over the course of one year.

Well, oftentimes, these investments are over a long period of time, multiple years, sometimes decades. And so we want a way to move those cash flows and account for the time value of money in a sense. And so we are we are, totaling all of the cash flows that happen year over year, month over month, whatever frequency, you want to to calculate your IRR in. And then oftentimes, we assume a sale a future sale. And so our dollars have been working for us all that time. And so this is a way of capturing basically how hard our dollars are working for us over a time that is different than a one year period.

So that was a very long winded way of saying it's it's a time bound calculation, that gives us an idea of what our dollars are doing for us. Like you it's not, it's not something that I use very regularly in terms of determining if something is a good purchase or a bad investment. And that's mostly because for these equations to make a whole lot of sense, I found, we have to assume a future sale price, which is not something that I'm going to do. And so I'm going to force value, I'm going to add value, hope for appreciation on single family stuff. But I'm more concerned with kind of the day to day year over year operation, and what the cash flow numbers look like.

Emil:

Right? I agree. I think if you come into an investment knowing okay, we want to hold this for five years. And here's our appreciation assumption, here's our cash flow assumption, all those things. That's when people start really using IRR because they know their exit timeline. Otherwise, it's like, I don't know, I feel like you're kind of throwing a finger to the wind and saying, we'll see.

Michael:

Yeah, because it can be like you could make an IRR calculation like amazing, based on what your assumed sale price is. So like, I think it's they often use it in syndications and bigger deals where they're raising capital. And so I would look to get a very clear understanding of like, Okay, what's your assumed? Like, as Tom always said, what's what's going on in the sausage? How's the sausage being made? What are the assumptions around the annual cash flow? What are the assumptions around the future sale price? What are the assumptions around that cap the exit cap rate, that's oftentimes what they're looking at. And just get very clear on what that is, because that's going to impact the IRR significantly.

Emil:

Yeah, I think you're right like this is more common in funds and syndications, where investors want to see all the assumptions. When are we gonna exit all those things before they put money in? I less so see, you know, mom and pop just people investing their own money really. Leaning on this metric, personally, from what I've seen.

Michael:

Yeah. And again, like, this whole episode goes to highlight that there's no right or wrong way or right or wrong metric to use. Everybody is different. And so figure out what makes what's important for you, and then use that. So Emil likes cash flow, and cash on cash. Somebody out there might love IRR and cap rates. So great, if that makes sense for you. Awesome.

Let's talk about gross yield. What is it? How do you use it?

Emil:

Yeah, so gross yield is the annual income generated by an asset before any expenses divided by its purchase price. So you take monthly rent, multiplied by 12 months, and you divide it by the purchase price. So if I buy a property for $100,000, and my rent is $1,000, I would multiply that rent times 12. So 12,000 divided by the purchase price, which would give me.

Michael:

12%

Emil:

12%. Like I said, I said, Man slow today. So I get 12%. So that's my gross yield. I don't find this to be a particularly helpful metric, you'll see it often. Obviously, it doesn't assume any expenses, it doesn't tell me my property, tax insurance, all those things. It can be misleading in that a high gross yield, like a market like Texas, right could have a higher gross yield. But we know that property taxes are higher in Texas, so it doesn't factor any of those things.

So to me, if you're comparing properties in different markets, it's not super helpful, maybe if you're comparing properties in the same market, helpful, but I would never use this to compare two different properties in two markets.

Michael:

Yeah, I think you nailed it. Thank you now that because yeah, it's a very quick and dirty calculation of What's the rent to sale price. Like this is just another way to say it.

Emil:

Exactly.

Michael:

Alright, Emil, this was a lot of fun man. Hopefully people can have a better understanding of what these terms mean how to use them and then be used them in their everyday investing careers. As always you like the episode feel free to leave us a rating or review. I look forward to seeing on the next one. Happy investing.

Emil:

Happy investing.

Here is what you should know about the Little Rock market Dec 09, 2021

After graduating from Auburn University and a two-year stint in East Asia, Gray moved back to Birmingham and joined the Evernest team as a Leasing Coordinator. From there he became the Birmingham Team Leader and then moved to Denver to lead the Colorado team. Gray is now the Director of Acquisitions where he handles daily operations as well as a majority of investor communication sourcing deals across all Evernest markets. When Gray is out of the office he enjoys skiing, camping, climbing, being on the water, and all things Toyota Landcruiser. Hometown: Birmingham, Alabama

In this episode, Gray tells us what we as investors need to know about the Little Rock market. We cover neighborhoods, price points, rents, tax assessment, environmental factors, and much more.

Gray's contact: ghall@evernest.co

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Transcript

Michael:

What's up everyone? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today with me, I have gray hall with ever nest who's going to be talking to us about the Little Rock Arkansas market. So let's just get right into it.

Gray Hall, thanks so much for hanging out with me today and taking the time out of your busy schedule. I appreciate you.

Gray:

Yeah, excited to be here and talk to you guys about Little Rock today.

Michael:

Awesome. So for those who might not know you, give us a little bit of background on yourself and how long you've been in the real estate property management game.

Gray:

Yeah, so starting out in property management first about five and a half years ago. So I work with Evernest. So yeah, been in the property management game in the trenches for a long time and started helping to buy investors houses. And I think that property management experience really translates into helping investors buy, because I think there's a lot of agents who understand the residential side, but I think it's really powerful to pair it with, you know, on the back end, what does this look like?

Because you can buy the deal. But if it doesn't perform, you don't know the rental rates, what the tenants want. And so yeah, that's my experience. Love being in real estate. It's a hobby of mine. So I think most people probably resonate with that it's, you know, I get excited get to do this work get to work with buyers. But some also kind of personally interested in

Michael:

Totally. And how many deals would you say you've done in the last 12 months on the purchase? And then sales side?

Gray:

So our team has done? We're crossing over the 600 threshold, and we've got breakers and kind of multiple markets? And I've done around 100 this year?

Michael:

Oh, that's awesome. That is awesome.

Gray:

Yeah. So it's fine helping a lot of investors. So it's get tons of market exposure in this this markets been crazy this year. And so yeah, doing consistent deals help you to keep up on the market and making sure that you're staying competitive, because it certainly is still competitive out there.

Michael:

It sure seems like it and great when you're not helping investors find properties or managing folks, what is it that you'd like to do in your free time.

Gray:

So married and so I love hanging out my wife, we like being outside. And so camping is something we enjoy to do together, haven't yet found in action sport that we like to do together. So camping is kind of our thing. We've got a little dog, a black lab. So anything being outside is where we try to spend our time.

Michael:

Right on. So let's shift gears here and focus on the Little Rock market as a whole. So can you give folks an idea of why are people moving to Little Rock? Or why do people live in Little Rock? What's going on there? Who are some of the businesses the big the big employers there?

Gray:

Yeah, so Little Rock is the capital of Arkansas, kind of smack dab in the middle there, you got Memphis on the east side, it kind of borders up on Oklahoma and Texas below it. So it's kind of like right in the middle of the state. Some of the big main employers are just government with it being the Capitol there. So that's, that's kind of one of the big drivers, there's not tons of big companies there. There's not like a burgeoning tech scene, like you've heard, it's a lot of kind of blue collar. You know, Dillards is one of the biggest company if you're a shop there. And we're going with my grandmother to Dillards department store. So that's headquartered in Little Rock.

But government's kind of really the main thing that drives which gives stability to the market, I think that's kind of overall, what I think about is just kind of stability. So it's had stable rent growth, stable population growth, stable and price appreciation. Up in Jacksonville, we'll look at the map here. And then there's the Air Force Base up there. And so, you know, that's a lot of kind of the drivers on the economic side, but just a lot of kind of mom and pop small businesses with some blue collar work up there.

Michael:

Okay, awesome. And yeah, why don't we go ahead and pull up the map here. And if you're checking this out on YouTube, you can follow along, if you're listening to this podcast, you can try to follow along as best you can. But Gray's gonna pull up a map here and then walk us all through just set a high level, some of the different neighborhoods, sub markets, and areas to keep an eye out for as a new investor is looking at the market.

Gray:

Alright, so we've got little rock right here, I kind of zoomed out showing where it is in relation to some of the other cities. And so when we talk about kind of city of Little Rock, a lot of what we're talking about, are kind of suburbs or communities outside the city center. So a lot of the places that, you know, property manager loves to manage and I like to buy are going to be some of these sub areas. And so we'll kind of start going through those.

We've got the Benton and Bryant area and Alexander. These are all you know, within 30 minute drive of downtown Little Rock. So if people are commuting to their jobs still within the commuting range, these have really good school systems. So houses rent really fast there. Typical three two on a rental side is going to be in that you 13 to $1,600 range depending on condition and square footage, but these houses go really quickly. This County's got a higher percentage of homeowners. And so it's kind of in that B class, maybe some low a class stuff there. So investors really like this area down here. So the bitten and Bryant areas.

Michael:

Okay. And great for the purchase prices down there, what are we looking at for, you know, your typical three, two?

Gray:

Yeah, they've kind of gone up. So I mean, you're probably talking in the, you know, 150 to two hundreds, I've seen them creep higher towards the two hundreds. So your cap rate and returns are going to be compressed there, we have seen rent growth. But the story a lot of the country is home prices have outpaced kind of rent growth in some of these areas over the past year. And so probably better by two years ago. But still, if you can find a good deal down there once everything was

Michael:

Welcome to the club.

Gray:

Exactly. So I think it's yeah, just good, stable, you know, to good school systems, people like renting there, but little bit lower returns in some of these other areas where you can get closer to the 1% rule. So you're going to be sub that and this market.

Michael:

Okay. And is there is a kind of general ballpark theme for vintage of a lot of the homes in Little Rock, or do you have running the gamut from older to new build.

Gray:

Yeah, and like most of you, so close to the city centers gonna be the older and as things, you know, expands and the kind of 50s 60s 70s You're going to start hitting some of these communities. And so that's when a lot will jump up to Cabot and kind of Jacksonwood Sherwood, closer to the city center, you're going to have some 20s, which I'd probably recommend stay away from, and kind of focus in on that in 1950s and above. And so these houses, you're going to have probably 1950s and above with a lot of them in the 60s.

Michael:

Okay, great.

Gray:

Yeah. You want ot move on to the next areas?

Michael:

Yeah, let's do it.

Gray:

Cool. So kind of zoom in, and this is West Little Rock, it's going to be tougher to make the numbers here work. This is probably your your nicest stuff. And Laura rock, it's going to be a class. So we don't spend too much time on that. But three twos gonna rent in the 1800 17 1900 range, ever. There's some higher rent stuff, but really high percentage homeowners, poems are going to be in the two hundreds there. And so it's been tough for us to kind of find houses that that make the numbers work there. But if you can occasionally find one over there, it might be a good blend, not a ton of cash flow. But that's kind of where you're saying that the home values be on the higher end over there.

Michael:

And what have you seen kind of I guess, on the west side, we'll take as extreme example, what have you seen appreciation do over the last couple of years?

Gray:

So previous to last year, which was just kind of a rocketship for everybody? I mean, it's kind of been steady in that two to 3%. And we've seen that bump up over the past year. I haven't looked recently, just what it's been this year. But the numbers are above 5%. On the appreciation side.

Michael:

That's wild.

Gray:

Yeah, it is. So it's kind of steady, consistent growth between two and a half to three and a half percent depending on what data source you look at. So it kind of slowly crept up every time.

Michael:

Awesome. Yeah. So then we shift over to the Jackson, is it Jacksonville?

Gray:

Yeah, so what kind of go in the river right here kind of separates Little Rock from North Little Rock. And so North Little Rock is an area you can see it pop up on the map. And so that kind of runs from the river. And then you still consider some of this area in North Little Rock. So this is going to be a little bit rougher of an area probably c minus housing. Once you kind of cross over 40 Here, there's some there's some good stuff to be had. This is probably your traditional c plus class and the 1940s and 1960s vintage, the three bed you know two bath rents are going to be in 11 to $1,200 in this area, and purchase prices, you know, between depending on how much work is needed with older vintage house, you got the opportunity to do some value add. But if you're looking for a rent ready house, you'd probably be in that 120 range right now. Something that's kind of move in ready.

Then you got Sherwood which is really good Area C plus kind of B minus houses. Three bedroom two baths are in that 14 to 1500 range. And so you'll kind of see as you get out of the city center rent start Tanna creeping up as you kind of move up 67 here so yeah, really an area like this stuff. Just kind of your standard 3-1,1 and a half, three, two houses. Home prices right now. 160s 170s What I'm seeing for for rent ready kind of moving Ready, three bedroom, two bath and so you'll have about a 14 to $1,500 rental rate on properties in the Sherwood area.

If you're consistently looking at the properties that I'm putting up on Roofstock, you know, once a week you should be able to come across something that looks good up there that's doesn't require a ton of work. So I think that's why people like the market because you can still get really good numbers and you're not kind of priced out from from a cap rate standpoint.

So we’ll kind of move up 67 You got you Sherwood's right here, and then Jacksonville. So I mentioned the Air Force Base is in Jacksonville. And so it starts to get more rural as you get outside of town. But Jacksonville is, you know, seen rental demand pickup over the past couple years here. And so, you know, I was looking at some houses, this is kind of more pocket street by street. So if you got questions on house, you know, reach out, there's some some areas that we probably tell you to stay away from. And there's some areas we can appoint you to like anything kind of on this north side of 67 over here. That’s Little Rock Air Force Base right there, and then there's, there's some pockets in here that we like that you can still get strong rental numbers on, you know, the rents are a little bit lower than share wood and Jacksonville. So you might be in that kind of 1300 range, maybe 11 to 1300 range, depending on the property for your kind of, you know, down the middle of the fairway Three, two.

And then Cabot an area that really like it's got some newer housing. So I've been putting up some properties that are in the post 2000 range, we've got some new builds kind of going on here, a few subdivisions in there. And so yeah, these properties, new moving, Ready, three, two, like I'm thinking of one that was built in 2004, it's on the market for 160, you can probably get it in the 151 60 range. And I think rental rates going to be in 1300 to 1400. And so still really good numbers pretty close to the 1% roll. And there's even some new biulds, if you get up to the Austin award, it gets a little bit more rule here. But I've seen some new builds that are at the 1% rule.

And so I think that's really cool when you can still get newer properties and be able to hit the close to the 1% role, because your repairs are going to be so much lower. And you're not dealing with the 1940s 50s Vintage house, which has its own issues in there. So yeah, put a lot of good stuff up in the cabinet area that we really like.

Michael:

So Gray, I’m curious up in those more rural areas, do you see properties renting as quickly as you do as some of the more centrally located ones?

Gray:

So yeah, great question. This is something that we've seen as you kind of buy properties and get them rented, if they're close to, you know, they've got a really good school system up here. So if they're kind of close to the city of Cabot, you're not going to have too much of a drop off, it becomes more of an issue when you get outside and you get on where there's just less houses out there. So kind of proximity to Little Rock isn't necessarily going to affect that. But yeah, once if you started, if you bought stuff kind of in these areas over here, you're not gonna have issues. But do know that if you're buying something that's on a little bit more acreage, or it's a little bit further out, you can't get top dollar or your vacancy is just gonna be a longer period before somebody is willing to pay that.

But overall, in Little Rock, we're seeing really low days on market even right now, it's kind of the holiday season when we're recording this, typically the longest days on market. But when I looked last we were less than 12 days on market. And so our averages we always shoot to be below 30. And so you know, in the summertime is probably a really good time to look at that. And we're typically in that, you know, high teens, low 20s. Number. So properties are written fast there. There's no shortage of demands for renters, as long as you're pricing the property right. And you're putting out a good product.

Michael:

Okay, that's awesome. Are there any other markets and kind of sub markets neighborhoods within Little Rock that you wanted to highlight?

Gray:

Yeah, one more Conway up here. So a lot of we're talking to get is kind of on the outskirts. And I think there's there's other good areas, which kind of hitting the highlights, but Conway is another one. It's got three colleges there. So it's a college town. And so there's a higher proportion of people that's kind of the draw to Conway, but we're seeing some new stuff being built up in Conway,Erin Dreher, our local property manager in Lawrence la loves the market loves anything that she can get her hands to manage, and Conway, typically nice purchase price, but they're probably in the two hundreds, close to the two hundreds. And so I think you're gonna get better return probably in the cabinet and the share with area. But this is something to keep an eye on is the Conway area.

And I think just as the city grows, we're seeing some new builds, just kind of along this interstate here. And the same thing here. So as the city's expand, just kind of looking at, you know, we're kind of getting the path of growth. And so we're seeing some cool new build developments up here. There's not much going on right now. But you're so close to Little Rock that it's an attractive place for people will be able to move into newer build.

Michael:

Interesting, okay. And great. Can you tell everyone how property taxes work in Little Rock?

Gray:

Yes, so relatively low, depending on where you're coming from. So kinda across the board.

Michael:

It is all relative.

Gray:

It is. you know, typically kind of like 1.25% of purchase price is a good estimation of what your taxes are gonna be. taxes are assessed, and there's kind of three or four main counties that the areas that we covered, they're assessed every between three and five years. So previously, it was between every five years but we've seen so much growth that they want to make sure that they're charging appropriate taxes so they can collect the revenue, and so they've shorten that time period. And so if you got questions I know which kind of counties have been really says this year in which ones have been assessed or will be assessed in the next couple of years, but that can play into it.

So you might buy the property. And it might be a lower amount, and it kind of gets reassessed every three every three years. And so but that's kind of a general ballpark number, if you just want to broad strokes 1.25% of what your purchase price will be knowing that it'll be lower for a couple years. And then once it get reassessed, luckily, on a lot of the websites can go on the property assessors websites and pull that information right there. So they're super helpful. If you have questions on that. Or if you got questions about specific properties, reach out to me and we get you pretty close estimate on what those will be.

Michael:

Right on. Okay. So I'm curious to know, being a California guy, we've got earthquakes out here, we've got wildfires out here. What do I mean, everyone's got something but do they have in Little Rock?

Gray:

No earthquakes, no earthquakes out here. Thankfully, I've never lived somewhere that has had to deal with that. Main thing is just gonna be a lot of trees. It's a pretty, you know, green area. And so looking out the trees in your property with the sewer lines, we don't have I mean, their foundation issues everywhere. But it's not like Jackson, Mississippi, where you've got that, you know, the soil that just kind of contracts and causes a lot of those foundation issues.

So I think that is a nice thing. You're not having tons of that it is pretty hilly. And so if you're buying properties on hills, making sure that the water drains around it, so kind of foundation and sewers would be the two things just to keep an eye on.

Michael:

Okay.

Gray:

But as long as you got a flat lot, there's no trees on it. You shouldn't have too many issues there. But once you start getting some of the Hillier areas, just keeping an eye on where's that water draining? You know, how's the interior of the crawlspace? The basement? On the foundation? How do those look?

Michael:

Okay, and speaking of water, do you know are there many flood zones? high hazard flood zones in Little Rock?

Gray:

It's a great question. I don't know off the top of my head. Okay. I don't come into it too often. So I haven't necessarily had to dig into it. So that might be my that's a good sign. Yeah. But I couldn't tell you where they are on the map.

Michael:

Okay. All right. And what are some things that people should be aware of that might be kind of par for the course for Little Rock inspection reports for properties in Little Rock that a foreign investor or an out of state investor might have not be familiar with? So I can California termites are fairly common, not necessarily a deal, a deal killer? Do you have something that is fairly common out there that folks just need to be aware of if they're coming from across state lines?

Gray:

It's pretty standard. Because I've looked at a lot of different inspection reports from multiple different markets. There's nothing that stands out about Little Rock that is kind of an outlier, that you really got to be worried about. But all the standard stuff that we've talked about, you know, getting termite bonds, and then just the normal home inspection stuff that everybody kind of deals with the major systems, but there's nothing that really stands out when I've looked at kind of Market to Market that people need to really be focused on. But as long as you're doing a full inspection and working with an inspector, who kind of top to bottom does it you'll you'll be in pretty good shape.

Michael:

Right on. So Gray, curious to know, in the Little Rock market? Are you seeing this feeding frenzy that we're seeing in a lot of other markets where things are on the market for four hours, and then getting bids way over? Asker? Is it a little bit slower there?

Gray:

It's not that crazy. It's not like it was kind of at the peak and you know, maybe July, but still seeing multiple offers on properties. And we're not in the 10 range, but you're probably in the two to three, which I love. I mean that hey, that puts us in a position to compete. It's tough when you got 10 offers that are eight of them are cash and all over asking, right? So we're not seeing that level. But yeah, inventory is still historically low. And seeing new properties be added daily, we've got a pretty wide range that we look at in the market and so we've got good access to inventory.

But buyers do need to be prepared, they need to have their pre approval letter done and you guys Roofstock does a great job of getting them educated yells Academy does an excellent job of getting them you know educated so they're running their numbers and they're calling me with really educated questions and we can move really fast in those cases. So that's a really important thing for buyers and so if y'all have not done the Roofstock Academy please go through that Michael and his team he didn't he didn't pay me to say this!

Michael:

I was just gonna ask, tell everyone how much I paid you to say it!

Gray:

But for real I mean it's it's great because we work with lots of different buyers and you'll do a good job of getting them from zero to getting in that first offer and building their portfolio and so with it being as competitive as is in the market, we've got to have all our ducks in a row know what we can pay what's a good return to you because that's a lot of the times the question is what should I pay for the house and a lot of times that's what what return to you acceptable with and we can kind of go in there and so yeah two to three offers on properties if they're priced right if the price a little bit over we've made it we get a couple under list price. So not the feeding frenzy but still competitive so let's make sure to have our ducks in a row and put in offers quickly because 48 hours there's a good shot they've got an offer that at least negotiating.

Michael:

Okay, great to know and I appreciate appreciate the kind words.

Gray:

Yeah, of course.

Michael:

Okay, so great you and Evernote and you all are going to restock certified agents out in the Little Rock market. And you were also preferred Property Management partner, which is awesome. So can you walk everyone through what the process is? If they do make an offer out in Little Rock market? What should they expect? What does that process flow look like?

Gray:

Yeah, so Erin Dreher is the kind of general manager, team leader of that market. And people love working with her. She's just an excellent property manager, she knows the market like the back of her hand. And she just gives tons of really good advice on specific rental rates, and then specific things that we need to upgrade in the property that maximize the rental return, I think it's a really important component to be able to pair kind of the brokerage side buying the house, the property manager has a you know, if they can execute your plan, they can really drive your returns.

And so Erin is a rock star, so I get her involved really early on in the process. So once we got a property under contract, we will connect the buyer with the property manager, verify the rental rates, verify kind of the renovation rates, have them, the property manager is going to go out to the house also and check out the house. And so we get them involved early on, because we want them they're gonna be a partner in this deal on the long term. And so we get Erin and her team involved really early on. And so post post contract acceptance, get the property management team involved. And so we can start getting the ball rolling, because we want to use that diligence time to not only check out the area of the property, the condition of the property, what things need to be done, but also on the rental side and get that squared away.

You know, I'm doing a lot of the putting of the properties on the on Roofstock’s. website. And a lot of times I'm asking her for, hey, double check my rents on that, I think it's going to be this what do you think it's going to be and so I think that's a really good partnership that we've got going on. So I think buyers really love working with her. And I think we can find them some really good long term buy and holds and the Little Rock and kind of surrounding areas.

Michael:

That's great. And so what do you look for as you're listing these properties on the website, I mean, what what excites you?

Gray:

So I'm looking at properties, I really like a newer vintage, I'm just seeing those play out with lower maintenance issues, which keeps the tenant happy, which keeps them I think that's the thing, you start to realize everything's kind of connected. And so you can't just isolate that. But I see this like a ripple effect, where if you got a property that has either been rehabbed really well, and you know, there's no big maintenance issues, that keeps the tenant happy. Now, as long as we handle the maintenance issues quickly, that's going to keep them in a good spot to renew. And so I kind of like a newer vintage, I'm looking for properties that are closer to move in ready, because I know how laying out a big cash outlay and the time it takes to get renovations done. So I'm trying to keep that below 5000 If I can. And we're seeing a lot of that stuff out there. That's kind of my target is keeping that below there.

And then just strong rental prices. And I'm kind of picking the markets in the neighborhoods that we really like and picking the streets that we really like. And so yeah, looking at from all those and we'll look at comps, you know how we think that they're valued. Roofstock software does a really good job of aggregating a lot of that data. But we're trying to triangulate, just kind of put the best property is up there. And trying to get all the information correct in the front end, you know, trying to get that rental rate talking to PMs, because the last thing you want to do is go under contract, or even close on the property and realize it's a little bit lower than that. So we're trying to be conservative on that, but trying to a fairly realistic value on the rental rate, and then what it's going to take to get that property rented.

Michael:

Love it. Love it. And you touched on it briefly before gray but curious to know because we love to be very action oriented. What can buyers do to be really well prepared to work with you and your team in a Little Rock market.

Gray:

And you'll seem does a good job of really getting them but that pre approval letter and I think having your Buy Box, like know what you want to buy, I think I always kind of preach that and when I talk to investors are kind of talking with other on other podcasts, know your buy box. And so if you want a three or four-two and this area, or you want this return, really kind of laser down on that and only look at properties that fit in your Buy Box, because if what I found is you can get this analysis paralysis, if you're looking at duplexes, triplexes triplexes single families, and you just get really spread pretty thin. And I've seen how that wears down on buyers to be processing all that information.

And so if you want to set up a call, we can go through your buy box, we can kind of say hey, these are the potential returns. And they get pretty narrowed in. Hey, I want to look at these five areas and they kind of filter on rootstocks website to find the properties that fit your buy box. And so if you can do those two things, we're in a really good position to know what to offer. And I hit on it earlier, but I think also knowing your return threshold and kind of setting the threshold and there, we can look at list price and know that things are gonna go fairly close to list price, if it doesn't need a ton of work, but what's an acceptable return to you? And then we can talk together about how many offers on the property and we can strategize where are the places in the offer that we can tweak to put you in a good situation to win.

So kind of know the return that you're acceptable with. And right now in this market probably be willing to go closer to list price don't view that as a bad thing, because you're going to probably miss out on more deals, if just on principle, you want to get something below was price. And so that's just kind of a starting number. But it's as long as the numbers work for you, over the long term, that's going to turn out to be a really good investment.

Michael:

Yeah, it's such a good point to make, because I think so many people are ego driven. And if it's like, if you can get the property for 100, but the same property is listed at 110. You're like, oh, this is awesome. But if that same property is listed at 90, like, Oh, this is a ripoff. But you said there's 100 grand,

Gray:

Even if somebody bought it for way lower beforehand, that doesn't necessarily like that might be the market rate, like they may have bought from a family member, right, the previous owner might have been in a financial situation, or they might have done the work. And you're getting it kind of at market rate. And so don't want… I've seen that play in the buyers heads of them passing on a good property because somebody else had gotten it cheaper, right? And it might be ego, or it might just be nobody wants to get in, you know, you don't want to get shorted or get a bad deal. And kind of get swindled over and so, since those two things kind of both affect buyers kind of psyche when they're looking at properties.

Michael:

Yeah. Well, this is such a great conversation to level set that to understand like, Yeah, this is the expectation going into this market. So just know that I think is really, really helpful.

Gray:

Yeah, 100%.

Michael:

Awesome. Well, Gray, this has been awesome, man. Any other tips, tricks, pieces of insight that you want to share with our listeners about this market?

Gray:

No. Reach out to us if you got questions about it. I'm excited to do this kind of thing, because I think it sets a really good primer on the market, but feel free to reach out to me or Erin Dreher on our team. And yeah, we were excited to get some properties under contract for the buyers. And then yeah, go through the Roofstock Academy talk with Michael to talk with his team. They do a great job of getting buyers really educated. I really have seen the power of them buy five properties and then they are just they're an expert investor after they've gone through the course and bought a couple of those. So y'all are y'all are bringing investing to the masses, which is a really cool thing. So we're really excited to partner with y'all. And to continue to help that. Yep, grow in the local market and across the country.

Michael:

Oh love it. Thank you so much. Well, if somebody does want to reach out to you or to Erin or your team, what's the best way that they do that?

Gray:

So my email is GHALL@evernest.co So that's probably the best way to reach out to me. And then if people have questions I can connect with Erin from there.

Michael:

Perfect. Well, great. Thanks so much taking the time this was a lot of fun super eye opening and I can't wait to see where little mark Little Rock market goes from here.

Gray:

Yeah, me as well. excited about it.

Michael:

Awesome. Take care, man. Yep, thanks. Bye.

Alright, everybody that was our episode A big thank you to gray for coming on. Sounds like Gray and his team have a pretty solid handle on the Little Rock market. So if you're interested, definitely give them a reach out. As always, if you liked the episode, feel free to leave us a rating or review. We look forward to seeing the next one and happy investing.

How Anna Kelley built a multi-million dollar net worth with multi-family real estate Dec 07, 2021

Anna Kelley is a 4X Amazon #1 Best Selling author and frequent guest on Real Estate Investing podcasts. She speaks at REI groups around the country on Buy & Hold Investing, Multifamily Investing, Vacation Rentals, Creative Financing, Flipping, the Unique Challenges of Being a Woman in Real Estate, & making wise, conservative real estate investment decisions that will last through every market cycle.

In this episode, Anna shares her amazing journey to financial freedom. Through multiple failures and hardships, Anna's unbreakable motivation helped her push through adversity to build a multi-million dollar net worth and focus on what is most important to her, her family. She covers everything from single-family real estate, small multi-family and larger multi-unit syndications.

Anna's websites:

reimom.com

greaterpurposecapital.com

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Transcript

Michael:

Hey, everyone, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today with me I have a very heavy hitter multifamily investor syndicator Anna Kelly, throughout the entire episode I called Ana Anna and she was so graceful to not even correct me. So we have her on the show, and amazing woman, really a lot of great things that she talks about with regard to multifamily investing. Let's get right into it.

Michael:

Anna Kelly, thank you so much for coming on the show this morning. I really appreciate you taking the time to hang out with me.

Anna:

Thank you so much. I'm so glad to be here.

Michael:

So for those people that don't know who you are and your background, I'd love if you could give us a little bit of brief history into who Anna Kelly is.

Anna:

great, I will try to be really brief, right? I've been investing in real estate for a little over 20 years, I think I bought my first property in 1999. And before that I had a financial background. So I worked in the financial sector, I was a financial relationship manager for Bank of America and our private banks. So I worked with lots of traditional investments, and really had a 20 year corporate career in the traditional financial sector, working on investments for high net worth individuals.

And one of the things that was interesting, Michael, is that I learned a lot about investments and what to do with it once you became wealthy. But even through all of my years of financial advisory training and college, no one taught me how do you actually create the wealth other than waiting 45 days and 45 years until your retirement accounts are finally enough that you can retire.

And I had a couple of clients who were very wealthy who laughed at the double digit returns that we could offer at our bank at the time, because they made more money in real estate. And I went okay, I've learned nothing about real estate, I need to at least start to learn and see if that's something that I should consider once I have a lot of money.

So I knew a lot about investments thought about real estate. But it wasn't until I had my first baby that really changed my why like, I really want to be home. I have this great six figure career I climbing up the corporate ladder, but I want to be home with my kids. And so I'm going to have to try to figure out how do I replace a six figure income doing something different from home and real estate was the way I did that. And that began a 20 year journey for me and to small multifamily large multifamily, ultimately retiring a multimillionaire through small multifamily real estate, leaving AIG two and a half years ago. And since then, I've been focused on large multifamily syndications.

Michael:

Oh my gosh, what the track record you had. That's awesome. So

Anna:

It’s been a long time.

Michael:

I think just a blip on the radar as a blip on the radar when when you were doing your financial advising, did you think that real estate was a realistic vehicle for to get where you want it to go, or you only saw it as kind of the the finish line, that's when you could start?

Anna:

The latter, I had no idea how to get started in real estate, I learned not a single thing about it. It was not even an option for growing financial wealth in terms of what we were taught. It was all about stocks, bonds, mutual funds, annuities, really to grow the wealth that you already had. And because we already worked mostly with wealthy people, we really weren't starting from the beginning with a lot of people like, you know, yes, we would, we knew what to tell you. We'd say hey, you know, set aside 10 or 15%, put it in stocks, you know, more aggressive when you're young and match, you know, everything you can for 401k company match and eventually you'll get that million dollar nest egg by the time you're 65 and then you can live on 4% of it like $40,000 a year. And supposedly you'd be really comfortable for the rest of your life. Right?

Michael:

Yeah.

Anna:

And we thought that was really smart and a good thing. But I figured it would take me that 45 years to develop that million dollar you know, nest egg I never thought wow, if I invest in something else I might be able to create a significant cash flow today that will make growing wealth possible before I'm 65 never even crossed any of the conversations that I had.

Michael:

Interesting. It also blows my mind that you could get double digit returns by park your money in a bank.

Anna:

Well in in tools and products that we had, sometimes they were you know hedge fund type investments.

Michael:

I got you I got no Not a CD?

Anna:

No, but CDs paid a lot more back then than they do today. So even then I think our CDs were probably seven or 8%. They were pretty high compared to today.

Michael:

That's incredible. That's incredible. Okay, so So now let's fast forward. So you found real estate, you're like, This is what I'm doing. Talk us through that first deal. And then your subsequent How did you get into small multifamily after that first deal?

Anna:

Yeah. So it's really interesting, kind of going back to that my, my mind was piqued that I needed to think smarter about money, and that I needed to think about real estate as something to at least explore. And I lived in Houston, Texas at the time, and my rent was really, really expensive. So as I was starting to think about am I making wise financial decisions? I thought it's really dumb that I'm blowing, you know, 1000 $1,200 a month on rent 20 years ago, why don't I buy a condo, maybe I could buy a condo, have my my total expenses be less, and then down the road, when I'm ready to buy a house, I can run out that property. So that's what I did. It wasn't that I thought real estate's gonna grow wealth, I thought real estate as a way to to live below my means a little bit and down the road to give me a little extra cash. So that's the only real thought I had about real estate when I bought that first condo.

And then I thought, you know, real estate is kind of a speculative thing. I got into about 20, 2002 2003. And a lot of people were starting to buy homes and build and kind of rough areas that were re gentrifying, and they were making $100,000 in a year or two after building and I thought, oh, we'll speculate we'll buy a house where there's, you know, it needs to grow. And the neighborhood's not so great, but right across the street, there's lots of expensive homes. And I thought we built it in a year, it would go way up in value, right?

Well, it didn't, didn't work, right. And then I had my baby, and I watched, I was on bed rest for three months, and I watched a lot of HGTV flip this house, it was the first year that they were coming out, like all the shows, okay? It's like, Oh, my goodness, honey, I said to my husband, I got a six figure career, but I work 40 hours, 50 hours a week, I could flip three houses and make that much money, let's flip the house.

So with a three month old baby in tow, we went and got a traditional mortgage on a second house and decided let's flip this house. It has a garage apartment in the back. So we'll get a little rental income while we're flipping it. And that was our next investment before I ever even thought about really making real money with rental real estate.

Michael:

Okay, and how did that flip go?

Anna:

It didn't go well. We lost money. We made a lot of mistakes. It's not as easy as it looks on TV, right?

Michael:

Never is it didn't take only an hour to do?

Anna:

No, no, we made so many mistakes, we could we could have a whole episode just on the mistakes that we made, right. But essentially, we bought in the wrong place at the wrong time didn't know what we were doing. Way over budget way over time. It took us a year to finish it and sell it. And we lost total about $10,000 with holding costs and everything, which honestly for our first flip wasn't terrible. But my husband during that time lost a job. So we had two mortgages, a six figure school loan, a new baby and one job and he said we're never doing that again.

So put real estate aside. We said okay, the way to wealth is entrepreneurship, my husband will start his own chiropractic business. So we moved to Pennsylvania, for him to start his own practice thinking that in a year or two, he'll make all this money. It was 2007 the height of the economy. And I told my company, I'm moving Can I work from home? So they gave me this like trial period. They said, well let you try it for three months. Back in oh seven, no one worked from home. So it was like I thought this is probably not going to work. We need to be really careful with our money.

So what we decided to do, Michael is instead of buying a big house in Pennsylvania, after we sold our big house in Houston, we decided to house hack, I saw this little four unit apartment building right behind us practice that had that was for sale. And I thought you know what the building that my husband wants to lease in is also for sale. I could buy that building. It has three tenants and four garages. And we could buy this four unit live in one of the units and essentially the rental income would cover the expense of living and the expense of starting his practice. So I never thought about that until I came here and saw these properties for sale. And I was just thinking, what would be a wise move? Well, that would be a wise move because we'd have a little extra money.

So it really started only as a protection airy move because we were relocating and starting a business. Not because at that point, I thought it was the way to Well, that took me a long time to figure that out.

Michael:

Oh my gosh. And so how did it go once you bought those buildings?

Anna:

It went really, really well. Obviously, we were living well below our means, right. But we were working on building his business and had another child at that point. And so I was working full time he was doing his business. And we learned to become landlords, we learned to update property, you know, update our units and fix toilets and answer tenant concerns and collect rents. We basically self managed everything because we didn't know any better, right? So we learned the hard way.

And what happened was the next year, my husband's business did amazing. But then the end of 2008, we hit the Great Recession, I worked for AIG, who was going under who was in the news every day, I was told, look for another job, we're probably going to be sold, we're probably going to have our department, you know, gone laid off. And I lost about three quarters of my 401k the same week. And i i It was one of the hardest weeks I've ever been through. I also found out I was pregnant with baby number three the same week. So my job lost the 401k. Pregnant. And I was the only breadwinner because my husband had a business startup with lots and lots of debt.

And the only thing that went well, during that time, my goal was that my tenants were still paying. And I thought, everything I've been taught and taught our clients about the stock market only works until it doesn't like the biggest companies are crashing, and they're not coming back. Right. So I learned that my trust in a job and my trust in the stock market was not well placed. And the only thing that was consistent was my tenants needed a place to live and they were still paying.

And so what I did is I took the rest of my 401k I took a loan against it, and I put it as a down payment on another four unit building. Because I thought if I lose my job, I'll at least have an extra 1000 to 1200 a month coming in to cover the cost of diapers and formula a new baby. And I just bought it again as a protectionary move because I realized the power of that income that was even stable during a mass recession, the great recession. And that was the first time I had the aha moment in early oh nine, that real estate was the path I was going to take for financial wealth creation and stability.

Michael:

Wow. Wow. That's unbelievable. So.

Anna:

It was crazy.

Michael:

So I mean, you really saw these as as defense moves so much more than offense?

Anna:

Yes, at the time. Absolutely. It was just, I got to put food on the table. We've got you know, we moved to rural Pennsylvania from one of the largest cities in the world, Houston. And so I knew I couldn't just go out and find another six figure job really quickly living literally in the middle of cornfields and farmland and chocolate. So I thought I've got to create extra income so that when I get laid off from AIG, and I take a lower paying job, we'll still be able to cover the cost of his business and to, to live for a while till things got better.

So, you know, I wish I could say I was smart enough to figure out 10 years before when I first heard about real estate, that it was a way to create wealth. But I just had to kind of figure that out through really, you know, the economy collapsing before I realized, wow, there's something more powerful about real estate than just something that'll cover our expenses like this is really a way to preserve wealth. Why didn't I ever learn about this?

So I decided at that moment, this is the time for me to go all in to learn. And I bought one book, didn't have blogs didn't have YouTube, I bought one book, Multifamily Millions by Dave Lindell. And I'm like, Oh, my goodness, I have these three properties now, basically 12 units. And if you buy multifamily, you can force appreciation, and you can make them worth more and not only create more income, but create equity to then be able to go buy the next one.

Well, I had no money, Michael, I mean, all of our money was in our stock, my stock market, and it was in these down payments, and it was in my husband's business. So I thought the only way for me to grow is I've got to fix up these units force the appreciation. So that one book was kind of like an aha at the same time. And I started just working on fixing up the unit's we had, making them worth more, and then waiting for banks to finally agree to let me take the equity to continue to buy the next one, then the next one and the next one. And once I figured that out, it was really, really quick, how wealthy we were able to become just from small multi units kind of doing the BRRRR method.

Michael:

So you were house hacking before it was a thing you were doing birds before it was a thing that you were revolutionary, and this is amazing.

Anna:

I never thought of it that way before. Yeah, makes me feel better about it taking me a decade to figure it out.

Michael:

Totally, totally. So were you doing that fix up, work yourself? Are you having contractors do the work? What was that like?

Anna:

Oh, We did everything the wrong way, looking back, but it made us we gained a lot of wisdom through the mistakes, right? We took it all on ourselves because we didn't have any other money. And so at the time, I didn't have a support group that could say you can use other people's money to buy these properties you get and there were no hard money lenders, they all went under, right during us, 08-09, like lending dried. And so I didn't know, you know, my banks wouldn't help the banks wouldn't let me have equity. They knew I worked for AIG, and was probably one week away from a job loss. Real estate was going under. So they didn't want to lend on real estate.

So I couldn't find anybody to say yes, to help me take that equity. And I didn't have anyone to encourage me that you don't need the banks to grow like, hey there seller financing, when I finally figured that out. And I was able to grow through seller financing. Like it was another one of those just the next thing and the next thing, but I just didn't have a support system or anyone to challenge my thinking, to let me realize that I really could grow more real estate even though I had no money.

Michael:

Yeah. That's so interesting. That's so interesting. And so if we take just a step back, because you did something that I think so many investors have a really hard time wrapping their heads around, you went from single family to a four unit, almost seemingly overnight. Aside from being scared and and trying to play defense, was there a mental shift? Or how did you wrap your head around,Okay, well, I understand single families because I lived in one and I've owned one, I've tried to flip on to then buying a four unit building, that's a leap that I think a lot of people have a hard time with. How did you get there?

Anna:

You know, I think I didn't really have that mind block of fear of that, because everything I was doing was so new, right? It was like, we're gonna start a business because I want to be home with my kid. And the only way for me to do it is become more reliable on my husband's income than mine. So we're just gonna have to figure out how to be an entrepreneur and start a chiropractic business, right. So I was like, Okay, I'm willing to move to an estate, start a business, my husband's a great doctor, but he was not a businessman, no entrepreneurial brain in a bone in his body, he just okay, wasn't thinking about that. So I'm like, I'll have to learn how to do his marketing, I'll have to learn how to do billing and how to hire people.

So I was willing to do whatever it takes, because my why was so important to me, like, I will get home with my kids, I don't care what I have to learn, I'm going to figure it out, to help him be successful. And the real estate was just a small piece of that. So it was another another one of those things, I looked at what it would cost to lease space. And it was really expensive. So I thought we're gonna have a lot of risk that we're signing a multi year lease, and 95% of businesses fail in the first couple of years. So that's not super smart.

But I see that there's a building here for sale or for lease, what if we bought it since there's tenants? What would that do to our expenses? And if the business failed? Could we lease it out to someone else? So it was just those wheels turning going, how can I figure this out? How can we start a risky business with a lot of money, a lot of debt, and do it in the safest risky way we can. And that's how I figured out hey, let's buy this property. It wasn't that I thought I'm gonna move to four units from a single family it was, let's do something that's financially smart, that protects us as much as possible. So I didn't have that that block, but I was willing to do whatever it took to succeed at me getting home with my kid, that's really what it came down to.

Michael:

I love that. And it's something I talk about all the time with investors is have this why develop your why figure out what's going to push you through the scary times and pull you through the unknowns.

Anna:

Absolutely. And that that removes fear when you have at least the confidence to say I know what it is that I want. And I'm willing to move Hell or High Water to figure it out, no matter how long it takes, it removes some of the fear, right? I never could say, I can't handle a four unit or I can't handle that, or it's too big it was, this is what I need to do. I've got to stretch myself, I got to start thinking outside of the box and just figure it out until I figure it out. And I think that that that attitude is what really helped me.

So if you're struggling to go from single to four unit, it's only scary in your mind because you think it's so different. But it's really not that much different. It's just four units in one building instead of buying, you know, for single family houses one at a time. So surround yourself with people listen to podcasts like this where you're hearing other people doing it, it makes it much less scary and then just do it.

Michael:

Yeah, that's so good. And then so when did you move into the really scary five unit plus space?

Anna:

So that first building was actually commercial, right? So it was like a mixed use five unit. And then I bought the four units and what I did is is after that great recession When I pulled my 401k, and I bought that third building and I read multifamily millions, then it was like, Okay, now I need a plan that if I want to replace, you know, $150,000 of income, I'm going to need to buy, you know, one four unit building every year for the next so many years, and then I'm going to need, you know, then it was I need three, four unit buildings to to really meet my number.

So I just made a plan that said, I need 60 units. And when I have 60 units, I can leave my job. So how can I get 60 units. And so in my market now, I wanted to go straight for that 60 unit, or a 30 unit or a 20. But I had no money. Zero. Banks wouldn't lend to me that wasn't going to happen. So I said, Where is there opportunity. And in my market space, there were a lot of four unit buildings for sale. And so I'm like, there's all these four unit buildings for sale, and they're sitting on the market, because this was the Great Recession, nobody was buying real estate.

So I thought four units is what I'm going to focus on because everyone's still buying the singles because now they're dirt cheap, richer, people are buying the bigger ones. So what can I buy? What can I afford? Well, I'll do one four unit at a time. And there's a whole bunch of them available. So I focused on the four units, because that's what there was, once I bought enough of them when I had 60 units. That's when I said Okay, at this point, I could literally walk away from my job and we didn't live on any of it. It took me five years to get 60 units.

Okay, so it's 12 units a year for five years, when banks said no. And when I got to that point, I decided, you know, before I quit my job, I really want to buy a much larger apartment building and syndicate my first deal. Because if I know I can do the first one. And I've already essentially, you know, for 10 years done the four unit buildings, it's just one in one location, instead of a whole bunch of separate ones, I had the confidence I could do a bigger complex because I was already managing 60 units, it's just a matter of making make it making it all in one building with more investment dollars.

Michael:

So you were self managing that 60 unit portfolio?

Anna:

Yes, I told you I learned the hard way, right. I wouldn't tell you all to do it that way now. But I live in rural Pennsylvania, I didn't have a lot of good property management options. And I didn't think I could afford them. Because again, my goal was get home with my babies like I need to figure out how to how to keep everything inexpensive to get the income where it needs to be. And my husband was a chiropractor working three days a week. So he had two days a week that he actually enjoyed the hands on. And he's like, I enjoy doing it. So I'll handle it.

So I did the money side, the people side and he did the maintenance side. Now we have staff and we have all kinds of other systems in place, right, but but at first it was just one rental at a time we'll self manage. We had some good contractors, right good trades in the area. And we'll get there. And then right before I decided to leave, that was my last goal is I'm going to syndicate my first deal. I found a 73 unit apartment building. Right in my backyard. It was off market. Right before it was listed. I met up with a seller and I bought it from him. And then I thought oh no, no, I'm gonna raise like $2 million that I don't have where am I going to find the money. So I reached out to some other people and I partnered with two people.

So we ended up joint venturing it instead of syndicating it. But when I did that first joint venture, and I had an investor say yes to me for a couple million dollar investment. Because I had worked with high net worth investors for 20 years, I knew how to talk to him about this investment, versus all these other type of investments, right. So I just said, this is a great investment. And once I got that first investment done, I knew that I would be able to syndicate and scale much, much bigger deals at that point.

Michael:

That's incredible. And so I have to know that what came next after that 73 unit.

Anna:

So after the 73 unit, I gave my notice to AIG. So all of that fear that I was going to lose my job in 2008. Because I worked with really complicated private placement hedge fund wrapped investments. Bermuda offshore, they couldn't sell our division, we were too complicated. And my job was really complicated. So I had that job safety because of what I did. That kept me from ever being laid off. And so I was able to give notice and walk away at 20 years and retire.

And at that point, I said to myself initially, okay, I'm just going to start doing bigger deals with my free time, right? And then I realized, all that desire that why for me to be home with my kids, and at this point, by the time I could finally retire I had four children, but they were all in school, Michael. So it's like, okay, they're all in school. What am I going to do with the rest of my time? Am I really going to sit back and you know, just go to the beach and You know, eat bon-bons, or am I gonna do something bigger?

And it took me a couple couple of months to really figure out what that bigger was. I didn't need to do a deal to do a deal anymore. I had created the wealth and the financial freedom. And what was really interesting is all that time I was so focused on the cash flow. And I never had to do a PFS because I was working with a small local bank. And that's when I had to do this big syndicate this big 73 and a joint venture. And I had to go to Freddie Mac for a, you know, multifamily loan and they needed a PFS. It was the first time that I realized that I actually have a multi million dollar net worth with all these apartments that I built up, I wasn't thinking about net-worth, I was thinking about income income, and how many do I need to grow this income?

When I realized that I had that net net worth and that I had the income and now I had partners who wanted to invest with me. I knew I could take my wealth growing to a much higher level by just continuing to do big deals. And so it was the first time that I decided, okay, I'm actually going to start syndicating bigger deals. I've worked with investors for 20 years, I've managed all these properties all this time. It just was kind of a natural thing for me to go into syndication, so I really didn't have any fear about it. It was really more taking time to figure out what's the best structure that I'm going to use for building multifamily syndications? Do I want to go solo? Do I want to partner with other people? Do I want to do joint ventures with a lot of different groups? So it took me some time to kind of figure that out with trial and error to see what my business model was going to be.

Michael:

Okay. And now you've you've landed that multifamily syndications with multiple partners is is the way to go.

Anna:

Yes. And for everybody, it's a little bit different, right. So some people are consummate entrepreneurs and the idea that multifamily syndications is passive is is a misnomer. That's not true. If you're really going to go into multifamily syndications, there's a lot of work you're you're just switching careers, right, you're going from whatever your W2 was to now I have a career of building a business, and being an entrepreneur with very large apartment buildings.

For me, because I worked 70 to 80 hours a week for over a decade, in order to create financial freedom. Once I created financial freedom, and I knew all the sacrifices I made all those years, I said I want to grow, but not just the set for the sake of being a serial entrepreneur growing some big wealthy company, my time was more valuable, valuable to me than additional money. So I decided very strategically that I'm going to grow my business really strategically, from nine to three every day. And the moment my kids come through the door, I'm not working.

So however many deals and how whatever model I need to figure out how can I continue to scale, but do it five, four to five days a week, nine to three, that's what I'm going to do. And so what I've decided for me, because my time left with my kids is so important. I have eight years before my baby's out of the house, I've decided to really joint venture with a couple of other really strong operators, I co asset, manage our deals, but I'm not responsible for everything. Like in the beginning with our own properties, we did everything.

Now I get to focus on what I'm really good at working with investors and asset management. And so I co-GP with a couple of other really good operators. Rather than starting my own company, where I'm hiring a director of acquisitions and hiring a marketing person and investor relations. I just don't want to grow the huge corporate company, because my time is so valuable to me.

Michael:

Yeah. And I think that's really kind of reflected in your company's name. Right?

Anna:

Yes. Greater Purpose Capital. Yeah, love it. And part of that, too. I'll just touch on that for just a second, if you don't mind, just because you just brought that up.

Michael:

Yeah.

Anna:

I grew up in Section Eight apartments, right. So Section Eight housing, I had nobody in my family with wealth or that knew anything about money. And I still have family that are in Section Eight housing. I have tenants that are in Section Eight housing. And so one of my big why's what I realized is once my once I was retired, right, I no longer say I'm retire, but I'm financially free, right and doing what I love with real estate. I knew that I wanted to make a bigger impact with what I do.

So part of that is really helping and educating other investors that want to invest passively how they can grow their wealth with passive wealth through syndications. But the bigger piece is that I really want to impact our residents while we're growing wealth. So if I can teach our residents financial principles and teach them financial literacy, so that they can move out of my apartments one day and become financially independent and grow and also give them hope that you can grow up in poverty and you can still change the trajectory of your future by making wise financial decisions. That's like a huge part of my why now so I spend a lot of my time working on materials to impact my residents.

Michael:

Okay, that's so amazing. Anna, thank you for the work that you do, because I couldn't agree more that education is really the key key component here that's definitely lacking, I think, throughout our education system.

Anna:

Absolutely. And even through, you know, look at me, I mean, I got my degree. And I was at Bank of America and a private bank, going through a multi year financial advisory training, and I still didn't even learn how to budget my own checkbook, and and develop the wealth. We can tell lots of people how to grow wealth once you have it. But there's very little financial education to show people, what are different ways you can actually truly create wealth. And really, there's no greater way than rental property, real estate.

Michael:

That's so good. You're also quite humble and that you have not mentioned that you are an Amazon Best Seller as an author. I would love if you could share a little bit about your book with our listeners.

Anna:

Sure. Thank you so much. So I have been actually in four books that are a compilation of authors like Chicken Soup for the Soul. One of them I'm really proud of is called The Only Woman in the room. And it's a bunch of women, real estate investors who in oftentimes, where we're going, we speak at these conferences, we speak if at the events and we're the only woman in the room, we're the only woman on stage. So it's really an inspirational book, I would encourage your listeners to get especially if you're a woman, or if you're married to someone that's a woman that really wants to be involved in real estate. It's highly motivational.

And then the last book that I did is actually called Bringing Value and Leaving a Legacy and Finding Solutions. And so it's all about that, that look, building your business for the purpose of leaving a legacy and creating a greater impact on the world with what you're doing.

Michael:

I love that. And those are available on Amazon. Is there another website where folks can check them out?

Anna:

Yes, you can find them on my website at REI mom calm.

Michael:

Reimom.com. I love it. I love it.

Anna:

Thank you.

Michael:

And and Greater Purpose Capital is that have its own specific website as well.

Anna:

It does. So Greaterpurposecapital.com is where you can find syndications, if you want to invest passively if you're an accredited investor, and apartment deals where we really go into make a meaningful impact on the lives of our residents.

Michael:

So good, so good. And I want to spend just the last couple of minutes here picking your brain around why you think multifamily is such a powerful asset class as compared to single family or small multifamily?

Anna:

Sure. You know, I think the biggest thing with multifamily is it's really shown resilience over many different market cycles for investors, whether you're looking to grow wealth, whether you're looking to create income, or whether you're looking for a safe place to park your money. While we can't say investments are safe per se, multifamily has often been a preservation of capital play during really rough times uncertain times, kind of like today, right. And so it's why a lot of institutional investors come in and swoop up and pay top dollar for multifamily apartments because they're very resilient to economic downturns.

So, you know, while they provide amazing tax benefits on top of income and growth, they typically don't lose value, because there's ways for us to force appreciation. So even if the market softens a little in terms of what they'll pay for every dollar of income. If there's inflation, I can usually raise rents, right. And so they're assets that will continue to go up in value during times like this of inflation, where my rents will continue to go up in value. And even if I can't sell it, because it's come down in value a little bit, I can usually live on that cash flow for quite some time. And the cash flow isn't tremendously impacted during downturns.

So for me, it's that it's that really recession resilient investment, as long as you're buying the right type of multifamily in the right markets, right. So if they're not all the same, just like single family house, and the million dollar range is not the same as a single family house in the $50,000 range. You've got to be making sure that you're in markets that are really resilient with population growth and job growth and wage growth and job diversity and low crimes and great schools.

So if you invest in those kind of really strong markets, you'll make significantly more money in multifamily than you will in single family and it's not transactional, you don't have to just buy and sell and buy and sell and buy and sell. You can buy one four unit building or 1 20 unit building or 100 unit building. And you can make a lot of money on it for a really long time and bank on that income for 510 20 years rather than having to you know flip and repurchase over and over and over again.

Michael:

That's great. That's great. I think so many of our listeners are mostly single family investors some small multifamily and then some some mid sized to large multifamily. What are some Some tips, tricks, tidbits of advice you can give folks who are thinking about getting into multifamily, where they can hopefully avoid some of the stumbling blocks that you've maybe encountered or you've seen others encounter?

Anna:

Absolutely, it's such a good question, you know, I would say first is start small and start where you are. So if you're in a market that has properties that you can afford that are profitable, start there, right? If you're not, then look for a market where you really have some, some alignment with some other investor that's in that market that knows it really, really well. So don't try to go into a whole new market on your own by yourself, if you don't have experience with larger multifamily, buy a small property and learn on a small scale. Because while there's a lot of and I speak at some of these events, right, so I'm not knocking it, but there's a lot of events and there's a lot of books that say go straight to syndication, right.

And the reality is, there's a lot of people that want to go straight to syndication, and now they're taking on millions of dollars of investor money, with very little experience. And when we have economic downturns like the Great Recession, like the pandemic, like where we are now, you better have made a whole lot of mistakes that made you really wise on the small mistakes that will keep you from losing your shirt and your investors millions of dollars, during times of uncertainty. So starting small gives us wisdom, it lets us fail small, so that we can fail up into the next thing and the next thing. So don't feel like if you're not ready or you don't feel that you have the competence or the scale or the money to jump straight into syndication, that you're doing yourself a disservice by starting small, starting small can actually be the wisest, safest way for you to do it.

And if you own the property yourself, 100% you can depend on that income for a much longer period of time than you can in a syndication.

Michael:

That's so, so good. I once heard the phrase, I never trust anyone without a limp. And similar to what you're saying, if you've never done it before, you don't have the experience or the wisdom to fall back on when things go south.

Anna:

Absolutely. And things can go south pretty quickly. You know, there's a lot to learn. So don't go it alone. That's the other thing is we started alone and because I did everything myself and I didn't even have a network of other people to bounce things off of. I made a lot of mistakes. You know, that took me a lot longer. So buy your own properties are buy with a partner but but listen to podcasts, you know, list, fill your mind with information, so that you can learn things without having to learn it by making the mistake.

Michael:

Yeah. Oh, that's so good. That's so good. Anna this was so wonderful is the best way for people to learn more about you to get in touch with you via the websites that you mentioned previously.

Anna:

Absolutely. You can also follow me on social on Facebook, LinkedIn and Instagram. I'm Anna “ReiMom” Kelley.

Michael:

Awesome. Fantastic. Well, thank you again for hanging out with me. This has been so wonderful. We'll definitely be in touch soon. I can't wait to see where you head next.

Anna:

Thank you so much. It's been my pleasure. Take care.

Michael:

Alrighty, everybody that was our episode a big big big thank you to Anna for coming on the show. I learned a ton. We are definitely gonna be having her back on to talk more in depth about syndication, so keep an eye and ear peeled for that episode down the road. As always, if you liked the episode, feel free to leave us a rating or review wherever you listen your podcasts. We look forward to seeing on the next one. Happy investing

The 4 biggest risks in real estate investing, and how to mitigate them Dec 04, 2021

The risk inherent in real estate investing scares many potential investors away from the industry. But successful investors take these risks all the time. They do so because they understand them, recognize indicators elevating them, and know how to prepare for them should they realize.

In this episode, Michael gives his take on the 4 most common risks in real estate investing and how you can protect yourself against them.

---

Pierre:

Everyone, welcome to The Remote Real Estate Investor. I'm Pierre Carrillo and today I'm joined with

Michael:

Michael Albaum.

Pierre:

And today we're gonna be talking about the types of risks that arise in real estate investing and things we can do to mitigate them. So let's hop in.

Alright, Mike, here we are.

Michael:

Here we are.

Pierre:

Yeah, we're missing Tom and Emil today.

Michael:

Only physically, but like not actually missing them?

Pierre:

Yeah, exactly. They're just not here.

Michael:

I'm glad they're gone.

Pierre:

That spoke to no emotional…

Michael:

Just kidding, we love you guys.

Pierre:

A little bit.

Michael:

We miss you.

Pierre:

So the way this will work is I'm going to just run by some common risks. I want to get you to talk to me about what they mean for your bottom line and ways that we can avoid them or, you know, protect yourself from these things.

Michael:

Yeah, totally. It sounds like a great topic. And it's funny when I used to work as a professional fire protection engineer, risk mitigation was what we did we engineered against losses. So now I'm just doing it in the real estate side of things.

Pierre:

And that's why I'm on this side of the conversation. All right.

Michael:

That's awesome.

Pierre:

All right, let's talk about lack of liquidity. What does that mean? Why is that risky? And what can we do to mitigate that?

Michael:

Yeah, lack of liquidity is basically not having a lot of deployable, cash on hand ready, and able to be used for things that come up, like a big repair a big capex item that you weren't expecting for, or a big one that I think a lot of people don't think about as an insurance premium. If you have a $2,500 deductible on your policy, and a tree falls on your house, and the roof damage is five grand, you're on the hook for the first 2500. And so being able to have at a bare minimum, your insurance deductible on hand on a moment's notice, I think is really important.

And so it's simply not having enough cash. That can be in the bank, you don't have enough cash, another great place where you could store is in a brokerage account. If you've got a $50,000 stock account, and you know, your your kind of biggest exposure is five to 10,000, you're probably in a good place. If you've got a $5,000 stock account, and your biggest exposure is 5-10 grand, maybe you you don't want to keep those dollars in a stock account, which could essentially go to zero in a really bad bad market turn. So knowing where your liquidity is, how much you need, and how safe it actually is, I think is really important.

And so another great place that I've seen people have access to liquidity in the form of a HELOC on their primary residence. If you can write yourself a check for $10,000 Tomorrow, because you've got a $50,000 HELOC, that's a pretty safe place, in my opinion. So I guess in the hierarchal order of safety for where you could keep a reserve or where you keep some liquidity is cash in the bank. HELOCs are great stock market account would be kind of your, your probably least your least safe, so to speak.

Pierre:

I guess another way to bump into this lack of liquidity is being over levered. How would you mitigate against that?

Michael:

That's a really good question. And I mean, everything we're talking about here today and on this podcast generally is subject to personal interpretation. And so what one person might qualify as being over levered another person, it may not, they might be very comfortable with that amount of leverage. But basically, what you're talking about is the amount of debt that you have on any given property. And so let's say a property, you're going to go buy it for $100,000, you could probably get 80% leverage on that property, meaning you could borrow 80 grand, you've got to bring 20% or 20 grand to the table, and now you've got an 80-20 loan on that property. Well, if you in some extraordinary case, were able to get 100% financing. That means that somebody would give you 100 grand you borrow 100 grand now you have $100,000 mortgage to pay on that property. Some people would argue that that's over leveraged.

Even some people might argue that 80% is over leveraged. I'm of the personal opinion that I'm more concerned of the debt service coverage ratio. And so really, what that means is just a fancy acronym, a fancy term for how much of the debt is able to be covered by the rent that I'm collecting. And so if I'm collecting $2,000 a month in rent, and my $100,000 mortgage cost me 1000 bucks a month, it probably won't but let’s just use that number That means I've got a debt service coverage ratio of two 2.0 that I'm bringing in two times the mortgage payment.

Now, I've still got all my other expenses that I need to calculate out. And let's say all my other expenses add up to $600 a month. So my total expense load, including my mortgage is, in this case, 1600. I'm bringing in 2000, which means my cash flow to me is $400 a month. Well, if $2,000 is a very reasonable market rent, I personally am not concerned with having 100% leverage on that property. Because I know I'm able to support the debt service. And so that's really the number that I'm more concerned with. But when people talk about being over leveraged, it's usually because they are have a high amount of debt on a given property. And that also can often translate to having a high mortgage payment. And so if you're close to cashflow, neutral or cashflow negative, I mean, if things take a dip, or things go a little bit sideways, that's where you can start to get in trouble.

Pierre:

Okay. All right, I guess that debt servicing is paid by what we'll bring up our next topic. And that's difficult tenants. So can you talk to me about all the things that can arise with difficult tenants? And how that…

Michael:

Oh, man? Yeah, I mean, anytime you're dealing with people, you can have literally anything happen, because people are known to do kind of wild and crazy things. So there was this great podcast that I heard it's BiggerPockets podcast, and they had a, they had a professional poker player on and I believe that she's written a book as well. And I forget the name of it, but she talks about evaluating the decision making process more than the outcome. And so many of us look at the outcome, and kind of in hindsight and say, Oh, well, we made a bad choice. Well, if we made a good choice, and the outcome wasn't as we wanted, as we predicted, that doesn't mean that we should change how we do things.

And so I think we really need to look at the decision making process and the tenant screening process that either you you go through as a self manager, or that your property manager goes through as a management company. And that's what you want to be evaluating. Because you can go through a great evaluation process and have someone slipped through the cracks and have a really crummy tenant experience. Does that mean you should go rework the whole system and change how you do things if you're self managing or operate your property manager because they didn't do their job? Maybe not.

And so I think that in looking again, at the being very process focused and process oriented, that will help hopefully catch some of those crummy tenants before they get through the system. That's what it's designed to do. But when and if they do make their way through, we're able to kind of take a step back and say, Well, that sucked. Let's move on. Let's try to do better the next time and what lessons can we learn and have takeaway from from that experience?

Pierre:

Cool. Yeah, I mean, we just closed last month, just a couple of weeks ago, and just yesterday, we got notification that our tenants were up and moving out. So

Michael:

Oh, no, any any idea why?

Pierre:

Not yet? Now, we were communication with the property manager. So we'll find out today, like what the story behind it is, and what it means because they do have an existing lease.

Michael:

Right.

Pierre:

So but that's just, you know, first month, no time to collect any reserves for a turn or anything. I mean, we have reserves in the bank for it. But still, it's, we'd like to have that property behave as its own business.

Michael:

Yeah, I mean, then the the nice, not the nice thing, but the thing that you can hang your hat on is that given if you own this property long enough time, this will smooth itself out, right, that this this hit this, yeah, hits your reserve account, will tend to smooth itself out given a long enough time. But it's when things like this happen, that people aren't prepared for is when you can get into real trouble. What if you didn't have reserves in the bank?

Pierre:

Yeah. No, we're not too bummed. I mean, it's, we're a little bummed about it. But it's, it's not taken us out of the game. We're not looking to sell the property yet.

Michael:

Okay, good. Good. I'm really glad to hear it.

Pierre:

The next one I have here is neighborhood decline. Can you talk to me about that?

Michael:

Oh, man, go round, start mowing everybody's lawn, start painting everyone's house, probably the neighborhood. If you are suffering, or in an area that's suffering neighborhood decline. And it's the first I don't know, one to three years of you owning that property. I'm people aren't gonna like what I'm going to say next. But I would probably argue that you didn't do enough due diligence on the neighborhood.

Things don't tend to change overnight. There tends to be signs and signals around how things are going in any direction. And so if you find yourself there, that probably means you didn't do your homework, but that's not a good solution or helped anybody in that situation. So I would say you need to think about what the next five to 10 years looks like in that neighborhood and start doing some homework. Things change both in the positive and the negative, and you have some really rough areas that have become really amazing areas and in different markets all over the country. So, and neighborhoods can go through cycles, you just have to determine is this a cycle that you want to be a part of? Or do you want to partake only once things have peaked or are valleyed.

Pierre:

Right. So when you say signs, what are some of the things that you can be looking out for, to make sure you are doing proper diligence upfront?

Michael:

Understanding where the market rents are going in an area, understanding what crime rates are like in an area and how they're shifting over time? Understanding how the school ratings have changed over time, understanding if people are moving to the area? Or are they moving away? And then looking like physically at the neighborhood? Are people rehabbing properties? What are the properties look like? Are they decrepit? Are they are people no longer maintaining the homes that they're living in, either as renters or as owners? Are people putting money into the area? Those are all signs and signals about how a market or a neighborhood is going to be trending.

Pierre:

Okay, a couple of questions, then. How do you go about getting all of that data? And as a remote investor? Do you recommend going on site and you know, traveling to the market and taking a drive around the neighborhood?

Michael:

Yeah, it's a really good question. So 70% of my properties in my portfolio, I bought sight unseen. And I relied heavily on the property manager and local agents to give me a flavor of the market to give me an idea of what's going on in the market. I've Google Earthed it and kind of taken that drive, so to speak that, quote, unquote, drive around the neighborhood to get an idea of what's going on. But those can be one to two years old. So

Pierre:

Right.

Michael:

You know, there is, and I'm gonna eat my words here in a minute, but there is no substitute for going to see the market. Now, that's I don't think by any means a hard and fast requirement, because again, I purchase 70% of my property sight unseen. So it's something I talk a lot about in the Roofstock Academy, in that when you go visit a market, you are not going to be able to unsee and unhear, and unexperienced things that you experienced. So and that's important to keep in mind, because we are going to automatically put our personal and emotional biases into that experience.

So imagine this, you go to a new market, Cincinnati, Ohio, and you get in your flight gets delayed, they lost your car reservation when you got there. And you know, you get to your hotel by 2am, and you're exhausted, you're already going to be kind of upset, then you go out to breakfast and have a crummy meal, they screw up your order. Now you're going to go start looking at properties. With all of this already having built up for you physically and mentally, that's not going to be as great of an experience as it could be. And you're likely not going to be as unbiased as you could be.

Now take the opposite side of that, you go on a trip to somewhere else, you have this amazing experience, and the people are so friendly, and you have great service of the restaurant to eat at. You might have a a rosier picture of reality than what it's actually like to live there as a tenant or as an investor. And so when you can remove all of the emotional side of the remove the emotional side of the equation by simply talking to people locally and getting kind of facts and figures. There's a lot of merit to for that as well.

If you go somewhere that you've understood the facts and the figures, you have a great experience. Okay, that's a cherry on top. But if you go somewhere, that's a great investment market that meets all of your numbers mathematically speaking, but you don't want to live there. You don't have a great time. I'm not so sure, that that means that that's a bad place to invest.

Pierre:

Right. Okay, so back to the first part of my question, then 70% of your properties are sight unseen. Where did you go to get that besides just calling your property managers, how did you find where the rents were trending, what the economy was doing? Like what what kind of sites did you use to?

Michael:

Yeah, I wish I wish I was more scientific about it, but it was like Zillow and Google.

Pierre:

Okay. Well, that's, that's great. I mean, that's super accessible to anybody.

Michael:

Yeah, it's I didn't do anything that requires a paid subscription. I didn't do anything that anyone with the computer couldn't do themselves.

Pierre:

Okay, cool. Let's hop over to the next one. I just got a little visitor here that just hopped up on my lap.

Michael:

Ah, today alien.

Pierre:

Unexpected repairs is our next topic and these guys are just found under the gazebo in the backyard when they're like two days old. So unexpected expense that have come up that trying to…. so let's talk about unexpected repairs.

Michael:

Are they forcing you to do some unexpected repairs at your current house?

Pierre:

No, that i That's why I'm in the kitchen. Now. Usually I'm in my office but now I can't. I can't let them out of my sight. They are domestic terrorists.

Michael:

running amok of the place.

Pierre:

Yeah, we're looking forward to getting rid of them.

Michael:

But sending them to good homes, right?

Pierre:

Of course, we're hoping with on the neighborhood so we can. I've known them since they were two days old so I have grown quite fond of them.

Michael:

And I bet get rid of them could mean different things to different people, depending on who you're talking to.

Pierre:

Yes, in the gentlest kindness. Kind, kindest, humane way.

Michael:

Love it. Love it.

Pierre:

So yeah, let's go.

Michael:

Speaking of unexpected repairs.

Pierre:

Unexpected repairs, what does that look, I know, you have had fires and all sorts of crazy stories throughout your journey. So I guess on Expect the unexpected is is a platitude that we can say here, but what else can you do?

Michael:

Yeah, I wish I had a more scientific approach or a more foolproof approach. But I think you know that you just have to expect the unexpected, and Tom and I joke that there's this seemingly inverse relationship between the people who are prepared in the type of unexpected repairs they will have, versus the folks that are not prepared for the type of repairs they have. And it tends to be if you're well capitalized, you're well prepared, you expect the unexpected, you'll have a $50, you know, circuit breaker go bad on you, and you'll have to swap it out. Versus you think everything is going to go peachy, nothing could go wrong. And you're going to have a $20,000 repair slip up on you, and it won't be covered by insurance.

So, you know, just be prepared for that old man Murphy.

Pierre:

Yeah.

Michael:

He's gonna show up, he's gonna try to mess with ya have a plan A, B, and C, I think is the best thing that you can do.

Pierre:

I guess we can pull up Tom's famous phrase here is just peanut butter, spread

Michael:

Peanut butter, spread the risks.

Pierre:

Peanut butter spread these risks out.

Michael:

That's it. That's it. Something to think about which which may sound counterintuitive, is to help mitigate some of those unexpected repairs is scale. When you have one property and you have $1,000 repair, that could kill the entire cashflow for the year, versus you have two properties in that same property has $1,000 repair. Now you're limping, but you're not dead in the water, you have a five property portfolio, and you have $1,000 repair becomes a bit more of an easier pill to swallow.

Now, some listeners out there might be like, Yeah, but you could have $1,000 repair across each five of those properties. That's $5,000. Yeah. Well, yes, that's true. But we have to look at statistics. And there's some of these to do in the insurance world. And my last job and talking about aggregate risk, what's the likelihood going back to our single property of you having $1,000 loss or repair on that one property fairly high. As soon as you start adding additional properties into the mix, and the conversation, the like, the statistical likelihood of you having a $1,000 repair it every single property you own tends to go down with additional properties.

So you know, we talked about the same thing as vacancy, we apply the same the same theory, the same style of thinking to vacancy, the more properties you have, the less vacancy will tend to affect you on a portfolio level.

Pierre:

Yeah, that's when it hurts the most is when it's going to happen. So that's when you're at the most vulnerable is when it hurts the most.

Michael:

Yes. Yes. Yeah.

Pierre:

Cool. Mike, that was the whole list that I had. Is there. A you want to give us a monologue on risk mitigation in general?

Michael:

Yeah, sure, I can get do my best.

Pierre:

Mr. Fire Protection Engineer.

Michael:

I really do think that insurance is one of the biggest places where where people can miss. And I think that insurance is they love you. I think it's a catch all. Where if anything goes wrong, that's why I have insurance. Well, yeah, that's true to an extent. But there are also exclusions as part of every policy things that insurance will not cover. And so we don't want to be assuming that if we have a repair insurance is going to come to the rescue. And even if they are having dealt with insurance companies, it can be a battle, it can often take a long time to get your claims paid. I've just I got the last of my claim paid and it was over two years ago. And so if you're relying on those dollars to own and operate a property, and it takes two years to get the money, that can be a big problem.

So I would really just recommend people take a look at their insurance policies, understand what their deductibles are, understand where their exposures are, and see how much money you think you need to to play a really great defense. Because that's, that's the best offense. I'm not a sports guy, but that was my sports analogy for the monologue.

Pierre:

A offense and defense goes far beyond just sports.

Michael:

Yes nailed it. All right,

Pierre:

I think I think that's a good place to wrap it up. Thank you for sharing all that. That's helpful for me and hopefully for all of our listeners.

Michael:

Yeah, my pleasure. Great questions Pierre. Thanks for for asking and putting that list together.

Pierre:

All right, everyone. That was our episode. Thanks so much for listening. We'll see you on the next one. Happy investing.

Michael:

Happy investing.

What you need to know about investing in Houston TX real estate Dec 02, 2021

Fred McDaniel is a native Texan and has been involved in many aspects of the Texas real estate industry since 2001. He is a part of the Roofstock Certified Agent Network and focuses on investors the Houston market.

In this episode, Fred tells us about the neighborhoods, the prices ranges, geography-specific issues that investors should be on the lookout for, how taxes are assessed, and more.

Fred McDaniels contacts:

fred@fredmcdaniel.com

713-321-9161

---

Transcripts

Michael:

Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today we have with us Fred McDaniel, our certified agent out in the Houston market. And Fred is going to be talking to us today about the market what we need to know as investors and what the price point and returns look like for some of the properties out there that he's seen. So let's get into it.

Fred, well, thanks so much for taking the time out of your busy schedule to hang out with us today and talk to us about the Houston market. Really appreciate you coming on.

Fred:

Yeah, thanks for having me.

Michael:

So for anyone that's not familiar with you, as an agent, give us a quick elevator pitch on who you are, where you're coming from, and what agency you're with out in the Houston market.

Fred:

So I was born in El Paso, Texas, so as far west as you can get in this state, and about 850 miles away from where I am now. Born and raised there, moved around a little bit, went to move to went to high school in Jacksonville, Texas, which is in Far East Texas. And then I went to college at Sam Houston State University in Huntsville, Texas, which is about 45 minutes north of downtown Houston. And since then I kind of fell in love with Houston area stayed in and around here went back and forth between Tyler and in Houston. And then I ended up back in the spring in The Woodlands area. Been here for about 13 years, but on and off for the last 20.

So I I work for Realty One Group Iconic. Great, and I am a broker associate. So you know, I do have the opportunity to mentor newer agents when I bring them on. But you know, I'm not the broker for the agency. But you know, with my experience, I mean, it actually helps me sometimes mentor newer agents because it brings up things that you forget when you've been in the business for a while. So it helps me to educate myself.

Michael:

And it seems like Houston is on fire right now. Have you seen it the Houston market shift over the last couple months?

Fred:

And I've seen it, I've seen it shift over the last, well, 18 months. Now, I've never seen anything like this and I've been in the business in some capacity. For the last 20 years, I've talked to people that have been in the business for twiice as long as I have never seen anything like this in the Houston market. You know, really, you know, once once the pandemic started, is really when our market just lit on fire. It was crazy how things work out. And you know, one of those things that, you know, in our economy that became a little bit more needed was real estate. And, you know, we had a we had an issue with historic rates being historically low rates, and historically low inventory all at the same time. So that's a perfect storm for increase in prices.

You know, so, though I, it's, it's been wild, it's been fun. And I've seen the inventory go down to such a low level that I think at one point this summer, we were under one month inventory. I think we're back to 1.8 right now, last year, this time was around two and a half months. So theoretically, if no houses were going on the market today, in 1.8 months, there will be no houses left on the market. But you know, it's it is there's still a lot of opportunity, though,

Michael:

That's wild. And what would you call a healthy market?

Fred:

I would say a healthy market is between two to three months inventory, probably our norm about two half months, on average.

Mark:

Yeah, Michael, it's usually about three months. And you know, interesting enough, Fred's backgrounds really interesting, I'd love to see or hear you know, what the background is there because he does come from a single family rental background, when the market was much different, right back in the days when you could probably find properties a little more freely, and he was picking up properties for institutions. So maybe Fred, give us a little background there because I think they'll help connect the dots.

Fred:

I'll start back a little bit further. I actually started the mortgage business as a mortgage banker, I still have a mortgage license active, you know, when the economy kind of turned a little bit in 2008 to 10 And you know, backed by the mortgage industry. I started doing a lot of work on foreclosures, you know, selling foreclosures, you you have to pivot yourself and, you know, you've got to evolve sometimes in your own career, you know, selling houses just wasn't necessarily working out great for me at the time to just regular people.

So I got into working with the, with the foreclosures in By doing that, I met a lot of investors, and all these investors were looking to pick up properties to rent, you know, we used to work with a lot of flippers and you know, the market just turned in, when the prices go up, the flips just don't make sense. So, you know, it made me go educate myself and start to learn a lot, I asked a lot of questions from these people. And I picked up some clients that are basically lifetime clients that whenever they see something, they want it, I send them properties regularly to look at and, you know, just kind of becomes a little bit more second nature to you, when you're looking for rental properties. So sometimes it's hard to, you know, describe what exactly I'm looking for, because I know when I see it kind of thing, you know.

Doing that in and learning from them from their own businesses, and how they, how they rent their properties, and what they do. And I also, you know, got in with a couple of other kind of property managers to kind of learn from them as well,

Michael:

That's really cool.

Fred:

I worked with a company out of Irvine called home union, kind of did similar what Roofstock was doing, I worked as their agent for Houston, and, you know, they, they provided the leads online and their, their clients, and we ran the numbers for them. And we found them houses here, in Houston for rentals, very similar to what Roofstock is doing. Right now. So, you know, my background in that is, is, you know, finding the properties, running the numbers, making sure they were, you know, putting them into, you know, quote, unquote, their portal, showing them to the clients and then talking to the clients and walking through the process. Some of those, you know, we ended up with some institutional buyers in that, from that point to, you know, mostly the individuals.

Michael:

Cool. So it sounds like for you, we're very well positioned to identify investment property opportunities out in the Houston market. So I'd love if you can share with everybody, you know, what is it that you look for, before you post a property to Roofstock, that makes a great investment property?

Fred:

So what I'm looking for in Houston, I'm typically looking for a house that's new, or when I say newer, built 2000 or later, I'm looking at all the price ranges, honestly, because, you know, the market is so huge, you know, we were talking earlier about the size of the Houston metro areas, it's the size of like I said, the state of Connecticut 7.1 million people. So we have everything, and some of those higher end markets actually makes it, you know, four or five $600,000 houses that can rent for 3000 bucks a month may actually work.

But I'm going to be looking for a newer home, generally, or a home that's been renovated, if it's a little bit older, you know, I'm looking for, when I'm looking at these houses, I'm looking to make sure you know, they don't have purple and orange and pink rooms and things like that. Or if they do if it's just one room, if that can be, you know, remedied easily. You know, maybe that makes sense. But uh, you know, I'm looking to make sure that, you know, a lot of things here, because they're newer, a lot of the older homes are renovated, I'm looking for a more modern look on the inside, you know, a little bit less carpet maybe.

And then I'm looking at, after I look at those individual houses, I'm looking to make sure that the rent prices are pretty steady in that neighborhood. One thing that's key about Houston or the Houston area is there, there's no zoning. So we do have neighborhoods where there's 200,000 range homes right next to a neighborhood that might have four or 500,000 range homes. So when we do our rental comps and we're looking to see what the rents are, we're getting very hyper local, we're getting neighborhood specific, sometimes street specific, you know, we don't want to pull a cop from a, you know, a three bedroom, two bath 2000 square foot house right next to the street over where there could be one that's five bedroom, four baths, that's a 3500 square foot. So you have to be very careful with the cost.

But you know, I am looking for, like I said, I'm looking for a little bit newer, a little bit more modern, maybe less work to be done. Because, you know, in Texas, as you know, our taxes are a little bit higher. So, you know, for the most part, we're not going to get huge cash flow properties here. They might cashflow a little bit, they might breakeven, but you're looking for appreciation, for the most part,

Michael:

Okay.

Fred:

So I want to make sure that when we do have those that they are, they do have the opportunity to appreciate.

Michael:

That's great to know and I think it's so important for everyone to keep in mind that if you are a cash flow heavy investor, that Houston might not be the best place for you because of that fact because the where the price point and where the taxes are. So we're gonna bring up a map here, Fred, and I'm wondering if you can give everyone watching this a rundown of where some neighborhoods that are interesting, interesting investment opportunities that you're seeing.

Fred:

Okay, so just looking at the map for people that have never been here or, you know, maybe somebody that doesn't isn't really familiar with Houston. The really cool thing about Houston, one of the things that I like about it is that the roads are right laid out in a radial pattern. So you see that there you see the city of Houston. And there's loop number one, loop number two, and then on the outside loop number three, which, when complete, will actually be the largest loop in the United States. It's called the Grand Parkway.

So generally, I'll tell you where I'm located,

Michael:

It's like a tire. Spokes.

Fred:

Yeah, looks, the cool thing about it is if you get off on the wrong exit, you can just turn around, you'll get right back on somewhere pretty easily, to get back to where you need to go. But if you're looking at Houston itself, so central Houston, the city of Houston, good do north on Interstate 45, that's where it says Spring in The Woodlands, that's where I'm located my office in my home or in those areas. So obviously, you know, by living in that area, and knowing that area the most, I'm gonna start there, and I kind of radiate out myself, when I start looking at properties.

You know, and I'll tell you, you know, the neighborhood I live in, they're probably 100 realtors that live in my neighborhood. So if you want to know where to where the best places to live, are gonna follow all the realtors. And but you know, we go because we see so many houses, you know, we know, we know the best places to live. But General, in general, if you're looking around, like the city of Houston, and really what we're doing is we're looking at most of the suburbs, because the suburban areas are where we're going to get most of our properties all the way from the north side over to the west side, you know, interstate 45 up and over West on Interstate 10, you're going to have your best opportunities for your rental properties in these areas. And this is where the growth is.

The cool thing about Houston is there, there's just a lot of room to move a lot of room to grow, there's still a lot of land, the developers and builders are building like crazy. So you know, I'm going to follow that you know what like, like that outer loop, that third outer loop that I call the grand Parkway, I'm going to follow that around, for the most part to start looking for my property. So I'm going to Spring I'm going to Tomball going to Cypress and I'm going to Katie, it and I'll go out to the east a little bit as well. But you know, those are going to be my main areas where I'm looking for properties, and we're going to find those, you know, those that are in the sweet spot in you know, now we're talking about the sweet spot, what used to be the sweet spot, or the breadbox would be, you know, under 200,000. Nowadays, those are becoming less than less available.

You know, even in Houston, the prices have increased to the point where, you know, the sweet spot for a rental property, you know, might be a three or four bedroom, two bath home, anywhere from 1800 to 2400 square feet. And they're gonna be in that 250, 200 to 250 range. And generally those are going to rent probably around like anywhere from 1800 to 2000 a month.

Michael:

Okay. All right.

Fred:

But yeah, I mean, if we're looking at Houston itself, though, I mean, mostly, I'm gonna stay on the outer outer rim of Houston area for properties.

Michael:

Okay. Great to know. And do you know, Fred, would you say 7.1 million people in Houston. That's the population.

Fred:

Yeah, that's the Houston metro area. So the map you're looking at is basically the Houston metro area. You know, you could even go a little bit further north to fourth, fourth largest city in the nation, I think they've estimated next year for the population to grow. Somewhere around 100,000. I ran some numbers on that. And what I was looking at, and I was looking at some census data as well, the number of people that move to the Houston area per year, it averages out around somewhere around 122 people a day. So that's a huge number. People are coming from all over the world, they're coming from every state, in their being brought in not just like, by oil and gas is what we used to be, you know, used to be what we're known for here, and they still are, that's that's the basic, you know, economic driver here. But you’d be surprise, the medical industry is actually the number one employer that there are the largest medical center in the world here. A lot of people come from other countries to get treated for cancer at our medical center.

So it's really strange that, you know, that's what used to that's what used to drive our economy. And now that's not even the biggest employer. But, you know, like I said, about 122 people per day, you know, they say when you take an account move ins and move outs and births, you know, really adds up more like 250 increase per day.

Michael:

How about that?

Fred:

The population is growing pretty rapidly.

Michael:

And yeah, you touched on kind of the big economic Drivers, any other notable companies that are moving to Houston or based in Houston that would be of interest to someone that doesn't know about the market?

Fred:

Yeah, well, I mean, all the oil and gas companies, the big ones, you know, we've got shell, we've got Exxon, then you've got your like oil and gas engineering type companies like Halliburton, KBR. So people may not recognize that there used to be called Kellogg, brown and root. We've got some, you know, companies noted that aren't in those industries like waste management, HP Hewlett Packard is moving their operation here, suppose they're building right now almost complete the beginning of 2022, they should have their actual headquarters here ready to move into.

So in this has got a lot of other types of companies like Igloo coolers, they build all their igloo coolers, the big warehouse, and their headquarters are out in the Katy area we've got about now I drive around a lot. So I'm driving in all different parts of the city, you know, see three brand new Amazon Fulfillment Centers being built right now. There's already one really big one here, central more central Houston. With three that I've seen with my own eyes, there could be four more that I don't know about. In you know, they're just everything that you can think of. That's one of the things I like about Houston is that, you know, I'm kind of a city guy. So I like to be close to everything, you know, pretty much you name it. I can get it here. You know, and that's one of the things I like about about the area.

Mark:

Hey, Fred, I got a quick question about like the Houston port, because that's such a hot topic today with like, supply, you know, supply and demand and just the supply chains in general, is the Houston port. Is that really something that's used in notable to the city and driving job growth? Because I know, that's just what's really causing the big mess right now with getting getting these products from around the world, you know, shipped to the United States.

Fred:

Yeah, it definitely is. And I can't quote your statistics on or anything. But I know, it's one of the I know, it's one of the busiest ports, you know, North America, but it definitely drives a lot of jobs. I mean, they're, it's centrally located as well, you know, a lot of rail activity comes from there. And a lot of trucking activity comes from there. And I mean, there there are, you know, like I said, I wish I could quote you numbers on on the amount of activity that goes on there and the jobs that it brings, but I mean, it is definitely one of our major employers here in the Houston area.

And then we've got, you know, along with that port. So right along that gulf coast there, we also have a lot of the oil and gas refineries, to I mean, there's there's definitely, when when Houston is affected by say, like a storm and have to shut those things down, your gas prices go up in other parts of the country before they go up here. Because, you know, they've got to get that to California. And they've got to get that to New York and Florida and other places. So that gas when the production stops on those oil and gas refineries, it's going to drive prices up. So you know, there's, there's a lot of incentive for the workers to be here in place to be able to move that product out of the city, or out of this area.

Michael:

Yeah, I think I just paid $5 A gallon for diesel out here in California. And maybe you want to cry at the pump. It’s brutal. So Fred, you

Fred:

That's hard. That's hard.

Michael:

Yeah. You touched on something that I want to want to talk about. And that's, you know, if there's a storm affecting the port, what are some natural hazards, or things that people not familiar with Houston should be aware of that are maybe commonplace to Texans out there?

Fred:

I get I get to talk about this a lot, especially working with people that aren't from here that are buying houses, they're, you know, they live in other parts of the country, Sue, they sue, you know, number one, you know, we're in hurricane alley. So hurricanes are always you know, going to be a factor, they're going to be a factor for your insurance costs are going to be a factor for the dwelling itself. Now, you know, I kind of tell people, especially if you're from California, you know, we don't have earthquakes here. So, you know, when I start talking about California, you start talking about earthquake scares, scares me to death. Same thing happens when I talk to somebody, especially from from the West Coast may ask about hurricanes. It is scary. I've been through some of these hurricanes, they're scary, but, you know, they're just kind of a fact of life. I mean, we wouldn't be here if they if every single one that came through here devastated the area.

So you know, what comes with those hurricanes is you know, you got your wind storm damage. We don't get a whole lot of like tornado activity, and we really don't get a lot of like hail activity. We get some from time to time. But you know, the major, I guess, natural disaster that we have They're, you know, hurricanes, what that brings the winds, winds and floods. You know, Houston is just, you know, it's a low lying area. So I always tell people, if, if you're concerned about it get flood insurance, not every place floods, sometimes they do, sometimes they don't at any given point, you know, anything could happen anywhere. But you know, there wouldn't be this many people living here, if, you know, we were going to get washed off the face of the Earth every time it rains.

You know, it's not a big concern to me. But I understand where people are coming from when we talk about, you know, those types of disasters, natural disasters, and where they, you know, what really makes the what, where they really factor in as far as like insurance goes.

Michael:

That makes total sense, Fred, so it's really not as big a deal as it sounds like maybe other people make it out to be or us Californians make it out to be since we don't have those type of events here. Anything else that people should be aware of that that just kind of commonplace, specific to Houston, maybe like with regard to inspection reports, or?

Fred:

When you when you're talking about an inspection report, one of the most common things that I do talk to I make sure I talk to every client about this, even people that are from here, because not everybody always understands, we're sitting on some of the most expansive soil in the United States right here. It's clay based. And when it's dry, man, it contracts. And when it's wet, it expands. Well, the cool thing about that is, you know, somebody way smarter than me years ago, came up with a way of engineering these these slabs that the houses sit on in the buildings all sit on that they have post tension rods and cables. So what they've done is they've engineered these to accept the movement, the natural movement, that that's going to come from these really heavy houses sitting on on these heavy slabs on this expansive soil. And the cool thing about that is that, you know, they just pop an end off, and they can release tension where it needs to have be released, if needed, or they can pull it back together.

So you're going to have cracks in slabs, on almost every home and every building here in this in this area. And Mark can probably speak on that, too. It's similar up in the Dallas area, and all over Texas, we're just sitting on that that type of that type of foundation here. But you know, we have, we were able to explain that to our clients in a way to help them I guess, kind of ease their mind on it, because maybe my own house is going to have that that problem too. So, you know, you know, like I said, there's a solution for that, you know, some of the much older homes may not have have those post tension cables, but they can also come in retrofit those two, there's companies that specialize in that. So even older homes that don't have those, they can drill those in cost a little bit of money on those older homes. But that's another reason why I like try to stay a little bit newer homes, because I know that, you know, the building codes say that they have to make them that way.

And then the other the other issue as far as like, inspections go, this is probably the most common thing that we deal with. For the HVAC unit the AC, you know, this is a hot area. And I mean hot temperature wise, you know, it's these ACS run 10 months out a year, right now at my house, I think it's 80 degrees, maybe a little bit hotter than that right now and conditioner is on. So you're talking about these things getting a workout. So the lifespan on those aren't maybe as high as they would be in some other parts of the country. But they also engineer and they make those to last longer, too, because they know that they have to go the type of air conditioning unit that I have here is not the same type that somebody in Kansas City has, you know, so they we know the furnace and the AC unit are going to run here.

And in almost every inspection report, the inspector is going to they're going to hit that controller and they're going to test you know, they're going to test all the outlets where the air is coming out, they're going to tell you you know what the temperature differential is, almost all the time I asked the sellers, you know, to at least provide a report that they've had it serviced or have it service during the contract period. Because in because they run for so, so long. It's such a high capacity. They should be they should be serviced at least once a year, if not twice a year. But you know, like I said, it's one of those also a fact of life here. I mean.

Michael:

Awesome.

Mark:

So Fred, I know one more thing about the area's it's it's very moist out there. So in terms of moisture, how do you see that impacting the properties and what do you find on the inspection reports that either scare you in terms of moisture and what doesn't scare you?

Fred:

We do have high humidity here and sometimes you'll notice the algae on the siding on the outside of homes especially where you know water runs off of the roof and you know, it rains here a lot too soon. There's going to be places where it looks like mold sometimes and what happen is, if you get an inspector or even a buyer or somebody that doesn't know, they're going to look at that go, that's mold. Well, it's not really mold, it's algae, and it really just needs to be cleaned off. And they can treat it, you know, a chemical or powerwashing or something like that. But it's just a natural part of the outdoors here. I mean, it's going to be on everything that, you know that specifically related to the moisture into the humidity. But it's not mold eating up the house, and in most cases,

Mark:

Yeah, that nobody likes to talk about that four letter word, right, we try to avoid it. So we call it moisture, for sure. And in regards to just flooding, I know we talked about that for a little bit, but we didn't talk really about the insurance aspect of it, maybe give the buyers and, you know, listeners, just an idea about what it is that you kind of run, how do you run your numbers? You know, what are the things I look for, you know, where are the flood zones that you stay away from? And when you underwrite properties? Like how do you factor in that risk?

Fred:

When I when I'm underwriting properties, especially for investors, I'm looking for properties that are not in flood zones. Yeah, it doesn't necessarily mean that a house may not have flooded in some 500 year storm, which is which we had in 2017, with Hurricane Harvey, but I'm going to try to stay away from those and for most of my buyers, now, there are places where their houses in flood zone, but for the most part, these developers and these builders try to build away from there. Now, if you're getting along, you know, I put on my mortgage hat for a second there, if you're getting a loan, and you are on anything, but the X flood zone, which means you're in some type of flood area, you know, the federal government buys that you have flood insurance on that loan. So, you know, that's going to raise your costs. And that's one of the reasons I mean, our margins are pretty thin here, because their taxes are a little bit higher, you know, so we're gonna stay away from any extra cost and flood insurance is going to add a pretty big chunk of you know, cost to that in pretty much take away any kind of returns that that you would get off a rental house.

So, you know, but like, like you said, Mark, I'm looking for houses that are not in the flood zones, and I'm looking at their seller disclosures to see that they haven't flooded before, you know, I'm not talking about you know, somebody's pipes busted in the winter or something like that. And they fix that, you know, that's not a big deal. I'm looking for rising waters, because then we get back to the moisture and the bad four letter word mold. You know, when you have those rising waters that come from flood, they bring in those those particulates and stuff that cause those, those issues in the house. And then they can be those houses can be renovated, they can be rehab, but you know, at the end of the day, how comfortable are you as a as an investor than buying a house that flooded before and I know if it were me, I'm probably not comfortable with that.

Michael:

I'm right there with you.

Fred:

The good news is Houston is huge. There's houses that have flooded, but there's way more houses that have flooded.

Michael:

That's great. Fred, can you give everybody listening, a rundown or an idea of how they should be calculating their property taxes? And how that works in Houston?

Fred:

Yeah, the property taxes work. Basically the same all over the state of Texas. You know, we are a high property tax state, you know, we don't have a state income tax. So we kind of give up a little bit, you know, on the real estate taxes, you know, the theory is we're basically paying for some things from real estate taxes in other states might pay for another ways. Number one thing is the schools. You know, we have really good schools here in the state of Texas with public school system, most people send their kids to public school and they’re very good schools. So you're paying for basically the school system through your taxes and that's that's the largest amount of what comes out of there.

You know, also your city services and things like that to the taxes are calculated by by each county. So the county appraisal district assessor they assess the value on a house every year. We do every April, I think we get it, we get an invoice in the mail for what the value is going to be this year. Sometimes they go up sometimes they go down sometimes they say the same. lately. I've been seeing more going up. But that's that's a byproduct of the economy right now in the real estate market. So there is a cap for homestead properties. They do cap it off. And then there's a cap that the city and county governments can't go up a certain amount each time. I'm not going to quote those those cap amounts. But you know, generally, if you're buying a house, that's $350,000. Typically they're not assessing that value at the county level at 350. They're probably going to need more like the 275 or less range.

Now sometimes they do Get up, you know, I'll say, in general, the lower the price of the house, the closer you're going to be the value the tax value at that the higher the price a little bit further away. So it gives you some, you know, I guess a little bit of a break and you're not paying, you know, 3% on a $400,000 house that maybe assessed it 350 You know what I mean?

Michael:

Okay.

Fred:

But yeah, that's what that's how they're calculated. And then they do assess them every year, but they don't always change.

Michael:

Got it? And do you know, Fred, does a sale trigger a new assessment? Or is it annual independent of whether a sale happens or not?

Fred:

Right? In Texas, the county, the counties aren't allowed to use that data, to use the sales data know, whether they do or not, you know, is kind of up in the air. But their their assessment is done independently, they have an independent appraiser or appraiser in quotes, somebody that works for their appraisal district that assesses those values, and they do an independent each year. I'm told they use Google Maps, you know, to calculate square footage and things like that.

Michael:

All right, cool. Well, that's great to know. That's great to know.

Mark:

So Fred, you know, real quick, the, you know, the taxes, taxes are high in general, you may have some flood insurance, your insurance may be a little bit higher, you maybe give us a idea about when you talk to investors today, you know, you mentioned there's appreciation, that's the big play, what's the expectation that you see for appreciation, maybe now, going into, like, 2022. So, you know, buyers don't think, Hey, I missed the boat, you know, Texas had huge appreciation, you know, what is it looking like in the near future that you would expect?

Fred:

In general, we say, in the Houston area that the market dictates about two to 3% per year, on average. Now, I mean, there's been a big increase over the last 10 years, I think it was like a 92%, or something like that. But you know, we're looking at about two to 3% On average year over year.

And you're gonna always have your pockets, I mean, you're going to have some, sometimes some suburb might blow up. And it just the hot area for right now, going to where I live north of where I live, is like that right now. I mean, in the past, in the recent past has been the west side of town where like Katie, the Katie and cypress areas, but, you know, you'll have your, you know, you'll have your big jobs, that if you average it all out over 10-15 years, it's gonna be generally about a two to 3%.

Now, the good thing, the good news is that, you know, like I said, with all the the number of people that are moving to Houston, they're not just coming from, you know, other places in this country, they're coming internationally, a lot of those people aren't going to buy houses, so they need to rent a house. I mean, they're on, they're on different types of visas. So, you know, they maybe can only be here for a couple of years. A lot of these companies, especially as oil and gas companies, they bring people in from South America, from Eastern Europe. You know, these people are coming in to rent houses, and they keep our keep our rental prices at or above what they are now. So we always have, we always have a good turnover, where those those homes don't sit empty for very long.

Michael:

Great, great. Mark. Anything else for Fred before we let him out of here?

Mark:

No, I think I think he covered everything that I wanted to hear about Houston. I'm from Dallas. So you know, we didn't talk about sports. So we have the belt. Yeah, absolutely. So yeah, Fred, and I will take that offline. But you know, I think my last point is, you know, you kind of call Texas, this little area called the Texas triangle, which starts in Dallas goes down, I 45. Houston cuts over to San Antonio, and you just have all this growth happening within those areas between Austin and Waco.

There's College Station, there's just so much activity that's happening, kind of that infill of that triangle. So without a Houston without a Dallas without a San Antonio, some of those other big markets, you know, you probably wouldn't have that activity happening. So I think Houston's got a lot going on. It is way bigger than Dallas. So I'd have to say we are the Big D. But Houston is by far, much bigger has a lot of activity. So I'm excited just because, you know, Fred's getting a lot of offer activity right now, especially with being a certified agent as a part of our network. So we love the fact that he can contribute be the local expert and you know, he's he's helping Roofstock grow our business and vice versa for all these buyers that are wanting to work with him and get a little bit more in depth and into the Houston market. So thanks for everything you're doing for a Fred.

Fred:

Yeah, no problem. I'm excited. I like talking to all these people, these new people every day.

Michael:

Perfect. In that vein If someone listening wants to learn more about the Houston market, what's the best way for someone to get a hold of you?

Fred:

They can get a hold of me through Roofstock or they can email me at Fred@fredmcdaniel.com They can also call me at 713-321-9161.

Michael:

Awesome. Prepare for your phone to blow up my friend. Fred, this was great. Thanks. Thanks so much for coming on. Really appreciate you taking the time and I'm sure we'll be chatting soon.

Fred:

Yeah, thanks. Thanks for having me guys.

Michael:

Alrighty, everyone, that was our episode A big thank you to Fred for coming on. The Houston market sounds to be on fire right now. Which is ironic coming from a California guy because that means different things to us out here on the West Coast. If you enjoyed the episode, feel free to leave us a rating or review whatever it is, Listen, your podcasts and as always, we look forward to seeing the next one. Happy investing

These are the top 10 cheapest states to buy a house Nov 20, 2021

As a real estate investor, you want to find properties where your investment dollar will go the furthest. To help you do that, we compiled a list of the top 10 cheapest states to buy a house in America in 2021. We analyzed data from several sources to find the least expensive states and the most affordable cities in each of them.

In this episode, Tom, Michael, and Emil run through the top ten states. They highlight important metrics and discuss what this means for investors.

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Transcript

Emil:

Hey everyone, welcome back for another episode of the remote real estate investor. My name is Emil Shour and today I'm joined by Tom Schneider and Michael Albaum. In today's episode, we're going to be covering the top 10 cheapest states to buy a house in 2021. So this is from an article off the roofstock blog that I wrote a while ago called the top 25 cheapest ways to buy a house in 2021. We're going to run through some of the numbers like median home value, one year price change five year price change and median rent to give you guys an idea of which markets may be good to target or at least do a deeper dive into So let's hop into this episode

Emil:

Alright guys, so this is actually a blog post I helped create on the Roofstock blog, and it's covers the top 25 cheapest states to buy a house. We're going to cover the top 10 And just to give everyone some context, the data here is from Zillow for home values and historic price trends. And that is as of June 2021 So that data is a couple months old but still you know relatively easy for people to kind of compare the top 10 We also have the median rent data is coming from go banking rates and the median rent of a three bedroom place and I'm gonna just run through the top 10 But before I do Tom you look like you have something a burning question…

Tom:

I do my mouth is like like half open alright a meal in writing this article states a pretty big area you know a big Is there a reason why it wasn't at like a metro just because like it I think of cheapest I mean you know California is a great example you know you can live in a very expensive area or you can live in a very less expensive area.

Emil:

Yes

Tom:

Curious. Go ahead.

Emil:

Great point Tom. i We don't have an article around the best the cheapest cities I think just because there are so many unique city so look at that it would be very hard to compile the data. So we have cheapest states. I think it's just easier to get 52 data points rather than I don't know 1000s

Tom:

Fair fair fair. I think there's I think there's I think there's a middle ground in there as well you know between from from city or whatever to state I dig I'm I'm picking you out a little bit I like I like this let's get into it. Let's get into it.

Emil:

Tom just ruined the episode and we’ll end it here. So thanks, Tom.

Michael:

Timeout you said you said 52 So are we talking territories as well like Guam and Puerto Rico?

Emil:

I Have not attended a geography class in quite a long time Michael so I don't even know if I'm correct in saying 52 Or if it's 50.

Michael:

50 states.

Emil:

50 states you know what? I'm just I'm done with this episode. guys. You guys take it from here

Michael:

Emil’s like enough of this so I don't get fired like enough of this. Just trying to help you out.

Emil:

I'm doing you guys a favor. How about that? Alright, so let's let's get into this. I'm curious if you guys can get some states in the top 10 If you had to guess. Pick three each you guys…

Tom:

Is Mississippi on the list.

Emil:

Ding ding ding Tom one for one.

Tom:

All right, Michael, your opportunity to take the lead. Do your two guesses…

Michael:

Show me Alabama.

Emil:

Alabama? Ding ding ding correct as well. All right, one one here.

Tom:

Show me Louisiana.

Emil:

Louisiana is a not in the top 10

Michael:

Ah, man. All right.

Emil:

First incorrect answer. Tom. What do you have?

Tom:

I got two guesses here. We're tied one to one. Show me Arkansas.

Emil:

Arkansas is ding ding ding in the top 10

Tom:

All right. No looking at anything on your on your computer. Michael.

Michael:

Keep your hands where I can see them

Tom:

Show me Oklahoma.

Emil:

Oklahoma in the top 10 Ding ding ding Tom is a liar. For three Mike. Michael you can you can take a consolation swing here and at least try to get two out of three. So

Tom:

Earn your blue ribbon or purple.

Michael:

That's right. That's right.

Tom:

The one they give to the kids.

Michael:

Show me, Ohio.

Emil:

Ohio is in the top Ding ding ding.

Tom:

There you go, Michael.

Emil:

Alright, so Michael finishes two out of three. Tom three out of three. Stellar. Perfect.

Michael:

Wow. That's what Tom's used to hearing.

Emil:

Very impressed, guys.

Tom:

That's kind of how I operate. I thrive on positive reinforcement. Thank you Emil.

Emil:

You’re welcome, alright, let's start at the let's, let's work our way backwards. So we'll, we'll start at 10. And then we'll go to number one and

Michael:

Are these in order of pricing.

Emil:

10 being the least cheap. Exactly, yeah. So it's by median home value. So the cheapest will be number one in terms of median home value according to Zillow data. Alright, so number 10. We have well let's just keep this going. Thing number 10 is

Tom:

Indiana

Emil:

Jesus Tom, Have you have you read this article?

Michael:

He memorized the last night before bed.

Tom:

No, that's it that's great. That's good. I mean Michael said Ohio Michael said Ohio so I just figured you know someone who's kind of friends with Ohio

Emil:

Tom you need to go make a lot of bets today because you're on it. So please just go like buy some alt coins and stocks and whatever today go buy a rental property till you can't miss today. Alright, so Indiana number 10 median home value comes in at 185,805. Our one year price change so looking at one year ago compared to today? Well this is as of June 2021 13.2% Five year price change 45.3% In the median rent on a three bedroom place I think this looks at apartment and a house from go bank rates $1,052

Tom:

Some some gross yield there.

Emil:

All right. So that's that's Indiana. All right, who's number nine Michael you get first shot.

Michael:

And it's not one of the ones we've already named?

Emil:

It is one of the ones you named?

Michael:

Oh, shoot.

Emil:

I’ll give you one further, it's the one you it's one you named?

Michael:

Oh, man. So I got a 50/50 shot. I'm gonna say Ohio.

Emil:

Bing bing bang Ohio coming in at number nine. So our median home value in Ohio $181,756. Or one year price change 14.4%. And our five year price change coming at 45.3%. And median rents on that three bedroom place is $1,024.

Tom:

A price change is so crazy. I mean, all those numbers

Michae:

That’s unbelievable.

Emil:

Oh, actually, ooh, this this article has the cheapest lists like three or four cheapest cities within these states to buy a place. So I don't know where that was pulled. Exactly. Let me see if I can find it real quick from this article. So from Yahoo, cheapest place. So it was an article called The cheapest places to buy a home in every state. So that's where this looks at. All right, so Tom, maybe we get some of the stuff you're looking for. So I'll backtrack a little Indiana. The cheapest cities to buy a house are Gary Anderson, Muncie and Richmond. And then for Ohio. We have Youngstown, Warren, Dayton and Marion.

Emil:

Alright, so number eight. I'll go ahead and just dive right in Kansas comes in at number eight. Our median home value is $176,898. Our one year price change not as high as number 10 or nine coming in at 11.3%. And our five year price change coming in at 33.8%. Our median rent comes in at $1,050 on a three bedroom place. Our cheapest cities within Kansas are Hutchinson Kansas City, Topeka and Salina.

Michael:

Topeka, capital of Kansas.

Tom:

You guys all invest pretty in that around that area. Do you guys have an exposure to Kansas? Or you're more of Missouri?

Emil:

I'm Missouri.

Michael:

I've invested in Kansas City, Kansas doing a flip out there so that's almost getting wrapped up?

Emil:

Are you in the Kansas side or the Missouri side?

Michael:

On the Kansas side? I'm like fairly certain I double check. Which sounds ridiculous as I'm saying those words.

Emil:

Alright, moving on to number seven. I think you guys guessed this one as well. I don't remember who said it

Michael:

Probably Tom because I mean he's flawless.

Emil:

So it's Alabama who said Alabama?

Tom:

I was gonna I was gonna say it I missed out I was gonna I was gonna guess that was the one.

Emil:

Oh my god this guy is just he can't miss that.

Michael:

That was me. That was me. Michael had Alabama. Yeah. With the second of my, one of two. Yeah.

Emil:

All right. So Alabama median home value coming in at $170,184. Our one year price change 11.9%. Our five year price change. We have 34.6% and our median rent on a three bedroom place coming in at $1060 Cheaper cities within Alabama to buy a house are Gadsden Birmingham, Montgomery and Phoenix city or Phenix City

Tom:

Another market Michael has some exposure to

Michael:

Yep, yeah. Birmingham Alabama

Emil:

Birmingham. Number six Michael is another place you invest in so go for it. What do you got here? What state

Michael:

Oh,

Emil:
We already covered Ohio so what else could it be? Other side of Ohio. Oh, other side of where you invest in Ohio,

Michael:

Tennessee? Kentucky? Kentucky like South. I guess it kind of like like,

Emil:

Yeah, Cincinnati right south of Cincinnati. Yeah. Toki See, I know what I'm talking about.

Michael:

Geography is tough man.

Emil:

Alright, Kentucky median home value we got $168,998 our one year price changes 10.8% or five year price change. We have 36.3% and our median rent on a three bedroom place comes in at $1,025. Our cheapest cities to buy a house within Kentucky are Hopkinsville Covington. Owensboro. And bowling green.

Michael:

Oh, Convington made the list man. Covington that's where I heavily invest. Yeah, it's

awesome.

Tom:

Kind of related talking about like, you know, West's of states are directional. There was this. I think it might have started on Tik Tok. This guy's like, he said, he's at a there's like a music playing in the background. He's like, Okay, here's the situation. And they're playing like, West Virginia. Take me home.

Michael:

Country Road, right?

Tom:

And he's like, here's the situation. This song is not about West Virginia. It's about the western part of Virginia. And that, like, closes and then opens them just like super hungover the next day. It's like, is there something like that's just like, so perfect about that. Here's the situation. I mean, I hope this stays in the episode because people who've seen this will be like, Yeah, that's

Michael:

Really relatable.

Tom:

But the western part of Virginia, not West Virginia. Anyways, continue.

Emil:

I've seen tic tock videos I've ever actually been on tick tock. It just sounds like a black hole of silly videos.

Tom:

Yeah,

Michael:

I think that's a fair assessment.

Tom:

Yeah, yes. Me too.

Emil:

Is there other types of videos? Or is it just silly videos? It's only thing I've seen like silly tick tock video clips.

Tom:

I think that’s it. But it's funny all like a lot of it does ends up going on to other platforms too. So.

Emil:

Right, right. I think I've seen them on YouTube. Anyway, moving on. Number five, we've got Iowa our median home value in Iowa we have $165,955 or one year price change coming in at 6.8%. Five year price change 23.1% And our median rent $1,021. Something interesting that I'm noticing as we climb up the list in cheapness is that the percentage price change so appreciation is getting lower and lower so far.

Tom:

Huh? Interesting,

Michael:

Seemingly, and also that the median rent is fairly consistent.

Emil:

That too, yeah, median rent is hovering around 1000 bucks a little over 1000. All right, cheapest cities within Iowa to buy a house. We got Waterloo, Sioux City, Davenport and Council Bluffs.

Michael:

Okay,

Emil:
All right. Number four, Oklahoma, which I think you guys I think somebody mentioned

Michael:

Tom mentioned

Michael:

Tom!

Tom:

Windy City, Mr. Three for three

Emil:

Windy City. Man somebody is worse that geography than me. All right, Oklahoma. median home value $150,754. One year price change 10.4%. So stepping up a little bit from our Iowa numbers. Five year price change coming in at 29.1% in our median rent on a three bedroom place $1,015 Or cheapest cities to buy a house within Oklahoma or Muskogee, Muskogee Lawton Shawnee and Enid. I probably butchered every single one of those.

Michael:

Yeah, if anybody knows the proper pronunciation, please feel free to leave us a comment.

Emil:

Spell it phonetically for us. Alright, number number three we get into top three good stuff. All right. I think someone mentioned Arkansas as well or console comes in number

Michael:

Tom again.

Tom:

Mr. Three for three did.

Emil:

Alright Arkansas.

Tom:

T for T for short. TFT

Emil:

Our median home value on Arkansas $149,120 our one year price change 10.4%. Our five year price change 30% And the median rent falling below $1,000 For the first time $926. Our cheapest cities within Arkansas to buy a house are Pine Bluff. Texarkana North Little Rock and Fort Smith.

Tom:

I like Oh, I like all these areas anyways, just having like visited and I don't know,

Michael:

Have you visited all those areas?

Tom:

I pretty much most of them yeah.

Michael:

Like every single one that a meal is listed so far or just physically in Arkansas,

Tom:

I haven't I haven't visited a lot in Iowa but I mean, Alabama, I've visited lots of Alabama. I had that. I don't know that we mentioned a weird deal where I played football in college at UC Berkeley at Cal and then I got hurt my senior year and then found a weird loophole that I couldn't play D one because my eligibility was expired, but I found a loophole allow me to play D two. So in the best D two football is like in the south, so I lived in Muscle Shoals, Alabama and we like traveled around a bus and like went to tons of these like spots in Mississippi or Kansas. Arkansas. Yeah. Hello. Ours are in Texarkana. I That's just proving me as a you know, not as a novice if by calling it that anyways, go ahead. Pass the mic.

Emil:

Such a west coast dude

Michael:

This is the situation this is a podcast is not about Arkansas.

Michael:

It's about the western part of Ar…

Emil:

Alright, number two, I think you somebody mentioned Mississippi did someone mention Mississippi?

Michael:

Yep. TFT did

Tom:

TFT, yours truly.

Emil:

Median median home value in Mississippi we've got $140,818 One year price change 8.4% Or five year price change 24.7% In our median rent coming in at $989

Tom:

This just my last derailing on that on living out there. So I had like mentally prepared for the heat. I was just ready right dog days and it was hot. But I ready. I had mentally said I'm going to sweat a lot. There's going to be kind of hot but I honestly I honestly kind of enjoy it like you know give me a sauna give me whatever steamroom what I was not prepared for is come wintertime it snowed a little bit there. And I was not ready. Yeah, right. It snows there.

Emil:

I had no idea it snowed there.

Tom:

It's not like feet, but you know, you'll get dustings every once in a while and Alright, number one, go ahead and do it. Interrupting cow, mooo!

Emil:

Before you before you come in, we gotta we got to talk about our cheapest place to buy a house within Mississippi. Okay, those are Jackson Greenville Meridian Gulfport, so now.

Michael:

All right All right. All right.

Emil:

One. I don't think anyone guessed it. It was West Virginia.

Michael:

This is a situation.

Tom:

Wait the western part of Virginia?

Emil:

How ironic and perfect could that have been

Michael:

That is so good.

Tom:

TFT.

Emil:

See, you can't miss today I'm telling you. Take every dollar you have and you'll make any investment that you possibly desire to get good day for you. That's West Virginia. Number one. median home value. We're dropping off a bit from number two. So 117,768 is our median home value one year price change at 7.1%. Five year price change 19.3% In our median rent for a three bedroom place, coming in at $912 our cheapest cities within West Virginia to buy a house Bluefield, Clarksburg, Beckley and Huntington. And there you go top 10 cheapest states to buy house in 2021.

Michael:

So what are each of your biggest takeaways from this?

Emil:

I think I already mentioned mine, I was surprised that the percentage change didn't like, I would think the cheaper the house is, you know, a $5,000 increase on 117,000 versus 160,000 is gonna be a higher percentage. I was expecting the percentage to be higher in price changes when it wasn't so that was surprising to me.

Tom:

My surprising is in some of the states it's like they're like It's like bigger cities that are the least expensive one so like Arkansas, like Little Rock is I think might be the capital I love like in like capital cities and just in that there's like kind of like a natural draw for like economy and, and all that kind of stuff. So it's cool in some of these less expensive in some less expensive states like you can buy, you know in that whatever Capitol Corridor, whatnot city or like around the suburbs and still have less expensive so I thought that was an interesting tidbit.

Michael:

Nice.

Emil:

How about you, Michael?

Michael:

MIne was just you could go to the 10 cheapest cities and over the last five years. Get A 20% increase on your value by doing literally nothing. And so it's crazy when we talk about the power of real estate and all of the great benefits that it has, like, if you bought a property there, for 100, grand five years ago, it'd be worth 120 grand today, like, that's unbelievable for the fact that you were getting paid probably that whole time, too, with a tenant in place. So like, it's just, it just speaks volumes to the power of real estate and how the multiple ways that it pays you even in like, less expensive markets is pretty profound

Emil:

Ya true.

Tom:

Yeah. I think also, Michael and I, we've done a bunch of webinars together, and one of them, we were going through some assumptions around building a passive income flow of $100,000. And within the assumptions, I think we had the purchase price, like somewhere north of $100,000. And like, someone had commented, like, Hey, you can't buy a house for 120,000 or 100 and whatever it is, like, yes, you can like that. You definitely can. And yeah, these are all 10 states in which that is very doable.

Michael:

Yeah. And it was funny, I was like, I'm pretty sure I just bought two of them not to like shame that person. But I was like, guy, you just like incorrect with your facts, like I literally just bought two of them. So

Tom:

I think it's a good exercise of like, kind of taking blinders off. Like perhaps that is your strategy only to buy in these really large cities. And that's great. And then you know, you can't buy $100,000 house or $150,000 house. But if you know, you're kind of open to moving around and shifting your strategy to meet specific goals, like there, there definitely are markets to do that.

Michael;

I think even in some like in some of these bigger markets, and even capital cities, if the median home price is 100, you know, is $300,000, I'm sure you can still find properties for 150k. They just need a bunch of work. So depending on what your investment thesis is, and what you're prepared to do, I think that there are opportunities in every market, you just have to be willing to uncover them or be willing to do what it takes to then profit from those opportunities.

Emil:

I've seen that a lot of like, like Midwest cities, like I invest in St. Louis, and there are their homes that sell for a million plus still even in St. Louis, and their homes that sell for 50k. Like there's a huge, huge, huge disparity. You know, one home was probably built 120 years ago and is fully dilapidated and needs need some love and the other one is like a mansion but still like there. You can same city, you can have a huge disparity.

Tom:

Hey, guys, I think we're going full circle from the very beginning of the episode, when I was kind of teasing a meal about, Hey, why did you guys do states? Why don't you do like a little bit, you know, not like the largest possible, you know, where even within each city like there's just, you know, really dramatic range. I mean, here in the Bay Area where I live in Northern California, you know, there's much smaller cities like not smaller, but less expensive, right. You know, perhaps Richmond or Vallejo or like Stockton and then you have areas like Piedmont and Menlo Park and all of these spots. So you know, even at every, every level, there's just really dramatic range.

Emil:

Yep. But in California there there is definitely no $100,000 properties, that's for sure. Maybe a shed in someone's backyard, but that's about it.

Tom:

Working on one right now.

Emil:

Are you doing a shed? Are you building an ADU?

Tom:

Uh, it's in a level electrical. It won't have a bathroom in it.

Emil:

It's made to be like your office like an office area

Tom:

Exactly. Office gym 10 by 18 I kind of wish I did it a little bigger like man 12 by 20 would have been like kind of fun but 10 by 18 is still very good it's basically the equivalent of like two rooms in one room so and doing prefab I think I've talked about before but anyways, the long journey and getting it the concrete truck should be coming any any moment now to lay the piers for the foundation of it.

Emil:

Alright guys, I'm gonna I'm gonna send this home before we meander as we always do. So if you've made it this far, thank you for watching. Thank you for listening, and we will catch you on the next episode. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

How Avery Carl builds long term wealth through short term rentals Nov 11, 2021

Avery Carl is a seasoned real estate investor and a co-founder of The Short Term Shop. Avery specializes in connecting investors with short term rentals with the highest ROI potential and then training them to manage their short term rental from their smart phone from anywhere in the world.

In this episode, Avery tells us about short-term rental strategy, hot markets, returns, and what you should know about short-term rentals in contrast to long-term rentals.

https://theshorttermshop.com/

---

Transcript

Michael:

What's up everyone? Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Avery Carl, distinguished author, speaker, investor, agent, mortgage broker, she does it all and she's going to be talking to us today about things you need to be aware of when looking for short term rentals. So let's get right into it.

Avery Carl, thank you so much for taking the time to hang out with me today. I really appreciate you coming on.

Avery:

Thank you so much for having me.

Michael:

No my pleasure. So I think a lot of our listeners probably already know who you are. You've got quite a bit of notoriety behind you. But for anyone who's not familiar, can you give us a 32nd elevator speech on who you are, where you're come from and what it is you're doing real estate?

Avery:

Yes, yes. So my name is Avery Carl, I am the author of Short Term Rental Long Term Wealth of about investing in short term rental properties. I'm a real estate investor, I own 100 doors, but eight of them are short term rentals. And I was able to scale from zero to 100 doors over the course of about five years with a starting salary of $37,000 a year. Because I invested mostly in short terms at the beginning of my portfolio. So since those cash flows so much heavier than long term, I was able to scale much more quickly than if I'd started with traditional long terms.

I also own the Short Term Shop, which is a real estate agency that focuses exclusively on working with short term rental investors where not only do we act as the real estate agents to help them purchase their property. We also teach them everything they need to know about managing their property remotely. We help them get it all set up on the the listing sites and teach them the ropes of remote self management. We've helped about 4500 families, build some generational wealth through real estate investing there. And then I also, own co own The Mortgage Shop, which is basically the mortgage counterpart of the short term shop, we focus mostly on short term rental investors there as well.

Michael:

Oh, that's awesome. So you were doing short term rentals before it was cool. It sounds like

Avery:

Yeah, oh, just slightly before.

Michael:

That's awesome. And so what is it, you think that people need to know if they're just getting started in the short term rental business?

Avery:

So I think the main thing to know is that it's you don't have to live in the city or even drivable to the city where you're investing, you can't always live in the best place to invest. So getting comfortable with long distance real estate investing, can make sure that you are able to make the most lucrative investment in short term rentals.

Michael:

That makes total sense. And what a place to have you on The Remote Real Estate Investor. It's perfect. So how do you evaluate what a short term rental market looks like? Because doing the long term thing, I think is relatively easy. I can go on Zillow, I can go on property manager websites and see okay, what is the rent, the monthly rent versus what are my expenses ballpark? And what is the price? So what is it that you're looking for in a short term rental?

Avery:

I'll start by saying there's not necessarily a black and white right or wrong way to do it. There's a certain way that I do it. But there are three types of markets that you can invest in short term rentals. The first one is the Metro market. So like Nashville, Austin, New York, places like that. The second is the big fly-to I call it fly-to vacation rental markets. So these are, these are the markets that people are like saving up all year to take a big vacation to like flying to Aspen flying to Hawaii, places like that.

Michael:

Okay.

Avery:

And then the third type, which is the type that I focus on exclusively with myself and my clients, is the regional drivable vacation rental market. So these are areas that the majority of people that travel to them are traveling between five and eight hours by car like the Smoky Mountains in Tennessee, Panama City Beach, Florida, Big Bear in California, places like that, where people aren't necessarily taking these big, expensive vacations, they're really affordable, and they're really accessible. So that's the type of market that I focus on.

Michael:

That makes sense. And I actually just bought my first vacation rental out in the Smokies. And I'm very excited to hear all the all the big news about it.

Avery:

Awesome.

Michael:

Yeah. So curious to know when I think one of the biggest hurdles or biggest risks that people see with short term rentals is changing jurisdictions, or jurisdictions changing their laws or ordinances. And so what's something that people can do to combat that or to be ahead of that curve when when looking at short term rental markets?

Avery:

So choosing the market is really going to be your biggest the biggest thing to get through in terms of getting past that. So I used to have an office in Nashville where we sold short term rentals, I shut it down because Nashville is really really volatile in terms of short term rental regulations. So that's why I focus on the regional drivable vacation rental markets because they're typically areas like take the Smokies, for example. People have been coming to this monkey since the 60s and 70s and staying in cabins rather than hotels. Also, Destin, Florida where I live right now, I'm there where I'm actually reading a really nerdy book about the history of this area.

MIchael:

Awesome.

Avery:

And there were actually vacation rentals that people rented here in the 20s before they actually even had electricity out here. So these are areas I focus on areas that short term rentals are not a new thing. As of the inception, inception of Airbnb focused on areas that people have been staying in condos, beach houses, cabins in the mountains since well before Airbnb existed. So you run into the problems with the changing of jurisdictions and things like that. It mostly in Metro markets, it does happen in vacation markets as well. But it's mostly Metro markets or areas where people have historically stayed in hotels like Nashville, for example. There were not short term rentals or were not vacation rentals until Airbnb came along. Everybody who came to Nashville up until mid 2000 stayed in hotels, there's also a lot of primary residents because there's a lot of industry outside of tourism in Nashville. So there's a lot of jobs, there's a lot of primary residence.

So the, when, Airbnb came along, and investors started realizing how much money they can make in Metro markets. You know, obviously, a lot of investors moved in, started taking market share away from the hotels started making primary homeowners angry because they're moving into what was previously a quiet neighborhood where people are trying to raise their kids opening up Airbnbs, Nashville is like, you know, the bachelorette party capital of the world, you can see why you might not want that happening next door to where you're trying to raise your kids.

So it's the hotel presence and primary owners, primary residents that kind of come together to make anti short term rental regulations happen so that we stick to those markets where the cities and counties figured this out a long time ago figured out how to monetize it a long time ago. This is the way that it's always been. And the cities and counties are just way too dependent on the income from short term rentals financially to ever really regulate against them.

Michael:

That makes so much sense. I love it. So, so something that I like a personal take that I've had on short term rentals is I've always said, Well, I'll invest in a short term rental if it also makes sense as a long term rental because I'm scared of the ordinance or law changing, but it sounds like for you because you've really done your homework. That's not a concern that you have. Is that fair to say?

Avery:

Yeah, yeah. So and that's kind of, you know, a pro and a con of vacation markets versus Metro markets as Metro markets, you could convert to a long term, probably if the numbers make sense. But in like in the Smokies or in Destin, or any of our other markets that we that we operate in, there are more short term rentals. And there are people who actually live in those areas, because it's so heavily dependent on tourism, that if something came along and like wiped out all the short term rentals, you probably would not be able to convert to a long term just because there there's not enough people to meet that.

But again, that's these areas have been through decades and decades of economic ups and downs. So they're still tourists coming and they're coming heavy. So, you know, we, we feel pretty confident about it. And then if there was anything that was going to come along and sweep away all the short term rentals, it would have been a global pandemic. And it actually had the opposite effect. So I think we're pretty good. We're feeling pretty good about it.

Michael:

Awesome. And you took the words right out of my mouth, I was gonna ask how was it for you? Because you've been involved in this over five years. So through through the pandemic, what did you see in your short term rentals during that time?

Avery:

Sure. So short term rentals still, as of 2020, being a little bit of an of a new asset class, when COVID came along. And we had at the time that we had five short term rentals and maybe like 20 or 30 long terms, when COVID happened, we thought, Oh, crap, they're the short term. They're the apartment building investors were right. This is like an early adopter crowd. Right? Great. Well, at least we have our long terms because if somehow if this kills the short terms, we at least have long term. Well, actually, it was the opposite.

So you know, we sat on the couch and watch Tiger King for two weeks and open back then the doors got blown off. We we were getting higher prices per night than we've ever seen. We still are. All of our income has increased in all the markets we invest in across the board, but actually the opposite of what we thought was gonna happen. happen, so we didn't have to worry about the short terms. They're doing great better than they ever have. But we had to worry about our long terms because of the eviction moratorium. So, luckily, we only had one eviction and that person was a problem well before COVID. So we actually came out our entire portfolio came out just fine. Really no change on the long term front, but the short term is just skyrocketed.

Michael:

I'm glad to hear it. I had a similar experience with the long terms and I was so thankful for it. So NACA continues. So Avery I'm curious and let me know if it's market dependent. And we can talk kind of market specifics, but I'm curious to know what type of property condo townhome apartment single family cabin do you target for your short term rentals?

Avery:

I personally do only single families. Condos work really, really well in beach markets. Nothing wrong with condos. I just prefer single families. Condos don't work so well. In mountain markets. Typically, the tourists and mountain markets are more interested in staying in cabins. I don't I know a lot of people are kind of trying to get into the multifamily short term rental thing to me that's like, that's a hotel guys that's been already done. Like they're like, Oh, we're gonna do multifamily short term rentals. Nobody's ever done this before.

Michael:

I'm a genius. Yeah.

Avery:

So we stick to this to single families, we have Multis for it in our long term portfolio that we stick to single families mostly.

Michael:

Okay, awesome. And so here's like a massive dichotomy between the long term in the short term market, in the long term, there's a price point for single family, which that's not going to cash flow, because you're rents just not going to keep up versus your long, you seem your short term. Does that occur? I mean, is there a spread at which Yeah, I'm just paying too much money for the purchase, that the rental income is not going to support it? Or does that not exist?

Avery:

Yeah, sure, there's definitely a limit. But the thing about short terms is like it's, they're more difficult to analyze, because it's always a range of what a property will be able to do. Whereas in long term, it's like, this is the rent, this is going to be the rent all year. And unless you go in and get the property and do all this updates, that's what it's going to be we're short term, that's always kind of a range, because you know, a week, in the second week of February, you're gonna be making way less money than the second week of July. So it just kind of depends.

And then also, there's a range of the income that can make really just based on how you manage the property. So I mean, for example, even if two people own the exact same property right next door to each other long term rentals, they're making the same no matter what short term, even if they manage everything exactly the same. But one person has a two night minimum night stay, and the other person has a five night minimum night stay, the two night minimum night stay person is gonna make more money because they have less poles in their calendar that 1-2-3 and four days long. So even just little tweaks like that can make a difference. Although there there does come a point that like a two bedroom, the most a two bedroom is ever going to make is here. And if the purchase price is here, then it doesn't make sense. So you just have to get a lot of different data points for your analysis.

Michael:

Yeah, makes total sense. And so to that end, how do you recommend folks evaluate the properties of potential income from an expense perspective? Because that's something I've seen is massively different than your long term as well. So what do you recommend to folks?

Avery:

So I recommend there's a there's several different places you can get data for what for the short term rental performance air DNA is one of them, it's not perfect, it's decent, good enough. Rabbu is another one, Rabbu has some pretty good data. Price Labs, which is actually a pricing manager that you would buy, when you buy a short term rental, you get a subscription to this to help you price your property, it has a function called the market dashboards, which will give you a pretty good data on properties in that market. So I recommend getting data from two or three different sources.

And then as far as expenses and things like that. So in conjunction with looking at the number, numerical data, and the short term shop we read, we preach something called the enemy method, which is where you go in on Airbnb and VRBO. Zoom in on the neighborhood that you're interested in buying in and look at your enemies or your neighbors enemies just kind of tongue in cheek. But then there's a few things you're looking for when you do the enemy method. So a there there are things that the numbers in the data can't tell you like the intangible reasons that the properties are performing the way that they are.

So you're going in, you're looking for outliers, like you know, if you've got a four bedroom that you're looking at, and next door is like a four bedroom dump with terrible pictures, and the host never responds. So it's like way, way, way down on the search results and never get seen. Well that's going to drag the data down, you're going to be able to do better than that one obviously.

Or conversely, if next door is another four bedroom that is just like the craziest four bedroom anybody's ever seen. And it's like celebrities rolling in and out in there and you're like making they're charging a million bucks a night to get to meet these celebrities at your house. Well that’s gonna drag the data the other direction. So you're looking for that you're also looking for what you your enemy's cleaning fees are because that's gonna be a big one for you.

And then the rest of it is very similar to as if you were purchasing the house for a primary home like in terms of internet costs, utility costs, things like that, I found that my maintenance costs in short term are less than in my long term rentals, they're more like 1% of my income. Just because you have a cleaner in there who's professionally cleaning two, sometimes three times a week, so nothing ever really falls into that much disrepair if your cleaner is doing their job and you know, letting you know, stuffs happening. Whereas my long terms, you know, they're doing God knows what in there all year, maybe two years, maybe three years, however long they say. And when they when they move out. i

Michael:

That's when you find out about it.

Avery:

Yeah, paint carpet cabinets, the whole thing.

Michael:

Yeah. Okay, that makes a ton of sense. I want to shift gears a little bit here and talk about a topic that's very near and dear to my heart, which is insurance. And so how do you insure these things? Because it's this kind of unique thing that I feel like a lot of insurance companies really haven't wrap their heads around yet.

Avery:

Yeah, so you definitely want to get short term rentals, specific Insurance Proper is the biggest name in that space. They're also the most expensive, but they do have pretty comprehensive coverage, like all the way down to covering loss income, if you get bedbugs. Um, some insurance companies are kind of catching on and adding short term rental riders that you can add on. You also want to or I recommend any way of getting a commercial umbrella policy, in addition to short term rental specific, just to make sure that you're totally covered. And I get this question a lot because Airbnb and VRBO do offer a million dollars worth of liability coverage, when you sign up with them. And a lot of people are like, do I need insurance? In addition to that, yes, 100,000% Do not rely only on what Airbnb and VRBO provide, because their goal is to not have to pay bat. So better to be over insured than under. So definitely make sure that you're getting STR specific and a commercial umbrella.

Michael:

Okay. And so kind of in that vein, if someone's owning the short term rentals in their personal name, do you think an umbrella a commercial umbrella is still appropriate? Or could they just add it on to their maybe existing Personal Umbrella?

Avery:

You could it just kind of depends on your entire financial picture. And really just kind of a number of things. So it's hard to answer. But I would recommend just everything you can get get it no better to have it and not need it than need it and not have it.

Michael:

No, I'm right there with you. And it's one of those things like you're only gonna know how much you really needed after a loss or after a claim. And by then it's a little bit too late. So I'm with you. 100%. All right.

And then. So shifting gears here again, how do you purchase these things, and it's so perfect that you you own the mortgage shop. And so, because there are short term lenders out there, but I feel like they're kind of few and far between and if you start talking with your traditional lenders about I'm doing short term rentals, like I don't know, so what are some things that people should be looking for? And what are some products that the mortgage shop offers that people might be able to take advantage of.

Avery:

So we have three main products that most people use, a lot of people use that 10% down vacation home loan, that's a conventional product, there are rules that you want to make sure that you are following in regards to doing that meaning you do have to use the property for I think it's about two weeks a year. You are there's nothing nothing out there prohibiting you from renting it on Airbnb and VRBO the rest of the year when you're not using it, but you you know, what you don't want to be doing is skirting the rules and like you know, trying to like syndicate with a bunch of people using 10% downs and like taking equity there and all that don't skirt the rules because you're going to get the product taken away from all of us.

Michael:

Don’t ruin it for everyone.

Avery:

Yeah, if any has caught on to people abusing that for buying like I saw somebody in a Facebook group the other day that was like yeah, that second home loans awesome. I've got two on the same street as me that are both second homes and like that, there's none like they totally like lied, they had to have lied to their loan officer to even get that because one of the main things is it has to be there's not a specific mileage amount that it has to be away from your primary, but a lot of lenders use like 50 miles or 65 miles because it has to make sense you're clearly not vacationing and you so that part that's the kind of thing that will get it taken away from from everyone but if you want to buy a vacation home that you're gonna use for two weeks out of the year and rent it the rest of the year, you can totally do that for 10% down so a lot of people do that.

We also have a 15% down investment mortgage, let me sorry, investment mortgage investment loan that is also conventional. So if you just want to use this is a pure investment 15% down you don't have to worry about all the second home rules you can just do it that goes up to the jumbo limit which I think is like a 725 ish or 750 purchase price on Have a look. And then the biggest one that people have been using lately, is what's called a DSCR loan. So that's a debt service coverage ratio loan, it's kind of a mix between a portfolio and a commercial loan. So it's not conventional. So the interest rates going to be a little bit higher, it is 20% down, but you can close it right in your LLC, it doesn't take into account any of your income or debt or debt to income ratio, all that it counts on to qualify is will the property make the same amount as what the mortgage payment will be on a one to one ratio.

So if the mortgage payment is 2000 bucks a month, all we need to see is that the property will make 2000 bucks a month in income, and then you qualify. So that's a really, really great one, especially for people who maybe have switched from w two income to 1099 income. And they don't have two years to show yet. Or maybe you're out of conventional lows, because you can only have 10. Or maybe you have the downpayment, but your debt to income is a little wonky. So a lot of people are using that DSCR loan just because you can drop it right in your LLC, you can have unlimited finance properties, and it's just a lot easier to deal with and not having to qualify based on your own income.

Michael:

Yeah, that's amazing. And so when you say a one to one ratio for the mortgage payment, are you talking principal interest, taxes and insurance as your mortgage payment are truly just principal and interest?

Avery:

Principal interest taxes in an insurance? So, um, the way that it works? Like I mean, you wouldn't be buying a property that wouldn't make at the very least, that each month,

Michael:

I should hope not,

Avery:

Because it's not a good investment. So I've actually had never seen one not go through unless you're buying a really weird remote area where no one has ever short term or long term rented before, then that would be probably a gray area, but in the big vacation markets and Metro markets and things like that. I've never seen one not, you know, not go through.

Michael:

Awesome. What a cool product. That's great. And Avery, I'm curious to know, from your experience, where do you most new short term investors go wrong? Where do you where do you seeing them then botch themselves?

Avery:

Analysis paralysis, just like anything just like any asset class, all real estate investing? The number one thing that stops people from getting started is analysis, paralysis, and short term is no different.

Michael:

Oh, that's great. That's great. And so I'm just curious to know, as well, you mentioned some of the markets that you're currently investing in, and you've got investors and both personal properties. Where is the new hot place.

Avery:

Um, so our newest market that we've opened an office in that I'm really excited about, probably the next place that I'm going to buy a short term rental, probably next year is the Crystal Beach, Texas market. It's right, right next door to Galveston, and the returns there are actually higher than the Smokies, which up until now has been our highest return market. It's also one of the most expensive markets, you know, in the Smokies, it's going to be a million dollars for a five bedroom maybe a little bit more. And to get a beach front or like second to your back beach property, you can get a five bedroom like a nice, pretty new five bedroom new construction for like the 700 range.

Michael:

Wow.

Avery:

So and make almost the same income as the Smokies. So don't quote me on that it's a case by case basis, obviously. But across the board the returns, they're really, really exciting.

Michael:

Oh, that's amazing. And when you say returns are high, what are we talking in terms of percentage cash on cash?

Avery:

So it depends on what kind of loan you do. Because obviously, if you do a 10%, down vacation how long your cash on cash can be twice the amount of what it would be, if it's 20%. But I mean, you're looking at 30%, like without issue. So depending it depends on what kind of loan you get. But even with a 20% down, like you're looking at some at least 20% cash on cash. So really, really good.

Michael:

Oh, that's an that's amazing. That's amazing. So I'm curious to know, too, and I don't want you to give away the secret sauce that that's included in the book, but what are some things that people should be aware of with regard to professional management versus self management.

Avery:

So this is something that I I talk about a lot so and and this is not an across the board thing. I 100,000% have managers for my long term. So it's a different game, we're talking about short terms, exclusively here. So um, if you are someone who is trying to use the income from short term rentals to really Bootstrap and boost that income and buy more properties faster, a traditional style property management company is probably not going to be the partner to help you get there.

Managing one short term rental is really only going to take you about 30 minutes per week. And it's not going to be all at once. It's going to be like I'm responding to a notification here responding to notification there. It's really like answering a few text messages a week. You might have to pick up the phone and call a plumber sometimes but it's really not anything, it's not any significant amount of work.

I have eight. And so to give you some perspective, so the traditional Property Management split and short term rental is average 25%. It was actually 40% When I started, but a lot of self managers and stuff have kind of brought, you know, people have had to lower their rates to stay competitive. But even if I had had a 25% manager this year, my properties are on track to hit an $800,000 Gross this year. So if I paid somebody 20% 25% of that, that's $200,000. This year that's like upper management level salary, to do something that I can do straight from my phone, like, is it work? Yes, but it's very easy work considering the $200,000 that I would be paying someone else to do that for me.

So when you look at it that way, it really makes a lot of sense. Once you get to probably about 10 properties, you might want to hire a virtual assistant to kind of help with things. But the way technology is now with channel managers and pricing managers, almost everything is automated, a lot of the things that were not automated when we started are now automated. So there's really no reason why I mean, really, anyone can self manage if they want to.

Michael:

That's incredible. Nicely done. Nicely done. Avery, before I let you go here, I want to talk about your book, short term rental long term wealth, what should people expect to find in it when they pick it up?

Avery:

So you will find the first half of the book is about how to choose a market, how to analyze a property, how to find the team in that market to help you so agent, mortgage broker, all those people. And then the second half of the book is actually about how to self manage remotely so that you can keep at potentially $200,000 a year to get yourself started so that you can then grow your wealth through short term rental investing.

Michael:

Amazing. And people can pick that up on BiggerPockets calm as well as amazon.com.

Avery:

Yes, so right now it's on bigger pockets, calm slash STR book, and you can pre order it on Amazon, it will ship November 14. It is also available on Audible right now.

Michael:

Amazing. And if people want to take advantage of the short term rental shop, or the mortgage shop, what's the best way for them to get a hold of you and your companies.

Avery:

So you want to go to the shorttermshop.com There's a little box in the middle of the page that says schedule a consultation, hit that button. That's the best way to get started with us. And then for the mortgage shop you want to go to www.mortgageshop.co

Michael:

Amazing. Every This has been so much fun. So eye opening any final thoughts for folks before I let you out of here?

Avery:

I think we've pretty much covered it. Thank you so much for having me.

Michael:

Awesome. Well take care and we'll talk soon I'm sure. Thank you alrighty everybody, that was our episode a big big big, big big thank you to Avery This was so much fun. I learned a ton. If you're interested in short term rentals, I definitely recommend picking up Avery's book as well as going back to this episode and giving it another listen. As always, thank you so much for listening, watching, and we look forward to seeing the next one. Happy investing

How title insurance can provide security against sophisticated scammers Nov 09, 2021

Daniel Wold is the acting president of the Americal Land Title Association (ALTA). Founded in 1907, ALTA's mission is to improve the skills and knowledge of providers in the real property transaction, effectively advocate member concerns, and standardize products for industry use.

In this episode, Daniel explains how title insurance works; how it is different than other insurance types; shares about how ALTA combats fraudsters: and informs you about what to look out for to keep your largest assets secure.

www.alta.org

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Transcript

Michael:

Hey, everyone, welcome to another episode of the remote real estate investor. I'm Michael Albaum. And today I'm joined by Dan Wold, president of the American Land Title Association. And he's going to be talking to us today about title insurance. What is it? When do we need it, as well as wire fraud and how to combat it and all of our real estate transactions? So let's get into it.

Hey, Dan, thank you so much for coming on the show and hanging out with me today. I really appreciate it.

Dan:

Well, it's my pleasure. And hopefully we can touch on some really important topics today.

Michael:

Yes, yes, I'm very much looking forward to it. And right before we started recording here, you and I were chatting about kind of what it is that the American Land Title Association does, and you are the president of, but so I'd love if you could share a little bit with our listeners.

Dan:

Well, our governance structure has a board of governors, and this year, I am the well, actually just just incoming president for the upcoming year. And that kind of a real quick primer on title insurance, you know, we basically are involved with land title transfers, and and then ensuring the lien priorities of the of the lenders as well. So we issue owner's title insurance policies, to the consumer that purchases the property. And we like to kind of just boil it down to we protect property interests.

And we also provide peace of mind because we're the ones that sweat the details in relation to all the stuff that goes on in relation to a settlement or closing. And so that the consumer, you know, they run around doing all kinds of things at the last minute, we're there to help them and give them peace of mind.

Michael:

It's It's funny, how many things get pushed until the very last minute and most closing, isn't it?

Dan:

Yeah, and things pop up. And, you know, we've got so many Lanta professionals around the country that, you know, do this for a living have seen pretty much everything that you can throw at them that they are very capable at, you know, navigating the challenges that could come up in any given closing transaction?

Michael:

Well, that's good to know that I'm not I don't have to be the first guinea pig with any of my closings coming up. So that's exciting.

I'm curious, Dan, if you could just elaborate a little bit more on what title insurance is, because I've got to admit, as part of, you know, the head coach and Program Manager with Roofstock Academy. This is a question that I get asked a lot of times by students in the program, so give us a kind of a high level breakdown of just what is it? And why should somebody may be thinking about getting it because it is optional, oftentimes with an all cash deal?

Dan:

Well, it is it's a one time charge that occurs, you know, as part of the closing transaction. And essentially what we do, which is interesting and unique about our industry versus other insurance industries, a lot of other insurance industry will use actuarial and then pool risk. What we do is we basically sweat the details, and we research the land property records, and other pertinent information so that when we issue our policy, it will say that you are holding title to that parcel of property or land, and then subjected to only the identified defects or lien rights that might occur.

For example, if you take on a mortgage, to purchase or a deed of trust, you know, depending on the part of the country that you're in, to acquire that property, then that would be shown as an exception to clear title. And what happens then is if there's somebody that comes in and challenges your interest, and if it falls within the scope of the coverage provisions of the policy, then we would defend and then also to the extent that we miss something, then then we would also have an obligation to pay money to recompense the landowner or consumer for the de munition and the like in relation to what we insured and what was the reality that the you know, have in relation to that property.

And so we provide a lot of peace of mind on a one time you know, it's it's your largest purchase for most people in their lifetime. And it gives you peace of mind that if somebody comes comes and challenges it, and there are instances where mistakes are made, and they if you don't acquire it, then you might be able to go back up against the prior owner if you got a warranty deed, but they might not have any money, or you can't pursue them. And so this is a third party that basically has the money to stand behind, essentially, their contractual obligations under the title insurance policy.

Michael:

Okay. So if I were to break that down and say it another way, help, help me help keep me on the rails here. So if I'm a buyer, and I want to go buy a piece of property, and I get into contract, and I'm going to the closing table, and I see that line item that says Title Insurance, that I have the option to buy, and I do buy it opt to buy it. Now, six months down the road, somebody comes knocking on my door and says, Excuse me, Mr. Michael, I actually own this property, you don't own it, I could then engage with my title insurance company and say, hey, this person is claiming to have a right to ownership of this property, I clearly own it based on a transaction just went through six months ago. And so the title insurance company is going to help correct any outstanding issues and get this issue resolved.

Dan:

Yeah, or we have also a duty to defend if someone Sue's you and claims that they have ownership interests. So there's, you know, multiple indemnification obligations under the policy, including the duty to defend, you know, so basically, you're pretty much spot on as to, to put it in layman's terms, kind of the function of what our product does, and the assurances that we give.

Michael:

Okay. And I'm just curious, in your experience, and what type of claims have you seen where somebody can come to an owner and say, Actually, I own the property, and that wasn't picked up during the title search during due diligence phase of that subsequent purchase?

Dan:

Well, I think I think another way to think about it, it's not always just a claim against ownership, it could be that there's a missed easement. So that all of a sudden, you got a utility easement in the back of your entire back of your yard. And you were intending to put a swimming pool in there. There's a there's a wide range of defects that could fall within the scope of coverage. And so basically, you know, to the extent that what is revealed in the title insurance policy is the scope of what are the are the diminishes from your your absolute ownership of that property without any third party interest affecting it from an easement or other standpoint, those are also matters that could fall within the scope of coverage and could result in us taking action to remove the defect or providing you with a, you know, a money award in relation to the scope of coverage.

Michael:

Interesting, okay. And something that and we always joke on the show that so often these episodes are self serving that the hosts get to ask these questions that we're interested in anyhow, and then the listeners get the benefit of that. But there's something that I'm curious about is often we hear the term chain of title. And if you can keep your name out of the chain of title, if you're going to be using an LLC, there could be advantages to that. But so my question is, is how far down the chain of title? Do you see people run into issues that involve title insurance?

Dan:

Well, I would suggest that more frequently than not, you're going to see stuff, that's more current that was missed. And, you know, one of the things to keep in mind, you know, a lot of times errors occur, you know, any any human endeavor, there can be errors. And so searching errors, for example, can give rise to a significant portion of our, our claims, you know, so basically, we would go in, and search, which, you know, there are other things that could arise too, because if they were not recorded properly, in the land tech, or title records, and so forth, there might be something that's sitting out there straight deed or other things.

So there's a whole range of factors that could give rise to a claim whether and then we would look at whether or not it falls under the scope of coverage. And ultimately, at the end of the day, if we have an obligation, we would try to cure the defect, because ultimately, we want consumers to be, you know, happy about their largest purchase, but if we can't cure that defect, then we we could also provide a monetary award in relation to what that policy provides.

Yeah, to circle back to your question. I mean, you could have something that's way back in the in the records. And remember, you know, it's kind of like a chain of title is basically if you look at the real property records, you know, let's say a county, use a county model, you know, they're, they're basically going to show transaction to transaction and the transaction, and you could go back and actually see what kind of history of who owned, you know the property or portion of the property that you have, you know, you know, oftentimes properties will be larger parcels that are subdivided or platted, into a subdivision and then you can go back to that original deed that came before the plat or subdivision occurred.

But ultimately, at the end of the day, you have the ability to search and go back. And that's what we do to determine whether or not there's any issues in relation to clear ownership rights to a piece of property.

Michael:

Interesting. I've got another question for Dan, that I think I already know the answer to, but I'm going to ask it anyhow. Is there ever an instance where you'd recommend not getting title insurance?

Dan:

You know, from my standpoint, I know that some people elect not to purchase a, you know, owner's title insurance. Partly, sometimes they just are not well educated as to the risks, or just make the value judgment that I'd rather buy a couch instead of, you know, ensuring, ensuring that I have pure ownership or clear ownership pursuant to this policy, to the title and they're willing to roll the dice. But from my standpoint, personally, I would not roll roll the dice with your largest purchase for most people in their lifetimes. And it's a it's a, it's a, it's a one time payment, that gives you peace of mind, and basically provides you recourse in the event that what you thought you were getting is not what you got.

Michael:

No, I think that's very well said. And is it something that you can buy after the fact if you decide this year, hey, I'm gonna roll the dice and maybe next year?

Dan:

Wow, I'm, yeah, yeah, no, no, we need you to, we need you to, you know, to buy it at the time of purchase. Because it basically is a it's a snapshot in time. That's, you know, basically we look back, and as of the date of closing, you have these rights, and we insure those rights.

Michael:

Okay. So for anybody out there listening, that's thinking is on the fence about whether or not to purchase title insurance with their purchase, think long and hard, because it's a one time deal that you can't go back and redo.

Dan:

Yeah, and there's lots of lots of horror stories of people that situations where all of a sudden, things emerge, and they've they've lost their their ownership rights, or or even worse, just getting involved with litigation. If it's a covered matter, you know, the lid, the cost of litigation, something that your policy, you know, basically provides you a defense. And that can be very costly.

Michael:

To come out of pocket if you don't have that coverage.

Dan:

Yeah. Yeah.

Michael:

So let's shift gears here entirely, Dan. And I wonder if you could speak to something that I've been hearing a lot about, which is just wire fraud.

Dan:

Yeah, wire transfer fraud is basically a real emerging risks that we see and are working really hard as an industry to educate and take the appropriate steps to minimize, you know, the risks that consumers and others have in relation to, you know, wire transfer fraud, utilized as part of the, the Real Property Acquisition. And, you know, we're kind of in a situation now, where that's by far the most prevalent method, for example, for acquiring a piece of property, you you wire, you determine what your net cost is. And then you wire monies to the recipient, as part of the transaction. You know, in the past, we oftentimes used to certify checks and things like that.

And I imagine way back in the day. You probably if you had good funds you might even have had if it would if you went way, way back, maybe maybe there was a cash transaction,

Michael:

A suitcase of cash or a duffel bag.

Dan:

Yeah, well, but now there's a lot of limitations as to how much what you can do with cash from from a reporting standpoint, things like that, but I'm just thinking, you know, back in the day when, you know, in the 1800s, or something like that, you might a lot of times that was before title insurance as well, but, you know, cash might have been king.

Now, so just understand it's business, email compromised schemes. It's not just this is not just an issue that we have to deal with in relation to the Real estate acquisition it's it's a, it's a broader attack on the manner in which we communicate and transfer funds in today's economy, but we focus it on it primarily from the standpoint of educating so that homeowners or future homeowners don't all of a sudden find out that they've been scammed. And they've now sent their life savings to a scamster, and aren't in a position to basically purchase the house of their dream i because of certain scamming activities.

And just I don't know how much your audience focuses on this, but we look at it a significant amount of time on this topic, as an industry. And so if you went to alta.org, bat slash wire transfer,

you could get a lot of information on this. And because it's a public service issue, you don't have to be a member to access that collateral. And we've got a lot of great information on there to educate and also to take steps to protect but if I were to back up just a little bit.

Now, these aren't all the most current pieces of data but ALTA did a the American Land Title Association, we will refer to it I'll slip up and call it ALTA as we go forward. But that's what I'm referring to. We did in 2021, wire fraud and cybercrime survey, dental insurance professionals reported cyber criminals attempted to trick employees to wire funds to fraudulent accounts, and about a third of all real estate and mortgage transactions. Just think about that. That's that.

Michael:

Wait, did you say a third of all real estate transactions, there was some attempt at fraud?

Dan:

A third. And, you know, wire fraud attempts are on the rise nationwide 76% of title agents report a wire fraud attempts were the same or increase in 2020. And also the FBI, internet crime Compliance Center, it's icy three, I mean, for whatever reason, well, we might reference that that's what that means. Recorded 13,648 prospective homebuyers were defrauded out of 213 million through real estate wire fraud. And this was 2020, which is an increase of 70% 17% from the year before. And obviously, cyber taxes as a whole are also on the rise.

And as a reflection of that during the second quarter of 2021, cyber insurance coverage increased 25.5%. So now, withstanding all of the efforts that we and our broader industry partners are taking to alert people of these challenges. But the cyber criminals and fraudsters also are evolving to go after, you know, basically, the wire transfers in real estate and other business, email compromised schemes. And if we were to kind of look back at this, and what are the techniques that they use, just generally, there's there's concepts like social engineering and PHishing, you know, phishing is not with the pole, you know, it's the pH is right,

Michael:

You’re not going to catch some salmon.

Dan:

Yeah, you're not gonna catch salmon or, or, or bass in this example. But basically, what they'll do is they will use their fraudulent approaches to try to infiltrate, and let's just use a consumer as an example. And a lot of consumers will use unsecured email, trance, you know, trans portals. I'm not going to name them, but we all know what's out there. And so you get so basically, they will find ways to get you to click on things or do other things that allow them to plant kind of their, their their cyber tools into your email account. And then when triggers such as real estate transaction or things like that happen, they start to monitor those transactions. And at the last second, then, they they basically would mimic one of the professional email addresses in the involved with a transaction and get the consumer to then wire funds to the wrong recipient.

And, you know, we're talking some of these people, you know, it could be $500,000, or life savings going to purchase a house or 150 years, a million. And all of a sudden, then when they they to show up for closing, and this is not a laughing matter, but it's just amazing how dangerous this is. But they do show up for closing. And then the title company, say says, Well, we are the or the or the lender or whoever the recipient was going to be for the the wire transfer says we've never seen ever received it.

And so there are certain things that we do as an industry to try to come combat this, this this scourge. So basically, from my standpoint, a couple things that you should keep in mind and your audience should keep in mind is what we do as an industry then is we try to do a lot of consumer education, as well as you know, work with our, you know, the realtors, the bankers and others in the broader industry to coordinate and make sure that we can get ahead of this.

But, you know, we we provide consumer warnings about the dangers of this on websites and communications. And then we send notices to consumers, real estate agents and others, that informs them, the parties to the transaction of the title companies wire instructions, that they will never change during the transaction. So we get that set upfront. Because what happens is, there's always a last second change, that gives rise to the diversion of funds to the illicit party's account. And oftentimes, the fraudsters are overseas. And if you don't catch it quickly, it's it's very difficult to claw it back. So you might have 24 to 48 hours after the illicit ACH transfer occurs to pull that money back.

And so from that standpoint, that's why we advise early on in the transaction that you're not going to get an email from us changing the wire transfer, you know, wire wire fraud Academy, the wire transfer instructions. And so, yeah, there's also a couple other things that we look at. You know, we exchanged no numbers. So for example, what the fraudsters will do is also, so they'll mimic a legitimate email address with a diversion. And then they'll have stuff in there. And they might also, you know, have social engineering and follow the council they know the names and who the husband is all this kind of stuff. So that looks real real. And then they basically say, if you have any questions, contact, and I'm not going to pick on Louise, but why not Louise at such and such a number?

Okay, well, Louise is just basically working with the fraudster. So you call and they and they basically have a pat answer, if you were to call. And so basically, we also then, at the beginning of the transaction, want to set the known numbers that if there's any questions they can call, because if you rely upon the email, the email will also cover that contingency to basically complete the scam. And so they're really quite tricky here.

And a couple things that I would mention here, also. So some of the things that we see, for example, the title insurance professionals put in there, they're basically email signature lines, they'll have things like, I'm just going to read a couple here due to increase fraud. Buyer sellers and lenders should confirm all wiring instructions by phone directly with our office before transferring funds to a previously disclosed phone number. I've got another one here. Warning wire fraud advisory, wire fraud and email hacking phishing attacks are on the increase. If you have been asked for a closing transaction with us and you receive an email containing wire transfer instructions, and then an upper case do not respond to the email. Instead, call your escrow officer close closer immediately using previously known contact information and not information provided in the email.

So we provide quite a bit of education and warnings to consumers. But the challenge is this, you know, consumer, we get everybody educated and we get all these transactions that go smoothly. But then, kind of on a rolling basis, you've got a new group of consumers every three months or so.

Michael:

Right, right.

Dan:

I mean, it's a rolling new group of consumers. So that is a constant need to educate. There's constantly a new group of people out there that that the fraudsters can go after. And so this is kind of a, you know, like the Greek tragedy pushing the rock up the hill, you know, basically, we're always, we're always on top of this, but there's always risk. And so from that standpoint, you know, I really do think we are going to have to keep combating this, and people need to be aware of it. And that's why it's great that you are doing a podcast that highlights these risks so that consumers and others can pay attention to it.

Michael:

Yeah, absolutely. And, and we're happy to do it. And so, Dan, if I'm hearing you correctly, it sounds like that initial communication that you're starting to have with your title or escrow closing officer at the beginning of the transaction, is kind of setting the tone or setting up the proper information, if you will, because that those cyber tools that you're mentioning, really sit and kind of wait and lurk for the transaction to occur.

Dan:

Yeah, I've been important to write them to that right spot where all of a sudden, they swoop in, and give you Oh, we're changing, where you need to send the money.

And, and if you recall, you know, the average consumer, you know, they're, it's, it's a complex deal. And they've got all kinds of stuff going on. They're arranging for the moving van, they're, you know, you look at the list of things that they're doing in relation to real real property transaction, and moving from one, you know, whether from one home to another, or from an apartment to a home, excuse me, and the like. They're very busy, and they're very easily distracted. And so that's why we really focus on this. If I could, I would also like to highlight some of the stuff that you should do if you if you do find yourself to be evicted.

Michael:

Yeah, absolutely.

Dan:

Yeah. So, you know, if you if you do discover that funds are transferred to a fraudulent account, you really need to act quickly. And you should contact the Financial Institution immediately upon discovering the financial or the cumulative fraudulent transfer, and request that the financial institution contact the corresponding financial institution where the fraudulent transfer was sent. Now, you also should contact your local Bureau, federal bureau and you know, FBI office, if the wire is recent, the FBI working with the United States Department of Treasury, Financial Crimes Enforcement Network, we call that FinCEN might be able to help return or freeze those funds. And then you could file a complaint regardless of dollar loss with wwe.ic3.gov. And so it's really important for consumers to recognize that if they do find that there's fraudulent activity, they need to act. And like I said before, oftentimes, but not always, but oftentimes, you've got foreign actors that are targeting US citizens to try to divert funds. And so the money could flow into that alternative banking account, bank account that, you know, you didn't want to receive the funds, but then they're going to maybe chop that up and send it in multiple directions real quickly. And so it's really hard to claw that back, if it if it gets into multiple transactions and is overseas.

And so that's why you really need to move quickly. And you You oftentimes are able to recover a good portion, or at least some of the funds that were diverted.

Michael:

Okay. And how long should a transaction a wire transfer typically take because I've filled out numerous wire transaction orders, and I said, oh, we'll send it at the end of the day or what have you, and then you'll get a confirmation. So how long should people wait before reaching out to the other party and say, Hey, did you get it without freaking out?

Dan:

Well, I think one thing to keep in mind is it's really a good idea to to, you know, confirm stuff contemporaneously? I mean, I wouldn't dink around with this From my standpoint, if you wait a couple days, it's too late.

Michael:

Right? Right. But so after initiating a wire, and I called my title escrow officer, and it's been an hour and they haven't received it, should I start sweating bullets?

Dan:

These things go pretty quickly.

Michael:

Okay,

Dan:

So I would move quickly, I don't have an exact timeframe, and we could get that to you to follow up. But from my standpoint, you know, I wouldn't wait more than an hour to get confirmation.

Michael:

Okay. Okay, that's great. That's great. Any other tips, tricks, advice for folks that they should be aware of things they can do proactively?

Dan:

Yeah, I think I think number one, they just don't click on attachments and emails, if you don't know where it's coming from. Because that's, that's a vehicle to get kind of like what they call a Trojan horse, or, you know, and I'm not a, I'm not a tech expert, per se. So I might use the wrong terminology here. But basically, they'll use something that you click on to basically infiltrate your email system, so that the fraudsters are now inside and can kind of monitor what's going on. And so they can do it here. But there's also risks of them being in there, as well to steal identities and other things that could happen in addition to the challenges that we're talking about today.

Now, but I would also say that, you know, the ALTA website has a lot of great information here. And so I would recommend if people want to follow up on this and have any concerns, and that they could go to that website and look at all the tools. So we've created lots of products, to help raise awareness and protect consumers. So there's a rapid response plan, which is a 10 step guide on what to do and who to contact if you've been hit by wire fraud.

There's also the ALTA registry. And this basically is kind of a phonebook for basically title agents, so that banks can basically look at the title agencies that are on the registry, as well as the underwriters. And we could get into kind of the distinction between the insurance side and the agent side of our business. But suffice it to say, say we don't want to necessarily confuse people. But basically, we have agents who will issue the policies on behalf of the insurance entities and some of the insurance entities in some areas will also have direct operations that do that functionality. The registry basically has all of those different entities identified on there, so that a lender can go there, and essentially verify that who they're dealing with is a legitimate operation. So that's a great tool for the lender lending community to basically reduce their risk.

We've also created the Board of Governors for the American Land Title Association also created an information security committee a couple of years ago, and it to basically examine security matters and threats that affect our membership and by extension consumers. And they basically make cyber awareness, prevention, detection and response and recovery methods for the industry.

We also have, on our website, a page dedicated information security, there's federal and state requirements to protect data, there's also ALTA’s best practices, which has pillars of appropriate conduct or recommended conduct, which are all designed to basically, you know, move everything in the right direction. And we have webinars, we've done webinars, we've also have videos and other infographics on there about this challenge that's out there. And so it's a it's really a great, great resource to look at, to basically see what the challenges are and what steps you might want to take. And there's some real great practical advice on there on there as well.

And one thing that we have discovered is that for example, the title agencies and and insurance entities that do the kind of the steps up front so that they've trained their people on this risks are less likely to have a loss. And so it's really a great campaign for everybody to pay attention to. And in that regard, I would just mention one more thing here. And that is that the American Land Title Association, helped form a national coalition called the Coalition to Stop real estate wire fraud. And so the goal of that was to raise awareness about the dangers of mortgage closing schemes and wire transfer fraud across the broader spectrum of our broader industry, you know, the lenders, realtors, and so forth that are involved in in the in the greater ecosphere of what we do, and explains how it happens. It provides tips to prevent it and what to do if you've been targeted by fraud. And there's also a video that can be uploaded, if you have an issue or an issue to share your story.

So there's a lot of resources out here. But from my perspective, we are going to have to keep battling this, you know, attack on kind of the entire system, and the attacks that are kind of perpetrated against consumers that may not be aware that those risks are out there. So we have to educate and provide the tools and then also provide practical methods to minimize the likelihood that the fraudsters are successful. And so we're gonna keep battling this this challenge. And I think that your podcast and getting it out to consumers, so that they become aware that this risk is out there. They just need to be aware and be careful if they get involved in a real estate transaction to, to not let this happen to themselves.

Michael:

Yeah. Yeah, that's so great. And we will definitely link in the show notes to that went to the author website, because that's great. That's great. Dan, this has been fantastic and super informative. Any final thoughts before we let you out of here?

Dan:

Well, I don't want people to be afraid. I mean, homeownership is great.

Michael:

Doom and gloom.

Dan:

Don't just don't just keep renting all your life, because you're concerned about wire transfer fraud. But if you do decide to purchase or if it's your second or third time of purchasing, you know, real estate, you know, a home and making those life changing events which are so meaningful. You know, basically make sure that you're aware of these risks, take appropriate action to ensure that you do not become a victim of fraud, and listen to your title professionals as well as the broader, you know, realtors, mortgage, mortgagees and OKC, mortgage companies, lenders and so forth, that all have an interest in making sure that you have a great experience and that you aren't a victim of fraud.

Michael:

Love it. Love it. Well, Dan, thank you again, for coming on and spending some time with me. I really appreciate it. And I look forward to chatting with you soon.

Dan:

I'm glad to have this conversation and appreciate your taking a moment to address these really important topics. Thanks so much.

Michael:

My pleasure. Thank you. Alrighty, everyone, that was our episode a big big, big thank you to Dan and the American Land Title Association. super informative. Lots and lots of good info in there. And definitely a great website for a resource to check out as well. Hope you enjoyed the episode. We look forward to seeing you on the next one. And as always, Happy investing

Why investing in portfolios might be a good idea, or why not Nov 06, 2021

Should you buy a portfolio of homes instead of one at a time? What are the benefits of this? What are the downsides? Why would anyone want to do this and how do you go about doing it?

In this episode Tom, with his experience with portfolio acquisitions, leads this weekend wisdom episode to get to the bottom of these questions.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, I'm joined by

Emil:

Emil Shour

Michael:

and Michael Abaum.

Tom:

And on today's episode, we're gonna be talking about portfolio acquisitions as well as portfolio management now, you know, obviously, with a portfolio, it's a little bit more money to get into the game and to buy multiple properties at once. But there are a ton of advantage. So within this episode, we're going to talk a little bit about reasons why some tips and different phases and acquisitions and management, and a little bit in between. Alright, let's get going.

All right, excellent weekend wisdom today. So we're going to be talking about portfolios. And for the conversation, I think I'm going to be really leading a bunch of it and Michael and Emil are going to be peppering some stuff in, but I'm going to talk about my experience in going through a portfolio acquisitions.

I'm going to start by talking about the benefits, and then we're going to go into the specific process some different ways to go about it. So Michael and Emil, I'm gonna I'll start but you guys can feel free to pepper in. So I'll start on the acquisition side, there's some benefit in buying portfolios in that you can deploy more money at once,

Emil:

What is a portfolio for people who don't know what a portfolio is

Tom:

Excellent hosting Emil. So a portfolio would be considered buying multiple properties at once from the same seller. So Roofstock has some cool features around buying portfolios, just a quick plug for the marketplace. But you know, these what we're going to…

Michael:

And selling!

Tom:

That's right, and selling so you know, but this, this episode is going to be agnostic to where you do your buying and selling as all of our advice is. But we're gonna be talking about Yeah, specific portfolio related stuff. So any other clarifying questions there for me Emil?

Emil:

No, that was it. Continue, I'm sorry to interrupt.

Tom:

Okay, so we're gonna start with benefits. So one of them as I was getting going, is the ability to deploy more money at once. Oftentimes, when I'm in acquisition mode, I have a target amount of dollar that I'm trying to spend. And it's much easier to get to a bigger dollar amount in buying multiple homes, right? Pretty, pretty straightforward. But there is for sure, some real benefit to that. The other benefit is, this is somewhat intuitive, it's kind of like going to Costco where you're, you can get a little bit of a discount, I'd say versus just buying individual properties. Oftentimes, when I'm submitting my offer on a property on a portfolio, I'll just sort of put a blanket dollar amount for both of them. And when I'm underwriting them, you know, I'll put in the specific individual numbers. But at a, generally speaking, in making that portfolio acquisition, you're usually to get able to get a little bit more of a discount to the marketplace.

The benefits on the operation side is typically portfolios are in the same market. So I love being able to scale a little bit quicker. In a market, perhaps this could lead to some discounts from the local property manager, because they're managing properties, perhaps even discounts related to the lender, or the lender, and maybe the lender, but the insurance as well. But generally speaking, you're OPEX can could see a benefit or a boon by doing things in a little bit of scale, just because you're able to get a little bit of economies of scales from the vendors, perhaps if you're able to negotiate that.

Michael:

And what is OPEX Tom?

Tom:

OPEX would be operational expenditure. So perhaps your property management fees all basically blanket for that right. Am I articulating that correctly? Michael?

Michael:

Yeah, totally.

Tom:

Any other benefits you guys see on the acquisition operation side that I may not have touched? Oh, I see Emil’s is raising his hand. Emil!

Emil:

I think one benefit to buying a portfolio is that you have less competition. I don't think people are as attracted to portfolios because you know, you have to you have to put more money down you're buying multiple you know, the seller may choose to only sell the portfolio right? I have these three properties. I will not sell them individually. You have to buy all three. So that will create less buyers I think. So if you play that right, you know you're doing I think that can be an advantage to you as the buyer.

Michael:

I'm gonna I'm gonna push on you both a little bit. You both now have mentioned needing more money or the portfolio being more expensive but is it always?

Tom:

Not necessarily, I think that like the cost per unit should be less, because you're in practice, you're getting a little bit of a discount. So but I mean, if I'm going to buy a super expensive house somewhere, right, I'll be deploying more money doing that, Michael, but yes, Michael.

Emil:

Yeah Michael.

Michael:

You can't just say my name and then assume you are making your point.

Tom:

That tone, it kind of works. It kind of worked

Emil:

You’re wrong. Here's why. Michael.

Michael:

That's exactly the point that I was hoping to tease out of you guys that, too, by the same type of asset? Yes, of course, with more with more properties in a portfolio, that will be more expensive. But to your exact point, Tom, if you were looking to go buy a $500,000 single family home, or a $300,000 portfolio, I mean, you could do that. So the fact that it's a portfolio doesn't intuitively mean that it will be more expensive, even on $1 per unit basis, or on a just total dollar amount base.

Tom:

Yep. Great point. Michael. See, I said your name that time.

Michael:

It's not what you say but how you say it.

Emil:

Inflection,

Tom:

How you say it. So great point, Emil, great point Michael. barrier to entry less buyers. And Michael, you know, there's different ways to spend more capital, anything left here on the benefit side, or she would jump into some kind of tips and tricks along the way?

Michael:

When it comes to the financing of portfolios, it can often be done a little bit differently. And so it can be really advantageous, depending on how you're going to finance it, there's something called Portfolio loans, they kind of have a double meaning people refer to them and use them in slightly different capacities, some people will refer to a portfolio loan that remains on the books of the lender, it's held in their own portfolio. And so that's technically a portfolio loan.

But then there are also Portfolio loans that actually spread across a portfolio, a single note across multiple properties inside someone's portfolio, that's also referred to as a portfolio loan. So you just want to understand who's using the term and what and how they're referencing it. But if you go get a portfolio loan, let's say across five properties, you get a single note that encompasses all five properties. That's only one loan. And that's not going to be a Fannie Freddie traditional or conventional loan. So that's not going to use up one of your 10, verses, you go finance those properties individually, if they're all single families, you're going to go use five, five loans of your 10 loan limit.

And so from just a ease of financing perspective, portfolios can be great. And then they also can be easier to cash out refi of or get a line of credit against, because they will often be looking at the total equity as opposed to individual properties. And then you can also Tom, as you mentioned, get savings when it comes to the actual financing costs, because you may only be originating one loan as opposed to five separate individual loans.

Tom:

That makes sense, I'll walk through a little bit of my my use case, and then tease out some specific tips and stuff that I thought was effective along the way. So I bought a portfolio out of it Atlanta, it wasn't a big portfolio, it was three homes, but they were all in, you know, fairly nice neighborhoods, I within the offering process, I you know, offered on the three of them and got a little bit of a discount. And the seller was kind enough to let me set them up into unique transactions. So even though I like made the offer negotiation on as of the three of them at once, we are able to close the three of them separately, because I hadn't filled out my 10 loan loan limit. So I had individual loans and individual transactions.

Normally with a portfolio transaction, it would be just, you know, the single transaction to close all three. But in this particular use case that I had, I broke it up just because I wanted to take advantage of that cheaper financing that I had available.

Let's see in so I acquired them three separate transactions after the negotiating on them as individual, excuse me three individual transactions after negotiating them as a portfolio transaction. And then just load them all up with a property management that a company that I'd worked with before that I had a lot of trust in and was just able to kind of quickly scale that group up a little bit more with some more properties.

Some tips in in doing it I had alluded to this a little bit before but you know, really rigorously underwrite each individual property and come up with an appropriate discount. And, you know, with the sort of portfolio transaction, there definitely is something to getting a little bit more of a discount. So I had underwrote, each of them kind of came at a price and then added it all together and then like hair, cut it off another five or 10%. So in use that sort of as a starting place from it, and from the sellers point of view, like you know, who cares on where the dollar amount is going towards each one. I guess in this case, it did matter because we ended up doing individual transactions, but you know, thinking of it all kind of holistically together. The three properties that make up the whole of the portfolio.

Michael:

Tom, I'm curious, in that transaction for a due diligence perspective, did you just look at one of the properties and kind of say, Oh, well, it's the same owner. So they're likely going to be in similar condition? Or did you do inspections on all of them? Talk to us about how you did that.

Tom:

Yeah, so I did inspections on all of them. And the way that portfolio transactions are set up, there's a lot of flexibility. I've seen portfolio transactions where someone would have maybe, you know, 20 properties, and they're allowed a certain number of kick outs. So depending on the size of the deal you're doing, you can get kind of creative with that. And when I say kick outs, it means, okay, I'm planning to go buy, you know, 18 properties, I'm going to make an offer on these 20. And if two of them don't look very good, I can say, Nope, take that out of the portfolio transaction.

So there's really some flexibility in the way that these contracts can be structured, of doing these portfolio deals, and it's, it's like, oftentimes very much kind of creativity of the buyer and the seller on how they want to get comfortable to make the deal happen.

Michael:

That's great.

Tom:

What are some other kind of fun portfolio stuff. So I'd mentioned Roofstock has some really cool tools for for buying portfolios, go ahead Emil.

Emil:

I keep raising my hand, I'm being very polite today.

Tom:

Throw some elbows, Emil,

Michael:

Class is in session.

Emil;

In trying to remain neutral and unbiased on our podcast, what would you say are the disadvantages of buying a portfolio?

Tom:

So downsides of a portfolio would be perhaps you you know, don't do the same rigor and underwriting property and individual property as you would in a portfolio, I could say that could be mitigated by by doing the work right by doing the same level of rigor, but you know, perhaps if it's like a bigger portfolio, maybe 20, homes, 50, homes, whatever, it can be hard to apply the same sort of, you know, level of diligence.

The other one is perhaps if it's in a market that's newer to you, or the property manager, is someone you know, you haven't really established that trust with yet, there could be an issue. And instead of just having, you know, one bad apple, that's going to be two bad apples, that you're managing with that with that property managers. But again, that can be mitigated by being really thorough in the way that you're evaluating your vendors. And, in doing that,

Michael:

Another risk to think about is your aggregate risk from a natural catastrophe standpoint. And this is something we looked a lot at in the insurance world is if we have too many properties that we're insuring in this one general area, and there's a fire or a hurricane or a flood, it's going to damage all of those properties. So same thing, same risk to you as an owner operator, if there's a catastrophe in the area, that could affect all of your properties unilaterally. And so that can be problematic. So you just want to be sure that you have kicked butt insurance, sound type policies with great carriers.

Because what we saw happen in 911, to use as an extreme example, is a lot of insurance companies actually went out of business, because they had taken on too much risk in the area. And they just were paying out all these claims. And so after post 911, there are a lot of carriers that just went out of business. And so people think, Oh, I have insurance, that's great. But if the insurance company has taken on too much risk in an area, you could go out of business, which is a pretty scary thing to think about. So highly unlikely to happen. And I don't want people running to their insurance carriers, like Oh, my God, you know, I want to make sure you're still gonna be in business. But just something to think about as an operator getting heavily involved in a particular or singular geographic area.

Tom:

Natural disasters, and other ones perhaps or something, if you're buying in a smaller area in something major happens the economy, you know, by by getting more concentrated in an area, there's there's a little more risk of a single point of failure. I would say I mean, that that doesn't keep me up at night. But in in the under the guise of coming up with more reasons why getting geographically dense with the portfolio would be a bad idea. That could be another reason

Michael:

Something else is just systematic and habitual issues. So if the owner never cleaned the filters for any of the HVAC or HVACs properties like that might not come up in inspection, but you might start losing all of your furnaces simultaneously across the portfolio. So deferred maintenance, how one property is maintained in a portfolio is likely going to be indicative of how the other properties are maintained. Hence the reason for my prior question, Tom, about the due diligence, I think it is important to evaluate kind of each and every property to verify or nullify that, that assumption.

Tom:

100%. And to piggyback off of that point, perhaps the the seller, the properties are occupied and the tenants weren't screened properly, or perhaps the the previous property manager did a bad job and you're inheriting a hornet's nest of angry tenants. So, again, did I sort of single point of failure in doing that? But like I said, like I think in going through the proper diligence process those risks are can be mitigated quite a bit.

Tom:

Awesome. All right, guys. Well, I hope you enjoyed the episode if you could, like subscribe, all that good stuff we always appreciate that. And as always, Happy investing.

Emil:

Happy investing.

Michael:

Happy investing.

Real estate investing horror stories with Paul Moore, Heath Silverman, and Michael Albaum Oct 30, 2021

When you have been investing in real estate for years, you've probably seen a lot of weird things. In this episode, longtime real estate investors Heath Silverman, Michael Albaum, and Paul Moore each tell one of their real estate investing nightmare scenarios. Not only are these stories spooky, painful, and entertaining in retrospect, but they offer some lessons for investors on what to look out for in their investing journies.

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Transcript

Michael:

Hey everyone, welcome to another episode of The Remote Real Estate Investor . I'm Michael Albaum. And today we have what has now become known as a tradition on the podcast. We are doing our Halloween Horror Story episode. We did this last year was a lot of fun. We're doing it again this year. So I guess now it's definitely a tradition, we have to do it forward every Halloween going forward. So we have a couple spooky horror stories from some other investors we're gonna be sharing with you. So let's get into it.

All right, Heath, so tell us your spooky Halloween story.

Heath:

Yeah, so as a somebody who's been investing in properties now for around 20 years, I've had my share of horror stories, from people dying and buildings to apparent ghosts that are hunting properties while I'm living in them in the middle of a renovation. But the one I'm going to focus on here was was probably I would say the, the scariest thing that happened to me in my early days of investing. So this is back in, I think it was 2004 when I was remodeling a garage on the first single family rental that I was living in and house hacking at the same time, 17 years ago.

When I bought the building, it was a bit rundown, you did a fair amount of work, and is going through, you know, remodel the top floor, found a contractor who was pretty solid, and he had a foreman on the job who I became pretty close with because he was there, you know, all the time, and I was living in the building at the time of the remodel. And once that was done, my very next project that I needed to do was to remodel the detached garage. So it was a detached garage that had some serious water issues, whenever it rained water was like pouring into the walls and there was a fair amount of rot and a significant amount of work needed to be completed.

At the time, some of the bids just came in a bit higher than I would have liked. And I didn't have the bandwidth to move the work forward. So I kind of put it on hold. And I don't know it was like six months later, the guy who was the foreman on the earlier job came by and he said hey, I know you wanted to remodel your garage. And hey, I just got my license. And I'm now a GC and I'm starting, you know, kicking off my own business and looks like you haven't done the work. I was driving bios in the neighborhood, I'd love to bid it, I can do a great job. So I said sure. And we you know, we got the work started.

And this was one of his early jobs as well. He ended up charging me a fair amount up front, I probably paid like 70% of the work, or 70% of the bid upfront before really getting deep into it. And they ended up demoing, he had a couple other guys who he brought on site, they demo the entire garage, garage, knocked out the roof knocked everything out. And next thing I know, they just stopped showing up.

So here I am, you know, in this, in this house that I'm living in, you know, there's just like debris everywhere. We're about to hit the rainy season again. And this whole thing is opened up, there's crap everywhere, they didn't even really have a dumpster and remove anything. They just kind of disappeared. And I didn't really understand what had happened. So I start playing, I'm trying to call him I don't I don't get a response. And I tried to reach out to people who I knew knew him no response. And then finally, a friend of mine said, Hey, if you looked at the newspaper, see what's going on, I think this is your guy. And it turned out that he that the contractor is using ended up being arrested under suspicion of being the 580 sniper.

There's somebody who was sitting on top of a mountain, you know, over the interstate 580 and shooting cars as they drove by. And it turned out that that person had, I believe was driving a white pickup truck. And maybe he matched the description of my contractor. But they ended up finding, you know, my contractor in a white pickup truck with a with a firearm in the vehicle. So this guy matches the description. And they arrested him. And then because they arrested him, they did go into his house. And at his house, they ended up finding some a couple other people living in his house, who maybe one of them had violated parole.

So So these were the guys who were the ones who are doing the work and my place. And they found a whole bunch of bomb making materials. Again, this is this is what's in the news. Right? So, you know, from my perspective, he was just a normal contractor you happen to have a car you have that, you know, it's all fine and and you have to have a lot of pipes and stuff at his house because the contractor does work. But the news blew this thing up into like, yeah, they arrested basically my GC and a couple people he was living with and it was a disaster. And I didn't know what to do. I was like, Hey, how do I move this thing forward that this place is a mess? There's no way I'm getting my money back.

Luckily, I did vet him beforehand and I had worked with him and he was a GC who was licensed and bonded. So I reached out to the Contractor State License Board in California. And then they get for any investor out there either. I recommend do your due diligence before you hire a contractor, make sure they're bonded, make sure they're insured, all that good stuff. So he was all of the above, I reached out and the Contractor State License Board, you know, they gave me all this paperwork. And they're basically like a, you're never supposed to pay more than 10% up front, you really should, you really should have paid all this money up front before the work started. But they went through all the details, you know, did an investigation.

Once again, I can't verify this. But one of the people in the CSLB basically said that they were afraid to go and interview him directly, because he was being held somewhere in jail, and they didn't really want to have to do an interview in jail, to get his side of the story. So in some ways, I think he really got screwed, I think I think it was I never followed up. But I highly doubt that he was the actual person who was doing this, he was a good guy, I worked with him on an earlier project. And when all this came out, he didn't really have an opportunity to defend himself or anything, but the CSLB did their investigation. And they ended up getting refunded for the portion that I paid him that was on incomplete and ended up finishing the work with somebody else.

But that experience going through the process of having my you know, my job abandoned on one of the first bigger jobs that I had ever done before and then hearing the news that he had been arrested for pretty serious and very scary a crime. It was intense and definitely was a that was sort of my first big horror story as a real estate investor.

Pierre:

Alright, Mike, what is your horror story?

Michael:

Alright, so this horror story involves actually my very first property that I ever purchased way back in the day, which seems like a lifetime and a half ago. So it was my first set of tenants actually, that I ever had in my first property. And I was I bought the property and it was vacant, and it was turnkey, it was ready to go. And I was just hounding my property manager, we gotta get it rented. We got to get it rented, we got to get it rented. And the timing was weird, cuz I think I closed like in November so and in Southern California, the weather isn't amazing as it normally is. So a little bit of a slowdown in the holiday months. And I just kept hounding her and honey, we got to get some we gotta get we gotta get some snow. So terrified. So she says, Okay, I have this, I have this tenants they applied. It's a mother and son. They aren't as qualified as I'd like them to be. There's a little bit a few kind of demerits here and there. But what do you think, as a good get them in there, I don't care. We just got to get someone paying rent. So we got him in there. And that was the beginning of the end.

So fast forward a couple months, I get a phone call from my property manager. The police have been called numerous times on these folks, that when the mom goes to work, the son is partying, when they're both home, the mom is yelling at neighbors making threats to neighbors just like everything you don't want to hear about your tenants doing. So then fast forward a couple of months, and I went on a European vacation with a buddy of mine. And when I landed in Europe, I got a Facebook message from the tenant from the son. And he writes me, he goes, Hey, but you know, your property manager is a criminal. She's doing all these things, she's robbing you blind is that the other thing and I'm like, Oh my god. So keep in mind, I've known this property manager. She's a good family friend. She's kind of who helped me get involved with real estate. My father knew her for forever. So she's just a good like a good human being above and beyond being a great family friend. And so like, there's no way that, you know, my property manager, she's robbing me blind, I think it's just a tenant who's pissed off. And I said, Thank you for letting me know, I appreciate it, please, you know, communicate through the property manager. I'm not trying to get involved here in a much more polite way. I communicated that.

And he was just writing constantly. I don't know I don't know how we got a hold of my contact information. But he somehow figured out who I was found me on Facebook and I started writing in your You're so stupid, she's robbing you blind. She's a criminal. We can't deal with her. She's, she's trying to kick us out. All this sounds like oh, my gosh, all the all the meanwhile, I'm forwarding this to my property manager be like, hey, these people are are bashing your name up and down the street. I don't know who else they're talking to. But like, I know that you're a wonderful person. She goes, oh my god, I'm so pissed. I'll take care of it. So I don't know if I mentioned but they also stopped paying rent. That was that was a caveat to all this. They stopped paying rent.

And so my property manager went to evict them. And then they just weren't leaving. And it was this whole thing. So fast forward a few more weeks, maybe a few more months. My property manager calls me she goes Michael, the house is trashed. There's human fecal matter smeared on the walls as they left the property. So it just like all the bad stuff you hear about, like happened all at once and on my first go at this owning rental property thing. So I said, you know, what do we do? And she goes well, we already kept that we're keeping their deposit obviously. She says you can go after them in small claims court because about $15,000 in damage.

And I was like yes great. Let's do that. So needless to say if anyone has had experiences small claims court they might be laughing to themselves right now thinking Oh, Michael, how naive of you thinking you're going to go get $15,000 from someone in small claims court but we try it anyhow cuz I didn't know any better. And we the judgment, we basically won the judgment. These folks didn't even appear they didn't show up in court. So the date got moved pushed out again. And it didn't show up again. And so basically made our case my property manager went, I paid her for time, we won the judgment. Okay, great, there's a very big difference between winning a judgment and actually collecting on that judgment. So now we have to go find these people.

And, and start to try to collect money for them. So now this person reaches back out to me, again, I can't believe you did this, we don't have any money, we're so poor, this sending their thing. And so I'm like, I just don't even respond to these people. We, my, my property manager finally reaches an agreement with these people. And I think they paid like $3,000 or $4,000, over the course of like two or three years, in increments. And I was like, it's like, you spend so much money on like, buy property manager going to court, and then just the court legal fees and the filing fees.

And it's just such a headache. And it occupies so much mental bandwidth and the money is gone. So it's a sunk cost at that point. But I was just so frustrated, and so mad at myself about these people out myself, because I went against my better judgment. And I really pushed my property manager to get someone in there. And she said, it was against her better judgment, too. But I was so forceful, and so scared that we just got somebody in there, and it ended up costing me big time. So I think the big, big, big takeaway for me is you got to listen to your gut. And if something doesn't feel right, if you're if you're seeing red flags, listen to those things. And and investigate those things further. And don't be so short term sighted. Because that's what cost me in the long run.

Pierre:

Yeah, I mean, it's funny that I mean, these stories are really funny when we look back at it. But I'm sure it was a nightmare as you're going through them…

Michael:

Yeah, very funny, Pierre!

Pierre:

But it's interesting to me that I know this being your first property, it didn't scare you out of going back into more.

Michael:

Yeah, it probably should have truth be told, it would have been very easy. And I don't think anyone would have would have knocked me for it or make fun of me or anything of that sort. But I think I was too naive to know that I should walk away. My property manager said, this isn't typical. This is very abnormal. And so let's just try to do better with the next one. And I said, Okay, that sounds good. So, part of me is glad that I, I don't think it really hit me about how frustrating it was.

And part of it too, is that the process took so long. So everyone listening is getting it in a five minute compressed version. But this is happening over months, and even years. And so to get to the end result, I had already done other stuff. I had already made other investments. And so it was it was which I think is great. It made it tougher for me to just walk away from it all saying, oh, man, that sucked. I guess this whole investing thing is is a kaput idea because I was having success with these other investments

Pierre:

That makes sense.

Michael:

So, again, just word to the wise. Listen, listen to your gut. Keep an eye out for those red flags. Be be aware of what you're getting into a small claims court and just go hard in the paint.

Pierre:

Thanks, Mike.

Michael:

You got it.

All right, Paul. So take it away with your Halloween Horror Story.

Paul:

Man, did I ever tell you guys what my favorite investment was?

Michael:

Yeah, I don't think so. No.

Paul:

My favorite investment is mobile home parks. I love investing in mobile home parks. I only wish I would have joined Sam Zelle, America's most successful billionaire real estate investor decades ago. In discovering this amazing asset class mobile home parks. Sam Zelle has over 155,000 mobile home park pads in his company and he's a billionaire and he's just it's just an asset class that’s been long overlooked and mostly scorned or ignored. I know of people who have mobile home parks they say they used to go to parties and people would say what do you do a mobile home by Okay, where's where's the hors d'oeuvres?

But my least favorite investment on the planet is mobile homes. Mobile homes are my like, I've got three horror stories with mobile homes. I wish I would have quit after the first one because man what a nightmare. And so I'm going to tell you one of those mobile home horror stories today if that's okay with you guys.

Michael:

Yeah, it sounds great.

Paul:

Yeah, so I was I had a friend I had this idea wouldn't it be cool to renovate some of those like a mobile home and like put it on a lot and you know, set it up and then rent it lease it as a home you know, put a permanent foundation on etc, etc. So I got a double wide and it had been somewhat trashed, it only it was only like three years old. But mobile home tenants aren't always the very best tenants and sometimes they don't take a lot of ownership. They don't take a lot of pride in their place. And so I decided I was going to somehow be smart and do a lease to own on it. So it wouldn't just be a rental.

And so I got this mobile home doublewide and put it about an hour and a half from my house, found a lot there, it already had, well, septic driveway, set it up. And then I started getting friends who were between jobs, I just happen to know a couple people between jobs to start renovating it. Now, I found out something when I tried to build some houses, I found out that it's not smart to build a house if you don't know how to tighten the doorknob on your own house. And that's why I think people, you know, really appreciate companies like Roofstock, you know, who have experts do this kind of stuff for them.

But anyway, I had these couple guys who were doing the renovations, they were driving an hour and a half from Roanoke, Virginia, way down into the sticks of southwest Virginia. And they and for some reason this thing took like a year to renovate. I don't know how you can take a year to renovate a mobile home, but somehow it did. And so we finally got somebody moved in. And we actually made it into a lease to own.

And so it was a couple who had just moved from a state or two away. And they signed a rent to own agreement. And basically it said that they would make payments, rental payments for three years. And then they hopefully their credit would be to the right place where they could just buy the house. I thought, Okay, not bad.

So I was pretty excited about this. And they started making payments. And they made payments for one year, two years, three years. And then they just kept making payments. And so I was kind of hands off busy with my other business, I didn't pay much attention, the payments just kept coming in. And so finally I reached out to the lady. And I said, Hey, you were supposed to close on this, you know, rent to own? And she said, Yeah, we just we couldn't get our credit score to the right place. So do you mind if we just keep renting till we do. And of course, you know, when you got a good tenant who's only missed maybe like one payment in three years. You want to keep them.

So I said, sure. I'll work with you. So this went on your four year, five years, six years seven, year eight. And they had fortunately made a good number of payments, you know, as far as a percentage of what I had in it at that point. But then I didn't I didn't get a payment. And then I missed a second. I missed a third. And I realized, Wait, something's going on. And so I called her. And she said, Yeah, we broke up. And I moved back to Baltimore. And I thought you wouldn't mind, I went ahead and leased it. I sub leased it to a section eight tenant. And I said, you went through the effort of getting a section eight sub lease and you didn't, you didn't call me or anything. She said now she goes, I'm like two states away now. Can you go check on it? And I said, oh boy.

So I got there. And it was like a warzone this place. So I only checked on once or twice in eight years. It was like unbelievable. I don't even know what happened. The people were gone. All the appliances were missing. There were scratches and scrapes all over the wall. And I looked at the evidence on the floor. And let me say it was disgusting. I tell you, I mean, this story, I don't know who was involved. Exactly. But I know it involved a dog or dogs. I know it involved a baby or babies. And I know and involve alcohol, more than likely alcoholics.

And this was it was unbelievable. I don't even know how you could do this much damage to your own enemy. It was like some kind of war criminal camp. And like they just went around for like what would possess somebody who wasn't even paying their rent at all to want to destroy someone else's property? I never met these people. I never knew their name. But I went in there and I calculated you know, okay, so this place was in like not that bad a shape. Eight years ago when it took us a year to renovate it. I think it would probably take 117 years to renovate right now.

So I did the calculations, I actually had a contractor out there. And everybody was just like shaking their head, this is beyond salvaging. And so I ended up paying, I think it was like $1,000 to have it hauled away to the junkyard. And I ended up selling this lot, by the way I was supposed to make $60,000 63,000 maybe when it closed, and I ended up selling the lot for $15,000.

That's my Halloween Horror Story. Like I said, I've had four mobile homes over the years, and three were disasters at almost this scale. And the fourth one was my mom's. But seriously, I really don't like leasing mobile homes, it sounds like a great idea on paper, and even sounds a great idea to get these used mobile homes and push them into a park. If you can find a mobile home park and then sub or you know, lease them to tenants. And then you're the tenant of the park, I actually did that once and had multiple, like it was trashed, this old home was trashed multiple times, we finally hauled it off to the dump as well. And so not a great business, especially if you don't like being a landlord, which I don't.

Pierre:

Is there a moral of the story other than don't invest in mobile homes?

Paul:

If you're going to manage your own properties, you've got to be intense about it. You've got to you know, give them the impression, you know, I'm not taking any crap from you are not going to you know, you're going to pay on time and in full, I'm going to evict the day you don't I mean, I think that I've come to a conclusion that with real estate, and this is controversial, and I don't think a lot of people are going to like what I'm going to say, but I've concluded that you either need to be fully involved, intensely involved, treat it like a business, actively managing it, or you've got to completely outsource it to an expert.

I think a lot of folks and I talked to investors every week, and I talked to quite a number of investors, who say that when they try to go in and do something on the side, like they tried to build up, like this dentist I was talking about talking to he said, Yeah, I'm building a 20 home portfolio to replace my income. And I'm so excited about replacing it in. And then he took a deep sigh and he said, kind of exhausted talking, talking to painters between oral surgeries and screening tenants in the evening, and I'm getting tired already. And I'm only on house number three.

And I talked to a lot of people like that. And so I think it's really important that you find someone to outsource this type of stuff to if you're focused on either a great career, or hopefully a family or retirement. It's it's hard to juggle that. And I hear frequently people say, Man, this has just become like a second job. And sometimes the returns aren't as what you know, aren't as high as they expected either. So I think it's really important that people find somebody to outsource to if they want to get in real estate or do it full time.

Michael:

It's so important for folks that are self managing really look at the the ROI on their time, and what they're actually paying themselves or what they're saving as compared to outsourcing. For me, that 10% That I'm paying every month is like the best 10% I've ever paid to buy back my time.

Paul:

Exactly. Totally agree. Yep. That's a really good point.

Michael:

Paul, this was great. As always, thank you so much. And we look forward to talking with you soon.

Paul:

Man. It's always great to see you guys appreciate you and thanks for having me on again. Happy Halloween.

Pierre:

Thanks, Paul.

Michael:

Happy Halloween.

Alrighty, everyone, that was our episode. I hope that these stories just provide you with some great fodder and some takeaways. Lessons learned not to scare you away from real estate investing, but rather to help you learn from our mistakes going forward. We hope you enjoyed the episode. We look forward to seeing the next one and as always, Happy investing

The entrepreneur journey, with the co-founders of Roofstock, Stessa, and Great Jones Oct 22, 2021

Over the past year, Roofstock has acquired Stessa, an asset management platform made for real estate investors by real estate investors, and Great Jones a Property management company specifically suited to serve remote real estate investors. This helps make Roofstock a one-stop-shop for remote investors.

In this episode we have the cofounders of all three of these companies on to explain the companies, why they joined forces with Roofstock, and their pearls of wisdom for investing and entrepreneurship.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. We have a really fun episode today Michael and I are going to be interviewing the co founders of all the different companies that make up the Rootstock ecosystem. So if you're not aware, over the past six to 12 months, rootstock has acquired an asset management platform called Stessa. A really cool software to manage all of your properties that an asset management layer, as well as a property management company called Great Jones. And altogether it's a it's a really powerful stack of real estate technology tools and operations for investors to have and we brought on the founders from all of these different companies.

So we have Gary Beasley from Roofstock, who was a co founder. We have the two co founders from Stessa in Heath Silverman and Jonah Schwartz. And we have two co founders from great Jones and Jay Goldklang, as well as Abigail Besdin. And we ask them about their company, the fit within the roofstock ecosystem, some pearls of wisdom on investing on starting companies, all of that good stuff. So really excited about the episode we have today. And let's get into it.

Michael:

All right, everyone. Well, thank you for taking the time out of your very, very, very busy schedule. We've got a lot of heavy hitters on the line here. So I would love if you could all introduce yourselves to our listeners. One by one. Gary, you want to kick things off? We'll start with you.

Gary:

Sure. Great to be here. I'm Gary Beasley. I'm the co founder and CEO of Roofstock.

Michael:

Fantastic. And Abigail.

Abigail:

Hi, I'm Abigail Besdin. And I am a co founder of Great Jones.

Michael:

Perfect Jay.

Jay:

Hi, I'm Jay Goldklang, founder and CEO of Great Jones now a Roofstock company.

Michael:

And Heath.

Heath:

Hey, I'm Heath Silverman, co-founder of Stessa.

Michael:

And last but certainly not least, Jonah.

Jonah:

Yeah, I'm Jonah Schwartz, co-founder of Stessa,

Michael:

And we've got Tom Schneider on the line as well.

So I would love if you all could share, why Roofstock, Stessa, Great Jones decided to join forces. What was the impetus behind that?

Gary:

When we first started Roofstock we knew not only did we want to have a marketplace for transactions, but we wanted to build deeper relationships with owners and build a community. And to do that, we knew that we needed to be relevant to all property owners who own single family rentals, not just those who are looking to trade at any given time. And so from the very early days, we were trying to figure out how to do that. And I met Heath and Jonah was 2017. Yeah, 2017. And we just hit it off right away. And I said, Wow, these guys are building something really cool that it could provide software for every single family rental owner out there. And like a Credit Karma app for real estate owners, it'd be a great way to stitch together community get a lot of data and and invite people into the marketplace at the right time.

So we had a marketplace and no community they had this great community they were building through the software. And so when I knew that it would be quite interesting to try to bring the companies together. Unfortunately, they decided to sell their company to JLL and not to us, JLL at the time was a little bit larger than Roofstock still is. But we'll talk about later life comes full circle very recently we were able to buy the business from gll and bring them into the Rootstock family and so that's worked out really well.

And then with with Jay and Abigail we also knew that we needed to have a relevant connectivity to retail owners and offer property management because that's the biggest pain point for owners is to be able to outsource a lot of those challenging tasks to professionals and and so we've been tracking Jay Abigail and Great Jones for a long time. There was an opportunity this year to get together get to know each other more recently and that was sort of the one missing piece of our fully integrated platform was retail property management. We have institutional grade property management through Streetlane, which was the first company that we purchased a couple of years ago and now with Great Jones and with Stessa we've all kind of come into the the ecosystem together one big happy family under the Rootstock umbrella.

And now we're in the process of integrating the businesses and, and, and growing. So. So why don't we turn it over to maybe Heath or Jonah, maybe you go first and then Jay, Abigail, you could you could chat about how, how this all has worked for you guys.

Heath:

Yeah, I mean, I don't know if I have anything additional to add other than I still remember those drinks we had back in 2017, where we got introduced and started sort of as a more casual conversation about what we were doing and turned into a couple hours of just diving deep into both of our businesses. And I think it was just very refreshing and super exciting to meet somebody who had, you know, the same big vision, you know, of how do we bring transparency and accessibility to this asset class, that traditionally was just one that, you know, was hard for a lot of people to get into, and just didn't have great technology to help power investors out there. So, yeah, fantastic, it came full circle, we're super excited to be part of rootstock. And yeah, excited to see what we're gonna do together.

Jay:

I think Heath and I, and also Gary and I have talked about how similar some of the visions are, that we've articulated, maybe the starting points have been a little bit different, because there's a lot to do. But sort of, I think each of us are organically as heard from, you know, the owners we work with, and to some extent, the residents that we work with, how many different moments they they'd like to, you know, have our partnership or, or, you know, partnership with like minded folks to think about using technology or operations to sort of remove friction and let them focus on on what they enjoy doing best. And I would say, you know, really, for the last 12 to 18 months, we've felt even more pull to help our customers, you know, buy more assets, dispose of assets, make good decisions. And so, you know, when, when there came an opportunity to come together, you know, not just in a partnership, but but but more than that with Roofstock. And also with the Stessa. Folks, it's been really exciting to get to work together, you know, to take take on the world, but with a with a shared vision.

Jonah:

Yeah, we hear that from a lot of our customers as well, that they're, you know, what, what they get from stessa is great, but they'd love for us to do more, they want sort of that one stop shop, full stack solution to a lot of these problems, including transaction, including property management. So, you know, fitting together and putting out one solution for our customer base, or shared customer base makes a lot of sense.

Tom:

I think what's so neat about these three companies is just solving, you know, three very different problems, from transactions to ownership to asset management. I think a lot of times as a startup, you know, you can have really big eyes and be like, Oh, you know, we want to do all of this, and it works really wonderfully. When it's able to come together. All together, I'd love to hear kind of the evolution that you guys had kind of originally, you know, was it always kind of to build out this full stack on your own? Or was it you know, more niche, I'd love to hear just kind of the evolution of your thought of the strategy of the business. And you know how that unfolded into where we're at today, which I think is a really nice platform, I'll say.

Abigail:

I could take the great John's piece there. But it sounds like we're all describing a different starting point that very quickly led to this broader vision. Because ultimately, that's what we all learned pretty quickly, the customer wanted a no friction, one stop shop for the full puzzle. And on the great john side, you know, we started, we exclusively were serving what we call the retail customer, the mom and pop investor. And we had started to describe ourselves as institutional grade PM, institutional grade property management, which meant a whole host of things around the type of service that you deliver, and what you actually do as the property manager.

But it became clear that to really be institutional grade, you had to give the retail investor access to all the things that institutions have access to, which is really a full stack solution to investing. And so we I mean, I think Jay can correct me, but I think within a matter of months of the business existing had articulated that it's actually a platform vision that property management is this wedge into this much larger space. And it It took us quickly to realize that and then that's a drum that we beat throughout the duration of the business, and continue to hear and in talking to both Gary and Heath and Jonah, it feels like everybody had the same path. It was just a different what is the wedge, but the thesis is the same.

Heath:

Yeah, 100% are our wedge, we always believe that financials were sort of the foundation of every real estate investors business. So by starting with the financials, we could become the system of record, we have all this data around the performance of their properties of their portfolio. And with that information, we can start providing you know, insights to help them maximize the value of the portfolio. You know, automate a lot of the you know, by automating the financials, we can save them a lot of time, help them make more money and doing so It would basically get us into a place where we could then long term become that platform. But of course, now that we have Roofstock and Great Jones, we've we've definitely accelerated that vision and are able to move a lot faster.

Jonah:

Another thing that we hear from Stessa users is that by using Stessa, it gives them the confidence to expand their portfolio and obviously Roofstock and the Roofstock marketplace is there when our customers are ready to expand.

Gary:

Yeah, I think bringing these companies together was a really natural thing. And we could talk about why I think it's working. It's still early, but it's working quite well, relative to I think a lot of business combinations. And I think what you're hearing is a lot of commonality of vision. And as Abigail, I think, probably like aptly, we put, we all just started from a different place, but we're kind of going in the same direction.

And so So for us, I think it just says accelerated kind of the growth and the amount of time it would take, rather than having to build all these things ourselves. By bringing them all together, we could just do it much more quickly. And and that's I think what we're seeing and then by getting the businesses together, then in addition to it's not just a one plus one plus one equals three, there are synergies, and we should each be able to grow our businesses faster and more efficiently. Because we're sharing data, we're sharing talent across the organization.

And there's a reason most mergers fail. And a lot of that is cultural. We have been very, you know, careful as we evaluate any of the transactions that we've done, it's got to be the right cultural fit. And this these clearly have been an honor. And I think one of the reasons that we've we actually ended up doing both of these deals was the people probably the primary reason they both had good tech and good businesses, but being able to attract all the the talent, the energy and the knowledge of the founding teams and their their core leaders around them really, really powerful. It's it's just hard to find that out in the market. So. So there's lots of reasons I think we're seeing early returns being very promising for this.

Abigail:

I think that we all started a different entry points, and not randomly, but because those entry points were our strengths. So I see Stessa has like having firsthand financial issues with their portfolios, like really understanding that space very well, coming at it from like a real software sophistication, Jay and I and the team that we've built both come from really heavy hitter operators, you know, operationalizing messy businesses with technology. And then you had Roofstock with really deep real estate expertise, having done more at scale in the transaction space than probably any any other team combined. So it's not that we all just had the shared vision and happen to be coming at it differently, you have these really deep strengths that we're all playing to. And when those come together, I think that's part of the one plus one equals three that Gary's referring to.

Tom:

Perfect segue into the next question, Abigail. So we've been talking about this kind of platform of the different layers of asset management, property management transactions, I'd love to hear the different founders talk about what is the special sauce within their layer of the transaction? Maybe technology, technology wise, you can explore the face the space of the question, but what would you say is some of the competitive advantages within that vertical of the company that you've started that has come together to form this this platform? I'd love to hear your guys's thoughts on, you know, what makes your segment that much better than other options out there.

Jay:

On the Great Jones side, I think what we saw was, you know, a number of different areas of inspiration, I think, as Abigail mentioned, a lot of our sort of founding team. And I think at the core of what a lot of what we do is, you know, how do you take hard kind of online offline problems, maybe where there hasn't been a tremendous focus on sometimes efficiency or the Cust customer experience and build something better? That's sort of enabled by by technology and maybe enables, you know, higher growth and higher levels of quality?

So, you know, what does that mean, with respect to property management, I think the experience that investors have often had is that it can be run as a local service business. And as with many of those cases, there will be a really wide distribution where some people will be excellent, some some teams won't be. There's not a tremendous amount of consistency, facilitated facilitated by technology. It's heavily reliant on the people.

And I think what we found, you know, both them in prior experiences and that Great Jones is by I think the core, the core of what we're doing is thinking about What are the outcomes we want to deliver at the end of the day that creates, you know, a great customer experience and really solid returns? How do we think about instrumenting processes that haven't been instrumented previously? And what that allows? And how do we build great, you know, really nice interfaces for, you know, our own team members, owners, residents, vendors, anyone who needs to engage to create that great outcome.

And what we find that that then leads to, is a much more consistent and controllable level of performance, where we, where our team has much more transparency into how can we drive those returns? How can we drive that quality. And because we've instrumented things beyond captured, that data that maybe historically wasn't structured or captured, we can create much more visibility for an owner or a resident on the status of something.

And so an example would be, you know, doing a property turnover, where it sort of, if you if you know, from move out to kind of rent ready, that there are, there's a bunch that needs to happen in terms of doing a full inspection, considering the different paths to remediate or improve anything, coordinating the work of many different vendors, managing timelines, managing costs, you know, giving an owner the appropriate level of choice. And so we've built things like workflow tools for our own team, external interfaces, owner approvals flows, to really make that more of ultimately, almost like an e commerce and messaging experience for the owner. And that's what we think people have been accustomed to, you know, in other experiences, and enables the owner maybe to to Jonah’s point to feel more comfortable growing their portfolio doing so across a number of markets, because they know, you know, the quality outcomes that can come with that.

And so, when we've done that being one example, but I think we consider a lot of the core of what we've done to think about, you know, how do we infuse maybe more consumer tech into a space that that hasn't necessarily had that to create a more, a higher performing, maybe more digital, more consistent experience?

Tom:

That's awesome. transparency, control, all of that good stuff. I love it, Jay. Gary, do you want to want to speak next?

Gary:

Sure. You know, one thing that I neglected to talk about at the beginning, and I know you wanted us to talk a little bit about our real estate investing experience. And I guess what, what it brought to mind that I was sort of thinking about this, which I think is sort of relevant to what we're all doing is, I started really, at very large scale on the institutional side buying 1000s and 1000s of homes during the last financial crisis, and really, kind of cut my teeth figuring out how to build institutional grade tools that would be used by institutions. And I think what we're doing here together now is taking a lot of those learnings that that I and my co founders, Gregor and Rich, kind of, were deeply embedded in institutional scale. And I don't want to say dumbing them down at all, because that's that it sounds derogatory. Simplifying them, and, and having a lot of that same power that we developed, you know, for institutions, and putting in the hands of, of retail investors. And, and, which is, by the way, where 98% of the home set.

So when we think about the addressable opportunity, as a platform catering to real estate investors, it just gets me so excited that we can take all those learnings and apply them now through these different business models at real scale to to retail investors, which as well as institutional investors. And I think one of the other I think, I guess, learnings or I would say, observations that might be counterintuitive, as people are out there thinking about building their own businesses, and how it might relate, you know, to what they're doing in their own lives.

But we took a little bit of a different path to building Roofstock, where oftentimes people will say, you got to pick the retail segment, or you got to pick the institutional segment, and then focus ruthlessly on that single customer, and don't try to boil the ocean. Well, we did try to boil the ocean in that we, we took a contrarian view and said, there's, you know, 90 million homes out there about, you know, 17 million of them or so are rentals. But that rental home doesn't know whether it's an institutional home or a retail home, it's a home. So we need to understand the whole market.

And by catering to both types of customers. We get data from all of them. And the market is the market. It could be an institutional buyer, retail buyer could be any of that. So So I guess I would just encourage people as they're thinking about that. Their own entrepreneurial journeys don't necessarily always listen to conventional wisdom. Because we didn't, we came at it differently, perhaps more ambitious than we then might have been wise coming out of the gate, but we felt like it was the right strategy has turned out to be, it's a work. And so you know, a lot of it comes down to execution. And being able to prioritize and ruthlessly prioritize when you're trying to do a lot of ambitious things, you have to figure out which is the most important which are the most important and focus on them.

And then also know when to pivot and when to stick to your strategy. That's just kind of another thing is for entrepreneurs out there. And that would be one of the things maybe that's interesting for everyone else on the call is that we've all had times where we've had to pivot our strategy. And that's one of the hardest things as an entrepreneur, you have to have conviction around what you're doing, until you decide you need to do something differently. And I'd be curious if there if any of you, my or my colleagues here had any, any observations around that, but that is something that as entrepreneurs and as real estate investors, you You are always trying to figure out well shoot, do I need to change my strategy here? Or do I need to stick to my stated goals?

Abigail:

We had something similar where a great John's we I mean, almost identical, we were serving the retail customer exclusively. And we had the opportunity to serve an institutional customer, which was so different and clearly frightening because you have your your heart envision set around a certain customer experience but but took the leap and did it and we too ended up finding not just that it works, but that it it benefited both customer segments. So the the wisdom of have a single customer segment we too maybe walked away from, and both customer segments benefited in a way that I think, paid off the courage of that paid off. I had definitely received the advice early in my career, less about Greg Jones and more in previous contests to get great at murdering my darlings, which I believe is a literary phrase around being willing to like, you know, move away from a plotline, if it's, you know, not serving the momentum of the book or whatever piece that you're writing and definitely sticks with me. It's it sounds ruthless, but I think it ultimately pays off ends up being the bolder decision.

Gary:

And you thought all that stuff that you learned when you were a writer was not going to be beneficial in your entrepreneurial career.

Abigail:

Exactly. Here I am.

Heath:

I’ll add, you know, with Stessa we actually pivoted pretty early on. So the first customers that we targeted were really mid market investors. So people with, I don't know, 50 to 100 million in assets under management who we go after and provide full service bookkeeping to. And that's kind of how we got started offering and create financial solution. But we quickly learned that the really massive market, as Gary was saying, is really this, you know, retail investor out there. So shortly, I don't know, what was it Jonah, was like a year and a half after, after we started signing up customers paying customers, we basically made a big decision, hey, we're gonna go off to this much bigger market much harder to reach. You know, these are investors who are very hard to identify, often not willing to pay upfront. So with a free self service product, and we had to go back and fire all of our existing paid customers, which was, which was a very painful experience, but put us on really the right track to get to where we are today.

And when we went after those retail investors, one of the things that we learned that was really interesting is that, while technology and data is really you know, there's quite a bit out there, it's very pervasive out there today, many of these investors were just not using anything, we found that most of them, they actually had no clue if they were making or losing money on any of their investments. They kept most of their financial data in a out of date static spreadsheet, and the only time that they knew if they'd made or lost that money, or how their properties were performing was once a year when they got the returns from their accountant.

So that was a pretty big insight, we realized that when we built Stessa, and when we targeted these guys, we really needed to make this an incredibly intuitive, very much a consumer grade offering for these guys. So we built this self service to all, you know, purpose built for investors, built by investors, you know, really based on our own pain points that Jonah and I have had after being investors. For a number of years together.

And one of the one of the wonderful things about that is again, this was very, very painful decision to to make this change. But nowadays, our you know, our biggest, one of our biggest areas of customer acquisition is just investors referring other investors. And when you go into our net promoter score comments and see what people are writing, I actually did this. The other week, I took all the words created a word cloud, and the two biggest, most common words that people use when they describe it that our users use when they describe Stessa is easy and love.

Gary:

Great, great question prompt Gary, Michael, go ahead. And yet, you know, feel free guys in move in the conversation in a certain direction you think they'll be more engaged in as we're as we're going through, but this is really great. So far, I love the inflection point question of these businesses, I think people are going to love it. Go ahead, Michael.

Michael:

So you all individually have mentioned technology and how your companies have leveraged that. So I'm curious if you can give listeners at a high level, what technology you're giving them access to. So they can compete with some of the big players at the institutional level.

Gary:

Fundamentally, when we think about what's different about Roofstock it's it's the data and technology that's foundational to what we're doing. So you're you're you've got really the same data and information analytics at your disposal that the major institutional investors have through our platform. And so the whole idea is to make it simple and intuitive, not not overly complex, to have a nice UI, but very powerful data around valuation underwriting how to evaluate investments on a risk adjusted basis with our neighborhood scores.

So the idea would be if you were an experienced investor, or even a novice investor, you can come and use our tools. And, and, you know, we provide, you know, I don't want to say it's training wheels, but but it kind of is your because it's all sort of teed up there with starting assumptions that you could then play with, you could look at other properties, you can, you can participate in the rootstock Academy and learn, you can join that community and share ideas and notes. So we try to provide this as a platform for investors to learn, we have plenty of people who engage with us who never buy anything, but they're just learning about investing and how to how to get on their own journey. And that's fine. It's, it's totally cool, we love it.

But eventually, we were there in case they, they want to do it. So I think in terms of if you if you're not in this in this, professionally, oftentimes just hard to understand how to value something, or how to think about the trade offs of buying a property in a four star neighborhood versus a two star neighborhood and you're playing with a lot of that stuff in. And that's what we're trying to do is continually make make the site in our, our business, intuitive, not overly complex, but have enough power that people can unlock, when they want to get in and do further and further research.

I know, when we were first raising money, we got some feedback from venture capitalists, it turned out to be very good advice. The first version of our site was way too complicated. We sort of nerded out on a bunch of different calculators and all these kinds of things that as kind of professional investors were like, oh, wouldn't it be cool if we could do this and that and that, and we did. And his feedback was, guys, this is a Frankenstein product, I get why everything is there. And it seems like it was kind of you just kept adding things because they were cool. And that's exactly what we did. We we did not, we didn't edit properly. And so that was a really good forcing function for us.

He said, If you could ever clean this up, you'll have a monster company, but it just, you know, it's gonna, everyone's gonna get lost in this. So we did and we, we simplified it greatly. And we took a lot of that functionality, we buried it a little bit deeper into the sites, you can unlock some of the sales analytics and things like that. But there's a real balance between having a powerful set of tools and a simple set of tools. And while people want choice, complexity can be it could tie you up in knots.

And so it's got to be this balance between, you know, editing and providing curated data and choices for people versus you know, maybe say that, like if you walked into a store and none of the products were organized into sections, it'd be so overwhelming, right? But if you if you could get guided to the right part of the store, and then you have three things to choose from, it's a heck of a lot easier. So that was I think another kind of interesting lesson as we were building just because you can do stuff doesn't mean you should In many cases, simpler is better.

Tom:

Gary one thing I've been meaning to hear you articulate a response. This question is, for some investors, there's a perception that Roofstock is more for like an intro investor, they buy a house on roof stock, and then they bought it, the training wheels are off and they go buy somewhere else. What would you say to that comment of thinking of Roofstock as kind of like, exclusively as like, on the retail side, just for the training wheels, like the initial investor, and then you, you know, go somewhere else, I'd love to hear your your kind of thoughts on that stigma?

Gary:

Sure. Well, I would say it depends on what you're trying to accomplish, right, we have some of the most sophisticated investors in the world buying homes off Roofstock. So it's not just for novice investors, it but we do have a unique positioning, and that there are very few on ramps for investors to to learn how to do it, and we provide that that guide. And if someone buys a home in a particular market, and they want to buy more homes, I think, you know, there's no obligation to do it through Roofstock, you certainly can can use those those skills that you have developed.

But it's it's certainly a heck of a lot easier. Because we've you've got all those tools already. And so there's no reason not to, it doesn't really cost you much to use our system. It's it's a, we charge a small marketplace fee to buyers, but you get all the data and analytics and all that to go there. So I would say if you want to buy remotely, it's very hard to do it on your own. So Roofstock has that infrastructure where we compare you with property management, financing, all the comps and analytics, that you certainly could go do it. But if you're looking at homes in four or five, six different markets on your own, it's very challenging, you have to travel, you have to find real estate brokers to work with.

And so, you know, I don't think, you know, I guess I really don't think about our platform is catering, certainly exclusively to first time investors, although a lot of people do start with us, I think on average, now we're just under two homes per investor. You know, people were using the site, I think a lot of people are trying to buy a home a year. For our platform, there's certainly no obligation to continue to use this. But I think for the most part, what we're seeing is people kind of continuing to use us and maybe using more and more of the tools over time, as they do get more sophisticated, maybe you do start to think about portfolio construction and think about where you want to own homes and set up little alerts, put yourself on a program to get build a diversified approach.

So I think it's it's a testament to the platform that we're building and the veracity of it, that it can be something that someone could start with, and then stay with throughout the lifecycle. And you can get as as geeked out is as you know, intense as you want about some of the tools and analytics, but you don't have to.

Gary:

And plus all the other additional layers within stessa. Great Jones and Michael, do you want to just reiterate that question that Gary answered first related to technology we can have. Jay, Jonah and Heath take a stab at it as well.

Michael:

Yeah, absolutely. So curious to know, because you all come from a technology background, what technologies and tools the individual investor has, Abigail, I think you said a nice that the mom and pop investor has at their disposal because of the companies that you all have founded?

Jonah:

So I think he then I, you know came to this not because we were full time real estate investors, right? Real estate was sort of like our side side hustle while we were working in in the tech industry. And you know, that our day jobs in the tech industry, you have access to workflow automation, KPI, dashboards, like, you know, sophisticated modeling tools. And when we were working on our side hustle, owning a moderately sized real estate portfolio, we were doing spreadsheets and sending a lot of emails back and forth and had a stack of stack of paper documents on our desk. And so that was that was really the core problem that we were looking to solve is is give people that those sort of, you know, professional tools, but make it simple and make it purpose built for real estate.

Jay:

Yeah, I think, you know, taking on a bit more of the operational side of property management but with a similar lens. A lot of our product strategy has been about, you know, how do we build the internal tool set and structured data that helps us create the outcomes in a scalable way. across, you know, an increasing number of markets, so enabling, you know, investors to work with us across a bunch of markets, that then leads to that transparency for the owner. And I think, you know, I talked a bit about how we've thought about turns in that context, I think that sort of measurement also allows us to then, you know, really lean in and maybe build some more custom tooling where we see there's going to be a benefit.

So for example, when we were very focused on once we had built a lot of the measurement of turn times, we saw there was an opportunity to get, you know, our staff out to homes to inspect them faster, that led to us building a set of sort of prioritization and routing tools, focused on that problem, that sort of prioritization of field work and, and completing that. And so I think part of where that thing goes, in addition to the outcomes for our investors, is a new layer of intelligence into that operational layer. So because we're measuring things like processes, or costs, maybe ROI around things like maintenance or turns or, you know, how did those decisions work out that we made around renewals or leasing, it's been our, you know, our goal, to think about how to structure those data sets, maybe into the owner, you know, web application, or, or help owners make their next decisions based on a sort of a layer of ownership that they haven't had that transparency into historically.

Michael:

So I've got just one last question for everybody and very curious to see where it takes us. But I would love if you all can share a little pearls of wisdom or a nugget that you've picked up, because you are founders and co founders of tech companies that you find really applicable to real estate investors, what's the kind of an actionable takeaway or something that an investor can walk away from listening the episode today, from you all that have that have founded companies?

Abigail:

I already shared, that you need to murder your darlings. So let that ne a minimum pearl.

Tom:

We should we should name the episode.

Abigail:

The website, you know, the original Roofstock website was so complex that he had to murder maybe just bury some darlings. So I think we saw that that the same lesson play out there, the the main piece of advice I have is to not overreact to things that are on fire. So just sort of set that your baseline is that all things will be on fire, there'll be multiple fires, and that you shouldn't over pivot or over course, correct, based on anyone, you know, imminent moment of pain, which I think takes a degree of articulation and commitment to where you're going and what the longer term path is. Less that be taken too literally, for real estate investor, I don't mean to use fire, like if something's on fire. Surely, that's not the lesson to be learned there.

Michael:

I was just gonna say, do you know about the two fires that I've had in my building, I don't, I don't, where were you two years ago to calm me down.

Abigail:

But whatever, whatever the appropriate corollary is, you know, to be confident in whatever strategy you set and be committed to it and not over pivot based on, you know, near term troubles.

Jonah:

I would second that, that in real estate, it can be tempting to try to optimize one particular transaction or renovation at the expense of like the long term. You know, thinking about your, your network, your you know, the your business relationship, so the team that you're using to build your real estate portfolio up. And, you know, obviously, you know, building a startup is similar, you can't get, you know, there's the day to day aspect of it. But you also have to make sure you're always building for the long term.

Heath:

Everything takes so much longer than you ever expected.

Gary:

I would agree with that. I agree with all those those pearls of wisdom. I think having the right long term orientation, making decisions that are right for the long term, very critical, whether you're an entrepreneur starting a company or you're a real estate investor, you know, how much do you want to invest in your renovation, it's going to cost you more, but then it's going to cost you less on an ongoing basis that when you're starting a company, how much do you want to invest upfront in your core technology and in your team, you could do things more on the cheap, but it might not be as enduring. So I would think about investing, you know, in capital and people that are really, really critical.

And then I would say, just on the entrepreneurial side, what has worked for me is real optimism is I think there's different ways and but it's you're intellectually honest, but you're optimistic and you're in solution oriented. You can fall into despair very easily as an entrepreneur or if you have a real estate investment that's going sideways, but if you really sort of say okay, we are where we are, you know, what are our options, how do we fix it and I know we're going to get through this. It You find very few entrepreneurs who won't don't have a glass half full kind of orientation.

A good friend of mine found in Workday. His name's Aneel Bhusri. And he also founded, you know, another company with Dave Duffield earlier in his career. And so Dave co founded Workday with him as well. And, Aneel said one time, he said, Yeah, you know, I'm, I'm, uh, you know, I'm a glass half full kind of kind of person. And I'm a good complement to today, my co founder, you know, by contrast, he's a glasses, entirely full type person. So, you know, it's not as a glass half empty glass half full. And Aneel thought he was, yeah, I'm pretty optimistic. Dave was like, oh, off the charts, this is going to work. And this is how it's worked. He's created multiple billion dollar, you know, multi billion dollar companies. But so I would say attitude is important, and perseverance.

And I think by keeping that positive attitude, not everything is going to go right, you need to try lots of stuff, and celebrate failures, keep going. So we like to say at Roofstock, you know, fail forward fast, try new things, celebrate those things. And it's not easy to celebrate failure. It sounds kind of silly, and it's kind of a West Coast thing. But we do try to do it and you know, talk about things that don't work. And eventually, you're going to find some magic in there. And if people aren't comfortable failing, they don't take those chances. So I think, you know, those are a few things that I would just I would share.

Heath:

You know, and I'm gonna add one more, which is luck surface area. And as you're talking about optimism, it kind of reminded me of this. So at my wedding, Jonah actually gave the best man speech. And he spoke a bit about luck surface area and how it applies. And I would say, both in real estate, and in starting a startup, you know, you really got to just put yourself out there, make it known where you want to be, you know, go and scream from the rooftops, hey, this is what I want to accomplish. This is what I want to do make sure everyone is you know, knowing what you're trying to do. And hopefully the right people will kind of step up and, and help you get to that end goal.

Gary:

I love that luck surface area. You know, if you think it was Ben Hogan, who also said, the more I practice, the luckier I get. So there's no substitute for that hard work element, as well.

Tom:

Jay, do you want to close this out? I haven't heard your pearl yet. Do you want to get to the final pearl?

Jay:

Sure. I mean, I think I think it goes back to something Gary said about investing in the team where I think the quality of the team. And I think relationships among the team are just such a huge lever in it, whether it's startups or really trying to be successful at anything. And so I think, being patient around building the right team, having a high high bar for the right team, and sort of, you know, who's your network that you rely on, as you build a portfolio as you build a company, I think has, you know, led to some of our greatest successes and, and some of our missteps occasionally. And so I think, as has always been, you know, something, something I've tried to keep in mind.

Gary:

And I would say, you know, one thing that I've also learned over time, and I firmly believe is, is the right strategy, whether you're building a company or a real estate portfolio, even though buying property is transactional, there is a way to live your life and build your career in a way that's more relationship oriented. And I think some of the most successful entrepreneurs, whether it's in tech or real estate, take the long view, and don't view everything as transactional. And while you want to get a good deal on a property, you might be dealing with a serial seller, you deal with that person well, you're going to develop in the long run, you're going to do much better by trying to find Win Win outcomes.

And so that I would put that out there because I think oftentimes in real estate, people view things very much as a one shot deal. very transactional, trying to maximize everything. And I think if you sort of take a step back a little bit, sometimes and optimize for the long run, take more relationship view can be smart.

Tom:

We love to hear your feedback. So if you have any questions you want to ask some of these co founders about real estate entrepreneurship. Please, if you're watching this on YouTube, just write it into the comments. We watch that stuff all the time. And if you're listening to this on a podcast, if you could write this in the either Apple podcast comments, or you can just email us you can email us at help at roof stock.com with questions, comments, anything you Want related to this content that we're creating and as always, happy investing

Welcome to the Central Texas real estate market Oct 19, 2021

Kevin Guerin is an investor-focused real estate agent and part of the Roofstock Certified Agent network. Serving the Central Texas Market for over 20 years, Kevin is a wealth of knowledge for investors looking to expand into the Central Texas market.

In this episode, Michael and Kevin discuss neighborhoods, price points, tax assessments, rates of appreciation, common issues that investors need to be aware of.

Contact Kevin: https://www.guerinpropertyservices.com/contact

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm interviewing Kevin Guerin who is our Roofstock certified agent out in Central Texas. Kevin's going to be talking to us today about some of the Central Texas markets as well as the Austin market and some of the things that we as investors should be aware of. So let's get into it.

Kevin Guerin, out in Austin, Texas. Thanks so much for joining us. How are you today, man?

Kevin:

Good. Thanks for having me.

Michael:

Now, my pleasure. My pleasure. So I know we were chatting just before we hopped on recording here, but for everyone listening at home, or in the car, or wherever they are. Tell us a little bit about yourself. Are you an Austin guy born and bred and how long you've been in Texas.

Kevin

Born and raised in Texas, which doesn't happen that much anymore, it seems but I've been a I was born in Houston moved to Dallas at a young age than it was in a small town called Granberry outside of Fort Worth through high school. And then as soon as I graduated high school, I came down here to Central Texas and went to school. It used to be Southwest Texas now it's called Texas State. But that was in 1987. And I haven't gone anywhere since. So I've been down here a long, long time.

Michael:

Right on and in that time. I mean, just from what I've seen in Texas, or Austin do in the last five to 10 years. You must have seen it really changed in the last 30 years.

Kevin:

Yeah, the last 30 years have been crazy. This place went from you know, the capital of Texas with the University of Texas downtown to all of these tech businesses moving here and just the growth of people just moving to the city. The high rises downtown. They kind of they call it crane city from time to time because there's just there's cranes building all of these big condo buildings and just people moving here left and right. Because quality living is great, that's a beautiful city. People just love being in Austin.

Michael:

That's awesome. That's awesome. What do you love most about living in Austin?

Kevin:

Well, we live out by the lake. there's a there's a few lakes that are out here. So we live out by Lake Travis. So you know, we take the kids, wakeboarding, and hay out of the lake as much as possible. And a bunch of hike and bike trails out here and sports and fitness is huge. And in the Austin area. And so we're on a baseball field or a golf course on the lake most of the most of the time and just kind of get out into the, into the nature in the wilderness and enjoy life.

Michael:

That's awesome, man. All right, well, let's jump into the meat and potatoes here of the episode. And I would love if you could share with everybody a little bit about Austin as a market and who is coming to the market in terms of companies.

Kevin:

Yeah, so Austin. Austin has been a solid market Austin and the cities around it has just been a great place for for investing, you know, for years now. Tons of people moving here, our rentals just don't sit vacant very long, because there's just still a shortage of supply. I remember one time I looked and it said that about 186 people per day were moving to the city of Austin. So when you think about that number and how many buildings are here, it's just you know, it's a supply and demand thing.

So now we've got you know, Apple is expanding Amazon. Tesla, obviously in Tesla's the latest announcement, I guess they're moving their home offices here. Samsung's talking about putting another big operation where they're building more chips or things in town. It seems like every week, there's a different tech company that's moving here and not just from California, they're coming here from other places like VR Bo is here. Indeed is here there's a lot of different companies that love to have their base here. So it's great with the University of Texas here and the other universities here is huge talent pool of, of employees. And so they're here and they're taking advantage of that.

Michael:

That's awesome. I mean, it's really sounds like a mini Silicon Valley or another Silicon Valley might even be bigger geographically than what we have out here in California.

Kevin:

I think it is I think we still have more land to build on. A lot of our current investors like to purchase things that are going to be a little bit closer into where all these tech companies are going. But there's still a lot more land around where you know, we're gonna have the appreciation because of simple supply and demand and people are going to want to buy and live closer in but it's, it's just never going to get as congested as some of the other places because you know, we don't have an ocean right on the other side to where that we have to stop building. There's there's Still space out there. There's still farmland. But I think prices are going to continue what they've been doing for years just because not everybody wants to be an hour out. Everybody wants to be 15 minutes away.

Michael:

Yeah. Yeah, yeah, that makes total sense. So let's talk about prices for a little bit, what are you seeing and maybe you can give people kind of a high level 30,000 foot level tour of Austin and some of the different markets and sub markets within the city where they could look for rentals if they're looking at they're interested in investing in Austin proper.

Kevin:

Yeah, prices. Who would have ever thought that through a COVID we would see price increases the way that we have over the last couple of years, but the days of trying to find something around 200,000 or even gone like we're, we're definitely creeping up to more expensive markets, or the sweet spot is kind of in between three and 400,000 that's gonna get you to 2000-2500 square foot house or so. A lot of the markets that that investors are really interested in are going to be kind of north of downtown Austin.

So we've got some other sub markets or smaller cities up north of Austin called Round Rock, there's Georgetown, there's Cedar Park, Leander, gosh, Liberty Hill even now hadow bunch of these little areas that have great subdivisions, masterplan subdivisions that have the hike and bike trails, and the resort style pool and the gymnasiums and things that are that are there that that they offer for, for people who live in these places. And, you know, we can rent them out quickly for a nice amount of rent. It's just, we can't get enough of them. We manage a bunch of properties. Here, we manage about 250 or so. And we may have two or three vacant right now. And that's just because we just put them on the market a few days ago. So things go really quick.

South is also pretty pretty happening right now because the Tesla that everybody knows about is down right by the airport. So there's some some markets maner Dell Valley and Kyle Buda people are buying those areas to because they know that there's going to be you know, however many 1000 employees at Tesla, they're going to need places to live to so we don't really focus as much in the city of Austin itself. The school systems not as good there as it is as some of these sub markets. So most of my most of my investors want, you know, the better schools. So we go into the other places that have higher rankings in the school districts.

Michael:

Okay, that's great. And just as kind of a ballpark figure in that three to $400,000 rental, the 2000 2500 square foot, what would an average rent and north of the city expect it to be?

Kevin:

It all depends on the sun, the square footage and sub square footage in the subdivision. And you know, the age of the home. So if it's a newer home $350,000 and it's going to be 2020 200 square feet somewhere in there. Again, it depends on which subdivision is but we're anywhere from 1900 a month to 20 $500 a month somewhere in there nowhere near the 1% rule that we used to be yours in the past but now hopefully we're still we're still able to you know at 20% down are so we're still even able to get to at least even or maybe cash flowing just a little bit after property management fees and taxes and HOAall that all that good stuff.

Michael:

All that fun stuff. Yeah. Talk to us a little bit about property taxes. Since this is one of the biggest misses I see, especially for new investors, and even those seasoned investors investing remotely. How do those work in Austin, just again, high level cuz I know county by county, it's likely to differ slightly.

Kevin:

Yeah, we're gonna be a little bit higher than most of the other markets, we're gonna be anywhere from two and a quarter to 3% of the county assessed value. So a lot of people think when you buy a house at 400,000, that that that percentage is going to be based off of that 400,000. But what it's actually based off of is what each county assesses that property for so the county may think that this house is only worth 300,000. So then then that the 2.5% is only off of that 300,000 instead of the 400,000. So it is definitely a little bit higher than some of the other markets that Roofstock is in. But we thank goodness we don't have a state income tax here. And it is how they pay for a lot of the schools. That's why some of the schools are good. Most of the people here go to public schools, they don't have to go to any kind of charter private schools because the public school system here is really good. And a lot of that comes from property taxes.

Michael:

That's great. Do you know how often the properties are reassessed

Kevin:

The property taxes are reassessed every year, and I believe the taxes the tax bills are due may 31. But most people are going to have a mortgage and it's going to be you know rolled into it but they reassess it every single year.

Michael:

Okay, perfect. So in theory, if you buy that house for 400,000 County assessor's it for 300,000 a year you buy it that could go up year over year. And you know, is there a limit for the amount that that could go up and could have jumped to 400,000? The following year,

Kevin:

There's a cap, I want to say is 20%. cap. So I don't think you can go all the way up to the top, you know, can't can't jump 100,000.

Michael:

Okay. Okay, perfect. So that's great to know. And also great to keep in mind for everybody listening, as you're looking to determine what your property taxes are. Definitely chat with Kevin chat with your local personnel on the ground to get a handle on, you know what that current assessed value might be, and to wrap your head around what it might be able to get up to?

Kevin:

Yeah, all those records are posted on the county website. So the tax assessor website, so whenever we're running our analysis, we go straight there and look to see what it was last year, and see what it was the year before that to kind of get an idea of what the increase may be going forward. But all of those numbers are on there to where you're not really guessing you're you're looking at the actuals.

Michael:

You're calculating? That's great. That's great. So Kevin, I know there's a lot of other really great markets in Central Texas. Can you talk to our listeners about what some of those might be? And maybe a little bit, they might be a little bit less competitive?

Kevin:

Yeah, so we, we've helped people buy homes from Killeen, Texas, which is up. That's where Fort Hood is. It's a little bit north of Austin prices are a little bit cheaper up there. We had one listed the other day for rent and my leasing agent said he had to finally just just shut it off because he got so many phone calls on it, but homes up there are going to be you know, under 200,000 or so. So they're a little bit a little bit more affordable.

New Braunfels is another market that has just exploded last I saw it was like the seventh fastest growing city in the country. And it's halfway in between Austin and San Antonio. So what I think a lot of people are doing is, you know, mom may work up in Austin dad may work down in San Antonio, but they live in New Braunfels and split the commute time.

Georgetown is also another area that if you look on a map, it's going to look like it's a good distance away from Austin, but it's simply not they've we've built some toll roads here where you can legally drive 85 miles an hour on them and get places really quick. And Georgetown has just exploded over the last few years. It's got a it's got a university there, Southwestern University, it's got a bunch of medical but there's just the ton of great subdivisions going on up in the Georgetown area.

So that place is also exploded, and, you know, even all the way down to San Antonio, San Antonio is going to be a little bit more affordable. I've been nervous in the years past about how long things were gonna sit in the market, vacant for rent in San Antonio. But those days are gone too. I think people have just been priced out of the Austin market a little bit people that are moving here from different states. And they're going to some of these other areas that are just a little bit more affordable. And San Antonio is definitely one of those along with Killeen, New Braunfels, Georgetown, I mean, I would take a look at all those areas, because I think you're gonna get some really good deals that are going to fill, fill quickly. And you're still going to have that appreciation play that everybody says it's kind of icing on the cake. But around here when it's historical, and it's been 15% over the last 10-15 years, you kind of have to consider that when you're you're looking at the different investments that you want to make.

Michael:

Yeah, absolutely. And in talking about some of the different price points and some of those different markets you mentioned, does the rent scale fairly linearly, or does that does that price to rent ratio actually get stronger with some of these more affordable markets?

Kevin:

That definitely get stronger if somebody's strictly looking for cash for the cash flow play, they're going to have to go in some of these sub markets because it won't quite be the 1% but it's going to be a little bit more affordable on the on the price of the home and rents are going to be stronger. Austin the rents just can't keep up with the explosion that we've had with with home prices going through the roof rents are always going to be lagging when it comes to you know, being able to get up to that next levels but some of these other markets that didn't have the explosion that's Austin's Austin's had over the last few years they're definitely stronger on the on the cash flow play.

And a lot of our clients that's what they're doing they're buying it they get that they get the easy one that's going to have the cash flow every month and then after they get that one and get some rents coming in then they look for that growth play property that's going to be close to Apple or close to Samsung and and that way they kind of they're kind of a wash when it comes to you know how they're looking at their investments when they're making a little bit monthly on one but they know that in 10 years is where they're gonna make make most of their money on the on the Austin property.

Michael:

Make the big money. Yeah, that makes sense. And just as a frame of reference for people, how far is it to drive from Austin to San Antonio because I just like being California I have no idea how long that takes.

Kevin:

So it's it's depending on what side of town you want to be on but you know from like the downtown area to the downtown area is about an hour and a half. And what they're saying is Dallas and Fort Worth is a Metroplex that kind of grew together. Now there's our LinkedIn in between where the Cowboys play and the Rangers play, but it's it's they call it Dallas Fort Worth metroplex. They're saying the same thing is going to happen here because in between Austin and San Antonio are these other sub markets from Kyle to Sam Marcus, where they go to college to New Braunfels to Selma and shirts and San Antonio so it's all grown together and you can I mean obviously I've been here for 30 plus years I've seen that happen you used to be driving in the middle of nowhere but now you're just driving driving within cities.

So it's you know, some parts are hour hour and 15 minutes to get from one part to the other, but they're pretty easy to get to and again with those toll roads that they've added, you can you can fly down there and get there really quick.

Michael:

Yeah. And that makes total sense then for those folks splitting the difference one partner living working in Austin, the other in San Antonio, it's a 45 minute split down the middle. I mean, especially someone coming from California. That's like a dream to commute. 45 minutes to work.

Kevin:

Yeah, yeah, no, most places here if you're going 45 minutes, they feel like it's a long way. At most things around here. point eight V is going to be you know, between 20 to 30 minutes to get from, you know, these cities that are up north of town to downtown or to the university or to the Capitol. It's pretty easy to get around except for I 35. I 35 is the one interstate that runs through Austin and they can get congested just because of all the people that are here but as I said, they've built some toll roads and they're continuing to build them that helps people get around a little bit quicker.

Michael:

Okay, that's great. Kevin, talk to us a little bit about insurance cuz all I hear about not all I hear about but I so often hear about hail storms, tornadoes, hurricanes, these type of issues in Texas. So in Central Texas in Austin and some of these other markets do you have a lot of those natural hazard issues?

Kevin:

Hail is the biggest one. When we get hurricanes that hit the coast here, a lot of people kind of hope that that it makes it up to Austin to fill the lakes that are historically 10 to 15 feet low. So hail is the one thing that you know if you buy a house here and you're gonna hold it for 10 years you're going to replace the roof, the roof is going to need need to be replaced at some point because a hailstorm is going to roll through here with golf ball and sometimes baseball sized hail that will damage your roof. Tornadoes or just south enough to where we don't have a whole lot of tornadoes knock on wood that has not been a huge issue flooding is not an issue here it's it's literally the only thing that you have to worry about is hail.

And then we do have foundation issues at time to time there's some of the the ground around here is has some issues with some shifting and so we get an inspection on every single property just to make sure that homes haven't settled a little bit too much but those are two of the biggest things that we look for is how's the roof does it need to be replaced and you know is the foundation doing as it's supposed to do it most of them are going to be slab up here because most of them are going to be newer construction we don't have basements here so we got to make sure that the foundation is doing what it should the roof is in good shape and insurance will cover the roof it won't cover the foundation but insurance is not expensive here either I'm not sure what it is and other parts of the country but most people are getting really good coverage for you know eight sometimes 700 800 to 1100 a year to cover those things again not the foundation but wind and and rain and hail that kind of stuff.

Michael:

Oh that's super cheap on like a $300,000 property I mean that's that's pretty amazing.

Kevin:

Good. Well we can we need it with some of the property taxes that we have to pay.

Michael:

Yeah, it all it all evens out. So would you say that foundation and hail damage are two things that somebody kind of colloquialisms unique to this central Texas that people should really expect to see or not be shooked. If they see that on an inspection report or other other things that are kind of unique to Central Texas that hey, every property just has termite damage for every property is going to have this type of thing. Because a lot of remote investors when they see certain things that they're not used to seeing get really spooked. So talk to people about what they what they should be expect to see and what how they should keep their cool.

Kevin:

Yeah, yeah. Almost every inspection report is going to state something about a hairline crack because of a foundation shift or you know, they're going to say that they can tell that there's been some sort of movement, we shouldn't freak out about it because It's going most properties are going to move just a little bit. But you know, in 10 years, if it's only moved a quarter of an inch, I think we're going to be good, you know, the HV AC system because it is hot here. Most of the time, we'll only have a few months where it's cool. People's hv AC systems are going to be used a lot. So when we're doing our inspections, we also really dive deep into how the unit looks. How old is the unit? Does it look like it's you know, somebody's been cranking it down to 65 degrees every day for the last three or four years it changing out that AC filter, but you know, we're looking at the ACS really close the roof, obviously the foundation, but none of them scare you away, if you know if we can get the sellers to take care of whatever small items there are.

But I would say the foundation is one that yeah, if it's got if it's got major issues, we're going to get a foundation company to go in there and take a look and see if it's something we should just run away from the roof. Literally most people don't even know that their roof has the damage on it. So we get somebody out there to take a look at it. And you know if they say yeah, this, this area had a storm six months ago, and there's enough damage on there, we have a lot of sellers that are that are taking care of replacing the roof before we close because that needed to be done. They just didn't, you know, nobody's hopped up on the roof lately to see that it needed to be done.

Michael:

And to just give people an idea of what a roof replacement costs, do you have a ballpark idea for your, you know, 2000 square foot property.

Kevin:

Yeah. 7500 to 12,000, depending on all the peaks and how high it is. I think two stories are going to be more expensive than a you know, a flat one story, but they're gonna be last one we just saw was right around 7500 for a full replacement.

Michael:

Okay. Okay, that's great to know. That's great to know. And then, Kevin, my last question for you is we're recording this mid October 2021. So for everyone listening, keep that in mind. But what are you seeing people do who are winning offers? Are they coming in all cash? Are they going over ask and you can talk specifically to kind of each of the sub markets that you touched on if you'd like, but just you know, what do folks need to do to win these twin these properties?

Kevin:

Yeah, you know, I think that the craziness of for about 10 months last November was the first time that I ever had anybody wanted to make an offer above list price. Like that was unheard of here. I've never seen that before. And I actually told him I said, You're crazy. We don't we don't do that here list price, we'll win it. Like No, no, we need to go. I think it was $20,000. Over I said, well, that's the craziest thing I've ever heard. And then every offer after that for about 10 months had to be above lists, we had multiple offers on things I was one of 75 offer one of 75 offers on a house in Pflugerville. It ended up going for like $100,000 over on a $300,000 house, it was chaotic, those times a little bit. They've slowed.

So we're still a strong market, there may be a couple of offers on property, but it's not the way it was. So now I would just suggest, you know, you definitely can't come in significantly lower and expect to win anything sellers, sellers are still sellers are still living in the past, when they think that they're going to get 75 offers at $100,000 over list. Those days are gone. So right, they have to be educated things have slowed down a little bit, let's price it appropriately, and then hope that we can get that price.

So you know, if we're coming in at less price financing is fine. People are still writing the appraisal waivers. So if it does get appraised a little bit lower than what they're willing to offer, they're coming to the table with a little bit of funds. But I'm not even seeing those as much as we were there for a little bit. But I would say it depends on the days on the market is something just hit the market and somebody really likes it, it checks all of their boxes, let's go in at list price and try to get it wrapped up. If it's been on the market for 20 plus days, maybe able to get a little bit of a discount, but I would you know $10,000 off or maybe 15-20,000 try to meet at $10,000 off somewhere in there.

But we've got to be strong with them. Just again, because there's not as much inventory as we've had in years past. There's more than there was a few months ago but sellers are still expecting to make a little bit of money on on their cell and they're getting it so nobody's giving away properties. Nobody's discounting big. We just got to make a lot of the other terms good, you know, we want to try to close within 30 days, our due diligence periods, try to make them a little bit shorter. Give them a nice deposit at the beginning to where they know that we're serious. So we try to sweeten the pot that way. And if we can if we can go in with a highly qualified buyer close in 30 days at what people are asking then Hopefully we can we can capture some deals.

Michael:

That's fantastic. All right Kevin My last question for you is you are a rootstock certified agent out in Central Texas so what is it that you're looking for when you're publishing properties to the rootstock select marketplace program?

Kevin:

Sure so we found that most of our clients are they like newer they like newer properties in nicer areas with better schools that are going to obviously rent quickly so we try to get something within you know, built within 2010 and newer, if we can't find enough of that then we go to the year 2000 and newer, we try to get to 1700 square feet to about 23-24 maybe 2500 square feet depending on the area and just something that looks clean that has what everybody's looking for you know the granite countertops the the good looking wood floors, we don't want any you know green bedroom green walls in the bedrooms and pink bathrooms we try to go pretty basic but you know, modern looking looking homes that that is not going to ship they're not gonna scare a potential renter away when they walk in there.

A lot of our clients just don't want to go in and spend a bunch of money up front they just want to buy something that may just need to be cleaned and maybe one wall painted and then they put it on the market and get it rented really quick and the price range you know we kind of talked about it some of these sub markets will look and try to find something in that 225 range and then you know everybody realizes when they're buying in Austin it's just gonna be a little bit more so we try to put a good variety out there because you know everybody's looking for something different for the most part.

Michael:

Alrighty everybody that was our episode a big big, big thank you to Kevin, I learned a ton about the central Texas markets as a whole hopefully you did too. Check us out wherever you listen to your podcasts, Google, Spotify and apple. We love comments and ratings. We look forward to seeing on the next one and as always, happy investing

What we think about the talk of a pending crash Oct 16, 2021

There are so many people talking about a pending economic crash. When are they not? In this episode, we discuss how we are thinking about our investment strategies in light of this topic. Even though timing the market is not a reliable strategy, it is important to hedge for the ever-present possibility of an economic downturn.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor Podcast is for informational purposes only and is not intended as investment advice. The views opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Emil:

Hey everybody, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and my co host today are Tom Schneider, and Michael Albaum and on this episode we're gonna be talking about all the doom and gloom headlines you may be reading out there so lots of YouTube channels lots of articles out there are saying there's an impending crash and so the three of us are just going to weigh in and tell you what we think tell you how we think you can navigate this and come out ahead so let's hop into this episode.

Michael:

I think it's important to just start start off by saying that this is not a prediction of crystal balls it's just so that everyone's been talking about it we were talking about the upset everyone's been chittering chatting, chattering, Chaturanga, chatting about this impending crash that we said let's talk about what you can do and this is applicable really for any crash whether it's tomorrow five years from now 10 years from now these are just I think solid and sound principles that we plan on using to insulate ourselves from from a crash.

Tom:

Definitely anyone who says they know when the crashes like happening just like run the other direction anyone who tells you Here are some easy you know here's the the easy no work way to make money run the other direction so anyways excited for this episode

Emil:

Let me ask you guys this When did you start investing? When did you guys start investing in real estate? What year?

Michael:

Like 2012.

Tom:

Almost like well, yeah about 10 years 2014

Emil:

So maybe you guys probably didn't see it as much I started in 2017 and I remember in 2017 I would probably see that headline at least once a week of like another bubble, bubble coming market crash crash like YouTube videos headlines, though since 2017.

Michael:

Real click-baity stuff.

Emil:

Yeah, and this is four years ago and so I think my my hypothesis here is it's click baity, no one has any idea at some point right? Someone's going to be right if you just keep saying every single month a crash is coming a crash is coming. You say that for seven years I guess at some point you may be right and then you're like See I told you so.

Michael:

I'm a genius.

Tom:

Kind of sorry I'm diverging a little bit I love that that's a great point of just saying that every day I heard the story about like fund managers that would have like tons of different diverse funds and like one would hit and then they would market everything on that one like diverse fund ended up kind of a similar sorry distracted Tom see what's a squirrel running by go ahead sorry keep going.

Emil:

No I mean yeah, this is just casual conversation. I just think it's it's a it's clickbait I don't think anyone knows when it's going to happen it real estate moves in cycles Yes, there's going to be ups and downs right? This this kind of trajectory have been on where things have only gone up that is not sustainable forever. None of us I don't think are going to say that real estate only goes up or that anything only goes up things come down but I think it's a fool's errand to try to predict when those things will happen.

Michael:

Oh, fool's errand great great saying.

Tom:

Totally agree totally agree. I mean I think there's a lot of things in the world you can worry about i think that you know worrying on timing exactly the the crash and the idea of like trying to no that is just unrealistic. I think you know, when we get into the the meat of the episode, it's about Okay, what can you do as an investor to put yourself in the best position to weather the storm? And, you know, perhaps even come out even stronger?

Michael:

Yeah, I'm with you. Yeah, I second that.

Emil:

So let's just talk about what what should you be doing what what do we do not what should you be doing? But how do we navigate these things? So Michael, Tom, whoever wants take it off? Like how do you approach investing even at a time like this when values have never been higher?

Tom:

Michael, would you like to go Would you like me to go?

Michael:

Yeah, I'll go cuz you always steal my thunder. So…

Tom:

I totally was, like,

Michael:

I can see you there like, Oh, I hope he doesn't go first so I can steal his thunder yet again.

Tom:

I'm sitting on the edge of it. All right, go ahead.

Michael:

So one thing that I'm doing, and this might be counterintuitive, but I'm actually levering up as much as I possibly can, because what it does is, we're kind of at this unique time and that like you mentioned, milk values are so high Interest rates are so low. And so there's that massive spread, if you've got equity in your property that you're able to take advantage of, and get a lot of it at a very low interest rate. And so that's what I'm doing. And I'm getting some dry powder in my back pocket to be able to utilize if there is a crash.

If there is not, well, I'm just going to continue investing. And I'm probably not going to wait on the sidelines for very long before redeploying that capital to wait and see what's going to happen, because if you find a good deal, the numbers make sense. Great. And this is something that we've said all along is something that I've been preaching all along, let the numbers do the dictation for you. But the numbers be your deciding factor. So I'm grabbing as much cash as I can, while the values are still high. And I'm trying to get as long term as long of a term as I can on the debt. And so that's that's what I'm in the process of doing right now.

Tom:

I love the contrary and take you have a little devil's advocate here. What say there is the crash, right that we are talking about? Are you concerned at all about the value of your properties being underwater?

Michael:

Yeah, it's a great question.

Tom:

Since you're maximizing your death.

Michael:

Yeah, it's something that Emil and I have talked a lot about. And I think we've shared on a podcast as well, I'm less concerned actually, if the if the value of the property goes underwater, because at the end of the day, the value of the property is really only meaningful in a couple of different places. One is from an ego perspective, talking about your net worth. But two is from If a If a transaction is to occur on that particular property. And by transaction, I mean either refinance or sale because I already own the thing, so I'm not buying it again. But if I need to refinance the property, it's and it's underwater, I'm in trouble. If I need to sell the property, and I'm underwater, I'm also in trouble.

But in light of those two, barring those two events, that I believe that even if it does go underwater, the value will come up over time. And as long as there's cash flow to support the debt service, and pay myself, I'm okay taking on that risk. Or again, the potential upside of I'm putting cash in my pocket today. So if there is that crash, I'll be able to buy into that crash down the road, and hopefully hedge my downside.

Tom:

Love it, Michael. Excellent. Excellent answer. Emil, do you want to jump in and I'll take up the wood, if there's any kind of scraps at the end after? Yeah,

Michael:

Clean up

Emil:

The scraps at the end? No, I agree. I think that's the number one thing I wouldn't miss is me personally, I'm not going to invest in anything that is me banking on appreciation to make my return, when valuations are high, I would only purchase something that I know I'm going to cash flow to be able to cover my my debt like Michael talked about because even if the value goes down 20-25% as long as I'm still able to pay my bills, I'm still able to make some money on top of it as well, it doesn't really matter to me what the value is I'm planning on holding long term. So my strategy you know, what I would avoid is is going in buying a property in hopes of it appreciating another 20% like it has in the last year or so.

Tom:

Awesome. So I'll throw a couple of other tidbits in there you know, just like Michael said, making sure well the actual value doesn't matter as much but just making sure that you have some buffer in the in the cash flow is is important to be cognizant of. Just because you don't you don't have a lot of control the value but you know at what you're buying for and the way that you're using debt, you can give a little more control of that cash flow. So if there is a downturn you need to be able to weather the storm.

The other thing I would say is making sure that you have the right reserves in place as a cash backstop. Sometimes capex comes up you don't you know the the worst thing that can happen to you as an investor is you need to, not panic sale but sell out of necessity and do it quickly and you can prevent that from happening controlling your exit by making sure that you have the proper reserves so that's like the biggest way that you can get in trouble with this downturn is just needing hafting instead is make up a word there have having hafting data definitely made up a word I think it has a punch to it it's kind of fun to say.

So the you know my number one tip is just look at your reserves make sure you have you know six months whatever whatever that number to make you feel comfortable if you have some older properties that have some potential roof stuff maybe you up what that the amount of dollars you have. But to Michael's point about cashing out and having some you know, quote unquote, dry powder on the sideline, should there be some sort of a downturn? You, you can be there but to be honest, I think there's so many investors with that same attitude, but maybe I'm wrong that you know, are kind of catching up and ready to pounce. Perhaps I'm wrong.

But, you know, for that reason, I think it also kind of provides a little bit of a backstop if prices were to go down. I think there is some money on the sideline, ready to go. But anyways, as far as kind of a way to go hedge kind of the downside of risk is just making sure that you have proper reserves. I think I repeated that same point like three times, but repetition is the mother of learning. So

Michael:
Driving it home. Tom, what are your thoughts on getting access to that capital via cash out refi or the lines of credit?

Tom:

I love it. I'm, I love it, I love it. It's like, I feel like elf talking about maple syrup. Anyways, it's I think getting access to it is, is great. And for the market dynamics that Michael spoke of have really low interest rates, as well as high price appreciation. I too am very comfortable getting as much debt as I can just making sure that the rent covers the the excuse me the loan servicing and the debt payments that I have. So I feel I feel the same way that Michael houses right now is a great time to get that money out and to either reuse it right or just keep it keep it in the background.

Michael:

But of those two, cash out refi versus HELOC or line of credit, you have a preference for what you what you would prefer?

Tom:

I think long term fixed deck is great. I mean, on my on my primary like I have a big HELOC that I'll use for some stuff I'm doing around building a little studio shed a little office. But for my rentals, I think getting that long term fixed debt into place. And who knows maybe the the interest rates go down in the future, great, I'll refinance and if they go up great, I'm already locked in for a really low debt. So that is the situation there.

I think the the one other thing I'll talk about on this topic around, hey, maybe the great market bubble burst is happening tomorrow or next week, or whatever. We don't know when that is. So you know, if you have acquisition plans, I wouldn't hold your breath and just wait for that to happen. I would, you know, go through the process of building out a buy box, you know, establishing what you want to buy. And then you know, continue to underwrite properties until they they fit and it makes sense. And you know, perhaps there's there's nothing that hits your buy box, like at this time, but I wouldn't basically at a high level, I wouldn't turn off your acquisition machine, if you're in like an acquisition mode, trying to wait in timeout, timing that particular cycle, just because as we said, it's, it's impossible.

Michael:

The other thing that I think about that, it seems to be on everyone's mind, and everyone's talking about, and it could very well be click Beatty, too. But I think there is some truth to this is the inflation, inflation is coming, on a prior episode with Jason Hartman, we spoke about inflation in great detail. And for those, I highly encourage anybody who's interested to go listen to the episode, at a high level, it's basically you're you're locking in a payback rate in dollars, and then that value is likely going to be floating up. So we get to pay back the loan with cheaper dollars over time. So again, totally recommend going check out that episode. But that's just another reason another benefit to taking on debt. And long the longer term, the better. And so for those two reasons, I'm out, I'm in. I just watched Shark Tank last night.

Emil:

So you're saying that that's why you are another big reason why you're going out and basically levering up as much as you can?

Michael:

Exactly, exactly. To get the cash backs up, like Tom was mentioning to have some dry powder, and that inflation is coming, I would probably be doing something similar. Even if there wasn't all of this talk of a crash. My strategy really hasn't changed. I just think it's kind of good practice and nice to have. And again, with the interest rates being so low, it's like how much better do you need it to get for you to go take the cash out?

Emil:

Yeah. I if I had a crystal ball I doubt we're going to look five years in the future and see lower interest rates. So probably a good time.

Michael:

Yeah. Yeah.

Tom:

My final point is in Michael kind of alluded to it as well as at least we're we're longer term hold guys. And with that type of a strategy, there's just a little bit less risk for these market fluctuations. In that you know, we're we're playing the hold these too as retire early, all that good stuff. So you know, if you're a flipper, I would be a little bit more concerned around big changes in the market values of the houses, but as a long term holder, it's less less risky, I would say.

Emil:

Great.

Tom:

What actually happens with is a lot of times flippers end up turning into holders just because they can't sell the property for what they're worth. So that's how a bunch of long term buy and hold started back in you know, late 2010s. Crash

Emil:

Alright, With that, let's sign off. Thanks everyone for tuning in. hope you got some value out of this one and we will check you out on the next episode. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

How Dave Homyak makes killer returns in the Smoky Mountains Oct 14, 2021

Dave Homyak is a former engineer that quit his job to go into short-term rental properties full time. Dave runs Smokey Mountain Cabin Realty, helping investors maximize their returns by investing in rental properties in Tennessee.

In this episode, Dave shares his investment journey, how he quit his job, how he 1031s his way into bigger properties, what his returns look like, the most powerful price points to get into, and some tips for investors thinking about getting into this game.

https://www.facebook.com/dave.homyak

https://smokymountaincabinrealty.com/

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Transcript

Michael:

Hey, everyone, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and Today we have with us Dave Homyak, who's going to be talking to us about short term rentals out in the Smoky Mountains of Tennessee, and what he did to leave his job is under two years with these types of investments. Without any further ado, let's get into it.

Hey, Dave, thanks so much for taking the time to hang out with me today. Really appreciate it.

Dave:

Yeah. Thanks for having me.

Michael:

Now, my pleasure. For our listeners who don't know you give us a brief background, who you are, Where'd you come from? And how'd you get started in real estate?

Dave:

Okay, so basically, I was an engineer, I did engine calibration for a living, I worked for Chrysler, Detroit, diesel, General Motors, bunch of companies like that, and always wanted to do something in real estate, but quite honestly was afraid to do it. So my first investment property I purchased at 53. And the reason I purchased it is because I wanted to be able to get away from my W2 income. And I had had some money saved up I thought I'd pretty good saver. But I was like, what would it take to make me feel like I can walk away and not have any anxiety whatsoever?

And the answer was pretty easy. It's like if I replace my income, then I can walk away and do anything I want. And it's gonna, I will not have to ever worry. And so basically, I set the goal for myself to replace my engineering income in two years with real estate. And I was able to do it in a little bit under a year. And that was due to getting into short term rentals. And I ended up doing it in what I had kind of researched somewhat to the best of my ability at the time. But then what ended up is that an independent third party which is airDNA they ranked it as the best market in 18 best market in 19. It's three of the top six large cities in 20 and I'm waiting for the latest report to come out and I'm sure it's going to be in the top again.

So bottom line is I happen to buy in the one of the best markets and my research indicated that was a good plan. I had no idea that it was going to work out the way it did as quickly as it did though.

Michael:

That's incredible. And so we've got to ask Where is that market?

Dave:

Said market is in the Smoky Mountains, which is Eastern Tennessee, the three major cities are Gatlinburg and Pigeon Forge, and Sevierville. So Sevierville is the one that people haven't heard of as much but it's equally profitable and made the air DNA dotco list basically ended up you know, I made the decision looked into apartment syndication knew I could replace my income with that didn't know if I could add it to your timeline, ended up deciding on the Smokies. I looked at the Smokies panhandle of Florida, which is also a good choice. I think Smokies are a little better. Less hurricanes there. I really wanted to go into Panama City. And that got hit about a year later. And I'm like, Oh, I'm so glad I don't have to mess with that stuff.

Michael:

Dodged the bullet.

Dave:

Yeah, exactly. And then Scottsdale and I ended up going to the Smokies. So started this search and started trying to figure out what I was going to do in March of 18. April is kind of apartment syndication month. first weekend in May, I actually went to the Smokies to look for the first time and ended up seeing six cabins tried to make a decision on three, picked one bought it. So end of May I had that up and running it worked great over the summer, bought another one in August and then bought a third one in November.

And in December I got when the General Motors was offering buyouts and I said, I think it's time to go. And my, my goal was actually to probably stay with General Motors through July. And basically they said if you leave now we'll pay you through July. So I said okay. I can start on, on my leaving and yeah, and all the healthcare and stuff like that that goes with it. So yeah, it worked out really well.

Michael:

Fantastic. So what about the Smokies attracted you? They're just out of curiosity.

Dave:

So the thing that attracted me was there were people that were making a lot of really good cash on cash return. So one of the things that makes the Smokies a lot different than most other markets and in the panhandle Florida it's fairly similar. But all these things are second homes they're sold turnkey. So if you have to furnish, if you have to buy silverware, if you have to put in beds, TVs, all that stuff, that's just more money that you're gonna have to pay. When the Smokies there's basically two contracts that get written when you buy a house.

One is the purchase agreement for the cabin or the chalet, whatever your choice may be. There's a reason that chalets sometimes work a lot better than cabins and mainly due to supply and demand issues of buyers. But you also write a purchase agreement for the entire contents of the house. So you know, you have here's the cabin price, the chalet price, and for $1, you get the contents. So I literally am closing midweek, and that weekend, I have it rented out. So that's one of the benefits of you don't have a whole lot of downtime. And the second benefit that I didn't even know about at the time or didn't, didn't have nearly as much of a priority on as I do now when I help other investors is the whole regulation.

So in the Smokies, there's not that many hotels, they cannot take nearly as many visitors into the hotels is a built up entertainment, venues, things like that. So there's no way that they can go in like they do in other cities and say we want to ban short term rentals or we want to regulate heavily short term rentals. And, you know, play that regulatory card in make what used to be a really good investment not nearly as good of an investment. And I think you see that in the panhandle of Florida, as well as the Smokies, but I like the Smokies a little better just weather wise stuff like that.

So yeah, I mean, then the other thing is, there's a couple loans that are available down there that I'm not sure if they're available nationwide, I know they're available down there, but there's a 10% down second home loan. So if you're, if your intention is to spend 14 days or more in that property that you're buying the first one down there, you can get a second home loan on it. And that's a fantastic way to get into that market. Because you know, most investment properties you're not going to get for 10% down, right, and certainly not investment properties, you know, that is a primary residence you can put down last but for secondary to put down 10% is pretty crazy.

And then the loan that just, it still makes me smile, it's making me smile right now, and I've talked about it hundreds of times with different investors is there's a 15% down investment loan. And to qualify for the loan, you have to project what the income of the cabin is. And if the cabin throws off enough income, that qualifies you on a debt to income ratio. So for example, if the cabin is gonna throw off $5,000 a month and the payments gonna be 2000. And you're maxed out on debt to income right now. You know, if you're at 40%, guess what, you still qualify because of a cash flow project. It's a cabin with projected cash-flow of 5000 a month, and that cash flows enough to cover the the mortgage payment.

So it's just, it's like one of those things that you're like, I'm pretty I get I've actually checked with my like, once a year, I check with my loan officer, the person that I've used just is this still a thing? Yep, still a thing. And I'm waiting for somebody to say I'm not sure that should be a thing. You know, but it still is now. So even if you're even if your debt to income is fairly high, you can still qualify on the for the investment loan at 15%.

Michael:

That is just incredible.

Dave:

Yeah, I, it makes me smile, every time I tell somebody, I still can't believe it.

Michael:

Yeah, I'm still trying to wrap my head around it, it doesn't seem to make sense. But if it's a thing, it's a thing.

Dave:

At least for me, when I've used an investment loan down there, like the property actually made the money it wasn't like you had to stretch your make something up, like I think it's gonna make 10,000 and it makes five or something like that. It's more like if it's going you know, I said an honest five, the payment I think was 16 or 1700 a month and and it did make the five a month that I said it would.

And then where it gets really interesting is once you show them once you show the mortgage company a Schedule E and prove that it made what you said it was going to make, you now qualify for another one the next year. So basically, you can get one of these a year, as long as you wait until after you file your Schedule E and give that to the loan officer. And then if you are married, you know and if you're playing in two person mode two player mode, then you and your wife can both do one a year on that plan. And then the next year you can both do one on that plan.

Michael:

Oh my gosh.

Dave:

So it's a way to build, build a portfolio very fast and that market is still one of the best markets when it comes to cash on cash returns. So even though there's been a lot of appreciation, the nightly rates have gone up a lot, they had about 2000 cabins burned down in 2016. And before COVID came in, they had I think five developers come in and start to build. And it just the nightly rates have just gone up and up and up. And it's just one of those places that when the when the economy does well, that place does well, the Smokies do well. When the economy does poorly, the Smokies do well, why 60% of the United States is within driving distance of the Smokies.

And smokey, Great Smoky Mountain National Park is the most visited National Park. And in 2009 2010, visitorship actually went up when the economy was doing poorly. And when people are like, what how do you Why do you think that happens? You know, I explained, you know, if, if you're afraid about the economy, you're not flying to Florida and taking a one week Disney Cruise, but you're still gonna want to go on vacation. So you're saying you know what, I'm going to drive to the Smokies, I'm going to rent a cabin for three days, we're going to do this thing on the downlow. It's going to be nice, but it's not going to be as extravagant. So I think even when things slow down.

There's, I obviously know a lot of people that invest down there and kind of one of the one of the questions that that we asked each other is what am I missing? It seems like there's really big upside, and not a whole lot of downside. And we haven't come up with anything. Yet that makes it scary. What am I, I very well may be missing something. But I've asked a couple guys and we can't figure it out.

Michael:

So I mean, I just I love hearing all of this because as I was sharing with you when we connected before the podcast here, I just 1031ed into a property down there and severe bill. And so I'm very excited now to to get that up and running right here. And this only makes me even more giddy.

Dave:

Yeah, yeah, it's pretty, it's pretty cool. I guess the other thing that I've done that I think is interesting, I think your listeners will find interesting is, the other thing I do is as an engineer, I don't sit still very well. So I'm constantly analyzing my properties. And I've owned five, but I keep trading up and 1031ing up. So for example, 2018, I bought a three bedroom, a four bedroom, a five bedroom, middle of 19, I look and I say hey, the five bedrooms doing better than the four, the four bedrooms doing better than the three. And they've all been appreciating, I know, I think I'll sell this three bedroom. So it's underperforming the other two.

So I sold the three bedroom and it had gone up enough that I actually use that 10 1031 money as a down payment on an eight bedroom. So very directionally correct eight bedroom does really well it costs me basically you know the downpayment that I put on the three bedroom and then just this you know the sale on the transfer the money to control an eight bedroom a year later. And there are different people that are doing that. So some are on a never sell anything. And I get I get some people upset on some of the real estate investment forums because they say, What's some of the worst real estate investing advice you've ever heard. And I say buy and hold and they say oh, they just don't like that.

And I'm like, I think I'm doing okay with it. And maybe I should have kept them all and just bought other ones. And then the other thing I ended up just recently doing is I sold the first cabin I bought which was a four bedroom, and I 1031ed did into this ultimate killer, like five bedroom the most incredible views. Just amazing. So that's kind of the other half of the coin is when you're looking at a lot of the when you're when you're looking to do Airbnb anywhere, when you take a look at the market. And if you if you buy the airDNA data, what you're going to see is, especially when you start to well, bigger places are there are less bigger places. So you're going to get outsized demand for the supply of bigger places, so you're able to charge more more bedrooms is better. In the Smokies a view is better a pool in the basement is better.

And what you're also going to see is that if you're running at 95th percentile property, your gross is double what your what a 50th percentile property's gross is going to be. So that isn't if you're running a 95th percentile property, your profits going to be double because you're already making a profit at the 50th percentile, it means your profits going to be you know, times three times four times five, because you've already got your expenses paid at 50th percentile. So anything about 50th percentile You really need, yeah, that's just money in your pocket.

So you really need to, I was, you know, I've made, I've made some mistakes along the way that have cost me someplace between, like a pretty lot of money and just like a lot of money. There are no small mistakes that I did. So, you know, one of the mistakes that I made was, well, if I can put 10% down, this will be I'm going to try not to put much more money and like, if something breaks, I'm going to do it. And looking back on it, there's a couple things that I could have upgraded, that wouldn't have been a big deal. That would have netted me more money in the long run better reviews. You know, when you look at that delta between the 50th percentile in the 95th percentile, it's amazing. So it's, it's worth, it's worth doing that and not kind of being gone on to put in 10%, I'm gonna try never to put another penny in unless something breaks, you know.

Michael:

That's worth the upfront investment. So yeah,

Dave:

It totally is worth the upfront investment. And even if it's in, let's just say it's, it's not, let's just say you only have the 10% of the closing costs, you know, the other thing is you're making, you should be making a couple 1000 a month anyway. So I mean, in two or three months, you're gonna have 567 $10,000 to spend. So maybe you wait a couple months, and then you put in, you know, the new the new furniture in the living room and refilled the pool table or whatever, get the better hot tub, whatever it is, when you feed that back in, I ended up just selling a place. And it's just doing some, I have some friends that also have properties that are identical, like literally identical to mine like same layout, same view, 50 feet away, and we were talking some numbers. And you know, they did, one guy did a really over the top renovation, his numbers were crazy, and one guy did a milder renovation. And I would I was doing some math of what it would have taken me to put in that and it'd been like under 10 grand. And basically, he was kind of he was out grossing me by about 10 grand, like, Oh, you put in the 10 grand and for the last three years, I could have made 10 grand instead of I save 10 Grand 30 grand Got it.

Michael:

Right.

Dave:

So it's it, you know, my mind is a is a work in progress for maximizing all these things. Well,

Michael:

That's the engineer in you I totally get that as a reformed engineer myself. We get that.

Dave:

Okay. Yeah, totally. Dave, I'm curious to get your thoughts because I'm sure that there are people that would argue that there are Smoky Mountain equivalents all over the place, I can invest anywhere in the country and make a good return. What are your thoughts on that? And how do you kind of narrow in on some hot markets?

Dave:

I agree that you could probably make the same money. If you dig into 95th percentile stuff, if you dig into all this stuff that makes money. I think it's harder to make money in other places. And what's really interesting is what the how I made more money inn the Smokies, I've made more money, I've made significantly more money in the Smokies with appreciation than I actually did from Airbnb. So if you're making crazy cash on cash, which you still can kind of do, if you know where to look. And your appreciation is outpacing your cash on cash. That's the thing that I think some of the other markets lack. And I've known people that have had places that you know, guy that was in, in place just outside of Denver, and he was killing it in his neighborhood. And I forget if it was him, or his, basically the two of them where they were doing Airbnb in there and it got banned, and all of a sudden, everything's gone. Or you do it in some small place that maybe you're making money. But you know, how do you get that out? And how do you find the investors to come in behind that? Do they know that's a hot market?

So I think a lot of people concentrate and obviously the rental arbitrage people are just doing a just a strictly cash on cash thing. But I think if you look on, if you look at the markets that are being rated by air DNA, I think you're going to have a better overall return. Because other people are just being pointed to that direction, and they have the proof that they need if there's any, if there's any fear of the numbers, the books being cooked, whatever, and you know, some far off market, the middle of Wyoming, whatever I don't know. I mean, I've heard some really interesting numbers of people buying places in the Midwest with pools during COVID, they just they just annihilated because kids want to swim and people have money and if you couldn't go to the public pool and your kid really wanted to swim, guess what you're dropping top dollar, you're gonna beat out the other guy to get that lock in that place with a swim pool, even though it's a less expensive city. So I mean, those guys didn't really well, they're going to do now that the public pools are kind of open, I don't know.

But I think overall, I trust the air DNA data. And I think the cash on cash is available in other places, I'm not sure the appreciation is as much.

Michael:

Okay. And so you actually help people find properties out in the Smokies, is that right?

Dave:

I do. I do. I that wasn't my goal, my. So my goal straight up was, I was an engineer, I took my bite out, I said, I get to do whatever I want. And I don't like I don't sit still well. So I'm like, I am going to learn to fly airplanes. And my goal is to fly jets. So my goal was to fly for Delta. And so I'm like, I got my private pilot license, I got my instrument pilot license, made it halfway through commercial license, and then kind of like, the whole real estate thing kind of blew up for me.

And in even before I started working, about halfway through the commercial, or excuse me, halfway through the instrument license, I started to get people asking me, Hey, can you kind of help me do that? And can you help me find some of the best performing properties. And I think, because of the engineering background, and because I'm not afraid to do the numbers, and because I'm not afraid to run some spreadsheets and stuff like that, I'm able to better explain to some of the more technical science, math investors, why this makes the most sense. And I'm able to make them feel comfortable enough to invest there.

So I'm getting a lot of clients that have never invested anywhere, I'm getting a lot of 1031 clients, but they see the numbers and it's just like you can't not do it. And that's, it's, it's one of those things that you know, right now, depending on depending on the cash on cash that you're looking for, a lot of a lot of the places don't work. But if you know where to look and and how to make it work. It's a lot easier and, and it's one of those things that it's like, even with, even with MLS access down there. A lot of the agents don't put in the numbers that you need to see. So there's a lot of calling and texting and stuff to dig a lot of this stuff out to make sure that your clients are getting the best stuff. And I think that's what myself and my teammate do better than a lot of other agents is dig out those numbers and make our clients comfortable that they're getting some of the best returns that they can in one of the best markets.

Michael:

That's awesome. So Dave talked to us a little bit about what some of these properties that we're talking about cost. And what are some of those cash on cash return numbers and metrics that you that you're seeing.

Dave:

Rght. So yeah, when I got started, things were a lot cheaper, it was a lot easier. But the crazy thing is the numbers were slightly better when I got started. But they're still pretty righteous right now. So right now, it's very difficult to find, but I am finding some clients 60% cash on cash returns, I'm finding people between 40% and 50% cash on cash on a fairly regular basis. But yeah, there's, there's just some places that are under priced a little bit. And that's why you're looking just to see what it can do. And there's so many, one of the things I don't like about the Facebook forums, any Facebook forum for Airbnb, is the amount of people that say that nobody should ever take a course.

And I never took a course. And all these people said, are telling these brand new people don't take the course. And I added up what I didn't know and how much it costs me. And it's, it's like 40 or 50,000. Like if I'd taken the course I would have saved myself easily 40 or $50,000. And I'm like, You have no idea how much you can spend on a course and save money. So one of the things that we're seeing down there when we're finding these properties, right is there was somebody that was just bragging that they just filled their last two nights for 2021. And I just thought, boy, you're so underpriced. If you have your entire thing booked up every last day that that just tells me you're leaving a lot of money on the table.

So it's a combination of what you know, kind of what numbers they're generating, currently what their calendar looks like. You know, if they're completely full and they have pretty high gross while you know there's a lot of room, a lot of upside. There's just a bunch of different things like that, that we're using to find properties. And just the straight math is if you find some property compelling enough to pay $100,000 more for it. That's great. Down to roughly $500 a month in principal and interest payment that breaks down. So let's break it down to short term rental terms, you're going to rent it out list, it's going to be under 500. But we'll just call it 500. For the easy math, let's just say you're going to rent it out 20 days a month, now, in the summer, there's no you're renting it out 20 days a month, you're renting it out a lot more than that. But let's just say 20 just to make the math very conservative.

If you rent it out 20 days a month. That means whatever you paid $100,000 more for. If you can charge $25 a day, $25 a day more. For that additional amenity you're breaking even. And if you can charge $26 a day more, you're making money. And guess what have you cost in the Smoky Mountains? About $100,000? Can you rent a cabin for more than $25? A day more? If you get a view? Heck yes. Can you rent to you know, can you rent a five bedroom instead of a three bedroom for $25? More day? Heck, yes.

Yeah, there's so many of these things. So bottom line is if you look, if you want to do just straight math, and let the math guide you to what you need to buy to have the best cash on cash, you're starting to get into more expensive properties. And you know, that basically, kind of up to any price works several million is is fine. If you have the financial ability to do that, things start to make sense, things make a ton of sense. And like 750 $800,000 range, you're still making money in just about any range, you know, 300, 400,000, but you're not making as much and you don't have as much cushion.

So there's a lot of people that are like I want to start small, and I want to and I'm like you, I will be happy to help you find and buy anything you want. But let me explain to you why starting small, in my opinion is more dangerous than starting with something that's making 5-6- 7, 000 a month, right? Because guess what, you can lose 567 1000 a month and you're still breaking even versus you know, if you're making 1000 1500 a month when something goes wrong, you're now making nothing and you may be coming out of pocket. I never want to come out of pocket.

Michael::

This is mind blowing day. This is such good stuff.

Dave:

Yeah, cool. So glad you like it.

Michael:

As as we wrap up here and let you get out of here. What's a final takeaway that first time short term investors to be thinking about that they want to get into short term rental game? What are some of the hardest lessons that you've learned that you can help people to hear from?

Dave:

One of the things I see people do is I want to stay so if there was a post I saw that said I visit Detroit on a regular basis, I want to stay in Detroit. I think I'm going to get a short term rental in Detroit. I say I will pay cash for wherever I want to stay. And if I want to stay in Detroit, I'll pay cash that I've earned in the Smokies are one of the top markets. I'm I'm very big into what's the least I like to earn money. But what I really like to do is earn money with less effort. So if I can have five or 10 places in Detroit, that earned me the same money as one place in the Smokies. I'm going with the Smokies all the time, or the panhandle of Florida or, you know, right now some of the other really hot ones Joshua Tree, Broken Bow. Some other places like that northeast corner of Pennsylvania.

There's a bunch of other markets, but I want I don't want to have I see a lot of guys do like a 40 or 50 person, kind of, or 40 or 50 property, you know, rental arbitrage grinding these things out. And that's just not me. I would say try to get the one that has the best cash flow and go from there.

Michael:

Path of least resistance.

Dave:

People trust me and people tell me things that they probably wouldn't tell other people. But if you knew, and you would never get any of these people on your podcast if you knew how much money that I know that friends have burned through attempting to do short term rentals poorly like 50,000 a year 75,000 a year just I thought I'd try this house. I thought people would really like it. And they didn't it's like go with the proven method, click the stuff that's working. Don't try to reinvent the wheel. You know, go to where there's 1000s of other people that have already done it.

That's the big mistake that I see people do that cost them lots of money and lots of time in the end and I don't know and just here's my other just general real estate investing advice. There's a friend there, I have a friend of mine who's very sharp. And he's basically he's put together a portfolio. He's mid 20s. And he's put together a portfolio that now basically makes him financially independent, he makes more money from his real estate portfolio than he does from his day job.

And it's like, just ask guys like that, or ask me or ask y'all like, I have this idea. What do you think? And you know, he's very happy to help people. I'm very happy to help people. I'm like, yeah, I'll jump on a call for five minutes. Tell me that you want to invest in, you know, I don't know, some, you know, I'll either tell you how to figure out whether it's a good idea, or I'll tell you why it's a horrible idea just to begin with, you know, avoid places with regulation, avoid places that you might lose money, avoid anything that you can make a couple $100 on, like, why are you doing that? Make 1000s? Like, think big. Like, it's not that much harder to do. It's actually easier. So I guess that would be the other. The other thing I would steer new investors too.

Michael:

That's so so good day. Well, it kind of in that vein, how can people reach out to you to get a hold of you if they want to either invest with you in the Smokies or just want to bounce some ideas off of you.

Dave:

I'm on Facebook. So Dave, homie, AK on Facebook is a way to reach me, you can message me click on me, whatever. I have a website, SmokyMountaincabinrealty.com and smokey is SMOKY. And if somebody wants to sign up, I have some introductory investment, zoom classes like a 60 minute thing. And I kind of explained what I think is important when finding an investment. I obviously say that the Smokies are a pretty good place to invest because I believe that so those would be the two the two main places to get in touch with me there's SmokyMountainCabinRealty.com, or DaveHomyak.com.

Michael:

Alright, Dave, this has been great. One final question that I want to ask you. Because it seems like you are so hyper focused on one particular market. Do you think it's make sense to diversify and invest across multiple different states? What are your thoughts there?

Dave:

Excellent question. I am hyper focused on the Smokies because I know those returns are incredible. I'm not necessarily saying somebody should invest in the Smokies only or the panhandle of Florida. I'm saying follow the numbers. I really have an issue with people that have multiple properties in multiple cities. And they're not doing a comparison of how much you know how much money they're earning, and how much time they're putting in. And there are properties that they have that are doing better and there are properties they have that are underperforming and It baffles me why somebody would want to waste their time on an underperforming property instead of cut that one loose and upgrade so I just wish more people would run the numbers.

Michael:

This has been so great thank you again for taking the time to hang out with me and I know we'll be chatting soon because we're fellow smokey guys now

Dave:

Yeah awesome really appreciate you having me on.

Michael:

Take care talk soon.

Alrighty everybody that was our episode a big thank you to Dave super super cool story and I'm just total fanboy because as I mentioned the episode I also recently invested in a smoky so I'm very excited to hear that the outlook is positive. As always, if you liked the episode, leave us a rating or review wherever it is this your podcast and we look forward to seeing the next one. Happy investing

What a professional project manager can do for your project Oct 12, 2021

Antonia Botero is a project manager, licensed architect, and urban designer. As the owner of MaddProject, a boutique project management consulting firm, she specializes in advising real estate owners and related-industry businesses with their development projects, keeping them on task, on schedule, and on budget.

In this episode, Antonia shares the scope of work of a project manager - what they do, what they don't do, what they cost, and when you would want to bring one in on your developments.

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Transcript

Michael:

Hey, everyone, welcome to another episode of the remote real estate investor. I'm Michael Albaum, and today I'm joined by a very special guest, Antonia, she is a project manager, extraordinare licensed architect in numerous states, and then the owner of MaddProject, and she's going to be talking to us today about when you should think about hiring a project manager, what are some of the do's and don'ts, do's and also what it's like to be a woman running her own business in the construction space. So without further ado, let's get into it.

Antonia, the Conqueror project manager, extraordinaire, licensed architect in multiple states and owner of MaddProject, how are you today?

Antonia:

I am wonderful. Thanks for having me.

Michael:

Now, absolutely. Thanks for taking the time to hang out with us. So you are a jack of all trades, you do a lot of different stuff. Tell us a little bit about what it's like to be a project manager. But before we get into that, can you share with everybody what the best way to get ahold of you is or a hold of your company bad project, if after listening to this episode, they're like Antonia is a beast. She's a rockstar, I want to use her as my project manager.

Antonia:

Sure, absolutely. So my website is great is a great way to get ahold of me, there's a little contact me form in there that I watched very closely. So Mad project.com. And you can scroll down, contact me. Also, there's a great newsletter that I write about once a month. So if you want to get it, you can hear from me that way. And additionally, I'm very active on Twitter. And I will give you my handle and you can share it in the notes as well. But that's a really easy way to contact me. And worst case, if you really just want to get to me, it's Antonia at Madd Project calm with a double D. So that's her always I'm very easy to get a hold of.

Michael:

Awesome, awesome. Well, again, thank you for coming on and sharing with everybody. What I want to talk about today is what it's like to be a project manager. What are some of the things that a project manager does? And then what are some of the hurdles that you've seen people really stumble over when doing rehab or renovation projects where maybe they should have gotten a project manager?

Antonia:

Sure, absolutely. So typically, on development projects, there's one person who serves as a point of contact for the owner, who helps coordinate the design team helps to oversee the permitting process and ultimately oversees or helps to oversee the construction manager during construction process. So generally, when you have larger projects, you should expect to have a project manager somebody either in house with the developer or a third party, like my company, that their job is just to make sure that the project is going in the right direction that you're accomplishing through design, all the different, you know, goals that are set forth in the pro forma. So that's generally what a project manager does.

Michael:

Okay, I guess what would be the scale or the scope of a project that you would feel a project manager would be justified in coming on because a lot of our listeners will do cosmetic rehab, update flooring, kitchen, bathroom, that kind of thing. And they might be thinking to themselves, oh, shoot, do I need a project manager for that? What do you what would you say is kind of the defining scope or cost.

Antonia:

So you know, it really depends on what you want the project manager to do, if it's something where you just need a little bit of help on strategy. That's one way if you need comprehensive project management because you've got no idea what you're doing. By way either of you know it's a new type of project that you've never done before or you've never done any kind of design or construction before you don't know how to hire an architect. It's really more about the resources that you have available and less about the size of the project itself. I think that's more the thing that I would say pushes you to have a project manager

Michael:

Okay, now I love that. What about let me give you a scenario because I think this has been a lot of our listeners fall into this category and curious your take on on project management versus their project management. So I'd say 95, maybe 98% of our investors or listeners are remote investors. And oftentimes they are newer investors. And so if they want to take on a project that involves some significant rehab of a house, maybe changing some bedrooms, around changing the footprint of the property, and then some cosmetic stuff, and they don't have any experience and they’re remote, is that something you think they'd be justified in hiring a property manager to help facilitate and coordinate?

Antonia:

I mean, I definitely think that there could be a lot of value. If they're thinking of doing it again, at some point, because there's a lot of things that you can standardize, for example, like, let's say, you know, that you like a certain tile in the kitchen, you know, that you want your bedrooms to be a certain size. And in order, instead of having to go through the process, you know, learning the lessons, the hard way, you could have a more strategic sort of session with, you know, we do hourly consults, or 30-minute consults, where we could talk about some of those strategies, we could talk about some of the things you could standardize.

So I think, perhaps not hiring someone full on, but at minimum, having some sort of conversations with somebody either be at the architect that you end up hiring for the project, because you're going to need one, if you're doing something like that, or the contractor that you hire for it. I think having some general strategy of Hey, like, what are the things that we're going to have to do? What are what is the permit like? How long do those things take, and then ultimately, going back and saying, Hey, we want to do this, again, let's make a list of all the things that we learn in terms of, you know, how long permits actually took, what finishes, we do end up liking that were very easy to get during construction, they were easily available at the local store, and in sort of really find a way to, like, take the lessons and actually use them, right?

Because a lot of the problem that people have is that, you know, let's say you do it once, and you're gonna make mistakes, and that's okay. But if this is the first time you're doing it, and you still don't know, like, how to pick tile, I mean, are you doing?

Michael:

What are you doing?

Antonia:

I’d really say, sort of sit down for a minute and think a little bit about strategy and about like, and then as you go through the process, write down some of the lessons so that you can refer back to them, and really have a better go around the second, third, fifth time.

Michael:

I love that. And I think it makes so much sense. And I mean, I love to that mad project does these half hour hourly console's because so many people don't know what they don't know. And so don't even know what questions to ask if they're a property manager or contractor who they're working with. So I think a strategy session could be so valuable. I know you and I have talked about my development project. And I wish we had sat down for numerous strategy sessions before taking on that project, but too little too late that this is how this is the learning lesson on the job.

So what about in terms of driving? timing? Is that something that a project manager should be expected to do or could be expected to do? If I'm a remote investor and contractor says, Hey, it'll take a month, I hire a project manager and said, okay, make sure they're out there getting this stuff done, because I'm remote? Is that something that you're able to help help out with?

Antonia:

Absolutely. So there's a couple of different ways that a project manager should be doing that. And again, it also depends on the size of the project. If you're, for example, in your example, where you're saying, okay, it's for remote investors, you know, the project manager should have a couple of different points of contact with the team that is actually on the ground, whether the project manager is also remote or not, you know, there should be at least a weekly meeting during construction, and that in that weekly meeting, you should be discussing things like, hey, like, did the inspector come this week? Are we gonna run out of the tile that I really like that I know, has like a two week lead time? And so we really need to anticipate it. Hey, are you actually on schedule? And if you're not on schedule, why aren't you on schedule? Oh, because the plumber didn't show up? Why didn't he show up? Did we? Did you not pay him? Or is it because you know his guy last minute had a family thing and couldn't come on Tuesday.

So it's really having those touch points and having them constantly like you can say, oh, we're gonna have weekly meetings and then by the third one, people lose steam or, or kind of feel like, Oh, well, you know, we've had them the last two weeks, we don't really need to continue having them. That's absolutely the wrong thing to do. You want to have constant touch points, you want to make sure that you're, you know, all the time paying attention to what's going on, particularly on those remote projects where if you're doing like a single family rehab, they go really quick.

So you want to make sure that you're Hearing the problems every week, you know, the contractor a lot of times a lot of these contractors can have a question. And they can forget to ask you for four weeks, and then, you know, they stopped work because they didn't have an answer to a question that they forgot to ask you. So, you know, a project manager can absolutely help to do one, make sure that you're having the meetings. And number two, you can in your agreement with your project manager, you can ensure that they are walking the site, at least, you know, every two weeks.

So, there's really a lot of things that you can do you know, the project management, you can also have these periodic meetings with the different parties. So you don't necessarily have to have a meeting with everybody you can have I mean, I highly encourage having like an all hands meeting once a week for for like a single family rehab. But you can also make sure that like Tuesday mornings, you call the architect, and you're just gonna, you know, you're just kind of chit chat, you're like, Hey, how's it going, like, Hey, what are you up to, you know, cuz those are the times when you get like, the dirt, right? Like, Hey, I went out there, and like that green that you chose for that wall is, you know, the contractor is not going to tell you, they're like, Oh, yeah, I painted the wall,

Michael:

And I got paid for it!

Antonia:

He’s not gonna say, Hey, I didn't write the I paid for it, I painted the wall, and you you come visit from out of town, and you look at it, you're like, Oh, my God. Good idea. Right. So those are the things you want to avoid. And the way that you avoid them is by keeping that contact. And and again, you know, once you're a remote investor, and you've done this a few times, honestly, these are things that once you kind of get the hang of them, you don't need to hire someone else to do them, you can do them yourself, if you have a good strategy and a good framework to begin to do them. And then you got to have the discipline, right?

So having a project manager a lot of times in a project is like having like a coach, you know, it's the person who's saying, like, Hey, you need to pay this invoice, hey, you need to sign this contract, hey, you need to make this decision. You know, hey, like, I need to, I need you to go to down to the city and sign this document like normally, having that extra discipline helps a lot in the project and they helped to drive the schedule. So all of these things and having that constant coaching and sort of follow up, follow up follow up was absolutely the role of Project Manager. And it is the thing that really keeps the schedule, which as we know and development schedule scheme, and that doesn't matter what project you have.

Michael:

Anyone who's watching the YouTube version of this will have noticed that I was smiling, grinning ear to ear when Antonio was talking about the plumber, because like literally, that's what happened, like flipped by GCS and all the Providence show up and I got family stuff like Are you serious? Are you kidding right now. So it that kind of stuff happens.

Antonia:

But it's also important to know that the guy didn't show up because he had a kids soccer game that he forgot about, versus Hey, you didn't show up? Because the contractor didn't pay him? And then you're like, wait, I paid you. So why didn't you pay the guy. So and the more you know, the quicker you figured that out, the better because you don't want to be having that conversation when you're like two weeks away from supposedly being done. And then it turns out that, you know, your contractor or your your CM has not been paying your subs for the last, you know, four weeks, and you come to find out that you have a lien on your house, right?

So, you know, in that sense, like, that's also why it's important because you can avoid these major sort of problems. If you're able to catch them as they're happening.

Michael:

Love it. Love it. So that's, I think, a really great summation of what project managers do do. Can you talk to us a little bit about maybe what the clients have expected of you in the past, but you said, you know, like, this really is outside the role and scope of a project manager, when what should people expect to have done by other people or to do themselves?

Antonia:

Oh, boy,

Michael:

Feel free to go crazy with this one.

Antonia:

You know, we've run into some funny situations that I mean, I've I've installed bread, I've built furniture on site, I've I've brought people coffee. I've been on site overnight on installs of big jobs. You know, within the bounds of professional reasonableness, we basically do everything. And I that's a big, you know, caveat that I put at the beginning of that reasonable professionalness.

Michael:

Right, right, which is so shades of gray. Right, in that statement?

Antonia:

Oh, yeah. Yeah. And then every now and then, I mean, you know, for for me on the bigger super complex projects where you know, you have sort of a syndicate or group of, or different group of investors coming in to code up a project. This is like the really big stuff. I will sit in a lot of investor meetings, just because Very often investors will ask, you know, the sponsor, Hey, how are you going to build this? You know, what are these things cost? What's your schedule? Like? What are you? What's your team? Like? Like, who's actually giving you insight? How are you going to review applications? All these things? And, you know, I'm the one answering those questions on behalf of the sponsor, the person who hires me. So there's a little bit, you know, that goes into that, you know, we also do a lot of feasibility at the beginning of a project.

Many times people will come to us to say, Hey, you know, we went down the road of designing this entire project, and it doesn't pencil. And it turns out that it's a terrible idea to build a high rise building in this neighborhood. What do we do, and so I'll actually, you know, I'll put my architect urban designer hat on, and I will redesign the entire building.

So I, you know, it's been crazy. And I think the last year pandemic, you know, kind of gave people a little bit of reason to pause. And to rethink a lot of these things. And so I actually ended up with almost every single project that has come through in the last 18 months, I have redesigned at the request of the owner, that they said, hey, look like we whatever we have isn't really working. What do you think we should do? Like, how do we start project management on this? And I'm like, Hey, guys, let's take a step back, read a feasibility and make it work. So we'll do a lot of that.

So we go from, you know, we are a little bit involved in those investor conversations, because they often have questions that we aren’t equipped to answer. And we're also involved in feasibility, you know, I'd rather be involved in projects that don't need to have the ship turned around, I'd rather just be involved from the beginning, but it is what it is. And then…

Michael:

It is what it is.

Antonia:

Yeah. And then finally, you know, we are obviously the on site day to day stuff, you know, design decisions, technical, mechanical, electrical plumbing decisions regarding ownership preference, and what's really going to be the best way to go with systems. You know, all of that stuff, obviously, that that's the more traditional stuff that you'd expect to see. And where we are a little bit less traditional is on the design, and is on that sort of investor facing stuff.

Every now and then I'm asked to be a part of potential investor conversations. And if for whatever reason, the situation is a little murky, or there's a lot of kind of unanswered things like, you know, it's a dance, right, you want to make sure that you're helpful and that you're, that you're there. But at the end of the day, I am not the owner of the project. And so I have to be very careful, not only from like a deal perspective, like I don't, I don't want to say anything that's gonna tank your deal. That's, you know, that doesn't help anybody. But at the same time, like, I am a registered architect, I do carry professional liability. And I am very aware of it. And so, you know, I my agreements with all my clients, like explicitly says that, on the project involved, I have no professional standing, I am not the architect of the project. And sometimes there's conversations or moments with building departments or things like that, where I have to really be disciplined about my role on the project and the fact that I'm not I'm not a professional with professional standing on this project.

So that's kind of the general where we draw the boundaries, you know, and then there's the, you know, the stuff that is not professional. We deal with some of that, too, but that's how they, you know,

Michael:

It sounds like we could probably do a whole episode on that.

Antonia:

Oh, yeah. Yeah, for sure.

Michael:

So I'm curious, Antonio, why in the last 18 months have Have you had to redesign all the projects? I mean, what have you changed? What have you seen changed in the last 18 months?

Antonia:

Well, I mean, I think a little bit, you know, some, some project types got a little bit of a break, naturally, like hospitality did. You know, one of my projects is student housing. And they had a little bit of a break related to financing to, you know, banks were not running to finance these projects. And so, you know, these owners took the time to say, Hey, you know, what, maybe there's a better way. And there's a, there's a way where we can make this a little bit more efficient, a little bit more appropriate. And so they took the time to do it, just because, again, they had a natural break related to the fact that, you know, no capital was looking out to put money into student housing or hospitality project. I mean, hospitality was pretty, pretty hard hit.

So yeah, it's, you know, there was definitely a lot of redesigning hotel ideas in these last 18 months,

Michael:

Okay. And redesign in the sense that it's no longer a hotel or redesigned from the perspective of we're just going to do it a little bit differently than it was done more traditionally in the past.

Antonia:

Two different types of projects that I have redesigned predominantly to Housing has been, you know, one of the types that I've redesigned. And then the other one was hospitality. In the case of the hospitality project, it had a condo component to it, has a kind of component to it, the mix was changed a little bit, the sizes of the units were changed a little bit, you know, the amenities were changed a little bit, ultimately, I mean, so this is for an existing building that has, has this massive renovation going on.

So it was really kind of with what you had and how far they had already gone into construction, because that buildings already in construction, they are like the interior renovation was already underway, basically, they were basically looking to make it a little bit more attractive. Now understanding that COVID had to happen and how the pandemic had changed the way that people use space, particularly public space. So that was what the hotel sort of redesigned, it's still a hotel, that building is probably always going to be a hotel, it's very significant. And so we didn't change the use completely.

In the case of the student housing, for example, there was a little bit more of wanting to make the construction a little bit more efficient. And so really looking at the massing. And how much of the structure was wood, how much of the structure was concrete, you know, whether it was more or less expensive to build as a podium versus a wrap, you know, if we were going to go above four floors, and if we did, what that meant for the construction type. And so having these sort of technical conversations completely changed the massing of the building

Michael:

Interesting,.

Antonia:

Like altogether, completely different building completely different size. And then it again, you know, prompted a lot of conversations about public space, because this, this building is the size of a city block. And so, you know, you had a lot of like that deep in between space. So it's like, well, how do we create courtyards? You know, originally they had a massive courtyard, and we said, hey, look, you know, really big corners are usually very uncomfortable spaces. And so what are why don't why are we a little more thoughtful about how we divide this space? And and what can we do in those courtyards to program them and make the whole project just better? That's sort of the flavor and the reasoning why you'll you know, we would redesign projects. So…

Michael:

That makes total sense how neat. That's really cool.

Antonia:

That's pretty cool. I enjoy that a lot. Because one of the things that I don't talk a lot about on Twitter, for example, is that I am actually an urban designer, I do have a graduate degree in urban design, and I and I, like, you know, the idea of the whole building, how does that building affect the the environment around it? How do you approach it? How does it you know, address the street? What's the human scale of it? Where are the amenities? Where do you see them from? What's the good corner? What's the corner, you want to avoid? All of these sort of urban questions really come into play when we do these building redesigns? You know, where are you going to get a lot of shade in the courtyard? Where are you, you know, is that going to be an uncomfortable place to hang out? So that's pretty cool for me to get the chance to do that.

Michael:

Yeah,

Antonia:

Being an architect without the hassle of being,

Michael:

Right, only the good parts?

Antonia:

Exactly.

Michael:

So it sounds like there isn't a whole lot that you don't do. And that's for sure, like a double, triple negative sentence, but that's okay.

Antonia:

Something like that. Yeah. I mean, who then the reasonable, asks, we, there's, you know, and every now and then we're finding new things that people approach us for, you know, one thing that also became a little bit interesting was, I had a couple family offices reach out during pandemic to say, Hey, we have this project going on, or we're gonna invest money into this project that's kind of starting soon, we want you to look at the people who are going to build it, and let us know if you think they can pull it off. And to me, that was a little bit surprising.

But I had more than one request, like that. So that kind of thoughtfulness is really on the investor side, and a little bit, adding a little more sophistication and a little bit more data to people who aren't used to having that data or have the background to make those decisions has been really interesting.

Michael:

Oh, that's great. That's great. Just a little quick word to the wise for the folks that are doing that hotel redesign, tell them not to have to fires during the course of construction, or really screw things up for him. Take it from me.

Antonia:

I will. Yes, I will make sure we should add that to the list of things to watch out for.

Michael:

That's great. So tell me when someone is going out and looking to hire a project manager or have a concert with the project manager, bring them into the fold? Should First off, what should they be looking for? What should some of the interview questions they speak to them about? And then you mentioned remote versus that remote could or could not be an issue. Can you speak to that a little bit?

Antonia:

Sure. Um, so one of the things that you want to find out from a project manager is you really want to understand the scope of services that they provide. Not, you know, unlike some of the professional disciplines that are related to development, project management is not really regulated in any way. So different people do different things. And it really depends on their background. So you can get some project managers who are very strong during the construction process that will absolutely have no idea how to lead a design team.

So and not to their fault in any way, they will advertise that, hey, I don't, I'll take it from the moment that you have construction documents, and you have permits and your financing, I'm good. But before that, like, I can't help you. So these, like make sure that that has been spoken about, like if you need somebody to lead your design team. You know, in the instances of small projects, if you have a really good architect, they can, they should be able to project manage the whole design aspect of it. But you want to make sure that you're on the same page regarding what you need, right.

So if you need somebody to help you figure out pay applications. And if you want to carry your own ACR, that's an Anticipated Cost Report, which I highly recommend for big projects, you need to have a conversation with the project manager that they will do that, you know, even project managers that are really strong in construction will not carry an anticipated cost report for you. You know, a lot of times that falls on the finance side. And it's a little bit disjointed and difficult to do. Because if you've never done one before, and if you're not familiar with construction, it's really difficult to anticipate things like change orders, you know, so there's very little anticipated in your anticipated cost report if you can't have any foresight, because you have no technical understanding.

So again, being super upfront and clear about the things that you need. Having said that every now and then I will have clients reach out or potential clients reach out and say, You know what, Antonia, I need help on this project. And I have absolutely no idea what I need. And that's fair. And being that upfront and honest about it is a great starting point. Because then the project manager, or the potential project manager can say, Okay, tell me your situation. And we can tell you what services we offer and where we think we can fill in the gaps. And a really, really good one will say, Hey, you know what, these are things that I don't do, and either I can recommend someone to do them, or this is how we should handle them.

So again, it's just being upfront about what you need. And really being comfortable with that person's experience and, and connections in the industry, because that's really important too. And making sure that they're able to they're, they're gonna be able to pull it off and you know, someone that I respect and you trust, right, that you trust their their experience, I would also recommend asking for references.

Michael:

Yep.

Antonia:

I always, I always have, like, you know, about about eight people that I keep in mind for references. And the reason I do that is because my contact with them has been super varied. You know, some people are people that I've worked for some people are people that have worked for me, others are contractors I've worked with others, or architects I've worked with. And so depending on the type of project that I'm sort of going for, and if the potential client says, Hey, I need references, I'll tailor my references to be adequate for what they're going to be building so that they're appropriate and relevant. So always ask for references, you know, I mean, you just want to be comfortable with the person, you're going to spend a lot of time with this person, you want to make sure that you can communicate well with them, that you can be candid with them. It's sort of like the lawyer kind of thing, like you want to make sure that that you're comfortable telling them everything that's relevant, because if this person is supposed to represent you, and they only have half the information, you also have to trust them that they're not going to share some stuff that you don't want to share with people right at the wrong time.

So it's all of these things, I mean, that I would really watch out for on that, on how to pick a project manager.

Michael:

That's great. And then remote versus local remote to the project local to the project, what are your thoughts there?

Antonia:

So you know, now especially again, same thing as last 18 months have been really interesting, because for a long time a lot of people were very adamant about, well, if you're going to manage this project, you have to be there. And I've found that not necessarily to be true, because for several years ahead of 2020 I had been managing projects remote just as a result of the kind of work that I was doing. I was doing a lot of hospitality work nationally and so We lived on a plane, you know, and the rest of the time you were managing it remotely. And we had very specific systems that we had set up.

So you know, that, that's a big part of it is if you're going to go with someone remote, make sure they have strong systems to manage it. And you want to put in that agreement that, hey, you need to be there once a month, you need to have that in your agreement, and then your understanding, and you need to talk about how often you're going to need them to be there. You know, having said that, it really depends on the project. And it really depends on the investor, as what you're comfortable, you know, a lot of banks will require to walk your site once a month. And so you may want to make sure that to put that into the agreement.

You know, there's two minds about it. You know, on one hand, I will tell you, there's nothing like having someone on site all the time. But at the same time, I will tell you that I've only ever done one project where I had to be there every day. And it was extremely complicated. You know, it had a massive Historic Preservation component to it, it had crazy MEP coordination for you know, kitchens, commercial kitchens. You know, it was a large urban project, it was six acres, there was a lot to it, there was like every day it was wild. And just very few projects fit that bill. So you can have that you can request that but be willing to pay for it. Right.

So that's also a consideration. If you want somebody there every day, if you want someone, someone there once a week, or, or once a month, that's going to have a different price point. And so you have to also be really honest, a good project manager will be able to tell you that hey, you don't me to be there everyday. You do need eyes on your project, especially while it's under construction. Absolutely. But you know, now managing design. I mean, I have teams right now that are let's say my average team is like 15 people, like project team. And out of those 15 people you can have, you can have them be in like six different states.

Michael:

Wow.

Antonia:

And like, that's normal right now.

Michael:

Wow. You know, that's really cool. And it really opens up the the availability for project managers of who you can select, that's great.

Antonia:

For sure. And you know, what, it also allows you to start hiring design firms that are more appropriate for projects. And a lot of times people were like, well, I want to hire a local architect, and you want to go talk to the guy, and you were doing a student housing project, but the guy had never done student housing, or multifamily, for that matter. But he had done, let's say, commercial spaces, that was kind of the closest local guy you're gonna find, you know, now you can, you can hire the best student housing architect in the country, and still feel fairly confident that they're going to be able to figure out what's appropriate for your project and working whatever jurisdiction you're in. So that's also a great advantage to owners to really open up that pool to get better resources for their projects. There's no excuse anymore. Basically,

Michael:

There's no excuse for sucking.

Antonia:

There's no yeah, there's no excuse for hiring a crappy team.

Michael:

Oh, that's so good to keep in mind. And you touched on it, I definitely want to come back to it. So I think what's probably on a lot of people's mind is cost. What is it typical? Is there such a thing as a typical cost structure? And what should people expect to pay for project management services?

Antonia:

Sure. So you know, for interior renovations, let's say that are under $5 million, which is kind of your typical hospitality renovation. For you know, the branded hotels or, and even the boutique stuff to to a certain size, you're looking at, you know, $5 million, and under, typically, those project managers will charge a percentage of the full project cost. And that doesn't include only construction, it also include your soft costs. So managing your design team, going through the process of hiring the architect everything, though manage, it's like turnkey if you will.

Those people will charge somewhere between five and 6% of the overall. And I don't agree with that general structure, I that's not how that project works. So we're fee based, right? So we'll give you a fee. That's the fee monthly for the duration of the project. Except during construction, depending on the larger projects, we actually switch our our style a little bit during construction. Actually, I put more resources on that. And so that's when it's a little bit more, but not, not so much more that you're like whoa, it doesn't double.

So, on those smaller projects, you'll see like a five to 6% that's typically what you'll also see In ultra luxury, single family, and ultra luxury, I'm talking about houses that are over maybe $4 million or so, where you absolutely need a project manager. Some of these buildings are so complicated between crazy structures insane, like audio systems, you know, really expensive materials where if you cut the marble wrong, it's like a $70,000 mistake. Yeah, so in those instances, that's what do you out, I would say that that's kind of market. So that's what you should expect to see.

On the larger projects like and larger, and you're going to realize that there's a gap here, and we can try to address the gap. So on larger projects, let's say $30 million over, particularly if it's ground up, what you'll usually see reps charges two to 3%. And again, on large projects, I don't think that that's the right way to build a project. You know, there's things that I think it sets up the wrong incentives, you know, like, oh, if your construction costs more than you pay anymore? I don't know, that doesn't seem right.

Michael:

Right, right.

Antonia:

And then, yeah, and then sometimes, like, there's instances where you're, and this rarely happens, but when it does, and this year was a good example of it, you know, ownership decides to redesign the building, and now you're doing an extra year of work, not necessarily for any extra fee. And when you are a smaller consulting company that can really hit you. So that also hedges for that, like I am, how much I am per month, until we reach construction, period. And if it and if you guys decide to put a pause on it to go do some exercise, and you want me involved in it, you know how much it's gonna cost you.

And so the benefit with having the fee based option, or the fee based billing that we do, is you know how much we're going to cost from day one, like, you know, you can anticipate those costs on day one, whereas a lot of project managers, or project management companies, you don't really know how much they're gonna cost you. I mean, you think they you do, but you actually don't,

Michael:

Because your costs change throughout the project.

Antonia:

Because your costs change throughout the project. So it's a really tough situation. And it always it's, it just always creates all kinds of funny situations with people, and you end up having conversations that are not related to moving the project forward. So you know, and then there's that gap, right? So what happens to projects that are, let's say, ground up $10 million?

My thought is, if you're in that position, and you're a developer, it is very likely that you didn't just wake up and get there, you kind of have a process of getting there.

Michael:

I would hope so.

Antonia:

Right. And so in those instances, and I've had people like that reach out, I will tell them, I will say, hey, look like this is how much I am because it's no less work from a project management standpoint than a $30 million project. The difference is obviously the fee, and the fee that that the sponsor will charge investors for management. And so given that the management fee is going to be a lot less, you know. Most of the time, I will say, hey, let's Why don't we set up like a retainer? That is not comprehensive project management? I have that going on right now with with one company in it, and it works fairly well with them. I mean, you know, they call me when they have a question. They call me for strategy, but I don't actually manage the day to day.

And it works really well. So on those, I just tell them like, Hey, you know what, you're, you're perfectly capable of managing this yourself. You know, if you have questions like you can call me and I have those relationships where I don't mind, like being on the phone for an hour here and there and growing those relationships so that when they do have the 100 million dollar deal, and then they're like, Hey, we're ready to have a really crazy project, and we really need you then. Then I'll be you know, we know that we work together well, and it works out.

So that's kind of the super long answer to your question how much your project managers should charge but no theories and yeah, you have to watch it To be honest, like I you know, it can there's some shenanigans in there. So just, you know,

Michael:

Like anything, there’s so many little shenanigans. Awesome. Well, I want to I want to start wrapping up here, Antonia and curious to get your thoughts. And if you could speak to kind of what it's like to have to be a woman in the space and any recommendations you have for women investors out there that are trying to do some projects in a space that's been traditionally male dominated?

Antonia:

Yeah, for sure. Um, you know, I think one of the things as any woman, business owner in any kind of industry, to be honest, one of the things that we always have to remember that that Men are usually pretty good at. And I'm not again, usually I'm adding that…

Michael:

There's an asterisk there!

Antonia:

Yes, um, is setting, you know, very good professional boundaries. And I think that that is something that in my experience a lot of women have a little bit of a harder time with because we want to be nurturing, right, we want to help, we want to, we want to be like, Oh my gosh, like you I really need to help you out of this project mess that you got yourself into and and so when you actually begin to look at owning your own business and whether it's that's a development company, or whether that is just a project management company, or just the the rehab that you're doing, and you're happens to be the owner, and you happen to be a woman, you know, setting up those those boundaries ahead ahead of time, right, and saying, like, hey, like, these situations, like I'm not going to put up with or are these things are not things that are okay, interpersonally not just between men and women, like really, this is just not professional, and sort of standing your ground and, and again, being kind about and being professional about it, but really setting those boundaries and, and making sure that the that you're you're training the people around you, so that you have those boundaries, right, you want to say like, Hey, you know, you can't call me on Sunday at six in the morning about this project, like that's not okay. Whether you're the owner, or or you're the consultants, so that's a little bit, one thing that I would just say, you know, boundaries are super important when you're doing your own stuff. They, they make things much better for everybody on projects. So that's one thing.

The other thing is, you know, for me, actually, and I just picked this, for myself, the idea of the perfection, like if I don't have all of these things lined up, then I'm not going to be able to, I'm not qualified or, or I don't belong in that space, or whatever. And I struggle with that still, you know, where it's like, well, I haven't done this, and I haven't done that. And so because of that I don't belong here. That's not true. You know, like, you'll meet plenty of people that haven't done X, Y, and Z and, and contribute amazingly, into a certain community. Because we all have something to contribute.

And so having that sort of understanding there from day one to say, like, Hey, you know what, like, maybe I haven't done these things, maybe I didn't go to that school, maybe I don't know, the mayor. But you know what, I'm going to do this rehab, and I'm going to rock it. You know, being a woman shouldn't never be like, Oh, I can't go there, I can't show up to the jobsite because I'm a woman, you know, that that kind of fits into that category as well. Either you know, the things that you haven't accomplished or who you are just because of who you are, it really shouldn't hold you back from from doing the things that that you that you feel like you could you can do and if you give them your best effort, there's no reason why you know, being a woman or, or not having a certain experience should should limit you. It certainly doesn't limit a lot of people out there and so that's kind of the other thing.

And then I think finally you know, for me, you know, not to not to make it sound like it's all roses, it's definitely hard in some instances. But I've gotten really lucky in that I've run into really good mentors. And you know, they're all men because obviously the industry has a has sort of the demographic that it has and they've been fantastic you know most of them have become friends they're people that I keep in touch with the people that I've brought business to after the you know after years and so you know, if you're able to lean on them and kind of call them and say hey look like I don't have to deal with situation or they're really the people who are going to champion who and so finding those mentors and having them close by is really pretty important finding kind of not only the mentors you know, just finding your tribe eventually finding other women in the industry who are like kicking ass out there and just you know, leading mechanical companies and leading Plumbing Companies you know, developing things themselves and, and having them as a you know, as a nearby kind of support, but also a little bit of someone that you can look up to and say hey, like they've done it. So.

But it is certainly tough, I'll give you that there there's some instances where you know, there's situations where you want to make sure that you're very ready to say you know what, I'm not gonna play like that's the boundary and and to me if you're able to really set those boundaries for yourself, and you know, that really goes back into like your self worth and like all of these really big kind of sort of your emotional stability You know, making sure that your your sugar is low right now, because you haven't had lunch, you know, it really goes back to like being really good. Really good for yourself. So that then you're able to establish those boundaries so that then you're able to deal with those situations because you know, development is really hard, you have a lot of unknowns. And it does add an extra layer that you're a woman and so people sometimes react to you differently. But I think it's all you know, if you're able to say like, hey, these are my boundaries, and this is my power, and I'm gonna go conquer the world, you know, brings us back to the conqueror.

Michael:

Antonia the conqueror

Antonia:

Then you're able to, like, occupy those spaces and contribute, right? Because that, I think, is the part where a lot of women don't realize but like, like, we need your contribution, you know, as a as an industry and not because you're a woman, it's because of what's in your head and the ideas that you have. And, and if we're losing your contribution, because you're a woman, I mean, how stupid is that? Right? So that's kind of my, my, my bent on it. But again, you know, we could have an entire episode about the ridiculous less than professional situations that I've been in that are super salacious and ridiculous issue, we're probably like, take up a pen name and write a book. But that's not to say that, right? So, you know, that's that's kind of how it is.

Michael:

I everything you just said like, yes, yes, yes, I love it all go back and re listen to the last six, seven minutes of what was just said, pure gold. Love it. Love it.

Antonia:

Glad to hear it.

Michael:

Well, no, absolutely, absolutely. So thank you so much. and tune in for sharing and coming on today. Any final thoughts before we let you out of here,

Antonia:

Um, you know, just that same in that same vein, you know, there's so much, it's such a place of abundance, to be honest, it's such a hustle and not hustle in the bad way. But like it, you know, it's such a, an amazing, general way of doing business, you know, development has all of these amazing opportunities for all kinds of professionals, or even for people who don't have a ton of experience in it, you know, getting involved in real estate development, like owning things, you know, like, we can't say that without saying I used his name, right.

So it's like owning things, and understanding how your built environment works. And being a part of it contributing, it is just so wonderful. And I really think the sphere of community that we have is amazing. And so, you know, continuing to grow, that continuing to be a part of it continuing to contribute is just such an honor. And it's really wonderful to, you know, I'll tell anybody, if you if there's a way that you can get into owning things and into contributing to your neighborhood and to the people around you. That's just, you know, that's what being a citizen being around and being here, you know, being alive is for people like me, but then again, I grew up in development. So for me, like, it's just something I'm really passionate about, and I if you have the means to do it, and in the interest, go for it.

Michael:

Love it, love it, check out Antonia on Twitter, check out her company mad project. It was such a pleasure to have you on and I'm looking forward to chatting again soon. Take care of Antonia.

Antonia:

Yeah, it was wonderful. Thank you so much for having me. And I'm looking forward to being back at some point we can talk about a bunch of other things.

Michael:

Absolutely. We'll take care. I'll talk to you soon.

Antonia:

Thank you. Awesome, everybody. That was our show a big big big thank you to Antonia I got tons of great actionable takeaways from that. Hopefully you did too. Especially cuz I'm in the midst of a pretty significant development project. And Tony has been a really, really big help there. So go back and listen to the episode with the chorusing on the next one. Happy investing.

Michael walks us through an inspection report on his short term rental Oct 09, 2021

In this episode, Michael wraps up our discussion on reading and deciding what to do about our inspection reports. Michael walks us through his inspection report on a short-term rental property. He highlights the most concerning issues and discusses how he will go about addressing them to set himself up for success.

The inspection contingency period is a crucial step in buying a new property. Doing your homework here can make or break a deal. Overlooking issues in the inspection report can potentially leave you with thousands of dollars of repairs in the near future and eat up that precious cash flow.

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Transcription

Emil:

Hey, everybody, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour. And today I've got

Michael:

Michael Albaum.

Pierre:

Pierre Carrillo.

Emil:

And if you saw the last episode here and I walked through a recent inspection report, I covered a triplex that I bought back in November of 2020. And Peter actually walk you through an inspection report that he's currently in contract for on a property. So last person up is Michael and just a quick recap, what we're doing is we're walking you through these inspection reports, calling out things that we see and just walking you through our thought process giving you an over the shoulder look on how we look at certain items listed how we go about addressing them, either with the seller or getting different bids. So that next time you get an inspection report, you feel confident to do the same.

Alright, Michael, kick us off.

Michael:

Alright, so I'm going to be pulling up this inspection report for a property that I am also in contract for similar to Pierre. So this is a 62 page inspection report, which oftentimes they are. And like Emil mentioned in the prior episode, the inspectors job is just to find everything that they can. And it's also important to note that inspectors there's like a national certifying body for home inspectors, I believe it's national. And so there's set guidelines and parameters for things that they're looking for, and how they report and things that they do look at and things they don't look at. So just keep that in mind.

And also something it's important to keep front of mind is that inspectors are looking for safety and habitability issues, not necessarily aesthetics, or rent readiness for a property. And so I've heard people in the academy talk about oh, well I got my inspection report and it was a $2,000 repair estimate. And then my property manager walked it and said, oh, there's an additional $5,000 and make rent ready costs. So these two people are looking at things through two different lenses. So it's really important to keep that in mind. And I always try to have the property manager walk with the inspector if at all possible, or at least walk after the inspector so that way they can give you their two cents around okay, well, that was the inspection, safety, habitability his side Now let's look at the make rent ready stuff, because the inspector is probably not going to tell you if the walls are scuffed or if the you know, the carpet is is thinning, right? That's all stuff that that a property manager is gonna be looking at.

Pierre:

I was just gonna say, Michael, why does your house look way nicer than Emil and mine?

Emil:

This is short term.

Michael:

This is a short term rental. Yeah, I'm getting out of an older property. Similar to Emil’s about 100 years old, I did a bunch of value-add rehab work on it. And now I'm kind of done with it. So I am moving on to something and I said, you know, let's go for something higher end fancier, less headache, because I've dealt with too many headaches in the past.

So, the properties built in 89. We can see here that the structure is wood Foundation, race, Foundation, three, three, and then some of just the basic details. And getting into the meat of the property. Here's lots of disclaimers, they talk about all of the things that were inspected versus not inspected. So telling me the smoke detectors were tested. There are some loose siding on the property. They're pointing out some growth, organic growth on doorframes. But let me find where there are some things that made me take pause. And to be honest, there were not many of them, which is really nice, because this is one of the cleaner inspections that I've seen.

Alright, so here we have a little, a little hideaway in one of the electrical boxes. So just something to take note of that if animals are present, rodents are presence present. There's a way and a reason that they're present. So look to find out how they're getting into the area and how you can keep them away. That observation.

Emil:

Was that a mouse?

Michael:

That was a mouse Yeah, I got a better picture of it too. We've got vegetation growing along the home and then touching the roof here. So trees can drop things that can cause damage to roof. And then they can also rub against the physical structure or the roof and cause damage as well. So keeping things clear of roofs is great.

We've got just some loose deterioration on the deck boards. There was an area that needed a hand railing It currently doesn't have one because it's taller than 30 inches. So inspector took a picture of that and said, we've got to put a hand a handrail here. And then getting inside the home, there's no discharge pipe on the water heater over pressure, pressure relief valve. So that's a safety hazard. And basically what this is, the pressure builds too much in the tank, this valve should open and release that pressure and if anyone is standing near here, or sitting near here, that could burn them and cause a cause of problem. So having a proper vent pipe or a discharge pipe is important.

Then they found that the anchor, the laundry basin wasn't properly anchored, it was loose when he moved it. So having something to anchor that to the floor is something I want to have done. Some rust on the on the chimney cap. And again, this is all really, really minor minor stuff. There was some mold growth in the bathroom, which is not to be unexpected. If anyone's lived in a place, they'll know that sometimes mold can grow, slow drain in the sink. Again, not a big deal, play some drainage down there snake the drain,

Emil:

Michael why didn’t that mold give you concern, because I know mold is one that people kind of big red flag freak out about why did that mold not give you any major concern?

Michael:

Yeah, it's a really good question. So mold in places where it's supposed to be wet, doesn't concern me, this is more of a cleanliness issue than a pervasive systemic issue. In in your infection report that you share, you had a toilet leak from the second floor causing wetness on the ceiling in one of the rooms. The rooms aren't supposed to be wet, ceilings aren't supposed to be wet. So if we saw mold there are starting to get black mold or mildew. That would be a big cause for concern, because two things one, we could maybe see what's on the roof on the ceiling. But what we can't see is what's behind it. And so we might want to cut a hole and do some investigation to see, okay, how pervasive is the mold? Mold in a shower? I mean, I don't have mold in my shower anymore, but I used to. So it's something that happens in wet areas. So the fact that it's here, it's on tile, it's very common, is not cause for concern.

Emil:

Got it.

Michael:

Great question.

Emil:

Thank you.

Michael:

Yeah, of course.

Emil:

And you’re gross for having mold in your shower.

Michael:

Hey, man,

Pierre:

He’s a married man now!

Michael:

Yeah I am married man, I had to step up my game big time. When I was when I was young and gross, I had mold in my shower.

So here is the, the breaker box for the garage. And you can see there are some blank spots that are just open, they're not filled with blanks. So getting blanks installed is great. It's nice that they're still open, open slots for additional breakers, additional circuits if need be. But we just want to make sure no one sticks their finger in there. And so that's like $1.50 part at at Home Depot or Ace Hardware. So just getting someone to come install that.

And then he tells me that the GFCI protection. And that stands by the way for ground fault circuit interrupt, interrupter is supposed to be anywhere near water is where these are supposed to be said it wasn't functioning properly. So he has a testing tool here and just shows that, hey, it's not working properly. And so the fact that it's an outdoor outlet, they should have GFCI, which they do, but it's just not working properly. So getting that corrected is important.

And then noting some loose outlets, just screwing that stuff down is important. And then here's an open box, junction box, which doesn't have a cover on it, it's in the attic or basement as you need. It's in the crawlspace in the basement. So not a big deal, because no one should be going down there. But it's not right. So getting that corrected. And again, it's a very easy fix.

Pierre:

That is so clean down there dude.

Michael:

It's impressively clean. It's impressively clean. So here we had pooling in one of the quarters corners of the crawlspace. And so this was something like I was mentioning before, there's not supposed to be water here that's supposed to be moisture here. So why is it here? So I had I called the inspector and we just had a really great conversation. He says honestly, Michael, for a home of this age, this is like one of the best inspection reports I've ever seen. And having also looked at a lot of inspection reports This was also a very clean report to look through.

So but this is this is again cause for pause. What's going on here? Why is there water here so I had somebody else another contractor actually go out and inspect and kind of get an idea of what was going on. And what they thought was there is actually a vent that goes up to the basically ground level near the lawn. And there are automatic sprinklers to water the vegetation and water the landscaping around this property. So what they thought happened is that water was actually going down that vent, getting getting into the basement, so they don't think that there's water coming up from the ground. They don't think that there's Any kind of leak, but they just think it's it's it's sending natural water intrusion, which making some changes to the watering cycle in the way the sprinklers are pointed is likely going to correct that issue.

And so here we also see that there was at one point moisture down here on the block walls. So he noticed the presence of efflorescence. And we can see that here in these pictures that hey, at some point, there was likely a little bit of moisture down here. And so again, I think that's the the same issue of Hey, the landscaping, irrigation is either not timed properly, or it's too much, or it's just the direction of it isn't quite right.

We also saw some sweating on the pipes. And so he just said, recommending additional insulation, which not a big deal. We talked about the vegetation near the structure already. And so here we see some additional furry friends. And so we need to get this taken care of so sealing up all the holes into an out of a structure. And this is an outbuilding, so not a huge deal. It's not like it's in the house, but still not correct. So we want to get all of these all of the penetrations into and out of the building sealed, as well as penetrations into an electrical box sealed.

Emil:

Mama and some babies.

Michael:

Can't blame Oh, it's nice. Yeah, Mama with my Melissa babies. So very cute picture. But unfortunately, I think we need to evict these these tenants. They're not welcome.

So here, that was really it. So 25 pages out of 62 with some pictures. And then he's giving some additional comments on the property as well. And so here we have some interior photos as well. And so he didn't, not any asbestos, which was great, which is, which is common because of the age of the property was built in 89. I believe that especially this was no longer being used at that point in time.

So that in a nutshell, was this inspection report, there were not very many issues to speak of. There was nothing really that caused concern other than the water in the basement in a crawlspace. But after hearing some opinions, personal opinions around what they thought was causing that, I think it's a very reasonable explanation. And so it does not think make me think oh my gosh, there's water coming into this basement, it's gonna flood, it's gonna cause a lot of issues.

So this, again, was one of the cleanest inspection reports that that I've ever got to view. And I was thrilled. So we're very excited about the purchase of the property. Because I think it is going to be such a such a easy thing to manage short term rental wise, and kind of pre empting for getting ahead of the question. This was actually we didn't ask for a dime in repairs, or credits or reduction in purchase price from the seller, I was so impressed with the way things were maintained that we already got it for less than ask so I said, You know what, we'll just take care of all this stuff, my property manager said there's only about $2,000 of stuff to do little stuff. And I said, You know what, not even worth frustrating the seller over because I need to I had to ask for some favors, because I'm doing this via a 1031 exchange. And so I needed the seller to cooperate with me on my timeline.

So I said, I'm going to just treat them as best I can and hope that they're going to do the same to me. So so often, I think we get stuck on the numbers and the price and the dollar amount where that's a piece of the deal. But the deal itself is comprised of terms and different components. And so you want to be able to to negotiate where you can when you need to

Emil:

Nice this is good we had a spectrum of of different properties yours Michael superclean didn't really need to ask for much peer you had a couple of loose ends and ask the seller to make those repairs. I didn't mind wasn't huge, but I knew I was gonna have some turns where it's gonna add up to like 20 30k with all the little stuff and had a couple bigger items that I asked the seller to either credit or lower the price on so we got a we got a nice spectrum of inspection reports on this one.

Michael:

Yeah, I think it's also important to keep in mind, you know, where are you in your investing journey. And you know, I, I was like you every inspection report I looked at was was of that caliber with those types of repairs because then it was a value add play. And then you bought this thing knowing you were going to add value to it, versus this type of inspection report that we just looked at. This is like already turnkey, there's not a whole lot of value to be extracted out of it. I'm buying it for the cash flow. So there's it's important to remember keep that front of mind as well.

Pierre:

When is that going to be available to rent?

Michael:

Well, so we should be closing on it next week. And then we're going to get a furnish so hopefully a couple weeks after that.

Pierre:

Friendly discount!

Michael:

Friends and family discount. Absolutely. Absolutely. You heard it here. Folks.

Pierre:

As long as you have a good internet connection there, I'll take a longer one.

Michael:

Oh yeah, I mean something that we're talking about doing actually with the property manager is kind of marketing it as a as a corporate retreat, because the front of the property kind of looks like a conference center. So having workstations and really kick butt internet is absolutely going to be going to be present at that property.

Emil:

Alright guys, well, if you are listening to this episode on the podcast, I highly recommend you go to YouTube, look for Roofstocks channel and watch the videos here. I think it's just so much more helpful when you can actually see the inspection report. See what they look like see what's called out. If you're listening just just go check out the video. I promise you'll get more out of it. With that we will check you out on the next episode. And happy investing everyone.

Here‘s what you need to know about investing in Pittsburgh PA Oct 05, 2021

Max Feinberg is a Roofstock Certified Agent out in Pittsburgh PA, a fellow investor and a wealth of knowledge about his local market.

In this episode, Max tells us about the homes in Pittsburgh, the vintage, neighborhoods, the rent to purchase-price ratio, common issues that come up on inspection reports, and details that only a local would know. Listen to this episode to learn if Pittsburgh is a good market for your strategy.

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Transcript

Mark:

Welcome to The Remote Real Estate Investor. My name is Mark Woodling. Michael Albaum and I are joined today by Max Feinberg, who's from Pittsburgh, Pennsylvania. So he's one of our certified agents and is going to give us a quick market breakdown and tips and tricks that we need to know about investing in Pittsburgh. So let's jump into it.

Max:

Thanks for having me.

Michael:

No, We're really excited to have you on So You are our certified agent out in Pittsburgh, right?

Max:

That's correct. Yep. Pittsburgh, Pennsylvania.

Michael:

And are you born? Are you a born and bred Pittsburghean? Is that is that the proper term?

Max:

Pittsburgher, Yeah, I am.

Michael:

Much better.

Max:

We could go with Pittsburghean. I was born and raised in Pittsburgh, Pennsylvania. I left when I was 18 years old. I lived in Arizona for about seven years. And I started my real estate career out there. But I'm back home in Pittsburgh and really enjoying working in real estate here.

Michael:

Where in Arizona where you?

Max:

I wasn in well, I went to Arizona State University. So I was in Tempe, Scottsdale Phoenix. started my career in Scottsdale. Yeah.

Michael:

A lot less snow out in Tempe right?

Max:

Yeah, yeah, well, weather was a little bit better. But it's not how I'll tell you that much.

Michael:

Yeah I totally can appreciate that. So max curious to know, how did you go from Arizona real estate back to Pittsburgh real estate was it just, you know, the home homesickness or you knew that market better, you'd read that market better?

Max:

It's a combination of a few things, those those are definitely part of it. Arizona is one of the more competitive real estate markets in the whole country. I'm not going to get the number exactly right. But I remember they had some crazy number of agents in the state of Arizona over 40,000 or something like that. And so just inherently not being from there. And not having that sphere of influence and network made it hard for someone who was just starting in the real estate industry to get you know, some traction.

When you combine that with not really knowing the area, like you just mentioned, and being a little bit homesick. All those things brought me back to Pittsburgh.

Michael:

Fantastic. And I'm curious what what's been the biggest change in Pittsburgh, since you grew up there to now what have you seen?

Max:

the biggest one has probably been, you know, some of the factors that are making up the economic drivers here in Pittsburgh, the increase in tech jobs, health care, education, all of those things. And then what they've done to the real estate market, some of the crazy amount of appreciation we've seen in certain areas, and now starting to spill over into these other areas. And we're seeing a lot of development. When I when I was younger, we didn't have we didn't have as much of that the Pittsburgh was still coming off that steel town reputation. And that's really changed a lot over the last 2025 years.

Michael:

Interesting. So when people say when people hear the word Pittsburgh now, what should they think of?

Max:

They should think of technology, healthcare education? I know it doesn't. Well, you know, you still think of the Pittsburgh Steelers, you think of steel mills and things like that. And I think there's only one steel mill left in the whole city, you know, those have been gone for a long, long time now. So you know, the main economic drivers, as I mentioned before, I've totally changed and we've become a really savvy city. That's more cutting edge.

Michael:

Interesting. That's really exciting to hear.

Max:

Yeah.

Michael:

So as someone that's not familiar with Pittsburgh, asking for a friend, talk to me, like I'm a brand new movie, and give us kind of a high level walkthrough, if you will. Okay, if I'm looking at a Google map of Pittsburgh, how should I be thinking about some of the different sections, sub markets areas, if I'm an investor?

Max:

Yeah, it's funny you say that, because I always tell clients I'm working with looking at a map of Pittsburgh is really not helpful at all. For a few reasons. One, we have over 90 different cities that comprise of a fairly small, big citiy, you know small major market. So we have a lot of small little neighborhoods, which are all really different.

And you know, outside of the city of Pittsburgh, there's another 150 or so small neighborhood. So when you combine that with really the topography of the area, looking at it to the map, as an investor really doesn't help you too much. You know,

Michael:

Great to know

Max:

A town that can be right next to another town on a map would be one place would be an A plus type community with great schools. And you look at a map and you say, well, these prices are lower right next door, why can't we invest in this area? Well, you know, it's across a river and there's a mountain there and you know, it looks like it's next to it on a 2d map. It's really not the case. So it's definitely be helpful to be familiar with the area. And that's where I could come in, or I've had a lot of clients come, you know, fly into Pittsburgh and drive around and really learn a lot from just doing that.

Michael:

What you just said, I think is so valuable for so many investors, because I think so often, especially remote investors will take our local knowledge and apply it elsewhere. And to your point, I mean, you can't do that. You can't do that ever, and especially not in Pittsburgh. So this is great to know. Okay, so then talk to us about some of the markets, sub markets, neighborhoods that you are seeing, really right for investors, where folks are doing quite well.

Max:

Yeah, you know, it's there's a few different types of investments that could work here in Pittsburgh, as I'm sure there are other areas and with there being so many different communities. I would say there's really not one answer to that, right. There's there's communities, such as Lawrenceville, or Shadyside, or East Liberty, where we've seen a lot of these companies like Google or Facebook, or Uber moved from Silicon Valley and open offices here. And so those are more appreciation plays, right? Or maybe Airbnb or a property like that works in these areas. But when we're looking at analyzing them for cap rate, or cash on cash, the prices are a little too high. So where we see a lot of success with investors in Pittsburgh is some of these areas that are a little more obscure, a little lesser known that I would call more B to C plus type areas. And we have a lot of them. There's no shortage of them. Like I said, there's, you know, 100 of them.

Michael:

Okay, so awesome. And kind of digging into the numbers a little bit on those more appreciation plays. Can you give us an idea of just a ballpark idea of what a 3-2 would cost and what it would rent for versus some of those more cashflow heavy markets?

Max:

Yeah, yeah, I mean, in Lawrenceville, and areas like that. Some areas that are popular with nightlife would be like the South Side Mount Washington, Lawrenceville, these types of places are three twos probably going to be the lower end would be 250, you're probably going to be in the 350 to 400 range for something that doesn't really need any work. And the rents are going to be in the mid 2000s. So on the surface, if we do, you know, napkin math, right back in the napkin math, that doesn't really meet that 1% rule that we look at, to further analyze a property. But right, you know, you are getting appreciation you are in areas where you know, it's probably a better tenant base that, you know, wants to be in those areas for the nightlife and things like that. So…

Michael:

Yeah, totally random question. Where do you think the term back of the napkin came from? Is it because there's like, like food on the front of the napkin?

Max:

Probably a couple guys sit in like a, you know, a pub in England or something. Maybe just doing some math on the back of a napkin? I'm not sure.

Michael:

No one ever says some front of the napkin math, it's always back of the napkin.

Mark:

So Max, I got a quick question. What's the sweet spot that you're finding right now between, you know, the cash flow markets and the appreciation markets? Where Where do you feel like the opportunity is that most investors are really gearing towards in it's competitive, but not overly competitive?

Max:

Yeah, so for Pittsburgh, there's, there's a few different answers to that, if you're looking for single family homes in those B to C plus type areas, we're going to be looking at prices that are in the low to mid one hundreds, just because that's where the rents are going to match up, and we're going to be near that 1% rule or maybe a little over it. Now, like most cities, if you get a little further away from town, or you go to some areas that are a little less desirable, we may be able to find single family homes where the numbers look a lot better. And there's inherent risk involved with that as well, the buildings are a little rougher, you may have more tenant turnover and issues in that regard. But that's generally where we're going to be for a three bedroom, one or two bath home, duplexes and triplexes are going to be probably in the mid one hundreds to low to hundreds. At this point, which has really gone up, you know, I'm sure like a lot of other cities in the past two years, from, you know, the low to mid one hundreds to high one hundreds, each thing's probably gone up about 30,000. So, you know, probably about 10 to 15% appreciation.

But that's where we're going to see the numbers. I like to steer clients towards duplexes and triplexes if they're looking for cash flow. You know, we know that there's probably more turnover on multi units than there are single family units. But cash flows generally going to be a little bit better around here.

Michael:

Max you bring up such a great point. And it's something that I talked to members in the academy all the time about, how do you have the conversation around someone who says, well, Max, here's this $120,000 house that rents for 1200 bucks, let's say, but over here, here's this $180,000 duplex that rents for two grand gross, and you have to explain to them that those tenants might be very different. We have to get beyond the gross numbers. I mean, how do you have that conversation?

Max:

Right? Yeah, well, that's tenant turnover is just part of it. I mean, here in Pittsburgh, as I'm sure we'll touch on In a little bit here, some of these buildings are older, and utilities are separated. In some instances, they're not separated. In some instances, the owner may be responsible for paying water and electric, the tenant pays gas. Whereas a single family home generally the tenants responsible for paying all the utilities.

But when you dive into the numbers a little bit more, may actually make those single family homes more attractive than they first appeared. But yeah, no tenant turnovers part of it. Utilities being split as part of it, just property maintenance is part of it. I mean, you've got two kitchens, to bathrooms, if not more, probably bigger buildings. So there's a lot of factors while the cash flow may be a little bit better, your expenses maybe a little bit more as well.

Michael:

That's such a good point to keep in mind. So you, you mentioned it, and I would love to come back to it. So the age of the housing stock in Pittsburgh, talk to us about what that looks like. Is it new builds? Is it 200 years old, 100 year old, you know, what, what is the age of some of these properties that are good cash flow investments look like?

Max:

Yeah, we don't really have a whole lot that's over 130 years old. And most of the stuff that's going to be that age is going to be really close to the city center. So some of the neighbors like the north side, South Side, you look at the date, those were built in those were in the late 1800s. But oftentimes, that scares people without even really looking into it. I mean, these places were built to last a little bit different than they are nowadays.

And then we have new builds, I was just at a friend's house yesterday, who has a townhome that was built less than a year ago, he's already got plumbing issues. So you know, sometimes sometimes age isn't a bad thing. But there are issues that are associated with having buildings that are 100 years old or so which is where I would say a lot of these properties are going to sit about 100 years old 80 to 100.

Michael:

And how do you determine or decipher? I mean, so I would give an example, I have a four Plex that was built in like 1890. But I took it down to the studs, brand new, everything brand new, you know, roof, electrical, plumbing, whatever, and so on the insurance that says your construction 2019. So how do you get how do you? How do you coach people? How do you walk people through? Yeah, I know, it says it was built in 1900. But it's been rehabbed. So for you, as the owner, it's effective your construction is 2020, or whatever.

Max:

I tell people that all the time, I say, you know, if this building was built in 1880, there's very few things in this building that are still from 1880, one of them may be the foundation, which I know is a big is a big issue for a lot of people. But again, these foundations oftentimes are 18 to 24 inches thick, and they're not going anywhere. But as you touched on the plumbing, electrical roof, all this stuff's probably within 50 years old. So you know, we go in there, we do inspections, and we figure out the age of some of these mechanicals, and we're better able to figure out what we should be estimating for maintenance capex and things like that.

Michael:

I love it. And so you touched on foundations, and there may be some damage to those foundations. What are some other common issues that you see in the Pittsburgh market that maybe are custom to the Pittsburgh market that might scare other investors away? Like for one we had, were chatting with an agent, they have termites everywhere, they have termites. So if you see termites is not a big deal. what's what's kind of unique to Pittsburgh?

Max:

Termites is one of them, but it's not crazy. Common around here. termites are prevalent, though, but a lot of the issues that we see here that I've noticed have caused pause for some investors from out of state are related to the foundations, and then kind of our pretty awful weather. So you know, these foundations that are from 1880 1890, they didn't use basements back then the same way we do. And they design these houses, with foundations that are oftentimes fairly porous. And then when you combine that with the amount of rain that we get here, we see issues like mold, we see issues like dampness and basements. And then, you know, some settling and foundation shifting that's associated with age and moisture.

These issues are pretty common around here and definitely can be caused for large concern, but oftentimes are not. And, you know, I talked to Mark about this a few weeks ago, I work with one guy who says mold is gold, because it scares people away. But it's really easy and common. It's an easy thing to fix. And it's so common, but you know, when you deal with people from Arizona, for example, they hear the word mold and they just shut down right?

So that was those would be a couple things. A couple other common issues around here have to do with the age of buildings and cause people to hesitate or odd layouts. We have sometimes these duplexes or triplexes that were single family homes maybe 100 years ago, and they'd be repurposed over the last 100 years. They've got really bizarre layouts and they're not your traditional uptown or side by side duplex. We've got very small bedrooms that really should be closets, attics that are finished, basement bedrooms, things like that, that if you trace the lineage of a property back, you'll find that every 20 or 30 years or so something was done and changed it a little bit so those are a few of the things and that just other issues that are associated with older buildings which we kind of already touched on.

Michael:

Yeah, that makes total sense.

MarkL

Yeah Max I think one of the important points to the mold aspect is it's so cold up there that you know mold really thrives on heat right and that's where a lot of water just kind of you know, it turns in the mold once the heat gets to it but out there the freeze you know, really takes care of it so you're not going through these vicious mold cycles out there. It's really just maybe more seasonal if anything, right?

Max:

Yeah, I would say it's not as common in the winter but these basements again, they a lot of them just let a lot of water in and if you're not running a dehumidifier or you know there's a lot of people that do external French drains and things like that there's ways to combat these once you remediate the actual mold issue.

Michael:

That's great.

Mark:

Mold is gold well we'll save that only for the more high level investors out there that really can coined that phrase I think that's good for anybody so it doesn't freak them out you know once they see some of those items.

Max:

Right.

Michael:

So max I come from a long long background in the insurance industry so I'm curious to know in Pittsburgh Do you guys have natural disasters? Do you have tornadoes, floods, hurricanes, that kind of thing?

Max:

You know, it's funny you say that I it's another thing I like to talk to out of state clients about while our weather here is not notoriously great, you know, we get a lot of rain and it's fairly overcast, we actually don't have many natural disasters. We really don't have earthquakes. We have tornadoes one tornado me we every, maybe every three to five years. And you know, it touches down and it's gone. And, you know, I guess we do have some floods, because of the topography and the amount of rain. And they're, you know, you coming from insurance, I'm sure you're familiar with, we do have a lot of properties that require flood insurance. So that's something that we dive into, you know, before we commit to a property, because that can be a little pricey and can hurt hurt the numbers if that's another 1200 bucks a year or so. Right?

But the weather here, it doesn't get too hot. It's really not as cold as some places, you know, in New York, or, you know, Minnesota or Wisconsin or places like that. It's not as hot as you know, some places in the south. So it's fairly mild here, in my opinion.

Michael:

You're talking to a guy from California. So the fact that snow is a part of the equation, mild is no part of that sentence.

Max:

That's right. Yeah. Well, yeah, with no earthquakes here so we'll take that.

Michael:

That's a big win. That's a big win. Sign me up.

Max:

Right.

Michael:

Okay. And so Max, I'm curious to know, or for investors to know, because I think property taxes is one of the biggest misses that investors encounter in investing remotely, they often know how, what their property taxes look like in their county or their state, but going across the country across state lines can often change things. So how do you know how people should be calculating their property taxes?

Max:

Totally. That's the biggest one I've seen. Mark and I have talked about this as well. You know, a lot of times we've got buildings here that have been owned in the same family for 70-80 years. And on the surface, you look at the taxes, it's like, wow, $200,000, and it's only $950 a year in taxes. Well, that's what it is now, but it's going to change.

So that's one of the conversations I like to have with people. It varies county by county here. So Pittsburgh's in Allegheny County, and that's where most of the properties that we're going to be talking about or Roofstocks going to be publishing are going to be located in Allegheny County.

Generally, in Allegheny County, the way they reassessed these properties is approximately 80% of the new sales price. And then the millage rate in each Township, which we just discussed, there's a ton of them, varies. So I can't really give a one size fits all answer there other than you can calculate the assessed value based off your purchase price, and then go check out what the millage rate is for whatever neighborhood that property is actually in and go from there.

Once you get outside of Allegheny County, in the neighboring counties, such as Westmoreland, Butler, Beaver County, places like that, they're all calculated differently. So we could go on a one by one basis there but Allegheny County for the most part, that's how it's done.

Michael:

Okay, perfect. And that's what I always share with folks too is Hey, just go call the county assessor ask how you calculate your resale property taxes. So this is super helpful. So for anybody listening, who's interested in investing in that market, go look up the millage rate for that specific area and multiply it by 80% of the purchase price.

Max:

Approximately varies year over year. Sometimes it's 75. But yeah, that's a safe way of calculating it

Michael:

More or less. Okay, cool. Mark, do you have some other questions for Max?

Mark:

Yeah, I think it's good to know really what your expectations are because it's a two way street. You know, buyers are putting in offers on Roofstock for MLS properties, we would kick those offers over to you as a referral. And you're going to work with those buyers. But when you have that first conversation with buyers, what is it that you always emphasize or some of the common things that you say hey, before we move forward into and submit this offer. Let's make sure we have these things in a row. What What is it that you go through?

Max:

Well, I'll tell you this, Roofstocks done a really good job of making sure buyers are pre qualified and ready to buy. So it's a little different for buyers I work with from Roofstock, that may be someone I've met through another means. But the biggest thing with expectations is I try to let people know that the market still pretty hot, it has slowed down a little bit, especially in the multifamily world. But if we see a property that the numbers look really, really good, a lot of other people are seeing that property, and they're running those same numbers as well. So you just got to be ready to go.

And I know a lot of people a lot of times being from out of state have a lot of questions. And some of which we've just covered, how do I calculate taxes or some of these issues? So I like to just try to have this conversation with them initially, and say, Hey, you know, here's, here's the answer to these questions. By the way, we also have a 10 to 14 day inspection period where we can make sure we're not getting into something that we shouldn't be getting into. So if a property looks really good, I just want people to understand that it's going to be gone still within 24 to 48 hours around here.

Michael:

That makes total sense.

Mark:

That's great. And when you submit an offer, and you hear back from let's say, a listing agent, you know, what's the typical back and forth that you have with a buyer, because I know some agents give you extra information and give you some ideas about you know, where you need to be, how do you approach that with a buyer to give them as much market Intel, just so they can really either submit that offer, say, Hey, you know what this may not be, you know, the the best offer on the table. So let's go shop for another property.

Max:

A lot of times, especially with deals that are really competitive, I just tell people, even if it's not a highest and best situation, sometimes it's best to put your best foot forward and just say, Hey, this is what I'm willing to do. This is my personal, highest and best situation. And if someone else wants to do 10,000 more, or is able to offer cash, then so be it right, and this one wasn't the one that was meant to be. But that way, at least you know, you're not trying to squeeze out two or $3,000.

I try to help people understand that if you're going to look at this as a long term investment, two or $3,000 off of sales price, when you're doing a 30 year mortgage is so small, that if you think this is a property that you really want, it looks like a good deal. Let's go for it, right. And we can do our due diligence on the property and some of these other things during an inspection period, when we can still get out of it, and you can get your deposit back.

Michael:

And Max to your point. I mean, even putting your best foot forward, knowing that you might still lose out on the deal allows you to potentially become that backup offer. If the first deal falls through this just happened to me…

Max:

Totally,

Michael:

You know, the selling agent came back and said, Oh, you know, our other buyer fell out. Are you still interested? And I see Yeah, you know, we can talk? Yeah, let's have that conversation.

Max:

Yeah, we can talk about that offer. That offer might go down a little bit right?

Michael:

Exactly. You gotta pay for rejecting me.

Max:

That's, that's right. Yeah. But you know, that's that's happened a lot around here. And I'm glad you said that, because I think we've had a lot of appraisal issues lately. I'm not sure if this is happening in other markets. But I think appraisers, especially around here, are tasked with the difficult job of trying to cool off a hot market, right? They see these prices going up and going up. And they don't want to be the ones left holding the ball like 13 years ago, or 12 years ago. And so we've had a lot of, you know, appraisals come back low lately. And that's really open things up for what you just mentioned, hey, this person doesn't want to buy it anymore, you know, hey, is your offer still stand? So I'm glad you said that, because we've seen a lot of that here.

Michael:

Interesting. And so in terms of the offer prices that you're seeing properties go under contract for, are they and keep in mind everyone listening, we're recording this end of September 2021. But are they at list price? Are they over list price? Are they under list price? Where are you seeing the off the winning offers coming coming in?

Max:

With single family homes, we're still seeing them above list price pretty often. With multi families not quite as often. I feel like there's a few reasons for that, you know, obviously the first and foremost being there's less people looking to buy multifamily properties that are single family properties. But multi families are still going to be around list price. I just had a client lose out the other day we went 7000 over on $125,000 duplex, and I think the winning bid was probably about 10 or 11,000 over so that's still common.

We don't really have anything, you know, more than, you know, 10 or 20,000 over for the most part, just because you don't really go 50,000 over, you know, on a $200,000 purchase. I'm sure in places like California, you may see it more often because the initial price is higher, right? But here the percentage is, you know, never really too much more than 10% above list price.

Michael:

Okay. And are you seeing people get really aggressive and creative with the terms that they're offering?

Max:

Yeah, yeah, I mean a lot of people still waiting inspections and I know that's something that's hard for a lot of Roofstock clients. And I really honestly expect a lot of Roofstock clients to want to waive inspections as they've never seen the properties but sometimes you have to remember you're competing against local investors as well, who have experience and they've walked that property and they're comfortable waiving inspections, because they already know you know what's needed or what's not. So that's obviously still a big part of it.

And we're seeing, you know, lease backs to the owners, because it's hard to find properties for them to move into. So they're letting owners stay, you know, for three months for free. There's a lot of creative things going on right now.

Michael:

Interesting.

Max:

There's still people covering appraisal differences as well, even if you're doing a purchase with a loan, you know, you can still waive the appraisal contingency, but you're going to be responsible for covering that that gap. I've seen that more often in the last few months than I have in the past as well.

Mark:

And so Max, are you when you're getting an offer submitted through Roofstock? How many times are you doing a leaseback? Like what percentage? Or what percentage? Are you waving? You know, the inspection contingencies or any of those like what's what's the common ratios that you're seeing out there?

Max:

For Roofstock not as much again, the clients are usually out of state. And so they they feel more comfortable, at least having an inspection done. And so I try to help them understand other ways that we can improve the offer, you know, obviously more money is helpful, but maybe more deposit money, maybe a quicker closing, whatever it may be, there's other ways to make your offer more attractive. Maybe you just tell them, hey, I want to do an inspection. But it's going to be an as is sale, I'm either going to take it or leave it I'm not going to use this inspection to really beat you guys up and negotiate any further. I just had a Roofstck client do that this week. So leasebacks not as often. But you know, other creative strategies are pretty common.

Michael:

Awesome. And, Max, when you're putting up properties onto the Roofstock select program in the Pittsburgh market, what criteria are you looking for? What is it that when you see a property screams Oh, perfect investment property candidate?

Max:

Yeah, Mark and I have talked about this a lot. And I'm still trying to find, you know, what's best for the Rootstock investors? And I think the answer to that is there's investors that are looking for all different types of things. So I'm trying to get creative, and put all different types of properties on there, I've been doing a lot of properties in these Lawrenceville types areas where the initial return doesn't look great. But I found that there's Roofstock investors who are from California or Washington, and they're still looking at us. And when these are still really good numbers.

So that's I'm doing some of that a lot of the B to C plus properties where we're looking at a 1% rule. That's one of the things I'm looking for. And then I've I've been uploading some properties to Roofstock lately that are in some of the areas where the returns are going to be a little higher. And on the front end, I've really found it's important with those properties to have these conversations about potential issues. So there's there's all sorts of different criteria for what we can find in Pittsburgh.

Michael:

That's great and cool to hear that Pittsburgh does really cater to to every investor type or every investor persona with the type of asset that they have that you have in the market.

Max:

Absolutely.

Mark:

Yeah, I have a few stats I want to throw at max and just see what he if he has any comments around these because I was just studying John Burn's real estate data, which is a great source of information. It shows that rents were up 2.7%, from 2020, basically. So over the last year, it was 2.3% in 2020, and 2019 is 3.6%. So slow and steady, I would say is always good. The existing home prices jumped. This is a median number from 173 to 192 in 2021. So over the last year is jumped up a nice percent was that clip about 20% clip, it's not too bad or 10% clip, excuse me.

Here's the number that stood out. And I would love to hear what Max has to say on this. So I'm looking at the cost of a payment and maintenance to own versus the cost of rent. And it shows that the cost of a payment with maintenance for let's call it an entry level home is $997 a month versus that same entry level home to rent is about $1416. max, are those numbers accurate? What do you see in the market?

Max:

That sounds accurate to me, like I said, you know, $1400 a month in rent would be about probably $170,000. Home, depending on the area, but so that average rent sounds just like the average purchase price you just mentioned. So that sounds spot on to me. And I'm glad you brought that up the rent increase to one of the other things that we see around here a lot, which I've had conversations with a lot of Roofstock investors about is the current rents of these properties we're uploading, we have a lot of properties here that are older, have maybe been passed down through families, tired landlords, and the rents are just crazy low.

And so you know, when we initially upload properties, if there's tenants in there, the numbers may not look great on where they are now, and there's a lot of reasons for that. And the most common reason is landlords, just really not raising rents and keeping up with how fast they've appreciated, like you just mentioned, Mark, I think a lot of these older, tired, landlords don't really go and check the real estate stats like that and say, oh, holy cow, I should have raised this, you know, 10% over the last three years, because that's what it's gone up, you know, and people don't realize that, you know, they're still sitting at 650 a month for a one bedroom. And, you know, it should be at 850. Now, and that changes everything. That's really, really common around here.

Michael:

Yeah, that's such a good point, Max. And I was just having a conversation with some investors yesterday talking about the difference between buying on pro forma or buying at true value. And so what we're talking about is because of single family is a little bit different than multifamily. But for single families, if the potential is truly there, I think it can totally make sense. But you just want to avoid is a seller saying, Oh, well, the market rents 850, my current rents at 650. But you have to pay the price to buy the home at 850. And really, the market is 700. That's where you get yourself into big trouble. Max:

Max:

Right? Right. It's like, well, you should have gone and done it then. Right?

Michael:

Yeah, why don't you do it? And then I'll pay for it. Right?

Max:

Why don't you do it then and keep the house. But you know, what I'm seeing a lot of times is that, in this market, we're kind of purchasing in the middle of the pro forma and true value. You know, people are pricing them at the true value, and the performance, you know, 20,000 below that, or 30,000. Below that. And oftentimes where we're settling is somewhere in the middle. So yeah, I'm glad you said that.

Michael:

Okay, that's that's super good to know, as well. And what tools would you recommend investors utilize to get a handle on what are the true market rents?

Max:

Well, I this is a conversation I have all the time, I wish there was some sort of rental appraisal software where there was an actual correct answer for that. But really, you know, we have this conversation a lot, there is no such thing as a rent appraisal, right? It is, whatever someone's willing to pay. The tools I use are probably the ones that a lot of other people use. I use Zillow rentals a lot. I use Rentometer a lot. I use Craigslist, I look what's out there, I just try to look at everything that's, you know, really available. And then oftentimes, if it's still available, I'll take 10 or 15% off of what that is, and say that's probably about where we should be otherwise, again, it would be rented at that price. Right?

Michael:

Right.

Max:

Yeah, it wouldn't be available still, if it was if it was priced correctly, but we use rent ometer I use rent ometer a lot. Zillow rentals a lot.

Michael:

Yeah, those are those are both great tools.

Mark:

So I have two more quick stats. One of them's vacancy. So we're showing the vacancy rate is actually like 5% going all the way back to 2016. So 95% occupancy, as you guys would say, Do you find that that's true? Or you know, it sounds like it's a very competitive rental market out there. Is that right?

Max:

It is a competitive rental market. I've I always go back to two things when I think about how competitive the rental market is and how people don't really realize how competitive it is I purchased a building in December of last year, so it's been about you know, 9-10 months, and the owner was living in the downstairs unit which was a really nice unit and they told me it's probably worth 750-$850 a month. Well I went on Facebook marketplace, listed it for 1100 a month I got all these comments You're crazy. You're crazy second day rented so it is competitive. You know people don't realize what true rents really should be and how many people are actually looking for a nice property if you've got a nice clean property people are willing to pay because there's not a lot of those available.

Michael:

Awesome Wow.

Mark:

Well the backup statistic to that is 53% of the housing units are tenant occupied. So renters are occupying 53% of the property so that shows you homeownership rate out there is just not as strong and that's in the city as Pittsburgh so that's where the competitive nature is coming from versus ownership rate is 64% nationally right so you flip those numbers around and you see that there's that many more renters than in Pittsburgh.

Max:

Yeah you know what it's really I've heard that stat and it's really amazing to think about when you think about the cost of you know purchasing a property here it's it's amazing that it's not flipped around and you can buy a nice house for $170,000.10 minutes away from the city but rental rates are really high here and I'm not really sure why I think maybe it's because we have a lot of out of state investors and you know, I'm not really sure beyond that, but the opportunity is there there's a large rental pool and not a lot of vacant properties as you just mentioned.

Michael:

Interesting.

Mark:

That's great Well to me that that's what sums it up right there is that it's there's the the slow steady your rental growth, there's a tenant occupancy, there's a there's a demand for tenants that are coming from both your side as well as they're looking for properties. So it sounds like the supply and demand is very healthy on the renter side which is the I really drive investors to the market.

Max:

Yeah, and rising rents and rising ARVs as well so it's a good time to get in.

Mark:

Max this was great. This is the the comments on just you know what, what the common things are that you're seeing out there. I mean, this is the information that you probably have the conversations every day, maybe 5-10 times a day so glad we could get that out there and share it with a listener. So Michael, this was us, he was probably one of the better interviews I would have to say because it's, it's a demystifying right, all the all the little things that people hear about, but you really need to hear it from the locals.

Michael:

And I can say wholeheartedly, Max that

Max:

I'm gonna have to go back and watch the other interviews how to make sure. Thanks, guys, I appreciate it.

Michael:

This was great.

Mark:

Thank you so much.

Alright, thanks again, Max, for joining us. And thanks to all the investors for listening and we'll catch you on the next one. Happy investing.

How passive is real estate investing really? Oct 02, 2021

We often hear real estate investing referred to as passive income. But we feel that can be misleading sometimes. Depending on the cycle of your investment periods, the asset class you are in, and the condition of the properties you are acquiring, real estate investing can require different levels of involvement.

In this episode, we discuss what that level of involvement can look like in these different scenarios and how you can turn the dials to adjust your strategy to accommodate your desired level of activity.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions, and seek investment advice from licensed professionals.

Michael:

What's up everybody Michael Albaum here from The Remote Real Estate Investor. And today I'm joined by my co host,

Tom:

Tom Schneider.

Michael:

And today Tom and I are going to be talking about why is real estate investing referred to as a passive activity and the benefits some of the benefits that it yields referred to as passive income, we're gonna be talking about how passive investing in real estate actually is. So let's get into it.

Alright, Tom, share with me a quick update about what's going on in your world. A little portfolio update, if you would,

Tom:

Oh, so I've mentioned before building a little, shed a little office shed, bottom of the lot, it is coming along. contractors are busy as all get up. But I have secured I'm in line, I'm in the queue, I'm the next person in the queue for my concrete guy. And then for the contractor actually going to putting it together. Next in queue there. So this is a symphony of development. This is my first development ground up development project. And it's just in the corner.

My wife's been asked to get it's a good way to frack totally, like totally, it's, um, you know, on my own whatever, project manager, whatever GM on the site, and it's timing from the materials getting ready from the company, that's prefabricating, the shell, the shed the site team that's doing the actual, like concrete stuff. And, you know, at first in doing this project, and like, yeah, this isn't really real estate investing. But the more that I do it, the more it's like, oh, these are totally muscles that you know, yeah, some some land up development stuff. So anyways, it's it's going along well, that is kind of the extent of my activities as it relates to investing. Right now is some value add stuff at my primary residence.

Michael:

That's awesome. And I wish I had done something like that. Before I started my total redevelopment projects, I had a goose egg experience doing that kind of stuff. So that's, that's really cool.

Tom:

Yeah, go getting it somewhere. Yeah. And yourself, Michael?

Michael:

So I'm in the midst of a 1031 exchange, I'm selling a value add property that I added some value to out in the Midwest, and I'm buying a couple short term rentals via that 1031 exchange. And, man, the timing of it is just like so tight. So I'm scheduled to close on the down like property, the property that I'm selling by Friday or Saturday, and then purchase the new property on Tuesday. And I timed that. So I'm well within my 45 day window, but I didn't realize how tight it was actually going to be. So if one, if the sale of mine gets pushed out a little bit, I might have to scale or slide the purchase a day or two, which I'm hoping doesn't happen, but just really trying to line everything up to be as seamless as possible. But I'm excited to get into the short term rental space.

Tom:

Exciting, juggle, juggle, juggle. That's it. That's it. timing. Yeah, very cool.

Michael:

All right. So let's start picking this apart. So a lot of people have referred to real estate investing as passive investing or real estate investing generates passive income. And I'm curious to get your thoughts around how passive you think it truly is. And is it black and white, or are there shades of gray here?

Tom:

So the way that I would describe it to a friend is, you can get to the point where it can be a pretty passive source of income. But realistically, like upfront, there's, there's some work to do. So in cycles of ownership of the property, there are going to be ones that are more busy. So when a property when you're doing your acquisitions, I'm going to I'm going to spend a good amount of time evaluating properties submitting offers, managing the transaction, stuff getting financed, lined up.

So in that upfront part of the process, definitely not an extremely passive process and even up to the point if you're buying it vacant, and perhaps there's some renovation work that needs to be done, I'm going to poke my nose into that process. Either managing contractors with my property manager or managing them directly. That's not a super passive process. And then going up into the editing process where you're working with your property manager to set rent, where they are marketing the property.

I mean, I'm at the point now with my property managers where I have an established relationship where I trust them to run with stuff but getting off the ground. I'm a little bit more hands on so the other kind of property lifecycle where it's time consuming is some construction thing comes up and I will usually with my property manager, that what's called a not to exceed limit and NTE, am I using that right i think so anyways, Start with the cost. Yeah, yeah,

Michael:

Let's run with it.

Tom:

If the cost is above a certain dollar, I'll say hey, I want to know about it like this could be a repair replace decision, where I did least like to provide some input, you know, I'll you know, talk to you the local property manager. The other high time commitment not passive is it repeats again, right, the tenant moves out goes back into construction. So a property can be occupied for a long period of time that is relatively passive and not really doing a lot except for opening the proverbial mailbox and seeing the rent check come in. However, though, there like is a good amount of time that it's not necessarily passive. So I think it's a little bit of a misnomer, the passive term that is often applied to it, just because especially in the upfront and some of these major milestones you can be a little bit more involved in, as you start building your profile, go from one to five, to 10, to 20, there really can be a lot more involved in it. I mean, I enjoy, I enjoy it, I think it's fun, you know, but it's definitely

Michael:

It’s because your sick in the head like me!

Tom;

Because I'm sick in the head! The other time where it's not so passive. I'm sorry, Michael, I'm stealing just all the fodder, I'm just like,

Michael:

I should never have given you my notes.

Tom:

You shouldn't, you should have spoke first, all the points and then anything else. The other pretty time consuming event is tax time. And I think I've complained about this before, on where you're, you're collecting all these different documents and passing them on to your CPA, you're collecting your 1099 from your property manager, your 1098 from your mortgage, if you have a mortgage, and all these other documents. So that can be a little bit time consuming.

But you know where I'm at right now, I don't spend a whole lot of time and that I have a portfolio that's been humming along for a while. So I'm not necessarily doing acquisitions. I'm doing land development on my own personal primary. So Alright, Michael, I'll stop stealing all the points that we talked about before the episode. So go ahead, Michael.

Michael:

That was great. You covered everything episode done. Thank you. Just real quick plug, something that you mentioned around tax time is if someone is using Stessa, they'll likely have a much easier time come tax time, because so many of those documents can be housed there and then sent directly over to their CPAs. But I think you nailed it. I think that's definitely a misnomer, calling it passive income. For all the reasons you mentioned that I'll just kind of share an anecdote from when I started investing, because I think it's it's a very common way that people get started investing.

So I started buying very turnkey single family homes in Southern California. And so the first one I bought was was relatively new build was a couple of years old, and was turnkey, ready for a tenant. So we got a tenant in place. And then I was freaking out until we actually got that tenant place, which took about a month, just because of the timing, that of what I bought the property. And so once you got a tenant in place, I was very hands on on the property manager trying to keep tabs on everything that was going on, because I didn't know any better. After a couple months of that it was very, that it was versus very passive. I mean, the property didn't need any work, that tenant was placed. And it was just one single property. So there wasn't a whole lot for me to actually do.

Now I would keep tabs on what the property manager would send over her reports every month and see, okay, what were the expenses and plug that into my spreadsheet and see how close was I in guesstimating, what my pro forma was going to be. So I spent 20 minutes a month, just checking up on things, reviewing the reports. And then I added a second property to the mix. And that was new construction brand new build.

So very similarly, there just wasn't a whole lot of stuff going on with that. And so there was the same property manager in the same market. So now I just had two properties on that monthly report as opposed to one. So okay, I spent 25 minutes reviewing that once a month, then added a third property. And that was my first add a state investment. And so that was a couple duplexes. And very similarly, it was fairly turnkey, fairly new builds about 10 years old. And so already tenants in place, there's just wasn't a whole lot for me to do in terms of being an active manager or managing the manager, so to speak. So I had property managers for all of these.

And that was kind of the case for a lot of my investing. And so the more turnkey I think you buy, oftentimes, the easier it is from the ownership and operational side of things. And there's really not a whole lot to do so to speak other than make sure things aren't going off the rails.

It wasn't until I started getting really heavily invested in value add projects that I was having to manage a lot of what you were mentioning with your with your shed is managing contractors keeping tabs of okay who's doing what and when and keeping tabs on your property managers because they're much more involved with that process on a day to day basis than I am but getting update reports, checking in seeing what happened, what works scheduled it and make sure things are actually getting done. And then following up and seeing what things are renting for how soon are they getting rented this kind of thing. So because that's been my life, up to my eyeballs for the last Three, four or five years, it's just been a lot, I've been much busier in that capacity. But now that things are starting to slow down from a project standpoint, it's definitely becoming more passive.

And I have a four-plex that I've talked about on previous episodes, and took that down to the studs total, I mean, brand new build, essentially. And that is very much humming along because there's not a whole lot that occurs on that property, knock on wood. So I talked to my manager about getting it pre leased and pre marketed and what the rent should be and how we're going to push rents and this kind of a thing, but that's only when the leases come due, so four times a year for that for those four units. So from that perspective, it can be very, very passive.

Tom:

It's just a great kind of a point in that I think your there always is going to be some time constraints kind of based where you know where the property is, but there is a little bit of a menu of how much how not passive or, you know, by the type of property that the condition of the property so depending on you know, what type of investment that you're looking for, you know, for me looking for a property you know, maybe turnkey maybe some light work that needs to be done but ultimately, you know, a minimal time investment beyond those major events you know, acquisitions terms, what that versus you were, I have an appetite for a little bit more stuff and up to your eyeballs at points in times. But I mean, like life, there's, you know, there's ebbs and flows of…

Michael:

I thought I had an appetite for, until I threw up, but that's neither here nor there. I think, Michaels, Uber says it really well, too. He talks about regularly. And in his book, he talks about taking on all these value add projects, and in hindsight, he wish teachers would have bought more turnkey. And so like you mentioned, you can really dial it up or down how much time and involvement you want to have. But you'll either pay for it or receive a discount. And so I think a lot of people end up buying properties on the cheaper end of the spectrum and given markets that probably do need work, but expect it to have the same time requirement as a turnkey property. And I just think that's a very big misalignment of expectations.

So you really need to understand what does this type of property What does this class of property look like in terms of my time requirement in terms of capital requirement? Because I think people often knock turnkey investments Oh, they're all the equities already been sucked out. Yeah. But if someone doesn't have the time to go manage it, or deal with the headaches or deal with the projects that are needed, like I think it's it can be a really great avenue for people. And so that's I think one of the beauties of real estate is you have this broad spectrum and depending on who you are and where you're looking to go there's likely something for you.

Tom:

Yeah, and the other you know thing about these you know, massive project type properties kind of against people who say oh, you know, all the values already been sucked out for these properties that are already in good shape, the concept of beta where in taking on a project that has a property that has a big project, sometimes those costs can go over like and you can you know, end up buying this property that you're thinking you're gonna squeeze out some extra value but instead you're actually just squeezing a bunch of extra work and then your costs are going over I mean, it's really easy to look at these projects with some pink rosy glasses and thinking that you're getting some extra value but when in fact you're just doing more work and oh, materials costs are up Oh, your contractors timing so it's vacant for longer like me I don't think that's really the purpose of this episode so I'd like to expunge upon or talk about the value of slightly more turnkey properties

Michael:

Vut that's where it ended up!

Tom:

That's where it ended up.

Michael:

I mean, I Case in point like Exhibit A myself that for that four Plex I was talking about as we got into the property started taking off the sheetrock. My contractor calls me goes look, Michael, the electrical and plumbing is all done very poorly. So this needs all new electrical and all new plumbing throughout, that wasn't in the scope of the project. So that's $40,000 that was not accounted for. Like that you pay for it now pay for it later kind of thing. So absolutely. I think big risk, big reward potential but also big risk for things to go sideways and get overhead get over your head and over your skis fairly quickly.

Michael:

And less passive back to the original topic.

Top:

Back to the original topic. So now kind of getting getting through some of the other asset classes I'm fortunate enough to own a couple double net and triple net leased properties. And if anyone doesn't know what that is, I highly encourage you to go check it out. You can Google it, it's abbreviated n n capital or N N N for double net and triple net lease respectively. That is about as passive as you can get in my opinion, with still being a direct owner. Now you can go invest in syndications or funds or crowdfunding any of that kind of stuff, which is truly passive, I mean, it's like stock market investing, you set it and forget it type of a thing, you're not a decision maker, you don't get to decide when things are done, ie being a decision maker, but double net and triple net leased properties often come with very, very little landlord obligations or responsibilities, if any. And so that in my opinion is is another definition of mailbox money. And if somebody is interested, again, highly recommend going and check check stuff out online about those

Tom:

And those leases are almost always you know, commercial or retail shop right?

Michael:

Exactly at the CVS is the Walgreens the McDonald's, the Carl's juniors. A lot of these companies will use utilize triple net leases and not actually own the property. And so it's it's definitely a different beast different asset class unto itself, but still within the real estate space.

Tom:

Future episodes thrown in the queue.

Michael:

Let's do it. Let's do it. Hopefully you can't hear the dog snoring next to me.

Tom:

Calming, it’s calming

Michael:

Soothing. Awesome. Tom, anything else before we get out of here.

Tom:

Nope, I think that's pretty good. We got it.

Michael:

Awesome. So takeaways, do your homework on the front end? Do the legwork. Get the train moving so that way it's easier on the back end. Alright everybody, that was our episode. Thanks, Tom. Always a pleasure to riff on these with you. If you liked the episode, feel free to leave us a rating or review whatever it is listening your podcast with the chorusing on the next one. Happy investing.

Tom:

Happy investing.

This is how Alex Jarbo gets massive returns with short term rentals Sep 30, 2021

Alex Jarbo is a real estate agent and investor that specializes in custom-built short-term rentals. He also runs the YouTube channel, Alex Builds which details his process.

In this episode, he tells us how he got started, what his strategy and returns are, and important things to consider if you are interested in getting started in the short-term rental game.

Alex's channel and contact: https://www.youtube.com/channel/UCN0sdWw5T6zP7-NG4p8Ry6g Email: alexbuildschannel@gmail.com

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Michael:

Welcome to another episode of remote real estate investor. I'm Michael Albaum. And today with me, I have a guest, Alex Jarbo. And Alex is actually doing ground up development for short term rentals out on East Coast market. So he's going to be talking to us about what that process looks like, and all the lessons he's learned along the way. So let's get into it.

Alex Jarbo, welcome to the podcast. Man. Thanks so much for taking the time to hang out with me.

Alex:

Oh, thanks for having me on, Michael.

Michael:

Now. No, I appreciate you. So give everybody a little bit of background on who you are, where you come from, and what is it that you're doing in the real estate space, because I know that it's very interesting. Let's bring everybody up to speed.

Alex:

Yeah, so I'm originally born and raised in Detroit, Michigan. My parents grew up in Detroit and then my parents moved to like 20-25 minutes north of Detroit. During the Marine Corps when I was like 18 years old did that for like five years, I was stationed in Washington DC, that time it was like time to leave the Marine Corps. I decided that I want to be in real estate got my real estate license in North Carolina, moved to Asheville, North Carolina, right out of the military, and then I sort of dabbled around in real estate flipping properties.

Didn't really like that too much did the real estate agent thing for a little bit made some good money but I was I was helping investors sort of find Vacation Rentals instead of, and I realized like okay, let me let me try like purchasing some. So we had some money saved up and I went out and started like looking for vacation rentals in this area. Or like properties that would do well as like short term rentals and stuff didn't really find anything that wasn't like crazy overpriced. This is like even before like the COVID lockdown and then so we just decided to build we just decided to build our first cabin which ended up being an a-frame took took about a year to get that done just because we were like my first build and just learning everything and then from there like we started renting it out and started doing really well and then like one turn into four and then four turned into not like next year so we're breaking ground on four this year and then we have 24 plan for next year.

Michael:

Holy smokes it sounds like these cabins are just having like little cabin babies.

Alex:

Yeah. We just took took the class cashflow and just rolled it into the next board took our like I took on investment money for the first time with with the like to have the cabins and then all the all the properties we're doing next year with investment money. So like with other people's money, oh,

Michael:

Man, that's frickin awesome. I love how you just said, Oh, this thing isn't working over here. So let me just go build my own. Most people say oh, it's not working like Screw it. Real Estate sucks. It's I can't do it.

Alex:

No, no, absolutely not. And I mean that the model that we're following now really has been I mean, like solidified with like with COVID, because we had a lot of like out of town, people moved to this area that are working remote. And that sort of drove real estate and that's driving real estate prices up everywhere. But that drove real estate prices up here now. And it's like, if I try to go out and find a vacation route right now like I'm competing with people who also want to live in the home, we build all of our homes a stick built permanent foundation. And the reason we do that is just so like it's just as a built in exit strategy there so we we build them as normal, like single family house for the most part, like they're still built as unique cabins, like a-frames log cabins, something something unique about the architecture. But if like for some reason, like 5-10 years down the road or the city, like decides to one like the county one day decides randomly to not allow short term rentals in the city or the county. Then like we do have an exit strategy there.

Michael:

So yeah, that's awesome. And so that first one that you built and rented out, was that a short term rental? Was that your traditional long term?

Alex:

Yeah, no, it was a short term right out of the gate. We had designed it as a short term rental and then we saw how good those numbers were that were just like I was I never really underwrote the property myself. I just figured that we underwrote it as a long term rental like okay if it doesn't work out, we can put a renter in there and just cover the mortgage and maybe cash flow a couple $100 but I mean the cash flow like for October's like five grand for the small cabin. That's like that's net in our pocket.

So yeah, I was I was curious to see like, I was You know, I've never done my numbers on this before because it's been renting out for like a year and a half a little over a year and a half now, I was like, let me let me do like annual numbers and see like, what actually would have like if like, let me do the cap rate, let me do the ROI. And like, just with, like, I didn't have an investor with that property. So like, my cap rate was like 26%. My, yeah, my ROI was like 80 something percent, like for the whole year, I'm like, oh, okay, I think we are working here.

Yeah, so that's what I put together, I started putting together like a YouTube channel and sort of talking to some people. Like just some, like close friends and stuff, who had some money saved up and they wanted to do something. And then I just just pitched him the idea of like doing like, right now what we do is like, we sort of pivoted from doing like one or two cabins at a time to like doing six at a time. So we do like these small vacation rental complexes, but there's still like stick build permanent foundation owns, like we purchase six to 10 acres. And then we subdivided into three plots. And then we put three primary homes on it. And then three accessory dwelling units are like mother in law suites that are detached, like in the back, like up maybe like 100 or 200 meters away. That way we get away with doing six at the same time, but it's three separate parcels. So safely, something comes up and we need to sell one of the properties are safe, like an investor wants to back out or something. We can also like give them back their money.

But yeah, it's like we the 24 that we're doing next year, we have like 455 investors lined up for those for those 24 cabins and it's four separate communities. So…

Michael:

Man, this is incredible. So I'm curious on that very first one, did you finance the build with a construction loan? Did you go all cash then he didn't have investors walk us through how you got that done?

Alex:

Yeah, and I sort of briefly talked about this on my YouTube channel. But we we started with like a second home loan, essentially I had my license technically was still in Michigan, like where I'm from, and then my wife, we'd live separate for a little bit until just like until her job allowed her to work remotely full time. So we were allowed to get away with doing a second home loan second home loan construction loan. Just because I had an established residency here in North Carolina, I didn't know if I was going to be here long term either. So technically, like my address was still in Michigan.

But a lot of people a lot of posts that I talked to now sort of that's how they get into this space, whether it be building or with with just purchasing an already built home for vacation while purposes they do it as a second home loan, and other lenders are fine with it. Like if it's a second home loan, it's rented out as an Airbnb that's what everyone's doing. It's like they'll stay in it two, three weeks a year and then for the rest of the time they'll just rent it out just to cover their mortgage.

So yeah, that's that's how we started we did a two time close loan, which there are negatives and positives to that so it's essentially a construction loan for a year and then you refinance into a permanent like 30 year fixed which is what we ended up doing.

Michael:

That's awesome. And so can you walk us through some of the numbers on what did it cost to build because I think a lot of people just assume that building ground up is more expensive than buying existing which is why more people maybe don't do ground up.

Michael:

Right. Like you're a little bit of the head like headache comes with it if you're just like starting with it, but but it felt like it fell on us we're just like okay, we're either gonna overpay for a property that's not 100% perfect and it's gonna need some work anyways, so we're like instead of renovating a home for three to six months, why don't we just build one like from scratch and we'll take like 12 to 14 months. So what are our numbers these numbers again, these are numbers that were prior to COVID so like with like materials and everything going up but our first Kevin the first Kevin we built for 202 and that the 202 means it was also like furnish the land cost about 50,000 and then it cost around like 135 130,000 a build it's only an eight it's like an 830 square foot cabin, which sounds small but if you actually like if you actually see it like it's an open floor concept pocket doors everywhere so no doors are opening in and out we just really tried to optimize the space like.

It's funny like we just the furniture sort of decided what when you're building these cabins like these smaller cabins, the furniture like decides what the house sort of looks like so it's like you have to like have your furniture planned out before you start designing the home but yeah, we that that cost It costs around like 202 to three to build and furnish.

And then yeah, we started we just started renting it out. We've been we've been 100% occupied for the last a year and a half. I mean besides maybe like, one or two days that we've taken for like maintenance days or like to just do some like extra work on the cabin. Like I already mentioned my cap rate was like 25% for that first year without an investor. And then my ROI was about like 80%

So like the nice thing about our market which If I do decide to invest in a different market and this market is year round I'm here like people like to be in the mountains year round we have the I'm in Asheville, North Carolina so we have like the breweries here but we also have like the Biltmore Estate, which people actually come for like in the winter and stuff people like to hike in the winter too so with Yeah, it's like I accidentally stumbled upon like a year round market now we do have like busier seasons and stuff so like October November in my opinion are our busiest seasons because it leaves season like with all the leaves, changing colors, it just like turns like yellow orange reds and stuff. So

Michael:

That's incredible. So while you were talking, I just pulled out my calculator and ran the numbers on your dollar cost per square foot, which is about 160 bucks a square foot

Alex:

Yeah, and I would say right now I'm pricing out these other properties that we did it's closer to 200 a square foot Okay, which is a pretty big jump but it's nothing it's nothing like compared to like if you're building in like California, like our lender that we're using now for the bigger projects next year. They're based out of California and it's like my entire 660 unit project is about like a $2 million bill compared to like something in California which like a single family house could cost that.

Yeah, So yeah, we're around like 200 square foot or and so like this the first six that we're doing next year, it's anywhere between 400 square foot all the way to 2600 square foot so it's like there's a big range there. Like some cabins can only sleep like two people but the biggest cabin can sleep like eight to nine people.

Michael:

Oh my gosh that's awesome. So you take on investors you do the build and then do you turn around and sell them for the investors and then you manage them talk to us a little bit about the whole business model.

Alex:

Yeah, so that we self manage and that's that's part of the business model is we take we we take on the investor money and then we don't take a development fee, we're a full partner throughout the whole thing it's a it's a long term play we don't we don't we're not selling them so that the hold is about 10 years I just that's a pretty round number. If I can refinance say like at the five year mark, I will just to give the investors back their money but I think my projections I've done for my last the last three projects were like two and a half years to get your money back from when your initial investment from when when they're fully built so about it takes about a year to fully build the project three and a half years to get your initial investment back and that's not including the refinance to pull out money say like they want to another initial investment back essentially or we can take that money and go do other projects with it. And also that doesn't include principal pay down that doesn't include if if we do want to sell like in 10 years like so. Yeah, they're getting their money back four or five times over six times over I would say so.

Michael:

That's amazing. That's absolutely amazing. So what do you tell people that are trying to get into the short term rental business? Do you tell them hey, you know go start go do ground up development because it works really really well.

Alex:

It's all dependent on your risk and what type of headache you want. Like so

Michael:

You're getting headaches it just depends what kind

Alex:

Yeah so like that was a that was the biggest reason why I started the YouTube channel was like to detail every single part of the ground up is is not as stressful as people find it I would say the hardest part is just making sure that you have a builder like a competent builder that's also comfortable and take it on

Michael:

Competent being the main key

Alex:

Yeah, absolutely. And another another thing is like when you're approaching a builder like and you're you're looking to do maybe if you're just on the like if you're just trying to do like what we first did which is like an 800 square foot cabin make sure the builder knows that upfront like you're they might not want to take on a project that small um so yeah, I would say getting into it just making sure that you have a competent builder but also an agent like when you go start to look at land.

And stuff to make sure that you have an agent that deals specifically in buying and selling land, which we have in this area. So like I went to Google and just type in like land agent Asheville and there are there are agents everywhere that only specifically deal in land save like you're in the rural parts of like the city that you live in. So that that's huge. It's just like you can you can leverage all their knowledge all their context when it comes to finding the right piece of land.

Access is the biggest thing for us. So making sure that our guest isn't driving like 20 minutes down a gravel road, especially if they're arriving at night. So like we look at we look for like properties that are like parcels of land that are attached to like state maintained like double lane roads and stuff, especially if we're building six cabins. So like the six cabins we're building, the first six we're building next year that All if all those cabins are fully like maxed out on, like the amount of guests that can sleep in, they're all rented out. It can sleep up to 34 people a night, like all six cabins together, so you got to think of like 34 people going up and down that road, it can't be a single lane, gravel road.

Michael:

Right.

Alex:

So that even even if you're building only one cabin, you got to think of like the guest experience, like do like do you really want your guests who maybe is arriving at night to be like going up, like 20 minutes up a gravel road, and they've never been to this cabin, and they lose reception like, like, so it's like, that's the biggest thing when we first look at even building the access to the lands important, which means before like part of the due diligence before we even go under contract is driving out to the land, because it might look cool on on the MLS and might look cool when we're looking at it with the agent like on the computer, when we're looking like at the GIS maps, like the satellite images, but you might not know like, maybe it's just that, like, it's an absolute terrible commute to even get to the land. So it's very important to drive up there, too.

Michael:

That makes so much sense. And so are you using the same agent and the same builder like the same team for all of your builds? Or do you find Do you bid out all your projects?

Alex:

So different subs, same builder, I wouldn't say we have an agreement with the builder that we have is just like we're sort of like, we've become his exclusive client. Because we we I went to him, I'm like, hey, like 24 projects next year, like I'd like to be a priority here. Which makes sense. So yeah, we use the same builder, same agent, for the last two that we did was the same agent, I'm licensed in this area as well. But it does help to have someone that only deals in land. And like the land agent that we use has like experience with like buying and selling for their clients like up to like, under 200 acres. So like our 10 acre parcel isn't really a big deal compared to like, some of the larger projects they build. So yeah, same team, for the most part, it's just the subs are going to be different because we bid everything out after that.

Michael:

So Alex, can you speak to now that the building is built, you've got your short term rental built, or maybe you go and buy one, what's what are some things that you're doing to kind of set yourself apart without giving away the secret sauce, but that, you know, investors should be thinking about or be aware of, of things they could do in their own short term rental.

Alex:

Yeah, and playing off the title of this podcast, you got to decide if you're, if you're going to be worse, if you're going to be doing it remotely like out of state or if you're if you're living in the city, you also got to decide if you're going to self manage compared to if you're going to hand it off to a manager, you're going to hand it off to a manager, that's easy, you just give it to them they handle everything. Um, there are more and more tools that are coming out now that allow remote real estate investors to be able to handle this themselves.

A good example of that is like when I when my wife and I recently went to Tulum, Mexico, I almost everything was handled from my phone like nothing crazy it happened there. So I would say the if you're going to self manage, which I'd honestly recommend because like right now managers is a good manager will take about like 25 to 30% of gross, which is a lot. I would recommend like trying to do it on your own. Start with the cleaning crew find a cleaning crew that specifically deals in short term rentals. If you're just starting out, I wouldn't like go out and try to hire a cleaning crew like find find a company that already handles short, short term rentals, they're going to be sort of like where the gravel meets the road there.

The cleaning crew helped helps with like save something's broken, like my cleaning crew will like take a picture and send it to me and I sent it directly to Airbnb or wherever I'm renting from they, my calendar directly links to my cleaning crews calendar. So like if there's an update on a booking or like if, if a new booking comes through, they automatically see it. So I would say cleaning crew number one.

Have some contacts. I like a plumber and electrician, like just like three or four contacts there just in case something does come up at the cabin. The nice cool The cool thing about new construction is for about the first year you don't really have to worry about too much maintenance, because they are brand new homes. And then on top of that it's just leverage leveraging the technology like we use. We use a service called Smart B&B that automates all of the messaging. So I'd say 80% of my messaging is automated, where like sending, sending and checking instructions, checking up on the guest sending out checkout instructions, and then everything like the last 15 to 20%. Like if I do like something some days will pass where I don't I don't look at we'll look at the Airbnb app, but it's like some days will pass where I don't even touch my like, contact the guests at all because they're having a good stay without me having to do anything. So messaging is important, Smart B&B.

And then right now we recently started implementing stay fi which is like an online marketing platform where it's like an email capture. So like say if you like go to an airport, you go to, like a mall, you have to put in like your email address before you have access to the internet. And that sort of protects us. Like if they're doing anything like sketchy on our internet, that that will protect us. But it also captures their email, it captures everyone's email in the cabinet as well. So it’s like one listing, if five people are staying in the cabin, that's five emails there. So you're building an email list there. And then we just re we're gonna start remarketing, to these guests who have already stayed with us. And the goal is to be able to take them off of the Airbnb platform and sort of run them through our platform. That way, we sort of have more control over the guests, like the the guests, and also, they're going to be paying less in service fees, because I believe right now, like the service fee on the guests adds like 15% for Airbnb, which it's getting higher and higher.

And it's like, they take 3% from the host, which is not too much, but 15% from the guest, and it recently went up like like a year and a half ago. And like now I like there isn't really a week that passes by, and that we don't get at least like a potential guests or to complain about the price prior to booking. Like they're like them asking for a deal. So that didn't happen for the first year where you're renting it out. And it recently started to happen in the last six months, where like a lot of people are complaining about the price where we don't really have too much control over it, like of the service fee. So that sort of really opened my eyes to like, Hey, I think we there there has to be a way to sort of start getting, like controlling, controlling the guest experience essentially.

Michael:

Totally. Well, I mean, I feel like it's very similar to a rental car, you say, Oh, it's 25 bucks a day. And then I'm renting for three days, and then you get your bill and it's $700. Like, wait, what, how did that happen. Sur charge

Alex:

Yeah, why is my security deposit more than my rental. Yeah, yeah.

Michael:

It's crazy. That makes a ton of sense. I think that's frickin genius. I think that is genius.

Alex:

We were thinking about it like last, the service that we use Stayfi recently came out like in the last six months, but we're I was trying to figure out how to do that, like I want because like with any business online or offline, like real estate to offline, for the most part, you have to build a list in some in some type of way. Even if you do long term rentals, like building a list, building a waitlist is super important. So that's our way of end like we're essentially getting paid to build our email list here. Where it's like the guest is paying us to stay at the cabin, and we get their email. And we're also helping them out. Because if they do decide to book through us compared to Airbnb, they are saving money on the service we sell.

Michael:

So yeah, so did you set up a direct website for us specifically, or is third party,

Alex:

We're building a website right now to help bring those like people in so like we're building the list right now. But for all of our future cabins, all of that is built into like the budgeting and everything. So..

Michael:

That is incredible, man. But Alex, anything else that folks who are getting into the short term space should be aware of things you know where that you've seen things go south or sideways for short term rentals.

Alex:

Oh, when it comes to utilities, make sure that you have like, when you're purchasing the land, I would say the land is probably the most important part is making sure that you have access to utilities, when it comes to like, you get like, here we're a little bit we invest in more rural areas about like 15 to 20 minutes away from downtown. So let's like the first cabin that we built, we needed like an electricity easement from the neighbors to be able to run electricity to our property. And it took about like six months to build that. Or to get that we built that entire first cabin with a generator, which is crazy to think about now.

Thinking about utilities, electricity Internet's a big one, making sure that you have like, even if you're doing Satellite Internet to like make sure that like you, you take down the right trees, or you know where the internet is going to be at. So when you start building. Yeah, making sure just making sure on the management side making sure that you are able to the right people are in place. So like before you if you're looking to get into like a specific market, making sure that the builder like you can find the right builder, you can find the right cleaning crew that that's going to be super, super important and just you building unique properties. If you're going the building route.

What I'm seeing is and I started this way, like I started with the master leasing thing where it's like you you rent out a property from a lot like an owner and then put it on Airbnb and sort of split the profits there or at least pay that rent. That's how I started. That's how a lot of people started. That's how I saved money to sort of do the my first build. But what I'm seeing is investors like I already mentioned are coming into these markets and sort of really bidding up the properties which is driving down returns, and they're just they're purchasing normal properties and just putting them on the market. There isn't any really draw to them or any type of appeal, they're not really unique in any way. So I would say for the listeners, though, if you're going to go the building route to like really focus on building a unique property where the property itself is an experience outside of the city, like that the guest is visiting. So that's sort of like my company thesis, for the most part is building unique properties that will, like draw guests to these properties and sort of set you apart from the 1000s of listings in your market.

Michael:

Yeah, that makes a ton of sense. I have a couple Airbnbs over in Portugal, and we're getting it furnished right now. Beautiful. Yeah, it's awesome. But I was chatting with a property manager about furnishing it. And he goes, Michael, I swear to God, if you put a single trolley car picture in your house, it is not going to work with you, because that's what everybody does. Everyone. Portuguese is very famous. So you have to set yourself apart. I think that makes tons of sense.

Alex:

Absolutely.

Michael:

That makes sense.

Alex:

Yeah. And I mean, you can't like, like thinking of that, like, before you even like when you're designing the property is super important. Because like, yeah, change the structure once it's fully right. So.

Michael:

Right, right, right. Yeah. Cool. And Alex, my last question for you is how do you think about or how do you go about getting ahead of political changes or county ordinance changes? What's the best way to get informed about that if someone is trying to buy a short term rental?

Alex:

Yeah, I would say number one, look up your your county city's zoning laws before you go in there. So in the city of Asheville, currently, you can't have vacation rentals, but in the county you can, in the city you can't so we invest in the county that sort of helps us a little bit to Asheville is a drive in city where a lot of our guests were coming in are driving in they're not flying here. Um, so they don't mind the 15 20 minute drive. Getting Ahead getting ahead of it, it's just like call up your planning department and just ask them what the zoning laws are.

What we do to on top of that, to protect us is we like Like I said, we keep the property separate. Where we subdivide, we're all say like, all six of our properties aren't on the same parcel say if we do need to sell, but we also underwrite our properties as long term rentals, like when it comes to like, we make sure that if we put a long term rental in our property that it will be able to cover the mortgage payment or at least break even if not cashflow a couple $100 a month. And that's like, that's like Plan C when it comes to the vacation rental stuff is underwriting them as a long term rental, which some coasts might not agree with. But that's just been with me taking on investor money, I need to be like 100 like very, very conservative when it comes to like, Plan B Plan C plan D So

Michael:

Yeah, I think that makes sense. That's that's what I've said for years too because you know, I don't know how somebody could disagree with that methodology because you seeing this this Airbnb going away in numerous cities like Monterey, California, you can't have short term rentals. So what are you going to do if you just bought a property there so I don't think saying it could never happen here is a realistic adage

Alex:

Yeah, no, I had spoken to a host that had like I think 2020 listings in Detroit where I'm originally from and the the mayor of Detroit at the time had done an Airbnb ad like he had he had been on an Airbnb ad like like telling people like hosts and stuff to like essentially come to Detroit like Airbnb is welcome. And then like a year later, it'll leave a year later, like Detroit just decides to get rid of Airbnb. So it's like like you like you? Yeah, and he had he had worked with the city and I forgot what he had done to sort of grandfather himself in but um yeah no you're completely right there is is like plan for the worst when it comes to this stuff because like, again, like the the mayor of the city was on an Airbnb commercial. Like and they still they still change their laws. So.

Michael:

Wow, yeah, I can't really happen anywhere. Alex might my truly last question for you is how can people find out more about you? Where can they get in touch with you? Where can they come invest with you if that's something you're open to?

Alex:

Yeah, absolutely. Yeah, we're, we're we're building out we're growing pretty rapidly right now. So if they want to, if they want to check out my YouTube channel, it's called Alex Builds. The little icon to find it is like a little treehouse or blue treehouse. Or they can email me directly at Alexbuildschannel@gmail.com so it's alexbuildschannelchanel@gmail.com. I'll be I'll answer any questions that anyone has some

Michael:

Fantastic man This was absolutely awesome. Thank you so much for coming on and taking the time really appreciate it and curious see how this next build turns out.

Alex:

Yeah, absolutely. Thanks, Michael.

Michael:

Alrighty, everybody, that was our episode a big big, big thank you to Alex. I hope I wasn't being too too much of a fanboy the whole time. I was like, what this guy is doing is unbelievable. So definitely go back. Give this episode another listen to if you're at all considering getting into short term rentals. If you liked the episode, feel free to leave us a rating or review wherever it is, listen, your podcasts We look forward to seeing the next one. As always, happy investing

This is how the pros protect their real estate assets Sep 28, 2021

Investing in real estate is a powerful way to build long-term wealth and achieve financial freedom. But if your assets aren't sufficiently protected, you may be putting yourself at risk of losing your hard-earned income.

Clint Coons is a real estate investor, an attorney, and an asset protection expert with Anderson Business Advisors. In this episode, Clint gives a clinic on how you can set up asset protection for your real estate portfolio.

Get a free strategy session with Clint's team here: aba.link/roofstock

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey everybody, Michael Albaum here. Welcome to another episode of The Remote Real Estate Investor. Today I've got with me a very special guest, Clint Coons with Andersen Business Advisors. And Clint is gonna be talking to us today about all things asset protection, and what we need to know about them as investors. So let's get into it.

Clint Coons, thank you so much for taking the time to hang out with me today. I really appreciate you coming on the show.

Clint:

Mike, thanks for having me on. Looking forward to it. Yeah,

Michael:

Absolutely. So for all of our listeners, if you could tell us a little bit about yourself and how you got into the world of asset protection.

Clint:

Well, okay, so I'm an attorney that that that goes right. How do I how do I fall in asset protection? Well, I think a lot of it stemmed from the fact when I was growing up, my father was an avid real estate investor. And he, he wanted two kids, he got two sons, because he needed indentured servants for 27 years. And so I grew up working on my own my dad's real estate for free, he always said, hey, it's gonna be yours one day, so you better do a damn good job, or you know, I'm sending you to college, and I'm paying for it. So this is your payment. But what was interesting to me is that my my grandfather, my dad's dad, he's an attorney, and he never wants to told my dad, you should do this, this, protect your assets, reduce your taxes.

And so the few times that my father was involved in a lawsuit is more about let's just write a check to make this thing go away. And when I was in law school, start thinking about this, hey, there's got to be a better way to do it, rather than put yourself out there and, and have all your assets exposed, because there'll be some times when he would be legitimately concerned about a situation that came up maybe at an apartment building, that he thought, you know, there might be a big lawsuit coming down the road and hit him.

So that got me really started with my partner, when we started our firm, Anderson business advisors, you know, it was, I never thought I'd be where I'm at today with, you know, close to 400 employees and in multiple states. But when we started out, we saw that there was a real need for this and that people just weren't getting the right type of advice, I guess, when it came to protecting their assets. And so that's what I started doing.

Michael:

No, that's awesome. And you so graciously are going to be offering everyone, all of our listeners a consult with a link in the show notes. So definitely check that out, if you are interested in scheduling a time with Clint or his staff in the show notes section of the podcast.

So curious to know, Clint, I mean, give us a high level of what asset protection is, what does that entail? Because I think it's a term that gets thrown around a lot in real estate investors love to sound fancy schmancy. So we love throwing terms around but give us a breakdown of what does it actually mean?

Cilnt:

So So here's the thing I'll do, I'm gonna answer your question, but it's gonna be a little different here. You know, right now I have a portfolio that's over 250 properties spread out, cross unite, well, not all I don't have as many states as I used to. But it's in multiple asset classes, predominantly single family homes, that have multifamily commercial, also have warehouse and mobile homes. And when I started investing, I went about the approach of, you know, set up an entity, an LLC, or a corporation, that's what you're going to do to buy property and, and you're going to protect it. And I thought that was the way that it should be done.

And over the years, I started to recognize the fact that when it comes to asset protection planning, you just can't look at that by itself. And that's the mistake that I made when I first started practicing my partner and I, Toby, we came out of the gate and our firm we were doing really well and the first couple years and we could make $500,000 and, and because our firm works both on the tax and asset protection side, you know, we have CPAs tax preparers, bookkeepers and stuff, we would work to reduce our taxes down to zero, so I can make a half a million bucks and pay zero federal income tax. I thought I'm the smartest guy out there and

Michael:

I have made it

Clint:

Yeah, yeah. You want to be like me? Alright, let me just show you some of the things that we could do for you. And all of a sudden, at about 2004 or five I realized that all that stuff I was doing on the tax side really wasn't helped me out on the investing side. Because I wanted to be in a real estate mess or just like my father I want to go out there and buy and buy properties and I started struggling because you know when you go to an underwriter What do they ask for copies of your tax return. So I turn over my tax returns and they look at and they say hell you make no money. Yeah, it just doesn't show up there. Yeah. Thank you. You're a drug dealer, right? You're running coke to Miami.

Not the best scenario to be in. And so when it came to the asset protection side, I started realizing Alright, so you got the tech side, get this asset protection side, so, so you can put stuff in entities and you can overstretch yourself, I started realizing too, on some of the investments when I was trying to apply for an SVA loan, they would look at some of my structuring and they go, What the hell are you doing, you know, I don't see your name associated with this, and I'm trying to get a loan closed, and I can't get it closed because of some of the planning that I had done, which sounded really great at the time. And so for me, it was a matter of finally coming to this realization that for any investor, you have to look at three things, you look at asset protection, you look at tax planning, you look at business planning, and you understand that the entities and the tax planning that you do, should further you're investing and investing to me as a business.

And many of the things that I tell our we tell our clients run contrary to what a CPA is going to say, or possibly what an attorney is going to tell them because they themselves only look at that one leg. And they don't understand the wider picture of what it takes to get a deal done. Unless you have tons and gobs of cash floating around where you're going to you're not going to use leverage, you have to be sensitive to that. And, you know, even when I started, I was flipping properties in the Vegas market for a couple of years, my partner and I and we'd set up an S corp to flip them, we had separate LLC set up to minimize the risk and everything's running great, then we decided to wind this thing down. As you know, more California investors started coming in and screwing up our returns on these deals were picking up.

Michael:

Yeah, we have a tendency to do that kind of across the board!

Clint:

I know we would look at something and think, oh, man, that's it. That's a 60% return like not touching anything less, it's 28 to 30. Because you get a taste for that. And you don't want to deal with anything else after that point. Right. And so I started winding that business down. And because of the way I'd set it up through an S corp, you know, I thought it already solved my problems. I went away from, you know, deferring on my taxes and changing, I started showing more income and then I set up this flipping business and then that flipping business starts to become an anchor around me because every time I turn over my tax returns my 1040s. It's a what's going on with this business over here, it looks like it's about out of business. So I'm just winding it down. Well, how do we know you're just not very successful, and you have outstanding obligations and all this stuff that the bankers or underwriters like to throw out the brokers throw back on you? And it was it's been a learning experience, to say the least.

And so when I went to your question, when you talk about asset protection high level, you need to think of it at that what I described think of as a three legged stool that the entities can help you do more. And that's what they should do, you should set up structures that are going to protect you, but at the same time allow you to achieve your goals. You don't want to create a structure that's going to handcuff you. And it's going to make it hard for you to get to where you want to be because you have to deal with title companies, you're going to have to deal with underwriters at the end of the day and local attorneys or CPAs. And so you have to be able to explain it. And if you can't explain that you don't understand it, it's really not going to be beneficial for you.

And so I always approach it in that manner. Look at what you're doing, and then design the plan around the investing rather than stick the investor into one common plan, which so many people end up doing when they're working with people who don't who aren't real estate investors themselves.

Michael:

Yep. I think that makes so much sense. And I love that you have kind of all three components at your company because I think so often too many of us have a great CPA that we've worked with and become investors and say, Okay, well, this is what I'm doing. Talk to a CPA, TPAs, tell them something, they go do it and then they go talk to their attorney and attorneys like yeah, I shouldn't have done that, like, Oh, crap. Well, the CPA told me and the attorney tells you one thing you go do and his CPA goes, I wish you hadn't done that. It's like, come on, can't we all talk under the same roof? So I think makes…

Clint:

that I would probably step in and tell them a completely different strategy.

Michael:

Yeah, there you go. So talk to us a little bit about some of the different vehicles that are involved with, we'll call it a quote unquote, asset protection, a typical asset protection scheme, somebody a lot of our listeners have a couple of single family homes, and they're looking to protect themselves, what are some of the different options or vehicles that they have likely heard about that they might want to consider utilizing?

Clint:

Typically what we're going to look at, of course, as a limited liability company, LLC for for single family investors, if that's what you're doing, you know, the buy and hold type. I like to use limited liability companies and about 90% of the time, because that structure allows you to control how the income is going to hit your tax return, which is which I think is oftentimes overlooked by people, professionals who are not real estate investors. And I'll, I'll come back and circle back to explain that in a minute.

So the LLC is a hybrid entity, it gives you asset protection, something happens inside of the box, you know, I always say it's going to stay inside of the box verse and it also protects your assets from what you may do, you know, say you sign a personal guarantee on something and then you default and they sue you. Typically LLC should protect the assets from your creditors. And so when we're working with investors, we want to make sure that they're utilizing that structure in the right context. And you know where you're investing as well, because it could change if you're investing in Florida, I'm probably going to use a land trust in Florida because most people have a mortgage on their property, if they want to protect it, and they transferred into an LLC, well, then you have the doc stamps, which is going to hit you for one to $3,000, possibly on that transfer.

But if you use a Land Trust, you've got to pay any tax, and you get the same asset protection as the LLC if something were to go wrong. Whereas if you're in California, I'm probably gonna use a statutory trust out there, because in that context, you're gonna save $800 a year in a franchise tax, whereas the LLC in California, they're gonna want $800 for each LLC set up. And there's other nuances…

Michael:

Per year for all you California listeners.

Clint:

Per year. Yeah, maybe in Texas, it's a series LLC, or a Tennessee might be the same thing. And so what I tend to do is we want to look at where you're investing, number one, and then we'll decide whether or not it's going to be a limited liability company, or a trust for single family investments. But the mistake that I see that people make, and I used to make this mistake when I would teach, when I first started teaching asset protection workshops for real estate investors, is that I would tell people, hey, you know, if you got four properties, look at the equity value, and if it's under 250, to $300,000, put all four properties into one limited liability company.

And the reason I would tell people that is a, I looked at asset protection from an equity standpoint, you know, I got four properties, what's the most I stand to lose that if something goes wrong with one of those properties, there's toxic mole, the smoke detectors not working in the place burns down, because the meth dealer that you're renting to disable them, and then their family turns around and sue's You these are all stories that have from our clients, by the way?

Michael:

Oh, yeah, I though you were grabbing these from thin air.

Clint:

No, Hell no, he got a multi million dollar lawsuit for wrongful death. And I'm like, he must have been the most successful meth dealer in that county. You know, they say his life was worth that much. But you say you approach it with this, you that mindset that it's all about the equity. And when people think about setting up LLC is, you know, they're they're trying to save, they think, well, I don't want to spend the money, they don't see it as an investment. They see it as a cost. And that's really a preservation mindset, not a growth mindset when you go that way.

But then it dawned on me, when my investing took off, and I started buying more. And I started to realize, as a single family investor, it's not about the equity, I'm not buying these properties, I do a lot of investing in Winston Salem. And you know, that's not an equity play, that is just purely income. And that's why I buy residential real estate is to generate that that monthly cash flow that mailbox money that comes in.

So I started realizing Wait a minute, I'm buying for cash flow, let's say had four properties in one LLC, and one lawsuit takes out all four properties. Yeah, I lose $200,000 equity. But that doesn't hurt as bad as losing the $24,000 in income I was bringing in every year because that's what I had my wife quit her job, and now she's working full time in real estate. Or maybe we're sending her kids to college now and that $16,000 or $24,000, and we no longer have it. That's life altering for a lot of people to lose that money that you'd come to count on.

And I started thinking, Wait a minute, I'm doing this wrong, I'm doing people a disservice. And so they start telling, hey, when it comes to asset protection, put one property per LLC, that's and and that's not uniform, okay. Now at my level, I probably I typically group 10 properties for LLC. And people say, well, you're hypocrite you just told me to put one you're just trying to charge me more for make more money off me. Yeah, that's exactly that's all you know, I'm an attorney. Right? What’s the difference between lawyer and liar, pronounciation.

So why? Why is that? It's because when you hit my level of investing, you have 200 properties, and you have 20 limited liability companies with 10 properties in each. And each of those LLC, let's say is thrown off 50 grand a year, I can lose a 10 pack of properties in a lawsuit and that $50,000 Yeah, it sucks to lose 50k but I've got 19 others giving me $50,000 a year. Whereas if that was all you had, and you just lost that $50,000 in income, that's life altering for me. It's not changing the wine I'm ordering at night, that's not changing where I'm vacationing, it's not changing anything about my lifestyle. And so I often tell people you know, when you get up to about 20 properties, then look at starting to group them, because I would never put myself in a situation where I have 250 limited liability companies set up to protect my assets, right? But when you're starting out, that's when you really need the protection, because that's where you're more apt to make mistakes as well.

Michael:

Yeah. So I come from the insurance world, for better or for worse, I was raised in that world and used to work in commercial property insurance. So I'm curious to get your thoughts around people, because there's kind of the two camps, there's the pro LLC camp, and then there's the no LLC camp. The no LLC camp says, especially for the California investors, for 800 bucks, you can go buy a lot of umbrella insurance, a lot of excellent coverage. What are your thoughts around that for especially for folks that are just starting out?

Clint:

Well, I mean, you need the insurance no matter what you do. And so you always have to get a policy. The way I look at it, when it comes to insurance planning is Do you trust your carrier is going to actually step in when you really need them? And going to pick up that claim? Or is that claim even covered, most people never read their policy, so they don't have a clue as to what's excluded.

Michael:

Right. And that's a very long list, by the way

Clint:

It is, and it keeps getting longer my business. But my partner here at Anderson, he used to be on the insurance side, he represented insurance companies, and he has a great little story where he talks about they always, you know, have these conventions about how they're excluding more and even charging more for less coverage,

Michael:

For less coverage.

Clint:

Yeah. So what I tell people is, it's the way I go about my planning for our clients is that I want to create a situation where number one, people don't even know what you because the way we structure the LLC is on the single family side, if somebody run an asset search, you're not going to be associated back to these properties, it's really difficult for them to find that you're the owner, because you can set up LLC, in a way in which your name is not tied to it on the public database. So you know, Secretary of State's website.

And so the whole reasoning behind this strategy is to get the plaintiff's counsel to take your policy limits. The Listen, that's my whole goal. I said, you know, if you're likely to be in sued those is pretty small. I've never been sued on my real estate have come close, but I've never been involved in a lawsuit. But if it did happen, I'd want it to be where, you know, they say we can't get after anything or better. They don't even know what you have. And and they'll take your policy limits and go away.

In fact, one of my clients in California, you brought up California and they have a nightclub. And two guys were injured. When they walked out of the nightclub, they got hit by a car by somebody who was in the parking lot. And so these three attorneys representing these two individuals, were suing for 15 20 million bucks. And my client that had the nightclub, which is probably the most responsible party for over serving, someone was able to walk away with policy limits. That was it. And in Why was that? Because all of his assets that are close to 15 to $20 million, were completely hidden from plaintiff's counsel, they couldn't figure this out, couldn't tie it back to them.

But then they went to the building owner, the least culpable person in this neurology was on a building's leasing it to this nightclub. And when he tried to settle, they're like, man, we did an asset search and live this, what they said is that we know what you're worth, and we know you can afford to pay. So you're gonna take we're gonna take policy plus on you. And he's looking at the other guy, which happened to be his son, he's like, this is BS, you have more than me, and you're walking away without paying anything and said, well dad, that's why you don't hold things in your own name the way you do. And so that's the way I approach planning. You know, you can't see what you can't see. And if you set it up that way, it's a great defense.

Michael:

Interesting. And as someone who has set things up in a certain way, how easy is it to change once it's already in place?

Clint:

Yeah. So I mean, you can do some things. But unfortunately, there's always going to be a trail there. If somebody were to dig hard enough, they're going to be able to find it out. But I often tell people I said, most attorneys in my experience that bring these types of cases are lazy. And they're just going to do a cursory analysis. And they're not going to dig deeper to see who's actually involved. So it's worth pursuing. But what's even more important to when you're setting up these structures is understanding the tax side of it that, you know, when you set up an LLC, we all know their pass through entities and a lot of people like to set up disregarded LLC, so they don't have to pay a CPA to file a tax return. And I get it. I mean, most of my LLC is are disregarded, they don't file federal tax returns.

But I like to filter that down on my 1040. By having that I call it a holding company will set up an LLC in a state like Wyoming or Delaware, and it will own all my single family residential LLCs as well point down to it. And on that one, I'm going to have it set up to be treated as a partnership. So it's going to file a 1065 and I know that's that some people say it's a cost I'm going to tell you it's an investment and when you pay a CPA to do that Because most of the loans that, you know I've dealt with, or my clients are dealing with on the single family residential side, they're underwritten by Freddie Fannie guidelines because those brokers are selling them off. And so they're going to take your 1040, they're gonna look at your, your schedule E, and they say, all right, look at all these properties, you're a new investor, you have three properties, right? And they're on your schedule E page one because either you hold them in your own name, or you hold them through a disregarded LLC, where you got the asset protection.

But when you're applying for the next loan, and they run a debt to income ratio on you, to see whether or not you qualify, you're pulling in $50,000 a year in rental income, but they're not going to give you credit for 50k, they're only going to give you credit for about $38,000. And you say, well, that's not fair. They say yeah, but we have to take 25%, throw it out the window, because Freddie Fannie will buy this stuff. If we give you full credit, we only can give you credit for 75% for vacancies.

But if you hold it the way I'm describing, you take that same amount of income, you put it on a different page of your tax return, the way it filters down, then you get 100% of that income credited towards your debt to income ratio. And it's just I mean, I find it astonishing how many people continue to make these mistakes where they start getting up against his debt limit on investment property loan limits, and he's wondering, Well, why is that, you know, I can pull out their 1040? Or are teams doing like, right here, right here, I need to change this. And it's as simple as just changing what you're doing

Michael:

Very, very interesting. So at what point would you say it's appropriate for someone to sit down with someone such as yourself or at your firm? or do some real business and tax and and legal planning? Is it their first property before they got their first property? Is it after they have five? Is there are a good number?

Clint:

Well, it depends on what you're doing. So if you're just strictly single family, then the next question is going to be if you have money properties at your single family investors, my next question is gonna be how you're going to fund the deal if you're going to use traditional financing. And then what I would tell you is listen, get the property First, if you're going to buy a property, maybe you think that you're going to be able to do a cash out refinance in a short period of time on it, within six months, you're going to try to angle for that, well, then I can't even touch that property, you can't do any planning with it for the first six months, but if it's not that type of play, where you're buying the property and rehabbing it and then go on to do a cash out refi on it, then then my recommendation would be after you get your first property that would be the time to explore what we're doing as far as asset protection is concerned.

Now if you're buying for cash or private money is coming into the deal to finance it for you and so you're not dealing with a broker or maybe it's a portfolio lender. I often tell individuals I always tell people that I work with or in our events, Hey, go out and find a community lender develop a relationship with a community bank that's going to be one of your best friends going forwards I mean it hasn't been for me and those deals I can't put together through other means and they have different lending standards so in that situation maybe you explore possibly taking title in the LLC itself so it never hits your name Yeah, you're gonna be on the debt but those types of lenders are they will allow you to close in an LLC. Whereas your Freddie Fannie stuff, it can't happen you're gonna have to close in your own name and then you can transfer later on into the limited liability company.

So I'd like to close in the name and the way I typically tell people to write up their agreements if you're making an offer you know, put your name and or designated entity on the offer and the reason I use that language is so that if it turns out that I'm working with a portfolio or private I can then set up an LLC and close in that LLC and the lender couldn't object to or the seller couldn't object because I had that language in there and if you ever asked by the realtor or the seller Why did you put that extra line in there? best response is my and then fill CPA or attorney you choose told me that they're not sure yet on how I'm going to take title of this property for either, choose again tax or estate planning throw it in there purposes and so they may want me to close in and one of the entities I've set up for me and then whenever you throw those names out there CPA or attorney tends to make the sellers and their agents go Okay, no problem.

Michael:

Okay. Yeah, sounds good. Yeah, all right. That's great. That's good. Something I actually do on every offer I make or every purchase I make is Michael album or assignee because I need to be able to move that around.

Clint:

Perfect. Yeah, that's I mean, you know, you're you're an avid investor. So you've been doing it.

Michael:

Yeah. Now that's, that's a great tip. That's a great tip. Clint, I'm curious to know and hopefully you can shed some light on is something I've heard in the past is, if if I go get a really big umbrella policy, even inside of an LLC, or a big a big high liability limit on an insurance policy, I'm putting a big target on my back, because like you mentioned, a lot of these folks are not going to go much deeper in So they're gonna say look here's the policy limit we could can see this guy is worth 5 million or this gals is worth 5 million so how do you think about how much to insure something I've heard is insure up to the the property value or the equity rather in an LLC or in the property I'm curious to get your thoughts around how much insurance should you get?

Clint:

Yeah, I agree with that um, I think that's a is typically a good way to approach it whatever your foreseeable risk of loss could be on that property. So typically, you're going to be looking at somewhere around 200,000 250 total for any type of bodily harm injury things like that that can come up from that but it's not to say wouldn't still have an umbrella policy if you can get it I mean, I'm sure you've had some other events where you've interviewed people who work with real estate investors and they offer those types of policies there's a number of them there's a few of them out there that I direct people to as well because it's good just to have the umbrella now if you go excess liability what a lot of people don't realize with insurance is that these things get stacked on top of one another so if any layer there gets cut out many times it throws off the rest so you could say well I have this umbrella policy or excess liability policy but if you're if it's predicated on your umbrella paying first now then if they doesn't pay then they don't pay and so that's why I'm not into the stalking the insurance get game because many times they find ways to get out of it.

Michael:

That makes sense. And I'm curious if you could share with us some common mistakes that you hear people come you know that experience in their life whether they're a new client they're like Clint, I tried to do it the cheap route and do it on my own and now I need you to fix it or are you someone that was working with somebody else and you know, regale us with some with some of America's Funniest Home Videos

Clint:

Well typically comes down to this is not understanding the investment that they're getting into and and what's going to happen down the road for example I was working with this was last year a guy called me yes I met him on YouTube, he calls me up and says hey, I've been trying to sell this multifamily deal that I got into I bought and I'm buyers keep falling out of under the financing contingency I've gone through two I've got my third one on right now and what's going on? I said well how's it held? You said an LLC so like let me get your LLC is a disregarded LLC said yeah, that's why I set it up on whose advice well my CPAs that I wouldn't file a tax return if I did it this way.

Well he’s, right but the problem is is that when you go to sell you know the underwriter is going to look up they're gonna pull title it's gonna say LLC and the what they're asked for is tax returns. I mean, that's they assume every LLC has to file a tax return. So that's your problem. You can't verify income and expenses, you should have been set up filing a return. And so it's things like that, that that that creep up on people or let's say you you don't understand the state law with regards to holding property, I brought up Florida let's say you buy some property in Florida, you set up an LLC deed your property into the Florida LLC, got $150,000 in debt on it, the assessor sends you a bill a month and a half later saying you owe 100, or you know, 1500 bucks in doc stamps, like, well, where did this come from? Well, it's because you put in the LLC, you should have never done that.

So those are the things that come up, or Pennsylvania, for instance, you know, if you set up an LLC in Pennsylvania to transfer your property in the county is going to nick ya for at least between two to 810 $12,000 on that property transfer. So knowing what you should do to get that protection is so important. And that's where investors oftentimes make these mistakes, where they just don't do anything. And that's the worst. And I often tell people when I teach you before COVID we always teach these you know, live events, 3d asset protection events for real estate investors. And on break, you always got attendees that want to rush in and ask questions. And I can always pick that one guy that had the story and I knew the story before he even got up to the front of the room because of the look on their face. And I always start out like this, you know, I used to have and now I don't and I wish…

Michael:

Back in the good old days.

Clint:

Yeah, I wish and my wife told me and I didn't listen but I do now. So those are the things that you know, you cannot predict when a lawsuit is going to occur. And if you're going to start getting that start investing in real estate, you know, just understand what you're getting into and look at setting up a structure as investing back into your business and that's what you need to look at real estate investing as a as a business. And then not only do you need the right structure, you need the right tax and accounting firm to work with or CPA who's gonna keep keep good books and records for you know, profit loss balance sheet, because there's going to come a time where someone's going to ask for that information.

And if your stuff doesn't look professional Like you actually pay attention to the details, then they're going to whoever you're working with is going to make an assumption that you're too risky to do business with. And then it's going to create doubt in their mind. And those instances come about, at times when you least expect it. I mean, look what's gone on now with COVID. You go back to, to last year where they had the idol loan and the triple p loans. A lot of people we couldn't help get this money because they'd never paid attention that to their financial side, the loss and balance sheet. Yeah, I mean, they guys would write down their p&l on a napkin. I've got pictures on it. Yeah, they would. They would take a picture of it and send it in and say, Here, give this at the SPM like, a series a napkin? Yeah, buddy, you can't help you. And then they'd be mad.

Michael:

At least use graph paper. Come on.

Clint:

Yeah, something. And crayons. So it's interesting, but that's what I often tell people, there are certain things you need to do, and you're sticking your head in the sand, saying that it's never gonna happen to me, it is going to happen to you. But it seems like you appreciate the risk and you take reasonable steps to mitigate that risk, you're going to be in a much better situation, because no one wants to give it all away after you've spent, you know, 5 10 15 years, building this this stuff up? Yeah.

Michael:

Yeah, that makes total sense. Then I've got two more questions before Yeah. And then I'm gonna let you get out of here. One is, I've actually heard of using debt as a form of asset protection in the sense that of, hey, if I, if I saddled this property with debt, I take out all of my equity possible, no one's gonna want to sue me over it, because they don't stand a whole lot the game Is that a fair way to think about it?

Clint:

We'll see. Alright, so I tell people the exact same thing, we show them strategies where they can put, I'll call it Phantom debt on their own property to make it look unattractive to a creditor to want to go after and we've heard these is friendly liens. But at the end of the day, they're just smoke screens, number one. And that's to discourage that the shakedown lawsuits right where somebody is coming after you really don't have a claim, they think they're just going to put pressure on you, and you're going to capitulate and roll over and pay him, right, but on a legit judgment, now, that's not going to help you because what what attorney would do in my instance, I would just record the judgment in the county, wherever you're located. And that that's just going to sit there. And if you try to sell or refi, any property, I'm going to get paid. And so I'm going to sit back, I'm going to make 10% rate of annual interest on that debt. And what you're going to be doing is working for me, but you just don't realize it because you're not going to default on your debt, you're gonna keep paying that mortgage down. And eventually, one of these days, you're going to want to sell that property or refi, that property, and that's the day I'm going to get paid.

Or I'm going to move against the property at such time where I figured there's enough equity in there because the equity is going to continue to go up. So it's a payday. I mean, a lot of times that's what what plaintiffs will do, they're not going to move on the property directly. We're gonna sit back and wait, let that judgment, you know, grow at a 10 cap, who doesn't want a 10? cap? So so that's what it does for you.

Michael:

Yeah. So not necessarily a cure all of Hey, I just laid the thing with debt, and I don't have to worry about it.

Clint:

You do when you want to sell a refi? Because that's when they get paid.

Michael:

That’s when they get paid. Okay. That's really good to know. That's really good to know. And then my last question for you is because you mentioned California, and I'm a California guy, and I think we've got a lot of California listeners. they'd heard over a year, California Franchise Tax fee just sucks. Like there's no other way to put it. So how you mentioned that there's a way to get around it. And was that via a trust?

Clint:

Yeah, actually, there's a couple of ways around it. One way is to use what's referred to as a disregarded limited partnership. And that is an entity a similar to a limited liability company. But the issue I have with with that strategy is that it's predicated upon a Franchise Tax Board ruling in 2019, that held the disregarded LP did not fall under the revenue tax code provision that assesses the $800 to disregarded LLC. They said hey, if the legislature intended to they would have put limited disregarded LPs in there, but they didn't, they just said disregarded LLC.

Well, the Franchise Tax Board moved to get the legislature to change the law, the revenue tax code, which they have not done yet to incorporate disregarded limited partnerships in that definition has been subject to the $800 franchise tax. You can use them and I have some clients that prefer to go that route because they're more familiar with the limited partnership and working with third parties, but there's always a risk California changes it and incorporates it into the revenue and tax code because of this Tax Court ruling.

Now on the other side of that is to use business trusts. And you've probably heard the term Delaware statutory trust which is a trust that it That has become synonymous with 1031 exchanges. So if you sold a piece of property and then you wanted to roll into a syndication, it wouldn't qualify into a typical syndication structure as an LLC. But if you structured as a trust, you can, the IRS has ruled that it's an acceptable interest to roll into. And so a lot of syndicators that want to bring in 1031 money started using that Delaware statutory trust framework to allow this to occur.

Well, the trust itself offers asset protection. So if you put an asset into it, and something goes wrong with that asset, the beneficiaries of the trust are completely protected from the claims of the trust creditors. Wyoming has a statute that's very similar to Delaware. And I choose to use Wyoming just because it's a little less expensive. And it's a little more flexibility built into their trust statute. So what we'll do for California investors, oftentimes this create a Wyoming statutory trust, then registered in California as a business trust, we have to make one filing in California, and then they can start holding their California real estate in these business trusts, instead of limited liability companies and the business trust is not subject to that $800 franchise fee.

And in fact, if you invest outside of California, I mean, the Franchise Tax Board has taken the position that since you live in California, any LLC you create on this planet, or some other planet is doing business in California, and out of it, yeah. So so many times, we'll just set up the trust in in every state that we can, that actually recognizes a business trust to hold real estate.

Michael:

Very interesting

Clint:

That’s a way around it.

Michael:

Very, very interesting.

Clint:

I'll still have an LLC, though for you will still have your interest in that trust owned by typically a Wyoming Limited Liability Company, and you'll still have to pay $800 on that. So you can't get away from the $800 fee completely with the way we put the structures together, we'll just minimize it down to no more than $1600 a year total. So you could have 50 trust and you're not paying more than 16 $100. And banks. I mean, I just did a deal with one of my clients, we set up for Ws T's for some buildings in California, and they were able to go through the refi process with Chase Bank, I had to do some work with Chase to get them to understand it. Namely they said these don't exist. And I say well, hell you guys underwrite this loan right here. And it's in a Delaware statutory trust. So what am I missing here? Are you guys are obviously using these things? And yeah, went through. There is a little bit of a learning curve there for some some institutions, but they di work.

Michael:

All right. Well, I might have to schedule a call with you here offline, because there's definitely something there. Well, Clint, this has been so great, man, thank you so much for taking the time, where can folks get a hold of you, or some of your colleagues, if they have additional questions want to reach out to you for your services?

Clint:

Yeah, I'd be happy to give anybody that will would like a free strategy session, if you just go in the show notes. It's ABA.link/roofstock, you can go there and click on that link, it'll bring you to a website and just put in the information. Or if you just want to, you know, Google, my name, YouTube, I got a ton of information. I mean, we lead by educating people and we give it all away for free the education because we want you to make informed decisions when it comes to your investing.

And it's really based upon as I stated, you know, real world experience because we're doing what you're doing when it comes to investing and I'm sharing with you those strategies that I'm finding that make better helpful for me and those for our clients to help them find success and build their business.

Michael:

Love it. Love it, Well Clint. Thanks again. Definitely look forward to chatting with you and do yourself a favor. Take care. All right.

Clint:

Thank you, likewise.

Michael:

Alrighty, everybody a big big, big thank you to Clint, that was an awesome episode. I know that I got a lot out of it. And as he was talking, I was like, Oh, I need to be doing some, some changing around here. So definitely give that one another listen to definitely check out the show notes with a link to a free console with Clint and his team. I think it's definitely something that everybody can learn and use from. If you liked the episode. As always, feel free to leave us a rating or review. We'd love to hear about new episode ideas. So leave us a comment in the comment section. Looking forward to seeing you on the next one

What you need to know about investing in Lexington KY real estate Sep 21, 2021

Daniel David is a Roofstock Certified Agent, real estate coach, and fellow investor in Lexington, Kentucky.

In this episode, we get Daniel's scoop on the Lexington real estate market - the local economy, price points, level of competition, common issues that come up on inspection reports, and what makes it a great market for investing.

Explore investment opportunities in Lexington on Roofstock today.

Contacts and links mentioned in the episode:

Daniel David - 859-797-4007 daniel@makekyhome.com, www.makekyhome.com

www.LocateInLexington.com

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Transcript

Mark:

Hey, everybody, this is Mark Woodling with Roofstock. Thanks for joining The Remote Real Estate Investor podcast. Today we have Daniel David, who's in Lexington, Kentucky. He's one of our certified agents. And he's gonna give us some insights about what's happening in the market. So let's go ahead and get Daniel on.

Welcome Daniel to the remote real estate investor.

Daniel:

Hey, Mark, thanks for having me on. It's a pleasure to be here.

Mark:

Awesome. So are you in Lexington today?

Daniel:

I am, you know, in the Lexington Kentucky area actually born in this area grew up here, graduating high school from here. But then I ended up joining the army back and 98. So shout out to any army vets that are you know, listening to the podcast.

So spent three years in Heidelberg, Germany loved it, I if I could go back there, I would go back there. Immediately, I came back started started being a wedding DJ, believe it or not. So I'm used to talking on the mic used to talking in front of crowds and you know, engaging and making things a lot of fun. So hopefully, we'll be able to make some, some fun stuff here today. And then you know, of course, you know, doing weddings is not just a one day event. There's the planning sessions, you have the rehearsal, you've got the wedding, and then you've got to find time to go promote your business.

Well, during this time, you know, my son happened to be in kindergarten. And he's like, Dad, can you come spend some time with me, you know, pick me up from school today. And I was like, I can’t I have a meeting? And then he's like, well, that's okay. You can pick me up on Friday. I was like, No, I gotta go to rehearsal. And then Sunday, you know, was the bottle showed or promote, to generate more business? And he was like, you know, dad, when are you going to stay home and spend some time with me. And I was like, that was the dagger that if I could have quit that day, I knew I would have.

So I knew some things needed to change. And that's what got me involved in real estate. So I ended up going with a large national brand, my first run out the gate with KW, Keller Williams, and my second month in the business, I actually listed 26 homes. A lot of people thought that, you know, look, you don't know what you're talking about, you don't know what you're doing. And then once I listed those 26 homes, those same people were like, okay, so maybe you do know what you're doing just a little bit. So end up getting into coaching, training, mentoring, and then have the opportunity to join the EXP where I coach training mentor, you know, we've got about 1000, our group across 38 states, four provinces in Canada, Mexico, and Portugal and Puerto Rico as well.

And so we've got tools, models and systems and things like that. But I've always been a real estate investor. I'm an investor agent. So I love talking to numbers. And you know, talking about cap rates, and all that good stuff that most people just don't.

Mark:

That's awesome. I've heard a lot of really good things with EXP Realty, these days where they're bringing on more investors centric agents that really know how to talk numbers versus, you know, selling somebody owner occupied homes. So that's great that you've made your way over there. And I also hear you're a real estate coach. So maybe give us a little background on how you've been coaching, whether it's buyers? Or is it families, like tell us about you know, that experience?

Daniel:

Well, you know, it kind of covers a vast range. So if you're working with buyers, there's certain things that you're looking for that, you know, can save time of, you know, if you're looking at, it doesn't matter whether you're buying real estate to invest, or you're buying for your personal reasons, one of the best things you can do if you're not paying cash, make sure you have your financing in order first. This is going to save you so much time on the back end and also on the front end. Because when you are pre approved and you've got all your ducks in a row, it's just like you've got cash on hand. So when we find something we can move rather quickly.

When you're looking to invest in real estate. You know, one of the best person investments that I can give advice is buy a duplex, especially if you know you're just starting now live You know, maybe you just graduated high school you're got, you know, roommates and things like that. It's amazing how much profit you can make. If you can buy a duplex, live in one side, and then run out the other, basically, when you're renting out the other, they're making your mortgage payment, then, you know, once you finish school, move out, take advantage of this IRS rule that the government has is the three five rule. So if it's been your primary residence for three of the last five years, you can actually claim that still like your personal residence, and not pay capital gains tax on that. So at the end of year three, look to sell that thing off, cash out, and now you've got a big nice cash portfolio to start going into future investments.

Mark:

Well, that's what's so interesting about today with you know, all the pandemic is that people are moving in are much more mobile. So they may be moving from California and in trying to find a market like Lexington, Kentucky, and in finding that the price point is just so affordable, where they can pick up these properties for, you know, nothing compared to what they're paying back home. So yeah, house hacking. That's, that's what they call that little strategy. But well, I would love to hear more about the coaching as we go through. Cuz, you know, the reason why I ask is do you coach more individuals or families to me that you end up as a life coach, because you know, there's two parties to any decision, you're gonna have to play mediator here and there. So, you know, we'd love to, Who is your typical client type, so maybe give us a little background there.

Daniel:

You know, I love working with investors, it's your typical agent does not understand how to work with investors. You know, they're more concerned about, you know, hey, look at the nice decor in the house. All Did you see that this has a garage, and investors like, okay, so tell me the cap rate? Does, what's the cash flow on this? What's the numbers look like? And so, you know, if the numbers make sense, then we can look at the house. And, you know, if it has nice aesthetics, that's a plus.

But, you know, let's look at the numbers and look at the meat and potatoes, let's dive into. And so, you know, back in 2015, I actually started a real estate investors group on and we can find it on meetup.com. And no, that is not a hookup site, just so you know. So we've got currently over 500 members, 556 Last time I checked. And, you know, we talk about how to buy, sell, invest, and even, you know, the fix and flips, you know, Lexington is a perfect market, if you're looking to buy and hold not so much on the fix and flips because everybody's looking to fix and flip. And those are few and far between. and it's like sharks circling. And they just all pounce, and they end up driving up the profit to where there's no like, meat on the bone at the end of the day.

So I, you know, buy and hold is like the best strategy that I found that works really well because Lexan has some great numbers for rents compared to prices. And you know, you mentioned like, back home or outwest, where you know, 300,000 won't even buy at the front door, you know, here in Kentucky 300,000 will get you a pretty nice place with with a good cash return on investment.

Mark:

Now, that's that's great Intel and exactly what we want to dig deeper into. So let's go into Lexington. And let's actually give people a little tour that may not be so familiar with it. So what I know is that it's the second most populated city in Kentucky. I think that's always a big thing that most people don't recognize. It's the horse capital of the world. So I think that that's a pretty big deal. Maybe known for a little bourbon and some other activities, you know that around fine tastings and, you know, good things like that. And then of course, University of Kentucky, Wildcats, though, maybe why don't you give us a little tour of the city and go through anything that people may know or may not know and, you know, give us your perspective on it.

Daniel:

Okay, so Lexington is, believe it or not one of you know, it's growing we're, we'd like to be a little conservative on growth as compared to some of the other cities. It's, it's definitely like an old money town. So you've got horse racing for those horse enthusiasts. You mentioned the bourbon. Some of the best bourbon in the world is produced right here in our backyard. So we've got a whole bourbon distillery trail the trail you know, if you're ever in Kentucky, I recommend you go check out the bourbon trail. We do have the University of Kentucky and that is what kind of anchors Lexington and then that's also followed by the medical industry we have some of the top medical physicians and things like that in in the world are right here in Kentucky. And that's that's not a well known fact, you know, one of the cardiology departments and things like that we, we strive for success there.

We've also got, you know, for those that like, some companies that you may have heard of, we've got Amazon, we've got Lexmark is anchored right here. And then if you've ever eaten, Zoe's, Zoe's was founded right here in Lexington, Kentucky. So awesome, great companies with opportunities and growth for, you know, future investments and things like that.

Mark:

So what I've been reading about, is that just the low overall cost of doing business out there. So it's very attractive, I think it's a competitive tax environment for companies to move to. So what are some of the companies you'd say that are making a splash right now? Are there any technology companies or companies that are maybe building the next great facility that they're looking to move to out in the Lexington area?

Daniel:

There's plenty of opportunity for those companies that want to take advantage of those industries, Metro nets, kind of installed their fiber optic network throughout the area. So now we did a true gigabit up and down, that opened up a time of opportunity. And we've had some companies that are taking advantage of those opportunities. And then other companies that are kind of like, Well, you know, I'm not sure about this whole fiber optics thing.

So there's great opportunity to hop in on the technology side. Lexmark a, you know, they are pretty some of the best printers in the world. They are, you know, anchor here, so they're taking advantage of some of those opportunities. And then, you know, you've got a lot of law firms here in Kentucky, you also have a lot of medical opportunities. So if you're in the legal or medical industry, Kentucky's, especially in Lexington, Kentucky is a great spot, we are considered a retirement town. It's a so if you're looking to retire. And I think money magazine has had us and consistently in the top 20 since like 2005, which is just insane.

So we have some great nightlife, and then, you know, some, some great little off the beat restaurants. So we want to get away from those chain restaurants. We have some great local eateries here that would, you know, rival some of the great cuisines are probably used to experiencing.

Mark:

That's awesome. Well, let's I want to dive a little bit further into the quality of life in a second, but you touched on it for a second they gigabit city. That's a big deal. Or gigabyte, oh, no, which when you pronounce it, but that's a big deal. There's only a handful of cities around the country that have the entire city infrastructure set up to have a gigabyte download speeds. So yeah, so MetroNet, is the name of the company and are is their headquarters in the area as well? Or is that just their presence?

Daniel:

They have some some of the companies and then because they've already set up that infrastructure here in Lexington, they're expanding to the surrounding cities and bringing that in as well. So that is a huge benefit, especially if you're looking to invest because I know, tenants are looking for, like the high speed internet to be able to stream and do things like that. So it used to be that we just had spectrum cable. And that was it. That was like the fastest internet that you could find, which you know, drove prices up. And, uh, you know, now that MetroNet has come in, it's been a game changer. And so a lot of those companies that had that, you know, kind of Monopoly have had to really rethink what they're doing because so many customers now have choices. Now, you know, it used to be that everybody had a landline phone, and everyone has a cell phone, so there's no need for a landline phone anymore. So your older population, they're still used to having that landline, your younger population. It's like nope, I'm completely mobile. I don't want to be tied to one spot which makes you know investing in elections and a great opportunity.

Mark:

Sure, into between all the colleges around town you have this you know, gigabyte city or gigabit. And what I've been reading about is the the millennial population that's really attracted to the area A. I think it's because it's post college, but also if you have the technology and you have This future thought on how to keep some of the the youth their income the restaurants, because these are the people with the disposable income. So what do you see in terms of like the city makeup, I heard a little bit about being a great place with for retirees, but when you see, are dealing with even local buyers, who is the buyer that you're working more closely with, or who's the renter, that you may be working with looking to rent a property?

Daniel:

Well, usually when you first come out of college, you've got that massive student loan debt. And so mortgage companies take that into consideration. Now, they are policed here locally, if you're in a certain field, they will forgive your student loans and not count that into your loan, which is a great benefit. For buyers, and I, you know, sellers have that opportunity as well, for your renters that, you know, whatever up whatever reason, you can't get qualified.

Lexington does have, you know, some pretty competitive rent rates, you know, you can look anywhere from like, for a two bedroom, one and a half bath, probably looking at, you know, around that 1000 to 1200 range, where if you get on the outskirts, that's probably closer to like 900-1000.

Mark:

Wow.

Daniel:

And you're still close enough to where you can commute, when I think commute, I think anything 15 minutes or less, is you know, you're right there.

Mark:

That's incredible. So you have this younger, younger set of, you know, let's call it the millennial generation. And next thing, you know, we have Gen Z coming around the corner. You know, what I've been reading as well is that, you know, this is one of the most highly educated, you know, post graduate groups in the in the entire country. So I saw that 42.9% of the population 25 years or older has at least a bachelor's degree. And 18.6% has a graduate or professional degree, which is the 11th highest. Let's see ranking Lexington, the 11th most highly educated city in the country. That's incredible. Wow. So the colleges are keeping the the renters around or whomever you may be buying as well. But they're staying around so they don't just graduate and then take off for the big city. It sounds like they're they're sticking around and spending their disposable income there.

Mark:

Yeah, it's, and a lot of that ties back to birth friendly city. No, we were not like all up in your business. But when you talk to us, we're cordial. We're, you know, we're genuinely interested when you're trying to carry on a conversation with us, we're not trying to, like turn up our nose and say, See, everyone's helpful, and very supportive. And I think that drives a lot into why you're seeing a lot of retention when students graduate from UK.

So we also have Transylvania University, which, you know, is not on the same level as UK, as far as like, student wise population. But academically, they, you know, like you said, they rival pretty much anyone in the nation. So we have a lot of educated people that choose to remain here just for the sake of, there's opportunity. And we're growing, we're still, you know, expanding. We're in Lexington has not reached its full potential yet. And so there's plenty of opportunity for growth. And that's what makes it attractive to a lot of people.

Mark:

Well, that's great. Well, we'll put some show notes and links into the podcast. But there's locateinlexington.com, that's where I got a lot of my information. It's the economic development group out of out of Lexington, or typically, it's the, you know, the Chamber of Commerce, that puts out a lot of great content. So I highly advise anybody to go check that out and study some more of those statistics.

But let's get into the actual like, let's get into the micro economics of this and start talking about what little pockets of Lexington that you're really focused on. So as a kind of a preface, you know, Daniel is the one that is a part of a certified agent network at Roofstock. So he's actually underwriting a lot of the properties from the MLS and then posting them to Roofstock. So he comes up in estimates if it's vacant, or rent a random out as well as potential rehab.

So maybe Daniel, give us a little idea about when you're going through and looking at properties. What are you looking for that you would consider as a good investment property and maybe walk us through some of the pockets around Lexington and talk about whether it's schools that are the driver or areas that are more a cap rate for Guess you know where you can get the better return on your investment. So give us a little Intel there.

Daniel:

Well, so let's talk about the sweet spots, because I love, love talking about sweet spots. So in Lexington, one of the hottest areas is the Kenwick subdivision area that's 40502 on the zip code, anything that you can pick up there that is increasing in value. So just to give you an idea, like what we saw last year, compared to this year, numbers were up about 20%, just in that area alone, which is just crazy.

So Lexington as a whole, we had about 1.9 months of inventory the last year that has, unfortunately decreased it's like 1.3 months of inventory right now, which, you know, not saying you can't find deals, because a lot of investors think oh, well, you can't find deals on the multiple listing service. Well, that's where I get a lot of my deals. If you know what you're looking for, you know what you're doing, you can find cap rates as high as like nine, nine plus percent on properties that are on the Multiple Listing, I find those all the time and upload those for you on Roofstock.

So, you know, what I've been experiencing? Since I have joined Rootstock, I'm actually you know, we're, we're writing about an offer per day. Right. So it's, it's just crazy. And there's a reason that a lot of investors were targeting. And it goes back to all of the things that we have discussed throughout the podcast.

Mark:

That's great. So maybe walk us through a few other areas, or how do you kind of divide the lines is it highways that are dividing is it you know, other areas that kind of separate where some of the better schools are give us an idea about how you would kind of generally categorize that.

Daniel:

We do have some schools that you know, outperform others, you know, as a real estate agent, I am kind of bound by this no discrepancy rule, kind of things. But Lexington if you think about it, Lexington as itself as if you think of a wagon wheel, and then each spoke points to the center. So the center is downtown, we have this road called New Circle Road or Circle 4 it makes up the outliers of Lexington, and then each exit points as a spoken and all focuses towards downtown. And then we have now started to take that wagon wheel. And now we're putting another wheel around that where we're getting into some of the other areas that have direct access to like, I64, I75. And we've noticed some rapid growth in those areas as well, that's out in the Hamburg area.

Also, we just build a new high school, Frederick Douglas high school that has drawn a lot of investors into that area. And then you know, because we have UK, there are some opportunities to invest in the UK student area where you will constantly have an influx of students, you'll never run out of opportunities there. Most of those are more than four units, though. So if you're interested in that field with me, I'm sure we'll go over my contact information later on. And we can discuss those opportunities.

Mark:

That's great. That's great. So, you know, when you're underwriting these properties in general, you know, is there a certain cap rate that you're really looking for? Because I know, like you said, the price points, you know, can be a bit higher in some of the areas but it sounds like your taxes also are not nearly as high as what you'd experience in areas like Texas where I am. So what is the price point and expectations that buyers should expect? You know, in terms of maybe like something between 100 and $150,000, you know, what should a cap rate look like and then 150 to 200, and so forth.

Daniel:

Most of the tax rate and Fayette County is 1.278%. So, you take that into consideration, which puts you know, if you're buying a property at like 100,000, you, you're right at about 200 a month or something like that, which points to 2400 a year. Or if you go lower, then of course that varies your cap rates. And my sweet spot is you know if I can find anything 9 plus I'm golden, but if I can get it between that seven and 9% I know most investors will no bite on that

Mark:

Fantastic. Wow. Yeah, those are numbers that you You really don't see in some of the the major we would call like tier one cities. But as you get into these secondary markets where you have less competition, and there is a little bit more available inventory, it doesn't sound like there's much so you need to add quickly. But, you know, there's some markets where I mean, properties aren't aren't on MLS for more than four to six hours, and then they're snapped up. So it sounds like you have a little bit of breathing room, but not a whole lot of time to react.

Daniel:

No. And so there is a great sitting right outside of Lexington. It's Richmond, it's about 20 minutes away. It has it's another college town, it's got Eastern Kentucky University is there EKU. And you would be surprised on $125,000 property, you want to take a guess at what the taxes are per year.

Mark:

No tell me

Daniel:

$25

Mark:

What Aren't you getting for $25, though? That's what concerns me?

Daniel:

Well, it makes a great opportunity for some investments, I actually have put a couple of those up on Roofstock. So you can check those out. And the cap rates on those. I think one of those was like 14%. So it's definitely worth at least checking out.

Mark:

So is it just an unincorporated town where they're not paying You know, the local city taxes are what makes it such a steal?

Daniel:

Just county taxes, not so much on the city end? And the county taxes are like .099321 or something like that. I mean, it's it's absurd tax rate. And I was like, No, this can't be real. But I got on the property value administration, which investors if you're not checking your PVA rates, you need to go check those out prior to on any potential investment. That's a added bonus tip there.

Mark:

PVA stands for what?

Daniel:

Property value administration,

Mark:

Okay.

Daniel:

And basically, they're the city elected officials that go around, they collect the taxes for the city on the property. A lot of people think, well, it's the sheriff's office that does that, well, yes, they go out and they serve the tax, notice that it's all paid to the county or to the city. And so when I said there's some great opportunity to invest in properties, not just in watchmen, but also the outskirts, Richmond in is one of those areas that it's definitely worth checking out.

Mark:

Very cool. So we've touched on a lot of the highlights, and I always think it's good to go through and really, you know, put a spotlight on the city, some of the great things, tell us about the negative aspects. And you know, I don't want to beat up on Lexington too much. But this is where I want you to be very forward with us. You know, are Are there any common issues that you see, in most of the properties, you know, that are investment properties that somebody may acquire, but what are the things that investors should be looking out for in keeping their guards up on?

Daniel:

I would say a lot of it has to do with whatever pm you're using and pm for property management, just making sure that they're vetting, properly vetting the tenants. Because, you know, it's just like any industry, every industry has their bad apples, and some do not do as thorough job as others. So, you know, just make sure that you properly evaluate your clients out.

If you're charging, you know, 595 for rent, you know, that there's probably going to be some, I'm not saying that, that it will always be the case. But we know more often times than not the lower the rent rolls, the core conditions condition that they leave the property and when they leave, and that's not every single tenant, but the majority do because it's not their place. They don't care for it the same way. So we're not putting granite countertops when we go in to those facilities. You know, a nice Formica countertop, a lot of times people think, Oh, well I have to go in I have to get this place.

And believe me, I made the same mistake when I invested in my first property after you know, having multiple properties. Now it's just about hey, what can I do? Go and buy it low? Let's repaint the cabinets, refinish them, let's put some new doorknobs or you know, hardware on the cabinets. Let's change out the door knobs put some decent doorknobs put some LED light fixtures in it. Then clean up the curb appeal. Then, you know, okay, now we can get that reappraised it will nine times out of 10 appraise for even higher than what your original purchase for let's refi, refi that pour initial money back out with our repair money, use that money to go buy our next investment and keep growing the portfolio that way.

But answering, you know, getting back to your question, I know we kind of went off the tangent on that one. So, tenant mixture, we do have, we do have section eight, we do have a need for, you know, Community Housing, and, you know, those needs. We do have some landlords that, you know, for whatever reason, they, you know, COVID kind of hit them a little hard. And maybe their tenants didn't pay rent, which we know, a landlords experienced that all across the country. So, you know, we didn't experience that much here in Lexington, but we did have a few that they stiffed of the rent, and then, you know, when the moratorium got lifted, then they just bolted rather than face the eviction, which, you know, they got to live in it free for about a year.

So they did, you know, kind of do some damage, they didn't really take care of the place, and nothing like major, but, you know, cosmetic wise, they, you know, don't, they didn't take care of it like they should. So I mean, a couple of drywall, patches, some new paint, maybe some new carpets, and then you're out the door, or, you know, in mine, I don't even use carpet anymore, I go completely vinyl. And that's what I'm

Mark:

Sure.Well, it sounds like there may be some tired landlords coming, coming to market in the near future, because that is a quite a blow to take and not have income coming in, but still having to pay pay your mortgage. So yeah, that's always the risk that you take. Now, I have to, I think, really good questions that I want to jump into as well as when you get an inspection. And in Lexington, you may say, you know, Mark, there's just one thing that you will see time and time again, that falls on that inspection report. But don't freak out. Like let's not let's not jump to conclusions and say, Oh, I'm out. What are those things that a buyer should expect in Lexington, that is just going to be common, you know, and in something that's going to be easy to remedy versus a deal killer.

Daniel:

Okay, so inspectors love to talk about drainage issues, and the effects of groundwater on the foundation. And they'll go on for like three pages in the report talking about all these potential damages that could occur if left untreated. What that means is that on the downspouts, you need to go to Lowe's, you need to get one of those black hoses to attach the downspouts and divert the groundwater away from the house. That's about a $15 fix per downspout.

But they will. But if you just read the report, and you're not talking to an investor savvy agent, they will have you convinced that this home needs hundreds of 1000s of dollars in repair or 10s of 1000s I you know, almost as much as the cost to build the place. And that's certainly not the case.

Mark:

Yeah, and I think what we're all experiencing right now, we've had a little more rainfall than normal. So I think it's good for any investor to check even their primary homes and make sure that water is going away from the property. Cuz in the south especially. Yeah, the the grounds may dry up like in Texas, we have clay. So you know, when it gets really hot, you don't have the right moisture down there. That's when the foundation issues come about. So yeah, I do agree, you just you got to reroute the water.

Daniel:

Now, I will mention that we do have some homes here in Kentucky that were built. And they have some knob and tube wiring. So it's rare to find those. But some of those older homes, like I mentioned in the Kenwick subdivision, some of the older homes there, they're full of knob and tube wiring that are still active. And you're not supposed to splice into those, but a lot of homeowners have spliced into that. So make sure that you look for that on the inspection report.

Mark:

That's great. But I think just knowing what's common and what to look for is big and then when you get the inspection report, maybe tell us a little bit about how how you interact with the buyer at that point. So when when the inspection comes back, you know, Roofstock’s, helping pay for that in order for a buyer to get the roof stock guarantees. How do you like to go through an inspection report with your buyers?

Daniel:

So we just look at it line by line. And I'll ask them hey, you know, what are your concerns over This section, let's talk about this. Then, after we talk about the whole report, I'll ask them. Okay, so what's the deal breakers? Because we can't ask for every single thing. This is not a punch list. A, you know? What's your top? Top Five deal breakers on this? Okay? So out of those five with what's your top three? So if I can narrow it down to like, one, two or three that, okay, we can have those items requested as repairs. And then, okay, these would be nice to have, but I'm okay If they don't do this, then let's, let's submit that and see where we land.

You know, I'm, I'm all about trying to keep everybody on the same team, which I do, you know, bring the other side in, I don't look at it is it's like us versus them. Like, no, we're all involved here. Listen, if we can make this work financially, then, hey, it's a great investment. It's a great opportunity. If we can't work it, okay, well, then we're obviously we got to kill the deal. But I tried to see what other avenues can we take? Before we get to that point.

Mark:

Man, this is great. Well, everything I've heard about Lexington has been an eye opener for myself and as an investor you always want to know Where the next markets are that others maybe haven't quite cannibalized, I would like to say you have iBuyers out there, you have institutions out there. And it just seems like Lexington is, you know, more of a local investors market, you're not having as much outside interest. But that may be an opportunity for our Roofstock investors to come out to Lexington.

Daniel:

It definitely is. Lexington is like one of those well kept secrets, that is slowly starting to trickle out to the rest of the nation. And what we're seeing, as far as the outside interest, outside interest is high, simply because what you can buy out on the west coast, you can buy multiple properties for that same price, right here on in Kentucky.

Mark:

That's amazing. Well, just to kind of close it out. And then we'll ask ask how people can get in contact with you. But the probably the top statistic I always love to look at is the census data. And it shows that 54% of those in Fayette County, which is Lexington and some of the surrounding cities, is that ownership rate is 54%. That national average is 64%. So you have a lot more renters in the area. And then all these economic drivers such as you know, the colleges, you know, the the younger, you know, the the younger renter base that's, you know, graduating and needing somewhere to move up into once they get a job locally. And all the job growth that to me, those are the win win opportunities that again, there's going to be more opportunity even with low supply that you have, there's going to be more to pick from because I think our buyers can be more competitive in the market to find properties in that seven to 9% cap rate, like what you're talking about.

In a lot of other markets. That's kind of the unicorn that is fictitious, there used to be a five or seven to 9% cap rate, but those have been compressed and pretty much disappearing at this point.

Daniel:

Yeah.

Mark:

Glad you could be with us today. Daniel, maybe give us an idea. If somebody wanted to reach out and talk to you a bit more about what's happening in Lexington or, you know, maybe have a conversation before they make an offer. How can they get in touch with you?

Daniel:

Best way to get in touch with me is either by phone or text, you can text me at 859-797-4007 or you can email at Daniel@makekyhome.com.

Mark:

That is awesome. Thanks so much for joining us today. I am enlightened now. And I'm more than excited to see what kind of activity we get with you and start to drive some offers t so thanks for being on today. Daniel, we really appreciate it.

Daniel:

Mark. Thank you again.

Mark:

Hey everyone, thanks for listening and participating in today's podcast on Lexington, Kentucky. Daniel brought a lot of good information. So we hope that it's useful for you and we look forward to having you on next time. Happy investing.

Why you should buy property with your exit options in mind Sep 18, 2021

Many investors buy with the intention of holding forever. But things can change and you should have an exit plan. In this episode, Tom and Emil discuss why having an exit strategy is important and how to be thinking of the right one for your property.

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. On this episode, I'm joined by

Emil:

Emil Shour.

Tom:

And today we're gonna be talking about buying with an exit in mind. So in other words, how to think about the eventual sale and if you're going to sell at the point where you're doing your acquisition. Alright, let's jump into it.

Emil, I am a big fan of this topic. And shout out to Pierre, for identifying this as a discussion point for today. So to reiterate, we're gonna be talking about buying with the exit in mind. And I think what before we get into the specific strategy points, as considerations is really important to think about buying with the exit in mind. Emil, I'd love to hear you riff on this.

Emil:

It is, it doesn't seem like it is when you're buying your first property. And I'll tell you from experience, but years later, you will start thinking about a lot more as you buy properties and wishing you had thought about it a little bit more down the road, even if you know you're going into this and I'm holding forever. That may not always be the case. And you may want to sell down the road, especially when you know, you've done this thing for many, many years, and you're just ready to get out of business or whatever it is, it's always good to think of the end in mind.

Tom:

I, the way my thought processes change, I've always been very, I buy hold forever, all that stuff. But the way I've evolved thinking about it is keep the capital in play forever. So you know, you can sell your property and have an exit in mind. But just roll it over with a 1031 and keep that capital in play. And there's plenty of good reasons to do that. Perhaps you're leveling up into you know, a two for one property is converting that 1031 or perhaps you're consolidating regions, I did that I did that with my first 1031 moving out of one market and doubling down into a different market. So just because we're thinking about the exit in mind doesn't necessarily mean that we're exiting the capital and I just need redeployment. So this discussion is very specific to the exit of the either redeployment or perhaps you have the money.

Emil:

Yep.

Tom:

Alright, so the first topic that I want to talk about with thinking about the exit in mind relates to thinking about who your potential buyers are. So, Emil, why would you ever notice up with a couple of buyers in a start discussion?

Emil:

Alright, so I'm gonna be assuming we're talking about single family homes here. So when you are selling a single family home, luckily, you have two buyers, unlike multifamily, commercial, we're only really selling to investors, but the single family you could sell to an owner occupant, or you can sell to another investor who is like you probably buying it, wanting it to be a rental wanting to collect rent, wanting all that stuff. So you have two options with a single family in place versus a multifamily or commercial property.

Tom:

Yeah. And I think what's a good way to think about that is, you know, how can you maximize, we're going to maximize the value for the various different types of buyers that you have. And I'm gonna reword that just a little bit. So next, I'm gonna start with analogy, a smart mouse has multiple holes to run to. and applying that smart mouse analogy here is one of the great things about SFR is having two different sellers to sell to so I think Emil is gonna talk about example in a minute with related to, you know, nicer homes.

Emil:

So to give them like a good example here of how you are maximizing your sale price by having multiple people, I think that's actually one of those unique things, single families, you can sell to an owner occupant. And so this is something I realized, after I bought properties in areas that, you know, the neighborhood's score, the neighborhood quality isn't as high schools aren't as good. But that on paper yield looks great, right. And so I'm traveling seeing these higher cash flow properties.

And having and having property, they're nicer neighborhoods, probably the less nice neighborhoods, I can tell you, I weigh this a lot more now in thinking about the exit. The property, the nice neighborhoods, they appreciate more, and again, you can sell them to owner occupants, down the road. And the reason that's great is that they are an emotional buyer, right, they feel that your home, they really want it, especially right now you think we're in a bidding wars, you got people bidding up prices, all that stuff, that's the type of person you want to sell to, obviously, you can sell to an investor as well, they're gonna look at the numbers, you know, if you have a tenant in place, we'll talk about how you can sell that. But failing to know document is a great option there emotional if you want to sell to.

Tom:

Yeah, selling to attend in place is a really interesting strategy to implement and adjust within your ownership. So one of the early funds that I worked at, they did a lease purchase option is one of our main products. And what they did with that is they collected a little bit of a premium of rent and also collected a bigger deposit that they eventually converted into the downpayment, should the tenant convert on their lease purchase option. So I think there's a couple companies that are doing that now. They're specializing these lease purchase options, where within the lease the tenant have the opportunity to buy. But I think that's like a really interesting strategy, kind of sub strategy of thinking about the exit in mind having an actual lease purchase option. And if they're able to purchase the property, awesome, then you know, you convert on your exit, and if they're not, yeah, there's a lot more upside of the rent that you've collected.

Emil:

Do you know if you as the owner can, like once you sign that contract with a tenant, like let's say, it's two years by the end of two years? Because it has the option to buy it? Or do you get final say like, Oh, no, the markets gone up? 10 20%? More? I don't want to sell it anymore.

Tom:

Good question. I mean, I think there there is some whitespace, or I guess, flexibility and how these are structured, the way that we had our lease purchase options is they were predefined prices upfront. And it was a little bit of a risk reward for everybody in that if the price isn't appreciated beyond what the predefined prices were on paper, then great for the tenant who's buying the property. If they if they didn't, then I think there was like a little bit of a decrease in the price. I don't even like really meaningful. But eventually as that company got bigger and you know, had more sophisticated investors that were investing in this property management, you know, owner operator, they decided they didn't like that feature of our leases, at least cuz they weren't able to control the exit, you know, they wanted to hold on as long as the candidate and like lease purchase option.

But I think as an individual investor, I think there are, you know, are some advantages for having this type of lease in place with, you know, the premium and renting and that and typically like a better tenant, you know, you could be like, Hey, you know, this is your house that you're buying, you know, you're less likely to have what was the hammer party Michael Zuber talks about, somebody brought hammers and just hammer the house for a party. So that's what's likely to happen.

The other potential seller out there that I think anyone who owns real estate is probably getting hit up is these these institutions or I buyers that are making these offers kind of on the spot. I know I've received them from Redfin, from all these all these other companies. And I think it's, it's a nice kind of validation on the price. I think if I was to sell to one of these companies, I want to really be really thoughtful and looking at what I think the price of the property is compared to what they're offering. And it can make sense. But away at an important thing about the ibuyer pieces, you need to be in a market in which those ibuyers operate. So if you're buying real estate in really little little itty bitty markets, you're less likely to have that as an option into selling to one of these I buyers or, or institutions.

Emil:

Yep. And the other person sending those mailers is maybe not ibuyer, but someone who may be a wholesaler, or they're an investor themselves, right? Like I'm sure you get that I buy houses letters, I get paid like five a week right now. I just wanted someone to buy your house all cash offer. So that's another investor who's may not be an institution or big company, but is, you know, small, private and buying homes for their own portfolio.

Tom:

I'm getting better at explaining I buyers, I think I might just explain it for those who are not familiar with that term. So historically, real estate has been a dealer model, excuse me a broker model, right, where there's someone in between selling to a buyer and a seller. But what's happening in the industry is they're moving to more of a dealer model where there's this ibuyer in between who buys the property, and then, you know, perhaps does make some margin because they have their own title company, they do their own this, and then they sell it. So they take actual ownership. And I'd say comparing the traditional broker versus a dealer model where and ibuyers, a dealer modeling tons and tons of money going into the space and doing that you look at Zillow and Redfin and all those companies.

And it's interesting, I, you know, I don't want to divert the conversation too much. But I would be concerned about nooit, where there's any kind of downfalls in the market, you know, I buyers is holding a lot of inventory on their books. But it was more money moving in space. So anyways, that's the other consideration in with buying with the exit in mind is kind of what are the buyers in the space and having that as an exit, and final thoughts on selling to?

Emil:

Those are the big ones.

Tom:

Alright, so lastly, we're going to talk about considerations with the exit in mind selling the property occupied or vacant. So I think timing is a really important consideration if you do have a very specific exit, timing in mind, monitoring that lease. And, you know, perhaps structuring the leases, so they've ended up in a peak sales time where you want to be a seller could that could be in the summer when School's out and all of that good stuff. So that's an important consideration in with buying with the exit in mind with occupied properties.

Emil:

Yep, good one in that you know, just general property management, you don't want to be having to fill especially if you're in the Midwest or somewhere it's called having to backfill a tenant during during the winter time. And the same thing with with selling right, it's you want to be selling in the summer in the spring, that's just when there's most activity most people buying so lining it up properly can help you maximize a good price as well.

Tom:

I will throw in a little Roofstock plug though. So as a big reason why rootstock was created the marketplace just to make it really efficient to buy and sell occupied property either. For some of those who have an earlier episode, we had Gregor Watson, he was one of the co founders, he had this awesome story where he was working for a fund that owned 1000s of homes and he went into a realtor and in Dallas, he says, hey, I've got 1000 homes I want to sell, do you want to sell them and the broker of that realtor like, you know, his put his hands on his chin was thinking about it. He's like, I can't I can't sell your homes. And Gregor was like, why not? This has gotta be the biggest boon for your business ever. And the guy's like, I don't have 1000 signs. It was that moment that Gregor was like wow, this is a market opportunity to be able to… But anyways, I diverge. If you are thinking about selling, you know, with occupied properties like Roofstock was basically built for that to, to do that make it really efficient. So you don’t have to vacate the tenant and all of that good stuff. So…

Emil:

Have you had you sold a property? I know you and I both bought to Roofstock?

Tom:

Yes.

Emil:

I have actually sold as well have you?

Tom:

I have, I've sold occupied and vacant.

Emil:

Nice. I sold only occupied, one last year.

Tom:

One last year, nice. 1031s are real 1031s are real. Got some exciting content coming up around the pike related to 1031. We will share probably in late September, early October. So lots of fun, fun things around that. I think a key takeaway from this session is, you know, you should buy with the exit in mind, even if you plan on holding forever, because it could be just a matter of redeploying capital. Because you never know necessarily as your strategy evolves and to have those that optionality is really important to think about.

Any final thoughts Emil?

Emil:

No, you know, just again, think about even if you go in, I had the same kind of I'm gonna hold forever, life happens things change. Yeah, you may feel differently. Always think even if you don't plan on selling, think about if I were to sell just take those considerations in mind. It'll it'll help you make a smart decision long term, I think.

Tom:

Totally. Yeah, I think it's been an evolution for me as an investor is thinking kind of ahead of that next step. like okay, what does an exit look like this property? Yeah, like that. Definitely.

Alright, guys. Well, thank you so much for listening. I hope you enjoyed the episode and please like, subscribe, wherever you're hearing us and as always, happy investing.

Emil:

Happy investing.

Here‘s a Roofstock Certified Agent‘s take on the Columbus Ohio market Sep 16, 2021

Roofstock Certified Agent, Harvey Yergin with Simple Solutions Real Estate in Columbus, Ohio answers important questions about investing in this market.

In this market overview, Michael and Harvey cover what investors need to know about the Columbus market from, local industry, the rent to price ratio, the competitive environment, the type of properties, and what investors should be looking out for on inspection reports.

If you have more questions for Harvey about deals in Columbus, feel free to reach out.

Simple Solutions Real Estate - harvey.yergin@gmail.com - 901-484-9751

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and Today we have with us our roofstock certified agent out in Columbus, Ohio, Harvey, Yergin, and Harvey's gonna be talking to us today about the Columbus market as a whole and some things that we as investors need to be aware for if we're going to go invest in that market. So let's get into it.

Harvey, thank you so much for joining us today, man. Really appreciate you taking the time out of your busy schedule to chat with us about Columbus, Ohio.

Harvey:

Yeah, sure. No problem. Glad to be here.

Michael:

So tell everybody listening. Are you a Columbus native? You know, where did you come from? Like, where did you come from? Where did you go? And how long have you? And how long have you been in the Columbus market?

Harvey:

I have been in Columbus, back in Ohio for six or seven years now, with close to six years. I'm originally from Akron, Ohio, which is closer to Cleveland moved around the country a bunch sometime in Virginia, Tennessee, Oregon, Michigan, had a bunch of kids and decided we wanted to get closer to family. And we do a little bit of research on Ohio. No offense out there to other Ohio and but Columbus is it's got the most going on.

Michael:

Sound like fighting words to me.

Harvey:

Population growth is exponentially higher than the other two major markets in Ohio, Cincinnati and Cleveland. And there's just way more industry here. They're just they're just plain simple. There is more going off Columbus. So we landed here. We're close to family. My wife is from Pittsburgh. So we have a support system here now and Columbus is home.

Michael:

Love it. That's awesome. And how long? Have you been a realtor? And then how long have you been in the real estate game? Because I know you're chatting for the episode, you're an investor as well.

Harvey:

Yeah, I'm an investor, I spent most of my time in my investment company, and working on investments, been a real estate agent since 2018. So three years or so. And, like I said, primarily working in my own company with my partner. But then also just by nature of being an experienced investor in this market, also helping buyers and sellers buy and sell their real estate investments, as well.

Michael:

Awesome. And how many transactions have you done in the last 12? months? Like number of purchases? number of sales?

Harvey:

Oh, I don't know, a couple few dozen, most of which are representing our company and the purchase? Or sale?

Michael:

Awesome. And so did you get involved in the transactional side of things, because there was just a need for it because you were doing so much business, basically, for your for your investing business on the personal side of things.

Harvey:

I got involved as a real estate agent, primarily to I mean, I think there's a common story but get in, get your license so that you can save some expenses and costs

Michael:

on the Commission's Yeah,

Harvey:

Yeah, on the transaction on your own transactions. And then, you know, obviously, there's some some money to be made. If you're representing other people. You have you have a little bit of a niche in that you understand transactions, maybe more so than other real estate agents, because you buy and sell for yourself. And you're familiar with real estate investment transactions and deals because they're, you know, they're very much different than your retail sales, sales. And I like helping people as long as people want to be helped. I like like working deal but like wouldn't deals together.

Michael:

That's great. That's great. All right. Well, now I want to give you the platform to yell from the mountaintops how great of a market Columbus's. So talk to us about some of the economic drivers and talk to me like I know nothing about Columbus And truth be told, I don't know a whole lot. So that'll be eat that should be easy for you to do. But so what are the what are the big economic drivers in the market? Who are the big kind of companies that are that are in the space and do they have a tech scene.

Harvey:

There's no secret anymore. I mean, Columbus as a market for real estate investment, that that information is out there makes every top whatever list for real estate investing. And there's really there's two big factors there. Maybe three one is population growth, something like a million people in projected population growth between now and 2030, or 2040, or something like that. So a lot of people for short amount of time.

Industry here, mostly retail, I call it junk retail and fashion retail. So Big Lots is here, dollar generals here. But also, L brands, which is the biggest the biggest employer, in Columbus, they're here designer brands is here. So people like Abercrombie and Fitch, the SW baby, big fashion, retail. Businesses are here. And then if you've ever heard a Nationwide Insurance insider

Michael:

On your side!

Harvey:

That’s right, so insurance is huge here. There's a lot of there's several big players, including nationwide. And then healthcare is also large, because nationwide is plays on both sides of that. So they they run a couple really big hospitals, facilities. And then if you've ever heard of the Ohio State University, their top five employer here as well. And not only do they have the university itself, but they have several research and medical facilities around the region. Technology is largely based in those those industries. There's a lot of funding in financial services I forget forgot to mention Chase is here. financial service technology, innovative insurance, technology and medical, medical technology. And then all of the technological research and development University is doing as well. I mean, there's a lot, there's a lot going on.

Michael:

Right on. So is it safe to say that that is a multifaceted economy? It's not solely reliant on a single sector?

Harvey:

Right. Yeah. I mean, I'm I went on to what I named, there may be three or four different sectors that are just in the top five employers in the area, there's Yeah, there's a there's a lot going on in terms of different industries, and diversity.

Michael:

That's fantastic. So that maybe you can give us kind of a walkthrough of if I'm looking at Google Maps, and I type in Columbus, I get a north, south east west over, you know, 30,000 foot view. Talk to us about some of the different markets, different sub markets within Columbus, that we should be aware of.

Harvey:

Yep. So if you look at a few of the map, you got it. 70, which goes around Columbus, generally, inside of that is Franklin County, it extends a little bit outside of that as well. So inside of Franklin County, obviously you have Columbus, but then you have really close in suburbs like Westerville Gahanna, Reynoldsburg, Grove City, Hillier power, how, in my view, there definitely is a couple other ones around. And those are the close in suburbs. And all of all of those cities and municipalities I just mentioned are super hot and saturated in terms of both retail and investment real estate. deals are just hard to come by they're as they are in a lot of MSA.

But if you extend out which the pattern now that we're seeing is that investors are starting to move out and it's because people are starting to move out as well. There's just cheaper houses. There's there's not as much of a demand right now anyway to commute to a job downtown. And even if you are commuting, it's likely that you're commuting less frequently. And maybe you're okay with a 45 minutes 60 minute drive now because you're saving 100- $200,000 on a house and you're getting more acreage and you're getting more space. You're, you're now okay with a 45 minute drive.

So places like Lancaster and Newark, Delaware, maybe Mount Vernon, which is to the north Lancaster's to the south east, Newark is due east, places like that, which are 45 minutes, average driving time to downtown Columbus, on fire. I mean, Newark. If you told me that Newark, Ohio, if you told me a year ago that Newark would be a place where you could buy a house, do a little bit of rehab, put it on the market and get multiple offers over asking, me and a lot of people will tell you recruit your that's exactly what exactly what's going on. And some of the best deals to be had are out in those peripheral markets.

Michael:

Now that's wild. And so give give everybody an idea of Like, if I'm a single family investor, I'm looking for a three to that'll have a good rent, what are some of the price points in those four markets, those four neighborhoods just mentioned, as well as their corresponding rents? And just, you know, ballpark average?

Harvey:

Yeah, I think it's pretty fair to say that you could find three to for between 130 and $150,000, then rent is going to be between $950-$1150 depending on your specific location and some features in the property. Awesome. Which, okay, 3/2 130 to 150. Good luck finding that and a lot of areas.

Michael:

I'm a California guy, and I can pretty well guarantee it doesn't just exist so much out here.

Harvey:

Yeah, not even in Columbus.

Michael:

So when you're looking to underwrite properties at Roofstock. And for those people that aren't familiar with you, you know, you're one of our rootstock certified agents out in Columbus, and so if not v certified agent out in Columbus. So when you're underwriting properties on Roofstock that go on the Select program, what is it that you're looking for,

Harvey:

You know, the big things are rehab, a lot of things that make them Margiela properties that make the market now in Columbus. And just as a disclaimer right now, on Roofstock, even though I'm mentioning these peripheral markets, we're the only the only properties that are available to Roofstock investors are the ones inside of Franklin County, really, because it's, it's because of the on the property management side, there's just there's not a lot of infrastructure for investor support yet on those markets. So we're limited to that, to that Franklin County, I 270 close in ring.

And we're looking for is minimal rehab, things that hit the market at certain price points, you can just guarantee or just just assume I guess that if they're under a certain price point that they probably got some issues with them. And we know that Roofstock investors are not, especially because most of them are out of town, they're not really keen on having to manage any sort of big rehab project with people that they all know in town that they can't get to frequently, minimal rehab being $5,000 or less, on average. And then neighborhood quality because neighborhood quality translates to tenant quality. So we're looking at the the neighborhood rating score, and then gross yield. I mean, just how much how much ranking you get compared to the purchase price, which that number is shrinking with every day that passes I think, I think with time we'll start to see rent start to you know, it's lagging now. But we'll start to inch closer to the kind of growth that we've seen in in sales prices. But so those are the three things, just minimal rehab, making sure we're hitting a minimum neighborhood quality than the gross yield is something that will produce cash flow.

Michael:

Love it. And Harvey, can you talk to me a little bit about how to calculate property taxes. Cuz in a market like California, our state, we kind of have a statewide law that says the property taxes are gonna be based on the sale price. So if you bought a property 10 years ago, for 100 grand your property taxes are based on that purchase price, if I buy it from you now, and I pay 500, my property taxes are going to be probably at least 5x what you were paying. So how should investors be thinking about property taxes? And does a sale trigger any kind of reassessment? How does that work?

Harvey:

Yeah, the sale the sale doesn't necessarily trigger reassessment. But the local school boards and this is municipality specific. So if you're buying in Columbus, this is true. The school boards are very in, they have a really good process for going through finding recent transactions, making an appeal and getting that value updated. Which because they want their they want their funds they want. They're trying to capitalize on a market that is appreciating. And you know, they want their programs and their facilities to grow right alongside it. So you can't blame them. But that is it's happened to me. And it can be quite sizable. So look at the auditor site and figure out what the tax is based on now. And then figure out where where you think you're going to purchase it. And you get a reasonable idea of how much that tax bill is going to go up. Outside of Columbus, I don't really know but in Columbus, that's very common.

Michael:

Okay. So if I'm looking at a property that was at purchase, last purchase $100,000 and the taxes let's call it were 1200 bucks a year. If I'm going to then purchase the same property at two to $200,000. Is it a safe assumption then to double the property tax because the purchase price has doubled. So now I'm thinking I'll be at 2400?

Harvey:

You know, if you're underwriting it, I probably will do that. It's probably not that exact. I think they, there's some formula, I forget what it is, but they take a certain percentage off of that, and then they tax you on on that percentage. But yeah, that's, that's probably not a bad place to start for your calculations.

Michael:

Okay, perfect. It's funny, you mentioned the school board's I had the exact same thing happened to me numerous times down in Cincinnati, I'm pretty heavily invested down there. And, yeah, and it's funny, you know, because part of me feels really great about being able to help the local school systems get funded and grow, because everybody wants to be part of a good school system. So if you're coming into an area, you're then donating, for lack of a better term, more money to the school system, which will hopefully bring it up. But at the same time, I was like, Man, this sucks, like, it is just so expensive, oftentimes, to do business. So it's a catch 22.

Harvey:

It is, and it's a but in theory, it should come full circle that you think as the schools improve the neighborhood improves your your neighborhood and consequentially your house becomes more desirable. And then the like kind of feeds itself. But that assumes obviously the school board is handling your funds with some sort of proficiency.

Michael:

Yes.

Harvey:

Which, you know, I think in Columbus, they do a pretty good job. But I will also say, if you're taking out a loan on these, and your servicer is a little bit slow to I don't know, I don't know what their process is. But if they're slow to make sure that your escrow account is enough to keep up with that tax increase, what happened to me recently, I have a duplex in Columbus bought for, you know, an increased amount over the last last purchase price. My servicing company didn't know for two years, and then just this past year, we got Oh, you owe tax on the increased value for the last 24 months. We then double your PITI, your your mortgage payment

Michael:

To catch up!

Haryvey:

For the, catch up. Yeah, for past payments and future payments. Oh, my gosh, that would have been nice to have just incremental increases over, you know, a shorter amount of time. Wow. Yeah, that does happen.

Michael:

Well, that's a great tip for listening is look out for that stuff. I mean, if you're if you know what your tax bill should be, and you're mortgaging servicing company, your mortgage service company isn't taking enough from you and to make those payments. Speak up. Say something that's that's a really good teachable moment.

Harvey:

You're going to get notification from from the auditor or the treasurer

Michael:

For the county.

Harvey:

Yeah. When your tax is increasing. And then if you don't see increases in your payment on that property for a couple months, it's probably time to call on it. Start asking questions, because you don't want that surprise. 24 months.

Michael:

Yeah, that's that's not a fun present.

Harvey:

No, no, not at all.

Michael:

Harvey, talk to us about some common issues that might show up on an inspection report in Columbus, that folks should just be aware of, as an example, I bought property in Alaska, and they have diesel fired boiler and heat the house that's just common place me being California. I was like, Whoa, major, major hazard and I was like, calm down. This is standard par for the course. So what are some things that you that that you see that buyers should be aware of?

Harvey:

Wet basements blowing basement walls, that those are scary things, especially for people who aren't familiar with basements. And we are familiar with basements that were made to be wet. houses. There's there's a lot of old inventory in Columbus. And a lot of that old inventory from what I understand, was built to take on water that doesn't excuse poor water controls from your downspouts and your gutters and your grading. But they can cause bowing and it can cause signs of water intrusion.

Remedying bowing basement walls is a very common practice going in and having to waterproof a basement that's not already waterproof is a very common practice. The selection of contractors that do that is very high. I mean, there's a lot of contractors out there that do that kind of work, both remedying the the bowing and the waterproofing. So don't let don't let that scare you. If anything, it's a it's a negotiation tactic with whoever you're purchasing from, but that will inventory there's still knob and tube electric work in houses, which can be scary for people. But again, there's those contractors that can handle that sort of thing. I've had to do it several times. It's just not that big a deal.

Being on well water or having a septic tank instead of public water and public sewer. It's just not that's not that scary one buyers, especially if they're native. They understand renters as long as things are inspected and safe and functional. They understand as well, but in certain areas... I mean in Columbus, it's very rare in fact that I think they've fallen gotten rid of all septic tanks? Anybody who's not on public sewer or public water, but just outside of the city. That's that's pretty common and it should not be a deal breaker. As long as they're functional. They're safe. And they've been inspected.

Michael:

Great. those are those are three really good ones. Because as you were saying them I'm so over here like, ah, like, that sounds awful. So this is a good learning lesson for me too. I've never heard that that some of these older properties were built to take on water. That is a totally foreign concept to me.

Harvey:

Yeah, yeah. When I heard it, too. I was thinking Who the hell would build a house? That's supposed to where the basements supposed to get wet? But yeah, it's just, it just was the way they built.

Michael:

Okay. And they don't make them like they used to, that's for sure.

Harvey:

No, they don't build basements to take on water anymore.

Michael:

Do you have any interesting stats, or kind of notable highlights that you want to share with with potential buyers or folks interested in the Columbus market?

Harvey:

I would say the inventory levels here in Columbus right now are pretty interesting. There wasn't long ago, there was 1300 houses on the market. And I just looked today, and I think there's 28-2900 houses on the market. Some of that is seasonal, I mean, things just tend to loosen up around this time of the year anyway. But that's a pretty sizable gain. And we're starting to feel it a little bit. It's not as crazy inventory is starting to sit on the market a little bit longer than it was this summer and spring. And prices are as crazy then maybe isn't as many offers. So it is getting a little bit easier to purchase. We run a real estate investment company we go direct to seller, the more difficult it becomes for anybody to purchase, the more difficult it becomes for us to purchase. But we're seeing a little bit more ease. On the purchase side.

I would just encourage investors Roofstock investors who are interested in the Columbus market to just continue to be patient. I've been a real Roofstock agent since early spring of 2021. Guess how many transactions we've completed for Roofstock purchasers? Zero sec. Yep. And it's, it's just tough. I mean, finding a rehab property that is on the MLS and marketed already, that isn't one going in 24 hours or two, doesn't have the rent to support the purchase price. To date, it's just been a very, it's just, it's just rare to find. But like I mentioned, things are loosening up, continue to be patient. And I think I think you'll there will be deals to find.

And I would also encourage through the winter. So let's say late September through March, keep paying attention because that is the time to buy because historically the market is more buyer friendly. Less seller friendly.

Michael:

Harvey are you trying to cut into my turkey time you telling me I gotta go look at real estate deals. I'm trying to eat stuffing.

Harvey:

I mean, if you want to, if you want to buy deals and build long term wealth, yeah, I guess

Michael:

That was it's such a good point. I bought so many deals in that exact timeframe for just that reason. I mean, I I joke it I kind of saying tongue in cheek, but I think for folks that kind of take time off. That's the wrong time to take off. I say if you're gonna sit out, you know, anytime do it when the markets crazy hot. And so when when there aren't folks out there trying to buy deals when everybody else is taking a break. That's when you should be pushing the pedal to the metal.

Harvey:

Yeah, sure. And it takes some discipline to because I came from, like corporate america and a regular job. And that time of year is where everyone kind of slows down takes vacation doesn't take work. So serious holiday parties party is in the office. But yeah, I mean, to just say, Okay, this is our plan for fourth quarter and in the first quarter of 2022. And stick to it and be disciplined about it. I mean, that can be you can make a break an entire year off of the deal you purchase in December.

Michael:

Easily, easily. No, I love that man. And I'm curious. I mean, you bring up a really great point that there haven't been any deals done in Columbus. So I would challenge everybody listening to go and be the first person to get a deal done when you know, win that race but also what should folks be aware of? What would you coach recommend people on that they need to do in order to win deals in this market? And we're recording this late August of 2021. So take this with a grain of salt depending on when you're listening to it but right now what do you see in folks? What do they need to do?

Harvey:

Be reasonably aggressive on your purchase price, not not aggressive? Just be reasonable on your purchase price. Just assume that the deal you're that you're offering was being offered on by other people now, certainly. You can submit offers below asking, and certainly you should submit offers at a price that makes sense. In fact, I would just encourage you to, to make offers. Because it's, it's, it's just like fishing, right? We just, it's a numbers game at this point.

Don't be over lease, freaked out by a an inspection. Recently, I had a deal blow up when the inspection came back, we had a 10 day remedy period in the contract, which just means that we get the inspection, we read it over, we decide to things that we don't like and then we ask you to either fix them or give us money. Because of that. Use the remedy period, if you ask for things, all they can say is no. Or maybe they say yes. And all of a sudden, now you have a deal. That was less cash in or a deal that is fixed up and better than it was when it was on the market to use that period to your advantage. Don't run off, just because there's some scary things in in the inspection.

Michael:

Now those are those are great tips. And how are you seeing all cash offers playing in the Columbus market right now?

Harvey:

They're frequent. And they come from institutional buyers quite a bit. There's hedge, hedge funds and institutions that we're all competing with. And they throw down big chunks of cash. And they they often buy multiple houses at the same time.

However, I've seen sellers opting to be more patient for more money than jump out a cash offer just because they can close in 10 days. So cash doesn't always win. It looks like maybe they're winning less frequently. I don't know that for sure. But it seems that way that sellers are being more patient thinking okay, I can get I can wait 30 days, 25 days and get 20,000 more dollars out of this. Well,

Michael:

Seems like a pretty good ROI.

Harvey:

Yeah. Yeah, not bad. I mean, then lender is good lenders are closing in 21 days. So if you come in and you're pre approved, and your lender is legit, and they're gonna move on things quick. I mean, three weeks, the seller can make, you know, several 1000 more dollars, which can compete with really as a cash offer, at or above asking that close in 10 days.

Michael:

Well, that's really good to know. That's really good to know, Harvey, this has been awesome, man. Is there other any other thoughts, tips, tricks, insights that folks should be aware of about the Columbus market?

Harvey:

Be patient. And like I said earlier, I'd make make offers and pay attention. Paying attention, especially through the winter months.

Michael:

Perfect. We'll have our our heat vision goggles on it's I know it gets pretty cold out there.

Harvey:

Yeah it can.

Michael:

Awesome. Well, Harvey what's the best way for folks to get in touch with you if they have questions about the Columbus market about property management?

Harvey:

Yeah, feel free to email me harvey.yergin@gmail.com. You can also text or call me although I'm usually faster respond to texts at 901-484-9751. I'm also on Facebook, our investment company Simple Solutions Real Estate is also on Facebook. I'm all over the place. Reach out and love to connect.

Michael:

Right on. Well, thanks again. Harvey. This was really great. Appreciate you coming on.

Harvey:

Yeah. Thank you, Michael.

Michael:

Take care. Talk to you soon.

All right. All right, everybody. That was our episode. A big big big thank you to Harvey. I know I learned a ton about the Columbus market very much looking forward to continuing to learn about the market and seeing where it goes from here. Sounds like some really big things coming down the pike. If you enjoyed the episode, feel free to leave us a rating or review. And as always, we'd love to hear comments or a future topic ideas so let us know in the comment section. We look forward to seeing the next one. Happy investing

How to navigate the inevitable head-aches of real estate investing Sep 11, 2021

Real estate is a powerful way to build long-term wealth. But like any business, it comes with challenges that make you question why are you are even doing it. This episode is a quick reality check with some suggestions on how to look at the challenges in front of you.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only and is not intended as investment advice. The views opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Emil:

Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and today I am only joined by one of my co hosts

Tom:

Tom Schneider, more than just an only you ARE joined by Tom…

Emil:

Glad I am joined by THE Tom Schneider, no Michael Albaum today he's he's traveling around in Portugal being the true remote real estate investor that is so just Tom and I on the episode which I mean, I don't think is a bad thing. You know, Mike, Michael is kind of dead weight around here anyway.

Tom:

Nice. Throw him under the bus.

Emil:

Throw him under the bus. I'm just kidding. Michaels, Michaels man will miss him. But today's topic, we're going to be talking about dealing with the hard parts of real estate investing. So contrary to what some people may believe it's not all mailbox money. It's not all rainbows and butterflies and sunshine and making money. This business will test you It's hard. There are points where you may want to throw in the towel. And I've certainly felt that Tom, I think you've probably felt that at certain points, too. I know many other investors have talked about it as well. So we're going to be talking about how do we deal with that we deal with the those emotional moments and those moments when you want to just give up? And how do you overcome them? Keep going. So let's get into this episode.

Emil:

All right, Tom, I hope I hope people don't see this as like a pessimistic episode, I'm more so you know, we talked about this before we started recording, I think it's just important to be aware of these things. You know, when I first got into investing, it was just awesome. And then something, something happens, right, you have a large expense, or you're dealing with probably, maybe your property manager isn't communicating the way you'd like, there's all these various things that will happen.

And it's going to test you it's going to test you emotionally, it's gonna test your resolve to kind of stick with it. And so I thought it'd just be good for us to talk about, like, these different points.

Tom:

I love it. It's just, it's something just kind of add onto that it's not a question of like, if something negative is going to happen, it's like, okay, when you know, like, it's go ahead of me.

Emil:

Yeah, exactly. It's, it's going to happen. And that's okay. And that's part of it. And I think, you know, anything where you're gonna make money, and there's opportunity, part of your job is to handle challenges. There's really nothing in life where you just kind of, you know, limp in and put some money in. And it's not that challenging, and you just have awesome out weighted returns, right?

So this is a business, you know, it's not just like putting your money in the stock market. And what happens happens, there is a business, you manage it, you have tenants, you deal with people all the time. So, you know, these things can throw curveballs in your life. So, Tom, do you have any moments recently that you can think of when you kind of when this has happened? I don't know how recent it's happened for you.

Tom:

Yeah. So I guess one more thing, kind of high level throw in is, you know, we all understand the benefits of real estate investing, right, you're getting loan pay down, you're catching, you're collecting rent, you're getting appreciation, there's all this good stuff, you know, but these challenges, they, they provide a little bit of a moat, in getting into it, you know, in being able to deal with it. For people who don't want to deal with some of these challenges that come up, that's that's a bit of a moat in kind of the perseverance and patience and all that good stuff.

So let's see something sort of recently that happened. So this happened maybe two years ago, I bought a property where there was a tenant in it for a very long time. And so there was what’s really called deferred maintenance. And one of the things ended up being in the bathroom, the I think it was like the tub or something, there was a little bit of leaks going on, in in the plumbing. So like it, it's like the worst type of leak where it wasn't a lot where was obvious it needed to get fixed. It was a little that it's just enough to wear down some of the sub flooring.

So I ended up on this property needed to do sort of a full sub floor gut job on the bathroom. And, you know, when you're mapping out these acquisitions, you're, you know, putting some assumptions in on how much you think renovation was going to be and this ended up being I think, like, five times like what I had for the year, is like several thousands of dollars to have floorboard, new tub, all of those trades. So this was a a real backbreaker in looking at this property as cash flow, which, you know, hit it for next few years thinking about cash flow.

Emil:

Yeah, I think that's when it hits me the most is like, anytime you're you're doing, it's usually with maintenance stuff, right? It's like things that cost a lot of money. And it's always the unexpected thing. So like, you go in, you're like, oh, we'll just have to, you know, clean the tub or whatever. And then they they open some things up, and they're like, Oh, your sub floors rot. And you got to change that out. You're like, man, why do I do this?

Tom:

Why do I do? Yeah, Does somebody want this?

Emil:

It's always with turns, mine is mine is the same thing. I'm doing two turns at the moment. And it's like, it's the ultimate emotional test is when you have a tenant leaves, and you think, oh, maybe we'll just have a couple $1,000 in repairs, and, you know, usually adds up, usually adds up.

So I guess my next question is like, how do you deal with it? Alright, you feel like this waits, and you're like, oh, man, this is way more expensive than I thought, you know, like, like, walk me through how you're feeling? And how you kind of deal with it?

Tom:

Yeah. So I think with any kind of challenges, it's good to break down, like, what is the path to being done like, on the other side of the good. And for this particular case, and also to kind of evaluate, like, what your options are, and have some long term context of like, what you're trying to do. So getting to the other side of this, it was like, Okay, I don't really have a lot of options outside of making these repairs, this is safety, this is habitability, this is function, you know, I like where this property is located, I, it is appreciated a little bit, is continue to appreciate quite a bit. Since then I'm, I'm still bullish on this, I'm going to keep kind of marching forward, and just take my licks, fix this up, I'm going to be in trouble and cash flow.

But giving it context, like I said, so I am very long on real estate, and this kind of stuff I know is going to come up. But if you you know, sure this is going to take a big kick in the teeth on the cash flow aspect of it. But the way that this property is continuing to be in demand, like it, you know, and occupied and appreciating, you know, I I'm okay, not needing, you know, the extra 5000 or $10,000 needed to fix up this issue. I am long term on sort of reinvesting these funds, that is going to go into fixing that to continuing this keeping this thing moving along.

Emil:

Solid I think that's great.

Tom:

So yeah, having a broader context. And then also, just not thinking abstractly and just thinking sort of, okay, this is what what I need to get to a point from where I'm at right now to where I want it to be. And having that broader context. And in the back of my mind.

Emil:

Smart, very smart. I think it's so important, whatever you do to surround yourself with people who are doing that as well. So if you invest in real estate, join groups, watch YouTube videos, listen to podcasts, like ours, or many others out there. Because I think, knowing that you're not alone, like knowing it's so easy when this stuff happens to be like, Oh, man, I made a bad investment, or I'm not good at your job, whatever it is, right? And think you're so singular in this problem. When you think follow more people talk to more people, you realize, everyone hits these speed bumps. Everyone deals with these really, you know, painful challenges, especially if it's the first time you've dealt with it, right? I think as as you keep going, and like, these things come up, you're like, Oh, just the cost of doing business. They don't like, they don't mess with you emotionally like they once did. So I think just like hearing other people's stories, surrounding yourself with people, allows you to realize you're not alone, and that this is all just part of it. And it's common, more common than you think.

Tom:

Yeah. I love just to echo that community aspect. I think it's important in that community that you build around you, as you know, has kind of similar experience or more experienced than you because, you know, if you start talking about these kind of issues with someone who doesn't invest in real estate, they're like, it's hard, harder context for them to get it.

Emil:

Right. Yeah, they'll tell you to sell like, oh, why do you do that? Like if someone doesn't invest in real estate, they'll be like, why are you even doing that?

Tom:

I think the one of the worst things that can happen as a real estate investor is being forced to sell, you know, thankfully, in my situation, I had proper reserves to go and apply it to fixing the property up I didn't you know, the property didn't have to go be dilapidated or whatnot. I had a friend who got involved in real estate investing and needed to sell for whatever, you know, whatever reason how to sell really quickly. And during escrow, the person came back to him and said, Hey, you know, you have a roof that's having some issues like I want you to take $10,000 off and he was in a rush to sell so he didn't really have a great negotiation chip and ended up selling during a super hot market for like $10,000 under what he could have had and that's just like bottom line money gone.

So I think another really important thing in managing the hardest stuff is to make sure that you have the right reserves behind you. Because that's really the the main way you can lose in this game is not having the proper funds. When stuff like this comes up.

Emil:

Yeah, you your first line was the most important thing. Don't be a force seller. That's when you lose money. Like you want to be in the position to sell when things are are doing well. You don't want to have your hand forced in this game.

Tom:

What's some recent nightmares in Emil's real estate investing?

Emil:

Mine is, you know, like I've been mentioning these turns man, like, I bought this property this triplex in November and like I underwrote, I don't know, I think like $5,000 for turns or something, because I knew, you know, a couple tenants were super under market, I was like, Alright, we're gonna try to raise rent, they'll probably leave let me write in some, some repairs. And just right now with the way things are, it's hard to find contractors, they're charging a lot, right, just given the way like, labor costs are going up, supply costs are going up. So like, are severely underestimated my underwriting. And so it's going to cost us a lot more to do these turns.

And they've taken a lot more time than I thought, right? Like some of these are taking four to six weeks when I was like, Oh, we can get them done in less than a month. I think it's always when your expectation and your reality is way off. That's when frustration or just like disappointment occurs. And that's what's been going on.

So for me, it's just been with this triplex like getting it turned getting at leased. Luckily, during this time, rents have also gone up. So like, I was way conservative with my underwriting on what I thought we could get for rents. And so like now, even with these expenses, it's like my cash on cash is gonna look much nicer than I thought it was when I bought the property. So, you know, not all terrible things. But man, you know, every time you have a turn and getting the unit renovated and leased out takes longer than you think it's just, it's always painful. It's always like, tough dealing with your property manager, because you're like, why are we getting this leased and blah, blah, blah. So, I don't know that for me, it's always during tenant turns that it's like, frustrating.

Tom:

Yeah, I think another point that I like that you brought up is just comparing your expectations, you know, against reality. And what's probably also like that much trickier and your your position is you're getting a little bit more on some more multifamily stuff where it's kind of like newer expectation building, you know, of what you know that versus if you're in a swim lane that you understand really well, like you just have a much better understand on the kind of expectation of a beta around like, timing. And so getting into either a new market or a new asset class, it's a whole new set of expectation setting and, again, to that community aspect, that's why it's important to have these people to bounce like, Hey, does this make sense for in this market for this property type talking to somebody who has that experience? To You know, let you know if like, yeah, you should be upset or no, that's that's normal Emil like for what you're doing what you're managing. I think that's an important to have for sure.

This is may or may not be related to the topic, I think it kind of is. It's it's a story that I heard yesterday that I thought it was just so intense. So this guy was trying to time the market, which is something that is like patently impossible to do. And this wasn't with the rental property. This was his personal property. So he has a house in the East Bay of San Francisco over in Walnut Creek, nice suburb. And two years ago, you know, the markets been climbing like crazy, he's like, no way the markets gonna go up anymore, I'm gonna sell my house and then rent. So he does this, he sells his house, and he rents for the last two years.

And meanwhile, his home is probably appreciated, like 30%, or some crazy amount, and now he's trying to go back and buy a house. And, you know, trying to buy just the same house that he was in before he like out priced himself because it appreciated so much. So this is not totally related. I mean, when you think about the different ways of going down as an investor like not being successful, it's I think it's important to think about what would make me more upset. So like, if you have this rental property, and you ended up, you know, selling it, and you no longer kind of have access to this type of a wealth builder versus managing through these waves of the challenges like I think it's important to kind of run scenarios as impartially as you can, kind of playing out these different paths that you can have when you're in a frustrating situation.

Having that five year 10 year 20 year mindset is I mean If that's your strategy to build long term wealth through real estate, it makes it a lot more palatable in going through these, Oh, darn, I have to change the sub floor out. But, you know, hopefully, that's something I don't need to do again.

Emil:

Right? Right. It is important to remember that, like, you know, when you want to throw in the towel, when you're like, man, am I maybe this just, I'm just not cut out for this, or whatever it is. I always think about all the people who bought 20 years ago and still own a property, and I'm like, man, imagine if I had bought 20 years ago, you know what I mean? Like the people just, they deal with the problems, they they persevere, they go through it, they maintain the hold for the long term, you know, the longer your time horizon, generally, the more smooth your returns will be. And all these these bumps will kind of smooth out with the periods where you have three years, same tenant, no issues, you know what I mean?

So I always try to remember those things in these moments of frustration and, and hardships, we'll call them.

Tom:

Yeah, some, some grit.

Emil:

It's mental. You know, it's funny, because it's a mental game, especially for us, we invest remotely, it's not like you or I have to go change out the sub floor or anything, right. It's really just like, we have to take money out of our pocket, give it to somebody else, and they fix the actual problem. So it's all just like, the mental game, we're playing.

Tom:

It was something I was, like, an angle I was going at a meal is, you know, while we are like in really fortunate positions, to be able to have extra income to invest in real estate, because there is a barrier of entry of like, being able to buy it, right. We're not like, like, overly wealthy, like, this is like a meaningful part of the, you know, the extra savings that we have that we're applying towards this and you know, very grateful to have the opportunity to do it. But it like is really meaningful. Money. It's not like, you know, abundantly wealthy to be able to do this. It's,

Emil:

Yeah, I wouldn't everyone thinks or their landlord is like this super rich dude living on an on an island, just sipping pina coladas. And it's like, I forget where I heard this joke or something. And he was on Twitter. It's like, like, some real estate investors, like, Oh, I'm wealthy, but I don't have any cash. Because it's like, your cash is always kind of tied up in your assets. And so it's like, you're building well, right? A lot of the times, you know, sitting in, in your portfolio, so…

Tom:

Totally, but you know, again, it's not like lost on me, like it's very unfortunate, very fortunate position to be able to save enough money to partake in this type of investment. But, you know, it's not like there's a money tree behind. So like, the mistakes and those issues are real, for sure.

Emil:

Totally. Yeah. Yeah.

All right, I think good spot for us to end this episode. Hope you all found this, this helpful next time, you know, you're dealing with a challenging situation. Hopefully, we gave you some tips to to break through that feel better and keep moving, keep chugging along and ride out your investment journey. So with that, thank you all for listening, and we will check you out on the next episode. Happy investing.

Tom:

Happy investing.

Simplifying Portfolio Growth Through Multifamily Real Estate with Paul Moore Sep 07, 2021

Paul Moore from Wellings Capital is back with us to talk about how to get started in the multifamily rental space. We discuss Paul's transition into the multifamily strategy, how to evaluate the trustworthiness of potential syndicators, different forms of multifamily investments, how to make the SFR to MFR transition yourself, common mistakes investors make, and taking action.

Visit Paul's site: wellingscapital.com

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and today I'm joined by my co host,

Tom:

Tom Schneider.

Michael:

And with us today, we have a repeat very special guest, Paul Moore of Wellings Capital. And Paul is going to be talking to us today about the transition going from single family into multifamily and then into massive multifamily syndication. So let's get into it.

Paul Moore, thank you so much again, for coming back on man. Really appreciate you taking the time.

Paul:

I's great to be here, Michael. Thank you.

Michael:

So Paul, what I wanted to chat with you about today is multifamily? Because I know that you are a big, big, big player in the space. And so maybe you can just start off by sharing with folks. What are some of the benefits of multifamily versus single family that in your opinion you've seen?

Paul:

Yeah, so I just for a quick history, I flipped single family homes for years. You know, we did dozens and dozens and dozens of homes. And we also did waterfront lots, I did some ground up single family. And I wasn't sure how to get into the commercial real estate realm. And actually a friend of mine and I found this huge glut in or the shortage actually what am I saying a glut? An anti-glut and housing in North Dakota for the oil boom that was going on there during the Balkan years in late 2010 and on.

And so we built a multifamily facility sort of a quasi hotel and then we build another one next door then we ended up building a Hyatt Hotel and found out that man, I really like commercial multifamily. I like having all these doors under one roof. I like one parking lot. I like one, you know place where all the toilets are and everything. So we really we jumped into multifamily. And we really never looked back from that point on. And so that's how I got into it.

Multifamily is interesting because the government cau… helped cause a huge supply and demand imbalance in multifamily. So in the mid 90s, in the mid 1990s. The government and its great wisdom decided that everybody who could fog a mirror should own a house. And so they actually pass laws and they forced those laws down on the bankers. There's different opinions on how this really happened. But basically saying, you know, like starting this massive subprime mortgage boom.

And basically they said, Look, you don't have to have a good income, you don't even have to tell us your income. You can just do stated income or you can even do no doc and you guys remember that. And so lots and lots and lots of people were able to buy a home I have a friend who was making about 40 or $45,000 a year, he had a house and he bought a I think was a $500,000 second home in this town he grew up in and it was actually a little castle. It was in, you know this town that was actually in decline in West Virginia. And he bought that as a second home.

And you know, he didn't even have a really good plan. It was years and years before Airbnb. And so he lost it back to the bank and a lot of people lost their homes. But what happened is homeownership went up from its historical norm of about 63% to 69.2% by 2005. And so from ‘95 to ‘05 and went up a whole lot and so single family home ownership was in multifamily was not so much and then of course we have the crash that you know the cracks that started in ‘06 and ‘07 and then the crash that happened from really ‘07 to ‘10 and there was a lot of people who lost their homes. And a lot of people who said you know what? The American dream of having a home having my own house is not such a great dream as they watch their some of their parents and their friends and themselves, lose a home and lose all this massive amount of equity.

I know a guy named Rod Cleef who you guys might have heard of in Florida he had his net worth went up by I think $30 million in in Florida in single family homes between like ‘05 and ‘07 and then it dropped like fifth million dollars after that, and he lost all his single family and his multifamily because they were tied together on loans, you know that we're kind of cross collateralized. But at any rate, single family home ownership dropped back down to around 63%. And every 1% drop from 69.2 to 63 ish was represent a million people coming into multifamily.

But they came in at a time, when there wasn't a lot of multifamily being built, you know, like,’07 - 09 10-11. And so there's became this pretty significant supply and demand imbalance. And the four types of people who are coming in and at the time, especially right after the Great Recession, but even to now are coming in, number one, baby boomers, people my age, it's the smallest number of multifamily tenants, but it's actually the fastest growing. And statistics say when someone goes from a single family home that they own to multifamily, they typically never go back to owning their own home.

Second group is millennials now millennials in general, not you guys, but a lot of people, you know, a lot of them don't see the point in tying themselves down to a 30 year contract on a seemingly overpriced home, when they might have new opportunities, new friends, new jobs, you know, something across town or across America or around the world next year. And a lot of them historically have had a lot of debt. And with the new rules that came in after the crash, you know, a little over a decade ago, it's harder to qualify for a loan. And so millennials on average rent more than buying compared to other generations.

You've also got Gen Z, it's hard to say where they're going to land, but at this time, Gen Z, which is about as large as the millennial group at 77 to 82 million strong in America, they are also renters. And then the fourth group is immigrants. Now people who weren't born in the US, on average, rent more often and rent for longer than people born in the US. And so the question is, are we going to end up going more trending more toward Detroit, whether it's over 70% homeownership, or more toward Dallas, where homeownership is down around 50%? It's hard to say, but my money is on Dallas.

Tom:

You know, it's funny, that inverse relationship of in Europe, it's there's some studies out where you have countries, some Scandinavian countries where maybe homeownership is left, but the economy is a lot more dynamic versus country where homeownership is very high, Spain and Greece, and usually the economy is a little sluggish. I think a lot of it has to do with what you're talking about where you have that mobility, you aren't necessarily locked in here. And you can, you know, move around. I think that's, that's part of it.

I love that story related to The Big Short, you know, talking about the run of the economy, I love to hear how your business evolved throughout that. So like you said, you initially were in single family was that in this run of time? Or had you already transitioned? I'd love to hear kind of the confluence of you through that whole, you know, through that market dynamic change?

Paul:

Yeah, I'd like to say I thought through it. And some intelligent decisions based…

Michael:

Crystal ball.

Paul:

Yeah, just didn't work for me. But no, I had a public I sold a company to a publicly traded firm when I was 33, in Detroit, and that was in 1997. At 34, I found myself pretty bored. And so I started seeing flipping single family homes in 2000. And we did that and then we built some ground up like homes, and then we did a small subdivision. And like I said, I did I got into land and lots for a while. But I also set up a website that sold leads to realtors, and I still have that running in the background 17 years later, and it's still going pretty well. That's a regional thing right here in the southern part of Virginia here.

But at any rate, during that time I was I just I didn't know how to get into commercial, like I didn't know, like, how would I get into large scale multifamily, I didn't have $10 million. And I didn't know to trust where to start syndication was a thing we didn't really know much about. I mean, we knew that there was a thing called syndication where you can pull together a whole bunch of few active and then a whole bunch of passive investors. But we really didn't know how to do that. And we were sort of thrown into that when we started building, you know, much larger assets, you know, then we had the money for ourselves. And that was in 2011.

And, you know, when when single family and small multifamily around the country within the tank, we found that the opportunity in the Balkan region of North Dakota with the oil boom made, you know, was made a lot of sets. And so we, and we've kind of fell into that, Tom. I mean, we actually we then we had a failed oil and gas investment in North Dakota. But that's how we learned about the housing shortage there when we drove up there and saw people sleeping in their pickup trucks along the side of the road, in rest stops in a Walmart parking lot.

Tom:

There's so many interested, interesting, successful businesses like that, where you went to the gold mine, you know, searching for gold, you know, the analogy of oil. But then you found the money was in the picks and the axes. And in that analogy, that would be the actual housing for it. So that's, and that's such a common, successful entrepreneur story of just kind of having eyes wide open. And, you know, pivoting as it makes sense.

Paul:

Yeah. So which is more exciting. Hitting oil? or building a multifamily property? The Healthy oil workers? No, seriously, there's a thing called like, I'm trying to I'm working on a book, I'm just kind of in the early stages, the joys of boring investing, or possibly the boring investor. Boring investing is powerful. I don't know if you guys heard of the coffee house investor, but it's basically saying this look, why should we actively trade stocks, and Bitcoin and all these things that are so exciting? Sure, throw a little bit of that, but why are we spending our life's energy, when we could be hanging out with our families or friends are having a better marriage or whatever those things can be and make more money and ETF, you know, ETFs.

And so I, the thought there are not a stock guy. But the similar thing in real estate is this, would you rather give your let's say, your professional, let's say you're a doctor, a dentist, a lawyer, an IT person, you're making hundreds of 1000s of dollars a year, and you're trying to flip a house on the side does that it doesn't always make as much sense to do that when you can have somebody else do it for you. And so I think companies like Roofstock, and my company, we, you know, we provide opportunities for people to get involved passively, still get the profit still get the appreciation of real estate. But at the same time, they don't have to give every waking moment of their free time to this. And that's one thing I love about it.

And that's sort of similar to what you said, Tom, and I mean, you know, you can either go out there and try to mine, you know, try to be out in the caves and you know, in 19-1849, trying to mine for gold, or you can just sit comfortably in your hardware store and sell all the equipment to them, you know, or you could be Amazon and shipping equipment. Anyway.

Tom:

I love that concept of a book, The urge, you know, just kind of going into the the boringness as like the winning strategy. And I mean, just in talking with friends, I think a lot of it is FOMO it's a lot of it the psychology, you know, maybe you have some, you know, of some guy who got in Bitcoin really early. And it's like, oh, maybe I should do that. But it's like, having a kind of a balanced approach at looking at the, the, you know, the variability of it, right, the beta versus some some boring ETF strategy.

Michael:

I agree with you both, because I think it's not sexy to talk about at dinner parties, you invested your money in something and it's just sitting there, earning you a great return. And like, everybody wants to hear the big win stories where you swung for the fences and knocked out of the park or it didn't go so well. I mean, that's, that's the stuff people want to talk about. But I couldn't agree more the passive stuff is, is really great.

And Paul I was hoping to kind of get your your take on this about how folks you touched on it a little bit about syndication, but I think so many folks can't fathom investing in commercial real estate, multifamily real estate. And for those of you that don't know, that's five units and up residential is four units and below. So how can people start investing in 100 units, 200 units, 500 units, you know, what, what's the path to get there? And then we'll come back to it and talk about how people can go from four to five.

Paul:

Yeah, that's great. So if they want to invest in larger, you know, like, let's say, so I have some money in an IRA and I can't invest in my own company, because it's an IRA and I it has to be, you know, like arm's length. And so I look for other opportunities there. And I'm looking for something really passive and really boring. Now, recently, my friend told me how he was getting a 60% return on setting up this amazing log cabin, Airbnb in Gatlinburg, Tennessee. And I was like, Wait 60% annual return. He's like, yeah, I bought a million dollar house, I financed 900,000 of it. So I have 100,000 in it. And I'm getting 60 to 70,000 free cash flow a year.

And he's actually done this over and over. And he's helping other people do it now. So I got really excited about this in June. And then I thought about through July, and I thought about it through August. And I thought, Wait a minute, you know what that will be so exciting, because I love Gatlinburg, that will be exciting. And that will make a lot of money. But that'll be another thing to think about. That's gonna be another thing I have to worry about. That's going to be some call, you know, from even if there's a third party manager, I'm going to get calls, you know, about some toilet overflowing or some insurance or something. And I'm making pretty good money in our company. And I don't want to have to think about that. And that's the path. That's my passion, to tell people, you know, to be a boring investor and to do it through like syndication, for example, do I mean, do any of us really think we're gonna go out and find a two or three or 500 unit apartment and somehow find a deal that nobody who's given their whole life to it, you know, these hundreds and hundreds of companies who are pursuing these night and day with a team of people? Do we really think we're gonna find a deal, it's probably not going to happen in the real estate realm at that size.

And so why not align yourself with the people who know how to find those deals, and just invest in their deals. And so that's what I recommend I I talk about my new book has a section like 50 pages of seven paths to get into large scale commercial real estate, but the path I'm recommending for this podcast for this discussion would definitely be invest passively with somebody who is an expert.

Tom:

So this is a, this is probably a common question.

I think this all sounds great. But, you know, how do you build trust with someone where you're going to give them a bunch of your money? How do you cross that chasm cross that bridge to get uncomfortable, especially for doing it for the very first time putting funds into a syndication?

Paul:

So Tom, before I answer that, I just want to make sure are you saying, How do I build trust as a syndicator? to get people to give me money or vice versa? How do I price it versus…

Tom:

Vice versa? I'm evaluating Yeah, sure. You know, the log cabins in Gatlinburg sounds super fun, but I you know, passive income, let's let's do that. Okay, how do I sort of vet a potential syndication to put funds into what would you be out around that?

Paul:

Yeah, so a couple things I would do. There's a book called The Hands Off Investor, by Brian Burke. And this book is, it's a wonderful book by a guy who was a syndication expert. He's done 1000s and 1000s of apartment units. And it's published by BiggerPockets publishing, so I'd highly recommend The Hands Off Investor, it's about 300 page Guide, which will tell you how to evaluate a syndicator before you invest. Secondly, I would go to the real estate crowdfunding review. And it's not just for crowdfunding, it's for syndication in general. And it gives a tremendous amount of information and education about how to vet operators, fund managers, syndicators, etc. And it basically helps people figure out, you know, the, what they need to know before they invest, there's a lot of other investors on there, and they give very honest reviews. And there's no syndicators or fund managers allowed in their group at all. And so I could never see what people are saying about me there. So they probably feel a lot more willing to, you know, willing to be honest, good and bad.

Tom:

I love how self serving these episodes are. This is this is incredible. Yeah, I love it. I have my Amazon cue the hands off investor in my that link to that site up right now.

Paul:

Yeah, you know what, I didn't really answer your question that Well, those are two resources. I'll just tell you real quick. I want to actually see how much skin they have in the game, how long their track record is, do they have a cohesive team? How do they treat their staff? How do they talk about their other investors? What do other investors that they refer but also that you find yourself, what do they say about them? What kind of risks are they taking? What kind of cap rate are they assuming on exit, which in other words How much do they assume that the market will go up or down on exit? What kind of occupancy? assumptions are they making? What kind of rate increases rental rate increases in cost increases of a assuming there's a lot to know? And that's why it's so important to lean on things like you know, other people's reviews, which you get especially That real estate crowdfunding review site.

Michael:

Paul, I agree with everything you just said. taking it a step further and allow your deeper if someone is brand new to the multifamily space and brand new syndications, how can someone know if the cap rate that's being projected on the exit is reasonable, or the vacancy that they're projecting is reasonable, their costs are reasonable.

Paul:

That's really tough. I was just talking about this to an investor about an hour ago, and he was asking me, he said, If I invest with you, what kind of quarterly reporting will I get? And I said, Well, you know, the problem is, you're gonna have to really trust us, honestly. And you're gonna have to trust the people we invest with, because the quarterly reporting will not it might like make you feel good to see a big page of numbers. But first of all, if there's one mistake in their Excel spreadsheet, it can throw off the whole sheet, you know, that's

Michael:

It’s all garbage. Yeah,

Paul:

It's all garbage. But also, you won't really understand, I mean, you won't really, really know. And so this is, again, going back to trust. And this is why I like the educational model, which is what you guys do so well, you're educating your audience, you're telling them about, you know, the different reasons people should look at a real estate investment with Roofstock, and other people on podcasts are telling you about theirs. That's why I think education is so important. And building a loyal group of people over many, many years.

There's a lot of newbies who are doing this now. There's some of them, say stuff like, hey, the real estate market will never go down again. You know, people always need a place to live. That's not true. And history tells us it's not true. And so my money is again, on people that have been around like Buffett, you know, 91 years. And he has some things to say even though he's not a real estate investor. He has some really, really important principles for real estate investors, and I love to study this stuff.

Michael:

Yeah. It's such a good point. I've been to several multifamily workshops and syndication workshops, and they're talking about how, you know, it's really important to evaluate not just the deal, but just to your point, the sponsors, who's putting this deal together, why is it that they're asking for money? You know, what is their track record look like? So I think if, if the numbers you can't read the numbers, or you can't tell the story between the numbers, look to the folks who are behind the numbers to get a good understanding of what how that deal is going to perform.

Paul:

Yeah, that's true.

Michael:

So wondering if we can shift gears here a little bit, Paul, and if you could share with us a little bit on what you've seen folks do really well. Or maybe you personally how you went from single family into small commercial multifamily, because I think that there's this chasm, Tom, to use your word, that people can't make this mental shift, that there's this commercial real estate in the multifamily space is so different than residential or than single family. So what have you seen folks do to be successful to make that leap?

Paul:

Yeah, I think it's just actually doing it. I mean, getting some education. There's a lot of great podcasts out there these days. There's books, there's mentoring, there's coaching of the path, you know, that I mentioned earlier, I really highly recommend, you know, getting paid coaching, or even unpaid mentoring and learning from somebody who's been before you.

One thing I mean, I hate to sound like rude, but I'll be on a, you know, I'll be on a BiggerPockets forum answering a question. And if somebody says, I'm trying to make a decision on how much to offer on a single family house, great. That's great. That's no problem. I understand that. But when somebody is on there, saying, I'm trying to buy a two or $3 million mobile home park, or self storage facility, or you know, even a 20 unit apartment, and they don't even know really basic stuff, like what does cap rate mean, or whatever. I'm like, Don't do this.

Michael:

What are you doing?

Paul:

You're risking your family's money and your friends money, and it's almost sure to be a failure. I mean, the money. The big money in commercial real estate is buying from a mom and pop operator and improving it. And we've seen people double or triple. I'm doing a case study this week with somebody you know, somebody who was able to quadruple their investors joint, you know, the group of investors equity quadrupling, in two years. It was from buying a $10 million Self Storage Facility from a total mom and pop operator who didn't know what he was doing.

And so don't be one of those. And the way to not be one of those is go get a paid coach, or an potentially an unpaid or semi paid mentorship with somebody who's way ahead of you. And then like I said, books, podcasts. cetera is really helpful.

Michael:

Yeah, that's such a great tip. I do a lot of coaching inside the Roofstock Academy. And I'll get folks in there sometimes say, Oh, I want to go big for my first one. And I said, Well, why? Well, because I want to do this and everything. And I said, Look, I can almost guarantee you, you're going to make mistakes, you're going to learn lessons. Would you rather learn those lessons on a big, big property with a lot of risk or on a smaller property with a whole lot less risk? and 90% of the time? That's so let's go learn. Let's go learn with training wheels, and then we can go ride our bikes.

Paul:

Yeah, I agree. It's so true. And I wish I didn't know that years ago. I mean, I made so many mistakes like this. And, you know, I love what the first Nobel Peace Prize winner Paul Samuelson, in economics from the US. He said, investing should be boring. It should be like watching paint dry are watching grass grow. If you want excitement, take $800 and go Las Vegas. You know, it's it's so people wanting to be part of the excitement is going big, go big or go home. Right. But, you know, life doesn't work that way very often. And when it does, it's such an exception, that, you know, they write books and tell stories about people. I mean, people think, you know, Jeff Bezos was an overnight success. He has massive pain and failure in his background before he got to where he got, you know,

Michael:

Yeah, it's so true. People only talk about the highlight reels no one talks about the other 99% that fail or don't make it or that, you know, go home crying,

Paul:

Right.

Michael:

Yeah. Yeah. Curious.

Paul:

That's true.

Michael:

Curious, Paul, what is one of you know, a couple of the big mistakes that you see newer investors make as they make the transition to multifamily?

Paul:

That's good. One would be just assuming that rent, you can increase rents, like 6% a year every year, but costs are only going to go up 2% make a ton of sense. Although it could happen, you know, it could happen if you can find some efficiencies and things like that.

Another one is not aligning with a great property management team. You know, I mean, if you, I mean, I think finding a property manager is critical. I know a guy who's a medical professional, I met him recently, and he had 42 units. And he was man… He was managing it himself, trying to run his medical practice and managing 42 units. He's like, well, the cash flow will be destroyed if I got a property manager. And I'm like, Yeah, but your life destroyed. Now, you know, like, he was telling me how a tenant had just moved into a place on Monday and on Wednesday, set it on fire. I mean, that was like three days before I met him.

And I'm like, okay, so if you just own that, and you weren't the property manager, you'd still have a ton of hassle here. But as the property manager, and the owner and asset manager, you've got, like, 10 times more. And so I think that is one big mistake people make, assuming they can do it on them on the side. And assuming it won't be that much hassle. And assuming that there won't be any vacancy, things like that.

Tom:

Pennywise pound foolish, I guess, Penny penny wise, sanity foolish.

Paul:

Yeah right. Yeah, sure.

Michael:

One big one that I see is when folks start to make bridge this gap, and it could even be in residential multifamily, but they'll look at a single family house that rents for 1000 bucks a month, and they'll look at a duplex that rents for 1000 bucks a month gross, you know each side for 500 bucks a month, and they'll evaluate those two properties as the same. And I would say that they're not because the folks renting that single family are going to be a different tenant class in the folks renting the duplexes. So don't you've got to go beyond the numbers and don't live in the spreadsheets because it'll come back to bite you in the keister.

Paul:

Yeah, sure. Well, that's great point. Appreciate that, Michael. That's good.

Tom:

Paul, I think we're we're kind of in an interesting economic point right now where we've had this this wild run up on appreciation, and maybe it will continue. Maybe it won't. I'd love to hear kind of your crystal ball thoughts around the market, rent prices, just kind of a general musing on what to look look towards and coming up and 2021 and into 2022.

Paul:

Yeah, well, I was sitting in airport, going in a tiny little airport in Belize city going to The Real Estate Guy's annual conference in June, and I was sitting next to a well dressed guy and I started a conversation with him. It turned out it was Doug Duncan, who was the chief economist for Fannie Mae. And I was like, Well, okay, what do you really think about inflation? I really think the same thing I'm saying publicly, I think it'll be in the fives this year. It'll be like 3.8% next year. I'm like, why do you think it'd be so low 3.8 as I said, they just injected 30% of cash that's ever been created in the US. It has been created in the last 17 months. So why won't inflation just go through the roof?

And he explained that it's not only the amount of cash, it's the velocity of spending. And he said, he thinks there's gonna be a lot of velocity this year, you know, kind of in this post, you know, like the year after 2020, where COVID was just reigning and ruling over all vacations and everything else. But he thinks there's gonna be a big spending spree this year, of course, we're seeing that tons of shortages. I mean, go try to buy a four wheeler or a four wheeler trailer right now you can tell I tried really hard to find anything or try to find a car. You know what the chip crisis, but it's the same in real estate.

And Doug Duncan went on to explain, he said, I think the shortage in the real estate market is real. He said, I started sounding a siren in 2014, saying, you know, seven years ago that there was this growing supply and demand imbalance, which is sort of what I was talking about earlier, that includes multifamily, and single family. And he said that the amount that in balance is going to take years to catch up. And so it really does seem like the price inflation in, you know, rents, and single family home prices and apartment prices, it seems like it's real, it is justified. And it seems to me that without some huge exogeneous shock to the economy, which, you know, we found out we could have, of course, with COVID and other things. Aside from that, which is kind of a black swan issue. It seems like the cap rates are going to continue to stay compressed, returns are going to continue to stay low, it's going to be hard to find single family or small multifamily that cash flows, and people are going to be relying on appreciation. But that's what we've been talking about earlier that that's really risky. Do we want to take risks like that?

Well, I'd say this, align yourself with people who have decades of experience if you're going to, because right now, if you're just coming in near that, what could be the top of the market, where the margins are razor thin, if existent at all. And you know, if there's a shock, or if there's a downturn, you could get, you know, in a lot of trouble getting a 97% loan, and then the value drops by 20 or 30%. It's I think it's a very risky time to get in, even though what I said a minute ago, it seems like the prices are justified, according to Doug Duncan's analysis, which made a lot of sense.

Tom:

Thank you for that, that I feel very optimistic about, you know, in hearing that, and that makes a lot of sense. How would that how does that translate into, you know, your strategy and going into the next year? Is it you know, kind of cautiously continuing to deploy capital into the space? Or are you know, I know, there's a lot of other strategies, perhaps, you know, new builds or build to rent, new development. I'd love to hear your thoughts on that, on translating that information into action.

Paul:

Yeah. So Tom, you know, Warren Buffett, that sounds like I'm going to go on a bunny trail here, and I am, seriously, he bought, he hated tech stocks, and he was famous writing it. But when when Steve Jobs died, I think it was 2013 or so Apple just was really, really stagnant. And he saw a huge, he saw his grandkids, how they were addicted to all these Apple products. He saw the consumer behavior among a lot of, you know, Apple people that they just couldn't wait to get the next thing that they were basically addicted and chained to Apple. And he said, Look Apple’s, like in the $20 per share range. And so he started quietly buying it. And he became the largest To my knowledge, the largest shareholder outside of apple in Apple stock.

And he did it because he saw intrinsic value. And that's where I'm going here. We need to find, I think at this point in the cycle with this much uncertainty, we need to find intrinsic value. And by the way, Buffett made massive, massive profits for Berkshire Hathaway, by his bet on Apple as it went up through the roof after that, and because people saw this something he saw something that people couldn't see before that this kind of crazy quote, Michelangelo said, I saw the angel in the piece of marble and I chipped away all the other stuff to get the angel to, free the angel.

And so the point of that is there's intrinsic value in certain real estate We've got to find that I told you the story about the guy I invested heavily with two years ago, who bought a $10 million self storage. And now he's quadrupled our equity in it. Because he saw intrinsic value. He saw stuff others didn't see. The guy in Gatlinburg I told you about, he has a way of unlocking intrinsic value in these cabins in to maximize the rental value. I know a guy in Minneapolis, he buys single family homes, and like for 400,000, but they only cashflow 1500 a month as to a single family renter. I'm like, how are you making that work?

He said, I furnish them and I rent them to students to beds per bedroom, to like for like five or $700 per bed. And the cashflow is massive because he's able to rent it to like eight students at like 600 a bed that's 4800 on a 44,000 excuse me, 400,000. home, he found intrinsic value. And that's what happens when we buy from a mom and pop, they don't have the knowledge, the desire or the resources to maximize the income and maximize the value of these commercial or residential assets. And so by buying from a mom and pop by seeing the intrinsic value, we have a chance to beat whatever happens in the realm of the market, the economy rents, all that stuff, we can beat it even if interest rates go way up from like where they are to 5,6, 7 range, which I doubt they will By the way, but even if they did a strategy like this can outfox that. And so I would just say that look for intrinsic value. Intrinsic value being the value that's not, that's hidden from the eye is what I meant.

Michael:

Yeah. I love chatting with you, Paul. Because every time self doubt starts to creep in on this redevelopment project I'm working on it's taken longer. It's become more expensive than I initially anticipated. But I hear things like this. I'm like, Yes, I'm doing the right thing. This is the right call. So it's it's exciting to hear and it's definitely refreshing to hear and something that I talk a lot of out to investors that I speak with, it's Hey, you know, everybody can see the same set of facts. But it's those who have kind of can look through things at a different lens or through a different angle, that you'll see something different and allows you to see and perform or others can't.

Paul:

That's great, man. Thanks for saying that. Michael. I'm glad to hear about your project. I'd love to hear more about it.

Michael:

Yeah, absolutely. Absolutely. Tom, any final thoughts for Paul before we let him go?

Tom:

No, this is uh, I love all the the Oracle from Omaha references, the Warren Buffett references and yeah, I love these conversations. Yeah. Thank you so much for for joining.

Paul:

Yeah, you bet. Well, I'm actually working on the book called Warren Buffett's rules for real estate investors and really excited about it, because I'm, we're taking two friends of mine and me are taking his principles and applying them to real estate. So it's really fun.

Michael:

When is that coming out, Paul?

Paul:

Well, I've got a couple publishers talking about publishing it, we had it. We had it about I think 75% done a year ago. And then I just completely stalled on it. And so I just reopened all those Google Docs yesterday, hoping to get it done by the end of the year and come out maybe late 2022.

Michael:

Awesome. Well, we'll definitely have to have you back on to talk about it. Cuz That sounds very interesting.

Paul:

Thanks, I love to do that, man. It's great to be on here.

Michael:

And for folks that are interested in learning more about what you do with syndications and learning more about you where should they go? How can I get a hold of you?

Paul:

Yeah, you know, like I said earlier, I had a hard time figuring out how to get in, do commercial real estate. And so I've written a guide for people who want to get in, it's actually a quick, quite simple, five day little course they can get that at wellingscapital.com/resources. That’s wellingscapital.com/resources.

Michael:

Awesome. And that's a free download for folks.

Paul:

Right.

Michael:

Fantastic. Well, Paul, always a pleasure to have you on thank you again, for spending the time with us really appreciate it really insightful, and definitely look forward to continuing the conversation.

Paul:

You bet, guys, thanks so much. Talk to you soon.

Tom:

Thanks, Paul.

Michael:

Alright, everybody, that was our episode a big, big, big thank you to Paul for coming on. Again. Always a pleasure to have you and definitely looking forward to having you back on and talking about your book. Paul's a wealth of knowledge, and feel free to go back and listen to that episode again. As always, if you'd liked the episode, please feel free to leave us a rating or review wherever you listen to your podcast, and we'd love to hear your ideas about future episode topics. Happy investing. Happy investing.

Are Institutions Crowding Individual Investors Out of the Market? Sep 05, 2021

Seeing both the high cost of property and all the institutional capital pouring into markets across the country causes many individual investors to worry about being pushed out of the market by the "big guys". In this episode, we address this concern by looking at the pros and cons of institutional activity in the real estate market.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, I'm going to be joined by

Emil:

Emil Shour

Michael:

And Michael album.

Tom:

And today we're going to be talking about a trend over the last couple of years where a lot of money is flowing into the space specifically of single family rental investing specifically from about from larger institutions. So today we're going to riff give our opinions on what's good about it, what's bad about it, what are some advantages that they have, versus us as individual investors, and so on. So Alright, let's go ahead and jump into it.

Awesome. So before we get into the topic of hand of discussing institutional capital coming into the space, I feel like it's been a while since we've checked in with each other on what is going on with our own portfolio and all of that good stuff. So Michael, I see you nodding your head on the video screen. So I'll let you, that is your trigger for you to go first, what's what's going on. I'm Michael album, portfolio life world,

Michael:

Right on, so a lot of different moving parts. So in the in contract to sell a 12 unit mixed unit property that I own with a partner, we were planning on keeping it as a long term buy and hold, but the market went crazy. And it's kind of a headache property anyhow, so we just said, oh, let's sell it. So we're making a decent profit on that and we're 1031ing it and I'm buying I have a contract, I have a property under contract out towards the east coast further east that I've invested before for a short term rental, and then I have some additional capital that I need to place as part of that 1031 as well. And then I'm also in the midst of two flips and so I have one actually under contract for sale

Tom:

Where you think of a parking that the the 1031 proceeds,

Michael:

Some of its going to be out in Tennessee, and then for that short term rental, and then I've got to find I gotta find some some place for the rest of it. So if anybody has any great suggestions, I think there's about $100,000 that needs to get placed.

Tom:

Nice more multifamily mixed use stuff.

Michael:

I'm not sure I think for that piece of it I'll probably just do a single family just go buy a single family all cash somewhere. That's the plan as of now and then I've got two flips underway or the construction is completed so I have one that's actually being sold on roofs currently it's under contract and then I have another one that is should be getting a lease signed any day now and that'll be sold through stock as well with a tenant in place.

Tom:

Awesome.

Michael:

So all kinds of moving parts.

Tom:

Nice Emil and yourself.

Emil:

So I don't remember my last update but I think I was talking about the the triplex we had the one bed one bath and getting ready to be renovated or just repaired, renovate whatever you want to call it. So we finished that ended up you know, there was a bunch of the tenant before was a smoker so we had to like do a couple coats of paint and a lot of patching to be done. We ended up replacing the kitchen cabinets and a bunch of loose ends here and there on the inside and outside of the property. So that just wrapped up and so my property manager is marketing that to be rented right now.

And then this triplex was actually a four plex converted into a triplex so one side is like a stacked one bed one bath. The other side is like a townhouse two story that tenant just left the other month which is actually great because it's a three bed two or one and a half bath. So the rent is probably a couple 100 bucks under which can be especially with the market rent starting to go up a lot recently. So we just approved a bid from a contractor yesterday and we are about to get underway making repairs there and getting ready to rent out so that'll probably be another four to six weeks if I had to guess.

Michael:

Nice

Tom:

Nice on actually guys I'm kind of in a in a boring position I which is always a good thing as a remote investor like boring is good. So I am actually so I did a couple of cash out refis with the great rates all that good stuff and right now I am in recording in my office which is our extra bedroom but we're in the not too distant future going to have another baby moving into it. So I'm losing my office space and these days it's really important so my real estate you know activities is more around, building a little To do shed on my lot, so I there's a lot of really cool prefab companies that that do this kind of stuff. So going through that rigmarole of hopefully the Contra Costa County Planning Commission is on the call of debating around permitting it or not, I mean, it's not going to have what you call it like plumbing or anything, but it will have electrical.

So basically working through contractors and site planning and kind of working on that type of fund development. But I think there's probably some real sweat equity to have like within the house that I'm at now adding an extra, you know, detached little office. So hopefully I get my money back. And some at the point which I decided to sell my place talk.

Michael:

Totally.

Emil:

I've been wondering about those, Tom, do you so you have to like, you have to get some type of permitting or approvals for the prefab stuff that doesn't have any plumbing, like I thought they just came in kind of like, set it down. And you're good to go.

Tom:

Yeah, I mean, I think that the city would want you to permit it. The from in talking to my contractor where you can get yourself in big problems is related to zoning and like setbacks. So like, let's say I build this, and I don't get it approved. And then for whatever reason, either they find out or come, if the building is doesn't have the proper setbacks, and they can make me rip it down. But if they don't, they just might never approve it. I could be talking out of my bottom. And hopefully we had the right disclosures at the top of the episode. These are all opinions, not necessarily facts.

But you know, I'm making sure that I'm nailing the zoning stuff, right and doing it if I decide not to necessarily to permit this this little unit, you know, I don't know, the I mean, the other consideration is permitting, so I sit when I when I sell it like it has that, but kind of funnily when I looked at a house earlier, maybe like two years ago, they had a little unit and I didn't ask if they were permitted. I mean, I guess maybe I should have, but I think the bids were still competitive, taking that in consideration that, hey, this is up and working as a an additional outside office.

So I don't know, we'll see if anyone would love to comment on. Should Tom try and permit his little studio shed that would be greatly appreciated.

All right. Back to the topic at hand. And I this is this is a great, Pierre, excellent idea for an episode today. So the question is, are institutions so big private equity that's coming in buying single family homes? Are they crowding out? individual buyers, such as ourselves, and the way that I think I love to shape this conversation is to give kind of an equal measure, looking at both both sides of the table as an investor, I think, with other people in the space, it's it can be sort of a double edged sword. And I'd love one of you guys I'd love for… Michael, why don't you lead us off on this discussion in talking about as an individual investor, you know, how do you see institutions, helping you not helping you in just kind of in the ecosystem of the single family space? Go ahead and lead us off.

Michael:

So I think I'll start by talking about the positives, first by some of the real benefits that we are likely to see if not seeing already from ibuyers institutions coming into the space. So for one is institutions don't make it their business to let properties become dilapidated. So they'll often buy properties and then fix them up with a lot of capex, make them nice. And so if I'm invested in that same market, or even better in that same neighborhood, my property is likely going to be seeing a lot of appreciation, because these other properties in the area are being brought up to snuff. And maybe even nicer than my property,

Tom:

Not just appreciation, probably rent growth as well, I might be stealing your next bullet point. But I think that's really tightly that you're seeing the benefit from.

Michael:

Wow, Tom. I had my linear path and you just cut me off at the knees.

Tom:

I know I'm, that's what a good leader of the episode does is just tear down other people go ahead and

Emil:

Take all the glory for himself.

Tom:

That's right. That was a good idea Tom.

Michael:

Last time I share episode notes with you. So I think that there's there's neighborhoods that are being that are being improved greatly. And I think that there's a misnomer and a common misconception when people hear the word landlord, or property owner and it's so somebody owns a slumlord. They let it become dilapidated, a lot of deferred maintenance, leave Park cars on the lawn type of thing. And so these institutions are in the business of making a return and are I think, likely in it for a longer period of time, then then some, mom and pop landlords. And so they are injecting capital into these markets, serious capital into these markets, and a rising tide raises all ships. And so if you happen to be investing in those same markets or have previously invested in those same markets, that can be a real big win.

Tom:

I like it, I'm able to do without any other initial commentary?

Emil:

On the on the pro side or the con side?

Tom:

I'm gonna let you take get where you want, you know what also a good podcast leader it gives…

Michael:

Flexibility

Tom:

…to take my fellow co host, explore the space, take it where you want.

Emil:

Okay. All right. All right. So I think it's one of those things that it just depends on on how you look at the world, I think they do a good service in that they provide a floor right back in 2010 2013, when prices just kept going down and down and down. That's when institutional investors came in and really created that bottom and started scooping everything up. And like Michael said, fixing up a lot of these distressed homes, bringing them up, bringing them up to code, whatever, making them nice and converting them into rentals.

So I think I think the same thing can be said, Now you have a lot of institutions who are interested in the space, they create a price floor for us, mom and pops. So that's good. I think it gives you some reassurance that this is maybe a more mature asset class than it used to be that there's a lot of money waiting on the sidelines. So if things go down a little bit, you know, it's not going to crater as much because some institutional money could come in and again, create that price floor. So I think that's one of the positives.

Also, you know, I remember reading these headlines, like, no one really providing data is kind of just anecdotal hearsay stuff. And so there's this Vox article that I just pulled up. Let me let me pull some stats from this. So this is from Laurie Goodman, who is vice president, vice president for housing finance policy at the Urban Institute. One of the things she mentioned is that as of 2019, institutional operators owned just 300,000 single family units. So you know, I know they're, they're putting more pressure to buy now, but you can just see there's such a small percentage and for context, researchers point out that there are roughly 15,000,00 1-unit detached single family rental homes in the United States. So a very, very small fraction are still owned by these institutions. So I think it makes all these you know, salacious headlines.

But if you dig into the data, they're really not scooping up the lion's share of properties. It's still owner, occupants, Mom and Pop investors. So I think a lot of it was you know, clickbait headlines trying to get people to outrage. You know, outrage sells. So I think that was part of it too.

Michael:

That's, that's a great point. But I also have to ask, Do you have one of those like Word of the Day calendars on your desk, because salacious is not a word that I've ever heard you use before? So curious to know if it's part of your daily lexicon?

Emil:

No, Michael, it just came to me as I was exploring the space that Tom had asked me to explore. So, you know, sometimes I'm a learned man, and I use words like salacious. So leave me alone, okay,

Michael:

I should explore spaces more, that's on me My bad.

Tom:

So I’ll add a couple of more points in the pro column as it relates to institutions coming in. So one of them is I love your point of meal about providing a price floor, I mean, in you know, family friends talking to me, Hey, aren't you concerned, if there's a huge, you know, drop in the value of the homes, it's like, no, like, so the rents stay fairly stable, just because they move very slowly, because they're on long contracts. And as a basic function of looking on what the return is, with the institutional money that's out there, they're going to pick up whatever you know, goes to sale, if it's below a certain dollar amount. So I think the the place price floor is really important.

The other is the liquidity aspect. So I'm sure and I've received a lot of different mail and you know, from like, OpenDoor, and some other like bigger companies coming in the space, maybe Open Door isn't isn't a great example, just because they're buying just to sell it, they're not necessarily long term buy and hold. But what they are providing is more liquidity if I needed to move pretty quickly, either on a 1031, or whatever.

The other aspect that I didn't hear talked about by you guys is better information on analyzing markets. So when with the institutions getting involved, they have a lot more data that makes sense in like a single place. And there's great research folks out there like John Burns, if you haven't looked heard of him, please look him up. He's, he's been on the podcast before. He's sort of like the the economic thought leader in SFR space and puts out these reports with tons of really good information on markets on like the top 50 or so markets. And a lot of that is made possible by the aggregation of data. So as a buyer, individual buyer, when I'm looking at potential markets to buy in, I'm going to have a lot more color on the type of return profile by these different markets because of the aggregation of the data on those institutions.

So I think that's been another boon or benefit of just kind of the lights being turned on. With regards to these different markets where there's good institutional concentration to be able to see what what, you know, how they're how those are performing.

Michael:

So are you suggesting like to ride the coattails kind of of the institutions that have Hey, if there are these big institutional players going in? It's they've clearly done their homework, it could be a great market to invest in?

Tom:

Yeah, I think that's definitely can be a strategy to do in like, you know, exactly like you said, these other people that are doing their homework and, and honestly, though, if you want to avoid that you can just buy in smaller markets, because a lot of these institutions are only going to find them in these Class A, for the majority of them, and maybe some class B, I guess, or when I'd say Class A Class B, I'm thinking more market size. I don't think I'm using the right verbiage, but like

Michael:

Tier one,

Tom:

So like the tier one. Yeah, exactly. Like the Dallas market versus some smaller markets, there's going to be less institutions that you if you do want to avoid them. But all right, let's go ahead and continue and continue the conversation. I'd love to hear some thoughts around negatives, with institutions coming into the space, Emil, why don't we change the order up? Why don't you go ahead and lead us first?

Emil:

I'm just gonna have to point to anecdotal stuff, right, like a an institution. And if you know your to believe these headlines, and these articles that are saying institutions are coming in I buyers are coming in and way overpaying for properties. That could be the case, right? That could be one negative, maybe they don't know the market as well as you know, your eye who is looking at the same market every day for years, right? And we know what an appropriate prices, they could come in, and they just have a lot of money. You know, they're looking at an investment in like a five year maybe 10 year time horizon. And they're like, Oh, won't matter. 5-10 years, we think it's gonna go up X percent. So we want to win as many properties as we can we have a lot of capital you want to deploy, so let's just throw a lot of money. So that could be one of the negatives is they're coming in, and they're willing to out pay your eye. So that I think is the biggest negative when you see things like this.

Tom:

I like it. Yeah, deep, deep pockets too tough, too tough to beat out that beat that out in acquisition. Michael, go ahead.

Michael:

Yeah, I think just to echo what Emil was saying. I think one of the reasons it's so difficult than they're able to overpay so much is one because it's not necessarily their money, so to speak. Like they have investors money they're playing with is other people's money. So there's, there's a bit of an attachment there. And then also they have access to death facilities, or if they are borrowing debt, they're able to do so at a much cheaper rate than then you were I. And so they're playing kind of with a different set of rules, trying to play the same game that we individual owners are applying. So that makes it really difficult to compete.

And then also Emil, like you mentioned that that price floor, I think that that can be perceived as a negative to if someone is on in a purchasing mode or purchasing phase. If I'm waiting for a downturn, or I'm waiting for a market correction, and there is a blip on the radar minor correction, these institutions might swoop in and prevent the prices from falling to a place where I might want them to be or need them to be in order to get involved into the game, or investing in real estate. So I think it's both a pro and a con, depending on which side of the equation you are, if you're already an owner, or if you're a potential buyer, that could be perceived as a real con.

Tom:

Pierre I'd love to hear how you came up with this as a topic, I'd love to hear your your thoughts on either side of the coin pro or con.

Pierre:

Well, to the point of the proportion of the market that they're buying up, say there's 15 to 20 million homes on the US market. And their only Emil was at 300,000. That you said,

Emil:

Yeah, but that was as of 2019. Just to reiterate.

Pierre:

So at that point in time when that measurement was taken, that's not that big of a market share. What about in 10 years? Is this a trend that is moving that will continue? And will they I mean, I'm not about anyone being regulated out of the market, but just as a concern, will this continue to grow and grow and take up a larger market share as time goes on? So that's one concern I have.

The other concern is is I'm not that worried about it. From what I've seen more what I see to be a bigger issue is the, the restrictions around building in certain markets keeping the housing stock low. So that's kind of my pro and con there is what's the future going to look like and is that actually the real problem. Are there other problems driving housing stock shortages?

Tom:

I like that option. See on other reasons why maybe there's just not enough houses and it's kind of artificially being kept low?

Pierre:

Suppressed Yeah.

Tom:

Out of the box.

Emil:

Tom, do you What about you? Yeah, share your thoughts here.

Tom:

I know that's a great thing about being the host. You can kind of just kind of pass the Hot Potato

Michael:

Sneaky snake,

Emil:

Aand just interject, Michael, when you have a really good point.

Tom:

Yeah, see exactly where his point is going. Yeah, I mean, I'm going to just continue to jump on, just call me jansport, I'm going to Mike, Michael is going to carry me. I am going to twist it up a little bit. So, you know, Michael talked about like debt facilities being different, you know, different, much cheaper insurance, because they're just getting much larger scale. The other big advantage that institutions have, and I'm not saying this, this is necessarily like going against me as an individual buyer. But institutions have access to these portfolios that, you know, let's say a seller only wants to sell it for $100 million and they're going to get a much better discount on these individual properties. So as an individual investor, some of the deals that these institutions are seeing, you'll never see them, because they're just so out of range on what that purchase price is. And you have these compounding effects that make institutions having this, like advantage in the space, like one better deals on individual properties, because they're able to spend $100 million at a time to buy the huge portfolio.

And I'm not saying this is bad, I'm just like, you know, making commentary. So, and then they have advantage to cheap or other type of costs that are involved, be it insurance, you know, maybe even internalizing property manager, management, seeing how that looks. So there's a lot of advantages that an institution has against you as an individual investor.

So the next place where I want to take this conversation is, what are some advantages that you, as an individual investor, potentially have over a larger institution say, you know, in, in buying in a market or for or whatnot, and, Michael, I see you shaking your head a little better? Maybe that's the breeze or something blowing in that mane of hair that you have? Why don't you go ahead and lead us off in this, this train of thought of of thinking about kind of advantages or ways to mitigate, in, in a market doing acquisitions with other institutions?

Michael:

Yeah, totally. So as an individual buyer, I think you have the ability to get really granular and really specific and really personal with the people operating in that market. For instance, I doubt that an institution is going to call up five local property managers and ask them their opinion about Fifth Street or 10th ave, they are going to be using data, like you mentioned, Tom aggregating that data to get an idea of what that market is. So if we simply pick up the phone, which I've always said that there's really no substitute for doing and having conversations with real people who are operating and living in that market on a daily basis, you're able to, in my opinion, get a lot more granular.

And so even block by block, a lot of some, some of these markets have have massive differences. And so when you can pinpoint that and get down, again, there's no other better word for it. I think that granular, you can get very precise and very accurate with the types of properties you're buying, and the physical locale those properties. And so I think that that's a massive advantage that we as individuals have, because I just don't see the the data being that granular yet. And maybe they're using data that we don't have access to my guess is that they probably are but from a property, I mean, property by property basis, block by block basis, I just think there's no substitute for for local local personnel.

Tom:

Totally love that point. Emil, do you have any other any other thoughts?

Emil:

No, I think I think Michael took the important one, right. You are somebody who, you know, like I mentioned earlier, you're looking at that market every day for years, hopefully, right? Like, you're gonna see things and notice things that an institution is not because they're just looking at aggregate data, maybe you see a property that, I don't know, it's three bed, two bath, but it's like two 300 square feet bigger than all the other three bed two baths and you know, you could potentially convert into a fourth bedroom or something, you know, like, these things that you only pick up after just knowing that market, knowing your properties for a longer period of time. So I think it just, you know, may require you to be more patient and have a little bit more skill and in analyzing deal by deal, but I still think you still have plenty of advantages as an individual.

Tom:

Yeah.

Michael:

I was gonna say one other advantage that I think individuals have over institutions is that we are individuals and we are people. And this applies more so for your mom and pop sellers or you're kind of one off sellers. So we as buyers can really humanize ourselves and often have interactions with the seller and approach it from a very at a human level and kind of human connection. And so this is something that my wife and I did on this 1031 property that we're purchasing, we wrote a letter, just talking about our background, who we are what we want to do with the property why we think we'd be a great fit to buy it and the seller said I want you to have this property, even though there were there were other tours and other offers, I believe.

So when you can connect with someone that kind of on that human level, I think it people like the invisible people they like, versus I am the institution, this is the price kind of thing. I don't know why all situations have robot voices. But that's kind of where I went with it. And so I think just, again, humanizing the deal and humanizing yourself can give you a massive leg up over over more professional investors.

Tom:

I think my point that, that in dividuals have over institutions is a longer term lens of, of a strategy, where institutions, you know, they may turn on the acquisition and turn it off. And I remember, in working for one of the single family REITs, you know, our price of our stock would go down, and it had like nothing to do with necessarily performance of the, of the properties that we owned, it could have had something to do with, you know, who knows, like, whatever, what other secondary aspects of the market, and that could impact, okay, when we're doing acquisitions, or when we're buying, there's just this long game of telephone, it's like, with bigger institutions on making decisions where you are this have this longer term view, in that you can sort of not beholden to this, like longer term chain of circumstance, which an institution may have on when they're selling a fund or when they're buying a fund where you can be ultra opportunistic, having a long term vision on when to buy when to sell, in, in time it out, you know, for the what's, what's optimal for you, versus what has happened in these like secondary factors, if that makes sense.

So another point that I made earlier is, there are a lot of markets that are not as saturated with institution, perhaps there's a reason why there's less institutions there. For some of them, it could be just a population thing where they're just looking for bigger markets. So you're much more nimble and agile as an individual investor, in, in moving right in, you know, spreading out longer terms on when you want to buy when you want to sell changing locations, there's just this agility as an individual investor that you have. And a good analogy is to another way to think about it kind of similar to Michael's earlier point is, you know, well, a lot of these institutions are using a lot of data and they're kind of firing, you're executing a little bit more as a shotgun versus like a sniper rifle, where with you, as an individual, you can spend a little bit more time massaging each deal. Understanding each stuff, and there could be times where you run into a brick wall, as in the institution that you're competing with in buying a house just you know, has way more money, but who knows, next month, they may put a halt block and buying for whatever reason that they do. And if you can be patient with your strategy. It I think it tends to pay off in having that longer term horizon.

Michael:

The it makes total sense, Emil did you remember that? We were talking to the enemy here, Mr. Mr. REITs?

Emil;

Tom, Mr. Former REIT Schneider.

Michael:

So Tom, I'm curious to get your perspective, because you did used to work for a single family REIT right? So you were on the institution side of things. And now you're, of course, on the individual side of things. So very curious to get your thoughts around, you know, what tools, advantages you think you had over the individual investor? And now, do you feel handcuffed, or more or less, less well equipped to participate in this space?

Tom:

Sure. So I think on from an acquisition standpoint, getting access, you know, as I mentioned, to before, of these, like, big portfolios to look at and to underwrite and buy, was a was a big deal, I mean, I'm probably going to be regurgitating a little bit of some of the stuff that I talked about earlier. So access to doing that type of an acquisition, because you're definitely able to get a little bit of better discount to market and in doing that type of a transaction.

On the hamstring thing, I think there's sometimes with as I said, like a big organization, you may make decisions, at certain levels that don't make sense all the way down to the bottom. Like, for example, like, there was this concept of like turning over capital, where we would just sell properties to recycle the money to come through. And it's like, these are great properties. I remember I worked in acquisitions for a little bit, and some of these properties I bought, and they were like performing awesome. And we sold them, they probably you know, doubled in value from the time that they sold them in whatever 2016 to now, or maybe even more, and it's like, why why would we why why would that institution sell that? I mean, I guess it's great. Now it went to either an individual investor or to an owner occupant in being sold on the MLS, but it just sometimes there's there seems to be decisions made that if you weren't down at the ground floor, you necessarily wouldn't make, you know, in working in one of those institutions.

What is interesting to think about for me, so I left that company to come work at Roofstock in 2016. And that's a lot of time to have improved processes and, like improve the technology. So I think they have institutions have an advantage in applying a lot of resources to getting more efficient as just like a big mechanism. So I I'd be interested to see how some of those companies are running now, as it relates to some of these, you know, in underwriting properties, and how much that has changed. I think there's, you know, definitely opportunities to have an even, you know, a bigger advantage and continuing to iron out those practices and best, you know, technology that support it, after so many more years.

I think the big piece is just his agility, as an individual versus an institution is agility and kind of getting able to, I mean, in buying a property, there's, there's always some unknown unknowns. And I think as an individual, you can go a little bit deeper into answering those questions, be it like, getting to know the local people better. In that area. If you're just focusing on that one, you know, that one property, there's just that much more of an opportunity to go that much that many layers deeper and underwriting a property and underwriting a market and under, underwriting and individual neighborhoods. So I'd say that agility aspect is really is something that we need to take advantage of as individual investors.

I guess as a super high level recap, and if you guys want to fill in, I think we both see institutions as a little bit of a double edged sword. But I think, altogether, I would put them more in the positive camp just in the stability that they provide to the market in providing a price floor and maybe pushing rents a little bit. But again, it can definitely be more competitive on the acquisition side. And Michael, let you fill in some fill in some gaps. I see you wiggling around over there.

Michael:

Well, I just I just this analogy just came to me. And it's one of an ocean and in the ocean, we have sharks, and a lot of people are terrified of sharks, they don't like sharks, because they are competing for their same food source. And they also are harmful can be harmful to humans, in some instances, but they're also necessarily part of the ecosystem. And if we got rid of all the sharks, we would likely see the collapse of our oceans. And so it's a it's a necessary evil is the wrong word. Because I don't think sharks are evil. But just as in thinking about some of the dangers or fears around getting in the ocean, could be applied similarly here, there's some maybe danger and fears around getting involved in the single family real estate space. But I think that these institutions are definitely necessary. Force all the pros that we talked about, just like sharks are.

Emil:

Yep.

Pierre:

The apex predator serves a function, but there's still room for the little fishies

Michael:

That's it? Yeah. That's it and surfing ocean analogy over.

Tom:

Emil, any final thoughts? You went through in?

Emil:

Yeah, just remember, you know, we pulled some data, institutional investors are still a very, very small part of the ownership of all the single family homes in the United States. And for anyone thinking, oh, they're driving up prices, just remember the owner occupants who are thrown 200 300 500,000 over asking to get into the home of their dreams right there. They're acting on it emotionally. And there is very limited supply. So I think that's what's driving up prices, not institutional investors.

Tom:

I like it, I like it, I think it's also can be my last, last last little thought is it can be a validation of the space. So you know, you have all this smart capital coming in, you know, one, if someone glass half empty, you could be thinking, oh, they're already there. But it's like like Emil said like, it's a really small percentage of single family rentals that they own of the entire piece. So it's, it's a validation, it's a it's a price floor. It's a an optimation optimization in the space and I think on behalf of everybody in the podcast, there's still room in the ecosystem to take advantage of it.

Awesome, guys. On that note, thank you so much for listening. If you enjoyed the podcasts, like us, subscribe, all that good stuff. I'd also recommend checking out RoofstockAcademy.com check out our YouTube channel, just search Roofstock on YouTube and as always, Happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

Our SFR Real Estate Game's Mount Rushmore Draft Picks Aug 28, 2021

There are so many benefits that come with investing in real estate investing. in this episode, we do a draft pick of the most valuable and heavy-hitting perks we have access to as investors. Shout us out on Twitter with who you think won, and some important picks we overlooked! @Roofstock

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. On this episode, I am joined by

Michael:

Michael Albaum

Emil:

Emil Shour

Mark:

Mark Woodling.

Tom:

And today we've got a fun episode. So as an investor, there are a lot of different events and things that happen, you collect rent, you pay your mortgage, and today we're gonna be focusing on all of the good events. And the way that we're going to do this is a fun segment where we're going to draft our favorite moments as a real estate investor. And then after we do our draft, it's going to be a snake order draft, we're going to post it on a Twitter for you guys to vote on. So again, this episode is going to be on great events or moments as a real estate investor. All right, let's do it.

Gentlemen, just to reiterate the rules, we all are going to have three picks, it's going to be a snake order. I've got a ping pong ball machine behind me with all of our names to define what the order is. And after we complete this draft, we're going to throw it up on Twitter, and let the people vote. I'm feeling pretty good about my chances here. I put a lot of research into great moments as an investor and good luck to get in second place too you guys.

Emil:

Trash talking already? Alright. All right. Let's see if you can back it up.

Michael:

You know, trash talking is like the epitome of someone who's not confident in their ability. It's kind of the way I see it, but you know, to each their own.

Tom:

Smoke smoke and mirrors let's trash talking right there. What you just did. Alright, so

alright. ping pong balls. So the with the the order is with the first pick of the great moments of being an investor is Mark Woodling. That's good. You get the first one but you have to wait all the way to the turn to get your next one. Up. Second is Ooh, Tom Schneider, ooo I like that second. All right, up third. Is Emil Shour. All right, good job and right, bringing up the rear and the turn, Michael Albaum.

Michael:

Is this is this because you thought it was talking trash to you? Is that? Why is that what your pinball machine gave me fourth place.

Tom:

The ping pong ball. The ball Don't lie. As, was it Ben Wallace that said,

Emil:

Can you show us proof of this draft order cuz you're just you're just looking at nothing and magically make taken names out of a hat. So I don't believe you, sir.

Tom:

Don't question what's behind the wizard.

Michael:

Off screen.

Tom:

Alright, so alright, let's let's get into it. So again, we're each gonna pick three rounds of events as a real estate investor that you love that are just like, awesome. And then we're going to shoot it out to the twitterverse to vote on the who, who has the best draft? So Mark, why don't you go ahead and start us off, kick off the draft the draft.

Mark:

Cool. So I named mine to add to the fun, and you'll be able to reference that later. But my first one is what I call Hail Yeah. Where I live in the state of Texas and a property that I own here had some hail damage. So I was able to get a new roof for about a 10th of the price, which is gonna run about $30,000 for this home. So you know, I paid the insurance premium and or the deductible excuse me, and it came out to be about a 10th of the price.

So the property needed a new roof anyways, and the timing was good. And so I scored that new roof, Hail Yeah!.

Tom:

I love it.

Michael:

Great.

Tom:

You know, and coming up with this. And coming up with this concept. I would never think of insurance covering some needed cost as an event. And I'm already I'm already digging it. Alright, that's a good one Mark.

Emil:

Like we got we got to all have sports analogy. So guys, come on, Mark, Mark started it, you get, you gotta you gotta have a sports analogy with your pick.

Tom:

All right, I'm up second. I'm going to simplify a little bit so this is going to be a cha-ching nice and boring rent. The rent collection hits your checking account. So rent

Emil:

off the board rent.

Tom:

Cha-chiing rent collected that mailbox mailbox money hits it, so that'll be my second pick.

Emil:

What's your sports analogy? Come on, Tom.

Tom:

I mean I said cha-ching i don't i don't have I don't have

Emil:

The layup the layup?

Tom:

Yeah layup that's a great one. Yeah. layup that's what we'll…

Emil:

I’ll be helping you guys all episode. Geez, you guys don't watch no sports.

Tom:

You're the marketing guy. You're the marketing guy. Yeah. Okay. Yeah. layup just nice and boring rent collected. That's my first pick.

Emil, You're up next.

Emil:

I can't believe this is falling to the number three spot you got you guys are obviously amateurs here in in drafting. So I get the Supermax contract extension. And so what that is that's a renewal with a rent increase, baby. So I'm taking that number three, the super max contract extension. Coming in at number three.

Tom:

With an increase in rent cash. That's a good one.

Mark:

And the sports analogy or name?

Tom:

Supermax contract!

Emil:

Supermax contract extension.

Mark:

All right.

Emil:

That's a basketball one.

Tom:

Love. Love that.

Emil:

Mark. Paid pay attention, Mark, come on.

Mark:

I find no relation, sir. But yeah, I'll keep going.

Tom:

Alright, Michael, you've got the next you've got the your pick and the turn. Yep. I'm not really a big sports guy. So I could use a little bit of help kind of finessing this one I call I'm calling it the forced error. But I feel like the error doesn't really apply here. So it's basically forcing appreciation on a property. I'm able to take out about 100k in the course of two years by increasing the rents and decreasing the expenses, sacrifice fly. I'm trying to think of how I'm like, I'm like forcing the appreciation.

Emil:

So sacrifice sacrifice, like kind of works.

Tom:

Well. How about this? I think you're I think you're including a lot of moments in that one. Why don't you when you get that appraisal back? So like, or whatever, when it's like the moment that you have the higher value.

Michael:

Yeah, that's perfect. So right. Yeah. Realizing that you have created equity in the property via forcing appreciation.

Tom:

Oh, yeah. It's like the squeeze or

Emil:

Yeah, the squeeze bunt squeeze bunt.

Michael:

Yeah, squeeze bunt.

Emil:

That's not really a bunt. It's like a squeeze Homer, but maybe it’s a homer.

Tom:

Inside the park home run?

Michael:

Okay. Yeah. And inside the park Homer, let's go with that.

Emil:

Michael's like, what is this hockey term, homerun, I don't understand.

Michael:

All right. So then for my next one, and I just came up with this. Alright, I just came up with this one, the name, it's called, stealing home. And that's where you can buy a property for significantly under market value.

Tom:

Ooh, that's a that's a good one.

Michael:

And you get a boatload equity day one.

Tom:

I like that Emil, you're up with your second pick.

Emil:

Oh, man, I'm trying to think of the name for this one. And maybe you guys can help me out. I don't know the name for this one. My pick is when Mr. Market treats really well. And interest rates go down while your property value goes up. And you're able to cash out refi your full initial investment. And the refi basically makes it so that your payment is no different than it was before. So you're doing a full cash out refi and your payment goes up like 10-20 bucks. We can call it the Mr. Market BRRRR

Michael:

I've got I've got one, you guys, you guys. Let me know I'm gonna throw it out there, feel free to throw it back. We'll call it a buy. Right? It's where you get the win. But you didn't have to do anything to get it.

Emil:

Okay. All right. Or maybe it's like, maybe it's like winning the division where you get to skip the first round or something. You know, you get to advance to the second round of playoffs without having a

Michael:

Wildcard?

Emil:

No the wildcard you got to play to make

Michael:

Oh, I don't know how I know Zilch about sports.

Emil:

Homefield advantage, I don't know?

Tom:

Oh, I think you're right. They're like buy when like if you're like the one seed like you know, you don't have to do anything and you're just getting that getting out that way. Yeah. So

Emil:

Good job Michael see you even though sports kind of

Michael:

Awesome. I like came in hot and then immediately fumbled over myself.

Emil:

Fumble There you go. For sports analogies. This is getting good.

Tom:

I got one that happened. I'm thinking of one right now of a property. This was an event where a tenant moved out. And before they even started to do the turn work. The property manager found a new tenant that wanted to move in right away so they didn't have to do any of the turn work. It wouldn't have been a lot but you know, probably saved me. 1000 bucks. 2000 bucks of the person moving in right away. I kind of like that. Stealing analogy or maybe handoff? That's what it is. Yeah. Handoff. Yeah. Handoff.

So it's a new property. Least before turn construction. That makes sense?

Michael:

Yeah,

Emil:

Yeah.

Michael:

That's a solid getting it leased up early that’s great.

Tom:

This is really working the right side of the brain coming up with these sports analogies that go with this

Michael:

Sure is, especially on the spot.

Mark:

Well, I have to say,Emil did take one of mine, it was you know, asking for over market rent getting a two year lease signed, and I called that one, Bill it and they will come. Reference the Field of Dreams. But that was already taken. I just had to one. Because that doesn't happen too often from the marketing genius.

Somine's a little different, but it's, uh, you know, again, in Texas, cash out refi on investment properties is almost impossible to find. But I was able to find one a year ago after making close to 20-30 phone calls to banks to, you know, any type of financing institution, and I found one, so I called it the walk off home run refi. I mean, to me, it was just like the ultimate winner to have that money now sitting there out of a ton of equity that was building up in a property.

Emil:

Nice.

Michael:

Wait, Mark, are you saying that

Mark:

Walk off refi.

Michael:

Are you saying it's tough to do a cash out refinance on investment property in Texas? Is that what you said?

Mark:

It’s very, very difficult. Texas has some different laws about home equity lines of credit, and on. I mean, it is probably one of the most strict in the country. And on investment properties. It's next to impossible, but I found a company that will do it. So if anybody is ever interested, I have the one that will do it.

Tom:

Is it the, So I'm assuming it's not the financials of the property? It's just the lending rules. Is that right? Mark?

Mark:

Yeah, lending rules enemy in this in this instance. And you know, I kind of use cash out refi, in a sense of like, they also they just left me a line of credit. So you know, in a sense, I just have a dry powder sitting there, they're in a checking account ready to be used at any point. So I kind of maybe use that incorrectly. But the line line of credit is not easy to come by.

Michael:

Good to know.

Tom:

You got some good creative ones, I love the insurance cover the cost of needed repair too.

Alright, Mark, you're up. And then our last round our third round, you're on the turn. So you do the first one in this round.

Michael:

Make it a good one.

Mark:

All right. This is a little trick because you know, I am a real estate agent and I am an auctioneer. So I'm calling this one, I'll come up with a creative sports name, going once going twice, rented. So have an open house, make sure you schedule it during a tight timeframe. So this is you know, again, for a property that I've I've managed on my own in the past. You have the open house tight timeframe, you have multiple people all show up at the exact same time. So you create competition. So once that competition starts to boil, people get a little more aggressive.

Hey, I'll sign a two year lease, Oh, great. Actually a one up you know, you know, they'll pay a little bit more. So I let that competition drive just like an auction. And man, it pays dividends because a I get all this time back in my schedule B. You know, I create that competition let people bid up a little bit and then get longer, longer terms and better terms overall.

So a sports analogy. Slam Dunk unno.

Michael:

For the competition piece of it. We could just call it sports.

Tom:

Or, or or what about this? crowding the paint? That's a lot of people in there.

Emil:

I was thinking full court press.

Mark:

Yeah, that's it. That's it. I'll take them all. So yeah, good job. I'll take it.

Tom:

I'll Alright. So I'm going to go I am up next. And what I'm going to select is, I'm a busy professional. I bought these properties as some ancillary income and you know, it's it's enjoyable, but you know, it's also enjoyable is when nothing happens. Just nice and boring. Call it chalk, right.

So, chalk is a term when everything goes to plan on like your NCAA bracket, and I'm going to call mine chalk so no news is good news. Just nice and boring collecting. You know, nothing no, no news, right Chock. That'll be my there.

Emil:

Those are my favorite monthly understatements when it's just rent management fee and that is nothing else.

Tom:

Two lines. Yeah. Charge rent, collected rent.

Mark:

Can't you just call this a soccer game where like, nothing happens for like, forever. I mean soccer fans,

the Olympics are on and I gotta into it, but otherwise, it's nap time almost like golf.

Tom:

Yeah, that's a good one.

Michael:

Shots fired.

Tom:

Shots fired. It'll be interesting, like a little personality test and looking at the ones that we've selected. Because Yeah, anyways, this is this is good. Emil, you're up next.

Emil:

Alright. My third pick is going to have to be when you buy a property expecting to do some work to get higher rent. And when you get a new lease, the lease ends up being higher than what you originally underwrote it for. And so I'm calling this one pulling up an all star from the farm system.

Tom:

Ooh.

Emil:

Michael, that's a baseball reference, in case you're wondering what I'm talking about.

Michael:

Thank you very much. Yeah, you saw the blade in the headlights look on my face.

Tom:

So I'm just gonna go right down. So this is…

Emil:

What's a farm, We’re talking about animals now? What's going on here?

Tom:

Higher rent than expected? Would that be the short way?

Emil:

Yeah, higher rent than expected. On a new lease.

Tom:

Sorry, farm system, pigs, I interrupted your guys's banter.

Michael:

That's great Emil. Thank you for teaching all of these sports things.

Tom:

Yeah, Michael's learning a lot in today's episode.

Michael:

Yeah, today, I get to learn all of the sports, all of our listeners get to learn real estate stuff, I get to learn

Mark:

All the sports

Michael:

Yeah. All the sports!

Alright, so then my third and final one is the fact that you get to have, if you use leverage, you get to have a very high degree of control over your asset. And so you can buy $100,000 asset and that appreciation that you see is on $100,000 asset, but you might have to put in 20 or 25 to get it. And so because you can have a high degree of control. I've called this one to Tom Brady.

Tom:

Okay, what is the what is the event here? What is the event?

Michael:

Leverage using leverage to purchase real estate because he established a higher degree of control right where he deflated the football.

Tom:

Oh.

Mark:

I call it the Emmitt Smith personally, just because he's a legend and a real estate investor but I'm a Cowboys fan. So sorry.

Tom:

That makes sense. Alright, so I like that you're getting using some leverage to buy and, and all that good stuff. So okay, we're gonna go through very quickly everybody's picks. And then we'll, when this episode goes out, we'll shoot it out to the twitterverse and see what see who see one. So Mark's picks are Hail Yeah, this is…

Mark:

I would change that to Hail Mary just to make sure that we're sticking to sports references.

Tom:

And that is when insurance covers the cost of a needed repair. That's super Yeah, that's, that's a winner. His second one is a walk off home run. And that's the doing a right refinance in Texas, where it's very difficult to to manage it. A refi. And then his third one is I think I picked the name you're crowding the paint. This is when you have multiple tenant applications, building come some competition, and just getting better terms and offer so. Excellent, Mark. Excellent. pick my….

Michael:

Very nice, very nice.

Tom:

Mine is a little bit more vanilla than mark so I have a layup that's when just rent is collected. I have a handoff that's when a new property is leased before the turn of construction starts or in the middle of term construction. That's always great news to see in your inbox. And then lastly, a draw chalk there's a there's no news nothing nothing new I don't have to worry about I don't think about it. So that's that is mine.

Let's see next we have Emil and he has some excellent naming you can tell he's got a good marketing mind here. The Supermax contract extension This is a renewal with a rent increase. Excellent Emil. Then we have the the buy win this is appreciation plus, at the same time, lower interest rates. So being able to have a pretty awesome refi perhaps even pay less and get a cash out. And then lastly, he has a an all star coming up from the farm system. And this is when you're getting a higher rent than expected. Excellent excellent.

Michael:

Just such a ridiculous like crazy ridiculous name.

Tom:

All right. All right. Last one. Michael you have a inside the park homerun. This is a forced appreciation. This is an increase in the rent doing some stuff. So that moment of when you completed that and have the forced appreciation. This is stealing a home buying a property on undervalue equity day one. Love that. A lot of that a lot of home runs here. And then lastly, you have Tom Brady deflate gate using leverage to buy those. Those are our list of, the yeah pantheon of excellent real estate investing moments.

Alright everybody, thank you for listening to the episode. If you enjoyed it, please like subscribe, all that good stuff. And as always happy investing. Happy investing, and happy investing. Happy investing

Here's What You Need To Know About Investing In St. Louis, MO Aug 26, 2021

Looking for a new market to invest in? How about St. Louis Missouri? In this episode, Roofstock Certified Agent, Tellee Warren from 314 Property Solutions Group joins us to tell us about the St. Louis real estate market. Tellee gives us the scoop on the competitive environment, the common price to income ratio, the particularities of this market, common risk factors to consider, and his perspective both as an agent there and with his past experience as an appraiser.

Tellee Warren, 314 Property Solutions Group

warrentellee@gmail.com , 314-753-4503

---

Transcript

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael album and today I'm joined by my co host, Tom Schneider, and Mark Woodling. And today we are chatting with the Roofstock Certified Agent out in St. Louis, Tellee Warren, and he's gonna be telling us all about the St. Louis market, why it's a hot place for investors, and some things you need to be aware of, if you're gonna head out that way. So let's get into it.

Tellee, thank you so much for being with us here today. Really appreciate you taking the time out of your busy schedule to hang out with us for a little bit.

Tellee

Absolutely. Thank you so much for having me. I appreciate it.

Michael:

No, of course, it's our pleasure. So I want to come out with a big swing and question right off the bat. I'm an investor I invest all over the country. Sell me on St. Louis, why St. Louis, the best market in your opinion?

Tellee:

Well, St. Louis, we have I think some of the best price points. The we have very affordable homes with great rents, which you know, make we have fantastic cap rates. We have I mean, we're working right now with with investors from from all over the country and from other countries that are flocking to the St. Louis market to buy rental properties. Because the price point is is so good. And the rents keep up with that to make the cap rates high a great place for investors to hang their hat here. So..

Tom:

Love it. What would you say those ranges of what you're talking about price point like where would you say kind of different ranges or buckets of price points that you can get into and the corresponding rents,

Tellee

Some of the great areas, I think for investing in St. Louis, the price range, North County area, we've got 100,000 to actually have about 120,000 - 250,000 price range. And that's that's for your average three bed, two bath, you know, probably 11- 1200 square feet. rents are 12 to $1400, on average there. And then you get you get into Western St. Louis County, the there's some areas there that are still great for investing price points are a little bit higher. They're in the 200 to 250 range, I would say rents are also higher, I mean, you got you know, you have rents 18 1800 to 2000. Some as high as 21- 2200. And then you move even further west into St. Louis County, and then you get to the to the higher price points. 400 Plus, probably so…

Michael:

Awesome. So you're saying in North County, you can still find 1% properties, properties that meet the 1% rule?

Tellee

Once in a while. Yeah, absolutely. We're still seeing plenty of that seven to 10% cap rate, which is, which is the sweet spot? I think anyway, I mean, it's it's where investors are looking to be

Michael:

Totally,

Tellee:

So yeah, I mean, we still can find the one percenters once in a while.

Michael:

For all you haters out there that spew hate, you know, online everyday, there's no such thing as what percent property, reach out to Tellee go check out St. Louis as a market. That is awesome to hear.

Tellee:

That's right. Yeah. We have him here.

Michael:

Tellee. I'm curious to get your opinion and kind of thoughts around what makes St. Louis, a great market independent of the price to rent ratio, what's driving the economy there? Why are people moving to the market? Or do you see them moving away? Kind of give us an overview, if you could, and help folks understand what St. Louis is all about?

Tellee:

I mean, reasons for people moving to the area. I mean, some of the some of the larger businesses. I mean, we have I mean everybody knows Anheuser Busch, you know, we're known for our beer here in St. Louis. We have Boeing, Purina, Enterprise rental car is all here. There's some some pretty good sized companies that are in the St. Louis area that bring a lot of jobs to this market.

Mark:

And also there's a ton of colleges out there is what I've been seeing and does that retain a lot of the the millennials are recent college graduates to really retain those people versus just go to college there then then leave town?

Tellee:

I think it does. I mean, you talk to a lot of people that have been you know, that have attended college here, Washington University. St. Louis University, University of Missouri St. Louis. I mean, there's there's several big colleges right here. And like I said, he talked to a lot of the people that are out in the workforce now that actually did attend college here too. So…

Tom:

Awesome. So let's, let's talk a little bit more about the economy in St. Louis. So, as we know, there's some established companies, why don't you kind of tell us a little bit about the different sectors and different types of industries that are within St. Louis?

Tellee:

As I mentioned before, I mean, we have Anheuser Busch, Boeing, you know, manufacturing industries, Purina, we have Enterprise, which is one of the largest car rental companies.

Tom:

Yeah, blue chip, blue chippper

Tellee:

Yeah, yeah, absolutely. Absolutely. We have, you know, there are some some technology companies that are starting in St. Louis square, is is one of them. And they're hiring like crazy right now. Bringing a lot of people to the area, which is, which is great. Yeah, I think there's some other technology based companies that are that are also getting going here in the St. Louis area. So…

Tom:

It makes sense with so many colleges around there, that you know, you get, I love the exposure that you have to both kind of the older industry, you know, the the blue chipper, Anheuser Busch, enterprise, and then you have the you know, with all these colleges, you're just bound to have a bunch of startups in the area. That makes it right, makes a ton of sense.

Tellee:

And we also just got a huge, they just, they just built a huge Amazon facility here too. Which is great.

Tom:

That's, that's fantastic. On some specific investor related questions. So I'd love to hear about, you know, there's this concept that people talk about with investor friendly, right, be it property taxes, be it with if there happens to be an eviction or any of those types of functions. Where does St. Louis fit in that spectrum of investor friendly as a city?

Telle:

Yeah, sure. So property taxes on the Missouri side are, are great. I mean, they're, they're some of the lowest in the country. Now, it's a different story across the river in Illinois, you go over there, and it's darn near doubled. What it is, here on the Missouri side.

We don't work over on the Illinois side, we're on the Missouri side. But yes, our city is is split right in the middle, partially Illinois, partially Missouri. But the real estate taxes on the Missouri side are much, much lower than they are on the Illinois side. Like I said, I mean, some of the some of the lowest in the country, some of the most affordable taxes in the nation.

Michael:

And you see rents differ much between the two sites,

Tellee:

No rents or rents are similar.

Tom:

Yeah, I think those are such interesting. You know, look at where you have these cities that sits on on two different states. Do you so you guys operate specifically in the Missouri side? That's correct.

Tellee:

We do yes, we only do Missouri.

Tom:

Got it? What a kind of a boon in that, you know, you have all the employment opportunities of just going across, but you can take advantage of those lower property taxes. How about any other aspects of being a landlord and rules around that? In Missouri, or perhaps even comparing to the Illinois side?

Telllee:

I'm not? I don't know, specifics on the Illinois side. As far as that goes, just because I don't I don't work over there. I know you had asked about evictions, things like that. And that's been an issue in the, in the St. Louis area during this whole COVID thing. You know, they've been on hold for so long. They finally took a hold off a couple of weeks ago, and then they put an end to that again. So the hold is back on. Lots of mixed feelings about all that. I think, you know, but But yeah, it's it's an ongoing issue.

Mark:

What do you think the pre COVID I mean, has it been relatively friendly? Would you say as a landlord friendly state, or is the eviction process rather difficult?

Tellee:

Oh, no, you know, it's it's pre COVID. It was fine. I mean, it's a you know, usually 30 to 45 day process. But they were carrying out the evictions regularly on a 30 to 45 day. timeframe, which is good, I think. But now Not same story.

Michael:

So I'm curious if you could give us some insight or listeners some insight into some call it a colloquialism into specifics around the St. Louis market that folks should be aware of. So for example, in California, we have earthquakes, if you're not from earthquake country, that might scare the living crap out. So what are some things that you have that occur regularly in St. Louis, that people should be aware of that are just kind of par for the course?

Tellee:

Yeah, so I would say the biggest thing is, is our tornadoes, a lot of hail, when things like that, you know, in the spring, summer, a lot of storms, and then in the wintertime, we get a lot of ice, we don't get a, we don't get a ton of snow, we're just kind of right in that area, to where we get a lot of snow to the north rain to the south. And we're kind of right there where we get the ice so. So that's a factor in the wintertime. But I would say the biggest thing would be the hail storms, tornadoes, things like that.

Michael:

Okay, great to know. And we were chatting with another agent in a different market around some commonalities around inspection reports. And something he said was, hey, in my market, we just have termites. That's just kind of how it goes. So expect to see termite damage. Are there any things like that, that you see in the St. Louis market of things that we should just expect, as again, kind of par for the course with regard to home inspections?

Tellee:

Hail damage on roofs is a very common one. We also have a lot of termites in the St. Louis area, we always recommend a termite inspection be done. They're very, very common. In this area, too. I would say another thing would be foundations. I mean, we have in this area, most homes have basements. That's one of the common things that comes up on an inspection report.

Michael:

Okay, great to know.

Mark:

Yeah, Tellee, I always like to call out some of the most common inspection issues. So it sounds like with, you know, with these basements that you do see a bit of water intrusion, like it can be common, are those things that you feel maybe really should be looked at even closer? Or do you find that, hey, these are simple fixes that are really going to come up more often than than not on these inspections that you can help address with any buyer that's buying a property?

Tellee:

Right. And it really, here, it really kind of depends on the area. But for the most part, I mean, we see a lot of these older homes, like in the city, almost every single one of them is going to have some kind of a trickle of water, you know, during a heavy rain, I mean, they're their old homes or old basements that they're going to leak. I mean, I always tell everybody the same thing. I mean, it's like, expect to have some kind of water in the basement. I mean, I'm not talking to feet of water, but but a trickle of water, at least, you know, coming in that shouldn't shouldn't alarm you, I mean, it's very common in the area.

Now, when we start to see huge cracks in the foundation, especially horizontal cracks. With displacement, I mean, then, you know, there's some, possibly some structural issues to the home, things like that.

Mark:

Cool. And, and so for the listeners who want to know more about you, as a certified agent, you're you're the one hand picking many of these properties that are in the St. Louis market that are Roofstock Select properties. So maybe give us a little idea about what you're looking for, you know, when you're helping identify properties to be listed on our website, you know, maybe you're billed as their square footage, Bed Bath count, you know, to help us get get an idea of kind of what you look for and why?

Tellee:

The sweet spot is is the three bedroom two bath home that is, you know, in the 1000 to 12-1300 square foot range. finishes don't have to be top of the line. They can be average finishes. When you're looking for investment property or rental property, there's some things that aren't as important when looking for those that they are, you know, like when somebody is looking for a primary residence such as garage, some of the exterior of amenities like you know, decks and and then even like fireplaces, things like that.

And we some of that stuff doesn't doesn't matter as much on the investment property. And those are kind of the properties that I look for. Also, I look for homes that have been on the market or I tried to find homes that have been on the market for a minute because there's you know, there's some of those that People that are looking for a primary home or skipping over and but they still may be great homes for an investor for rental property. So sometimes those are great candidates for Roofstock.

Tom:

I have my final question for me and I love food big, big food and guy so I'd love your your input on if I was going to go to St. Louis and I was gonna get two different meals. One of them is fancy date night, you know, taking the wife and the other one is Oh, I need something greasy. I want to get my hands messy. What would you recommend those two to restaurant meals be? fancy date night and the down home goodness.

Tellee:

Fancy date night, I would say we have an area here in St. Louis. It's called The Hill. It's an old Italian neighborhood. And there are some incredible Italian restaurants down there. Very authentic. Amazing. And it's a neat little area too. But there are several restaurants right there that I would recommend for a fancy date night for sure.

Tom:

The Hill I like it.

Tellee:

The Hill. Yeah. You know, St. Louis is known for toasted ravioli. That's a good greasy food. So

Michael:

That sounds great.

Tom:

I love ravioli., I love toasting, sounds like a match made in heaven.

Michael:

It’s a beautiful marriage.

Tellee:

Right? Yes, pretty darn good.

Michael:

Tellee, my last question for you is, granted for everyone listening. We're recording this mid August of 2021. How are you seeing all cash offers play in the St. Louis market at this moment in time?

Tellee:

I don't think that cash means as much right now as it as it used to. We submitted a cash offer, say against an offer with a with financing. It’d usually is going to to win. I mean, even if it's you know, a little bit less, the risk is a lot less. But now I mean, we're seeing cash offers for, you know, that are being treated the same as as offers that are financed. I'm not seeing a big advantage to that. I mean, it's cash is always King. But I don't think it's as much of an advantage as it used to be.

Michael:

Okay. Great to know,

Mark:

How about competition out there, I always love to ask the question about, you know, are you seeing eye buyers? Are you seeing a lot of institutional investors are, you know, coming in as a roof stock buyer, you know, what should they what should they expect in terms of competition? And how do you advise them on maybe where to come in on price point, relative to list price on any offer?

Tellee:

We're starting to see it maybe led up just a bit most of these areas. The list price to sale price ratio, I would say it's at about 104 to 106%. So I'd say four to four to 6% over list prices is about average, what a home selling for right now, in these areas in most of these areas that we're finding the investment properties in.

Mark:

Sure, so when a buyer comes in and wants to make an initial offer, how do you approach that do you like to come in and kind of warm up or you say, hey, make your highest and best up front? To really make sure you get the attention of the listing agent and the seller?

Tellee:

Well, I usually like to, to feel out the situation contact the listing agency, how many offers they have? I mean, usually the you know you're not getting they're not going to tell you how much the offers are for but you can find out how many they have kind of gauge it that way. They usually base it off of that. I mean, if they don't have any, you know, we may be okay. Closer to list price, if they have a few. It needs to be strong. So..

Michael:

That's great to know, I know a lot of people, I talked to members of Roofstock Academy get frustrated with paying over list price. But I always tell them, hey look, go back to your numbers. If your numbers support a different price that's above and beyond list price, great. You shouldn't feel bad about that. Because you're still hitting your marks the same token if you can only offer less than this price, but you've got to offer based on your numbers. So get specific get good at running the numbers, and then your answer will will appear to you almost like magic.

Tellee:

Right? I mean, it is what it is. It's all yeah, it's all in the numbers.

Michael:

That's for sure. Yeah. You know,

Michael:

That's great

Telllee:

You can only do what makes sense.

Mark:

One more question in terms of competition. I like to look at it kind of in the inverse directions I heard last that you have about a month or maybe greater in inventory on the MLS. And that means it you know, the inventory that's available would take one month to sell versus an average market at any given point is about healthy market call it average healthy is about six months. What do you see is the current inventory level now? And how do you see this really impacting, you know, how a buyer needs to react to making offers?

Tellee:

I think that's starting to increase just a bit. But I mean, I would say it's, it's probably still between a month and two months worth of inventory. And offers have to be strong. I mean, there, there's a ton of competition. I mean, we're seeing it almost on every deal. So.

And that's, and that's the biggest issue, I think, is that people aren't, you know, we're not making the offer strong enough, that we're getting beat out a lot, which I mean, I know it's happening everywhere. And everybody's writing a ton of offers right now and getting a ton of offers declined. That's just the way this market is.

Mark:

I have some stats that I pulled that I think would be good to just throw out there and see if Tellee wants to talk to any of these points. But I was just looking through that John Burns real estate consulting data that he puts out every single month Roofstock is one of the clients so we have access to this data that's not typically available to the open market, I would say. But here's some cool stats I found.

So Tellee, stop me or like go into any detail you want about this. But I saw St. Louis had employment growth that was 5% year over year, starting this July, looking back a year. Appreciation in home prices. The median home price was 194,500. This year, compared to 179,000. Last year, rent growth was 4.5%. year over year looking back one year from July 2021. The cost two for an entry level single family home on a monthly basis is $1434 versus $1126. to own so use me $1434 to rent $1126 to own there's a good night. Yeah. Inventory was one 1.2 months I saw as a December 2021 occupancy was 94.8% for single family rentals. And the census data last showed that 56.6% of St. Louis was renting versus 36%. nationally. How about that?

Tellee:

Wow. So you see…

Mark:

rapid fire numbers. What do you think about all?

Tellee:

St. Louis is the place to be right there. The proof is in the numbers? No, I think Yeah,

Mark:

Absolutely.

Tellee:

Fantastic.

Mark:

I love occupancy, you know, high percentage of renter's, you got the cost to own a home is actually cheaper than what people are paying in rent, year over year market rent growth, great appreciation, and then I always look back at job growth. Right. Those are, those are those big drivers. And I know looking back a year, the market was in a state of turmoil a bit more in terms of the job market, but still to see things, you know, growing and climbing at a rate of 5%. Still pretty dang good.

Tellee:

So yeah,

Mark:

What do you think overall Telly if you were talking to investors, you know, what are some kind of final pieces of advice that you would give an investor coming into St. Louis, specially from out of state?

Tellee:

Yeah, I would say give it a try. I mean, take a look to what we've got here. You're gonna find that your cap rates are great. You're I mean, it's, it's, it's a great place to, to buy investment properties. You'd be happy here, that's for sure. So.

Michael:

Awesome.

Mark:

Good cash flow. Nice appreciation was kind of the the two two solid things that you're looking for. That's great. Well, we appreciate what you're doing for the certified agent network and bringing the select properties to roof stock Telly. So thanks for all you're doing. And I would say our buyers are going to be interested in connecting with you. So maybe give them a little idea about how you would like to be connected with maybe via email or even phone.

Tellee

Yeah, absolutely. Yeah, you can contact me at email. My last name warrentellee@gmail.com. Or a phone number 314-753-4503. We are 314 Property Solutions Group in St. Louis, brokered by Keller Williams. Awesome.

Michael:

So I'm curious to get a little bit of background on you as an individual as an investor as an agent because we talked about the market as a whole but give give our listeners a little bit of insight into who you are.

Tellee:

Sure. Yeah. So I have Been in the real estate business in some way, shape, or form, I guess for the past 20 2021 years. I started off in 2000. As an appraiser, I'd always wanted to get licensed as an agent. And I finally I just never never had the time to do it really, finally, made myself do it in 2015, I think I got is when I got licensed. And then I eventually switched over to just selling and I don't do appraisal any longer.

Michael:

That's great. And I'm curious to know, your track record, having been a former appraiser, when you when you're consulting with clients and saying, hey, this is I think, where this is gonna come in? How close are you typically?

Tellee:

Well, actually, I'm, I'm, I feel like I'm pretty close most of the time. Um, that's one of the biggest values that I that I bring, is, is being able to, is Property Valuation. I mean, I'm pretty good at that. And I think that helps out, you know, it can help out a lot. So I think there's a lot of agents that are not nearly good enough at it. And that can really put a client in in danger. So.

Michael:

Yeah, big time, but we'll call that your superpower.

Tellee:

Yeah, there we go.

Mark:

And how about if if values come in too low from an appraisal for, let's say, a lender? You know, what's your success rate there and challenging some of those values? Do you do you find that happens? These days with values going up? Or, you know, what do you see nowadays?

Tellee:

We're seeing some issues with appraisals. A few, but not not near as many as I expected to see. Which is kind of a surprise. And of course, I mean, we always try to, to rebut those, whenever we do get alone and try to hit him with as many comps as possible and all that, but it's it does. They're not overturned very often.

Michael:

Okay,

Mark:

Got it. But that's always a challenge when real estate prices are going up, you know, an appraisal comp is looking backwards, right? So you're looking at prior sales. And when the markets moving so quickly, you know, some of those sales haven't even closed, they're just under a contract. So, you know, that's good to know that there, there isn't this huge valuation challenge that's going on, because a lot of times the, you know, the lenders are trying to mitigate their risks, so they cap their number and, you know, values are moving so quickly, you know, just means buyers may have to come to the table with a little more cash than anticipated.

Tellee:

That's right. And that's, that's why it's, I mean, it's very important right now to, you know, typically on an appraisal or in a normal market, you can, you know, they're comparing the home to properties that or maybe six months or even a year, you know, that was sold, six months out, or even a year out. Where now, it's very important that they use sales that are within a month or two, just because the market is changing so quickly. Yeah.

Michael:

Yeah. Interesting. Seems like the country's on fire. It is like I gotta be careful how I say that. Well, right. In Flames, so yeah.

Awesome. Any other questions for Tellee guys?

Mark:

I'm good. This is this is insightful. Thanks for your time Tellee. We always appreciate it and getting some local knowledge.

Tellee:

Absolutely. Thanks for having me, guys.

Michael:

All right, awesome. Well, Tellee, thank you so much. This was really really insightful. Very excited to see the St. Louis market and all it has to offer and for anyone interested, feel free to reach out to Tellee.

Thanks again, man. Hopefully we'll we'll catch up with you soon.

Tellee:

You bet. Thanks so much, guys.

Michael:

Alrighty, everybody that was our episode a big big big thank you to Tellee if you're interested in learning more about the St. Louis market definitely reach out to him. He is a wealth of knowledge, especially with his appraisal background. As always, if you liked the episode, please feel free to leave us a rating or review. If you're checking us out on YouTube, hit the like and subscribe button right below you. And we'd love to hear about episode ideas for things you want to learn more about. Thanks so much for watching. Happy investing.

How much down payment should you put on an investment property? Aug 21, 2021

How much you put down on a property can have a huge impact on the performance of your investment. More is not always better, and putting up the minimum does not always get you the best cash on cash return. Each deal is unique. In this episode, we share how we think about it, important metrics to look for and how we come up with the right choice for each deal.

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Transcript

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum, and today I'm joined by my two co hosts,

Tom:

Tom Schneider,

Emil:

and Emil Shour.

Michael:

And today we're going to be talking about how much downpayment should you be putting down on that investment property. So let's get into it.

Alright, guys, so there are a bunch of different metrics that investors utilize and look at when looking at investment property. And I think two of the big ones or three of the big ones that we talk a lot about our cap rate, cash on cash return and cash flow, either monthly or annual. So I'm real curious to get your thoughts around. How do you think about down payment amounts and how it affects the metrics that you're interested in?

Emil:

Yes, I'll talk about what I've done in the past versus what I think you should do. So I've always gone. I've always gone to minimum downpayment because that I want to, you know, as I'm growing my portfolio, I just want to have as much money as possible to acquire properties. So I would just went with the minimum.

Michael:

And for those that that maybe don't know, what is the minimum, the minimum?

Emil:

When I first started, it was 20%. I don't know if it's moved up to 20. I've had some lenders, like when I bought my triplex in November, the minimum with them was 25%. I don't know if that was because it was more than one unit. They require a little bit more.

Tom:

It can be lender specific too

Emil:

Yeah, so typically 20% some lenders will be 25% currently.

Michael:

Okay, so in that ballpark?

Emil:

Yeah. The way you should look at it, if you're, you know, if you're an investor, right, you're looking to maximize your returns, right? If you're especially looking at your cash on cash return, you should ask your lender how your rate changes a different down payment amount. So let's say you put 30% down, and it goes down a quarter of a point, I'm just using examples here, versus 20%. Down, it's a quarter point higher, and maybe you pay, I don't know, one point on top of that for closing costs or whatever.

Well, what you should do is look at how those two compare and how those affects your cash on cash return. Right? It could be that when you put 30% down, you get that quarter percent off your interest rate, it actually improves your return. And you won't know until you do the math. So I think that's the way you should do it versus how I've done in the past.

Tom:

Love it, That is good Emil.

Michael:

Tom are you similar? How do you think about and approach your down payment amounts?

Tom:

Yeah, I think it's, you know, good hygiene to look at what the different rates would be based on the different down payments, amounts, I typically somewhere to a meal will max out the debt just in that, that I get the biggest mortgage as possible the biggest loan to value just because the cost of debt is so cheap right now. And I, you know, don't necessarily need the cash flow now. So by getting a bigger loan, my cash flow is going to be smaller, but I don't I don't need more cash flow now just because I'm servicing more debt. So I'll typically max out that loan amount, I'm pretty aggressive about once my property appreciates a certain amount, all refinance it. In that I'll do a cash out refinance world, I'll get my down payment back into my pocket, and even increase the loan amount, I think with when I when I do the initial acquisition all use as much debt as possible.

And when I refi, I typically will be more conservative, you know, hopefully, there's that much appreciation and that much sweat equity or whatnot into it. So when I refi, it, the value is way higher, but I'll be a little bit more conservative, just because typically, when you're doing that refi it gets a little bit tighter on on cash flow. But I'm pretty aggressive about pulling that money out and redeploying it to grow my portfolio. I'm just not necessarily a spring chicken but still fairly young. So trying to grow my portfolio out while being conservative on making sure that there's good cash flow. So…

Michael:

Right, and do you have a minimum cash flow that you won't go below, or you won't cash out? refi to above a certain threshold from the cash flow perspective.

Tom:

You know, depends on the the cost of the house and how much money involved but typically, you know, I want to see like 100 bucks a month of cash flow, just to give myself a little bit of wiggle room, but I'd say I'm a little bit more aggressive now than I'll be in the future. And just as I mentioned, like I don't necessarily need the cash flow now and I'm more about deploying the capital and getting it getting it to work. But still being mindful of conservative about what the loan to value is, in keeping some wiggle wiggle room? I'd love to hear it. Yeah. How about yours? I'm gonna flip this on, flip it on your head and flip it on your head, Michael. What's your thoughts around downpayment and cash flow?

Michael:

Yeah, I have a very similar approach, kind of splitting the road between you two. So when I first started investing, I was like a meal getting as much loan as I possibly could putting as little downpayment as I could. And about that time, it was 20%. And I've since changed that approach a little bit, in that I'm getting more particular around what I'm buying and how it performs. And a while ago, I was talking about how I'm trying to do more with less now. And so getting really strategic around, kind of precisely determining how I'm purchasing properties, because if anyone's evaluated a property before, you'll know that the down payment has a can have a fairly drastic impact on both the cash flow and then also the cash on cash return as a metric.

And so I love the Roofstock evaluation tools that we have on roofstock.com with the slider bars, where you can manipulate on 1% increments the down payment, and you can see how that it affects your cash flow, as well as your cash on cash return. And so I mean, like you mentioned, play around with the down payment amounts, and then also play around with the quoted interest rates. And you'll determine, hey, maybe 27%, is where I need to be, or maybe I need to be at 33%.

And so getting really precise and strategic around what type of return Am I targeting? And can I just cleverly or creatively adjust the financing to get me there, because I think a lot of people look at a property and like, oh, it doesn't work with this parameters, well, maybe try different parameters that you have some degree of control over. So I'm looking at taking out some debt on some property, and we're only taking like 45% loan on it. Because we want the cash flow to still maintain it's a certain level. And so we're okay, taking a lesser return.

Tom:

Just kind of that point, like if you're buying at a higher price point in you, you know, don't want an alligator where the monthly cost is higher, you just use less debt, so there's less coverage, so you can still cash flow, if you are buying that, I don't know, $200,000 property, it's probably gonna be very difficult to get a full 80% loan and have a cash flow still, maybe that's a 50% loan or 60. So it's great. Great point, Michael.

Michael:

And then the other thing that I found really eye opening and I think we've talked about on prior episodes is that uncertain size loans, the way that the deal works, using more leverage doesn't necessarily get you a better return. And so there are instances when you look at a property and let's say you buy it all cash and you get a 6% return, you go put debt on it, and now you're getting a 4% return.

So people think I think mistakenly so that leverage automatically means a better cash on cash return. And that's just not the case. And so I mean, I think you brought the point earlier that you've got to run the numbers, you've got to understand how the dynamics of your particular deal work. And if you're putting debt on something and it performs worse, you might want to be thinking about is that a proper deal to use leverage on or maybe is that a better candidate for an all cash purchase.

Any other points that you want to bring up that you think it's important for listeners to be aware of with regard to how they structure their down payments?

Tom:

Reserves. So making sure you know, you aren't blowing all of your funds into your down payment, and you're keeping some liquid cash available. Just because stuff happens. One of the worst things that can happen to you as a real estate investor is running out of capital when you need it, that that that's what turns into a fire sale in him needing to sell a discount. And that's like the last thing you want, you know, that's getting picked off by vultures. So being cognizant of what you're keeping in readily available liquid cash, should something come up. Because sometimes stuff comes up.

Michael:

That's such a good point. And I think a lot of lenders are requiring six months of your property, Principal interest, taxes and insurance. So just having that as part of your reserve, kind of in In addition, so Tom, do you think about that as your reserve? Or should that be in addition to your reserve?

Tom:

I have some funds in some, like ETFs that I can quickly like pull out to go use as I need to. I used to be have more than I should have just total cash cash. So I've been a little bit more disciplined about putting that into some, you know, ETF, some some funds, but I think of it as altogether.

Michael:

Got it,

Tom:

I guess sure there's the six months in actual cash that they need, but then having like a little tranche or whatever, just some extra capital right behind it in, readily available.

Michael:

Yeah. Makes sense. Emil, any final thoughts?

Emil:

It's something I've been thinking about a lot, I think thinking with the end in mind here, right? Like, we talked about cash on cash, yes, you can take out more debt to juice your cash on cash. But let's say your goal is $5,000 a month in cash flow, right? Can you do that in five properties versus needing to get 15 right and having more headaches and having 15 different loans having 15 different insurance, you know, like just really thinking About What's your goal and not just how do I maximize my cash on cash but like working this out so that it provides you with the life you want with the least effort and headache? I think that's like something I'm starting to think about more and more instead of just like, oh, what's my cash on cash on this property? How do I maximize it?

Tom:

I love that take. I love that take Emil. I mean, you can even like kind of work it into your, you know, the length of your loan, say, Okay, I want to retire in 15 years. Oh, great. I have some 15 year loans on I mean, I'm sure there's like definitely ways to optimize but just thinking more proactively of okay on this date I want to be have X amount of cash flow. I don't love that point Emil.

Michael:

Yeah, and that goes, I think when we had Chad Carson on the pod A while back, he was talking about having smaller portfolios, but paying them all off paying off the property and so owning less but free and clear properties and then your cash flow can be you know, a lot stronger than if it has debt. And so when you look at that global cash flow picture when you have free and clear properties, you can do a lot with a little Tom is there anything else?

Tom:

Oh, nothing. I can see that like you know, less is more is a is a is a beautiful, like mantra or philosophy. I can see it being hard, especially like the three of us were constantly like, oh, what's next? You know? Yeah.

Emil:

It's so hard. It's so hard to tell you're like actually be like, I am not going to just grow to grow like what do I actually want to do here? And the easy thing is just it just keep growing, keep growing, keep growing like that's the kind of the easy default option to go to.

Michael:

Everyone that was there episode. A big thank you for listening. Thanks for watching. If you check us out on YouTube, feel free to like and subscribe that helps us out in our algorithm and getting you additional content. And as always, if you want to hear a specific topic on an episode, feel free to leave us a comment. And we look forward to see you in the next one. Happy investing.

Tom:

Happy investing.

Emil:

Happy investing.

The Powerful Transition from Residential to Commercial Real Estate Aug 14, 2021

Paul Moore, from Wellings Capital, joins us to talk about how to leverage inflation to your benefit, transition from single-family rental properties to multifamily and commercial real estate, force appreciation, and how his company is giving back by helping combat the horrors of human trafficking.

Paul Moore, wellingscapital.com

Find Paul's podcast here: https://www.wellingscapital.com/podcast

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum, and today I have with me a very special guest, Paul Moore, you may have heard of him from BiggerPockets, you may know him as the founder managing partner of Wellings Capital, or you might know him better for his fight against human trafficking. And today, Paul is going to be talking to us about some pretty hot topics, specifically with regard to inflation, commercial real estate, and also what Paul and his team are doing to fight human trafficking. So without further ado, let's get into it.

Paul Moore, welcome to the show. Thanks so much for spending the time.

Paul:

It's great to be here, Michael, thanks for having me on.

Michael:

No, of course, of course. So, before we started recording here, I was learning a little bit about your background. But for all of our listeners who might not be familiar with you would love to learn a little bit more about kind of who you are, where you came from, and how you're involved in real estate today.

Paul:

Yeah, absolutely. Um, let's see. So in the early mid 80s, I got an engineering degree, which was my first mistake. And then I went on and got an MBA went to Ford Motor companies spent five years there I actually really liked for but I had this desire to be an entrepreneur. So I quit started my own company. I ended up being entrepreneur finalists for Entrepreneur of the Year, Michigan a couple times and we sold that company to a public firm and 97 came to Virginia started flipping houses, then I started flipping waterfront lots then I built some modular and stick built homes. And I learned something you shouldn't build a house if you don't know how to tighten the doorknob on your own house. I don't know just something I just thought I'd tell people that. And, you know,

Michael:

Word from the wise.

Paul:

Yeah, right. So but that's one of the values of working with a company like roof stock, you know, you you know, if you're flipping houses or building houses yourself, you know, you might have a full time job or something else, you might not know what you're doing. And it's great to be partnering with somebody who does. That's just a side little advertisement for you guys. But anyway,

Michael:

I appreciate the shout out!

Paul:
Yeah. So but over the years, I was wondering how to get involved in commercial real estate, but I didn't know how. And so I actually started a website to generate residential leads for buyer's agents. And actually, we I mean, I had like 40,000 people on our list at one time that have come through our lead gen. And sold those to realtors that I'm still getting, you know, leads all the time. I got that running in the background, but at the same time, I started a multifamily and slash hotel and we build it I should say from in North Dakota. Then we did another one next door. My business partner did a hotel, I jumped back into multifamily syndication. And now I do self storage and mobile home parks as well. We have we're on our fourth fund with my company right now.

Michael:

That's awesome. And what is the name of your company if folks want to get involved in that space?

Paul:

Yeah, that's Wellings Capital.

Michael:

Awesome. Is that Wellingscapital.com is the website people can go to?

Paul:

Yeah, that's right.

Michael:

Hmm. There's so much I want to unpack here, Paul. And we, it sounds like we'll have to have you on for another episode. But I'm just curious, getting back to your engineering degree. What kind was it? And I know, you said it was a mistake. But do you think that there was any value in terms of being mathematically inclined or numbers inclined with that degree to helping you in real estate?

Paul:

You know, Michael, I'm glad you asked that. No one's ever asked me that. But I think it really is true. Because like I said, I went on to get an MBA and some things that were really simple to me, like, you know, calculating, you know, weighting weighted averages and things. Other people were just like, what, you know, so, yeah, so yeah, I think it did. I think the discipline of getting an engineering degree did help. I got a petroleum engineering degree.

And it was funny, when I went in in 1982, there were seven graduates coming out of that program, and they had seven job offers each and oil prices were high, you know, and when I got out, four years later, in 1986, there were 89 graduates and they had seven job offers total. And, you know, the oil prices were up and down, and you know, I should have learned right then I should have learned, you know, getting a degree in something like that is quite speculative. I mean, you know, it's not like industrial engineering or other things that have a steady demand. It was kind of like swinging for the fences, even back when I was 18. I joined that program.

And Michael when I got out of when I sold my company, In 97, and started investing and doing other things full time, I should have learned the lesson, but I had to learn it all over again. And that's the difference between investing and speculating, you know, speculating is when your principal is not at all safe, and you've got a chance to make a return. And investing is when your principal is fairly secure, and you have a chance to make a return. And over time, investors went over speculators almost every time.

Michael:

Yeah, I'd agree with you. But I think it's such a sad story that we hear so many of these big stories about the speculators hitting it big, you know, Bitcoin AI billionaires all overnight. But what you don't hear is the other 100,000 people that lost it all, in that same speculation.

Paul:

It's exactly right. And that's, you know, again, that's, I think that's what your company and our company are both about. And that is, you know, investing, you know, and, you know, expecting a stability and a, you know, an expectation that's not based on a war in the Middle East, or a rumor or a tweet from Elon Musk. I mean, we're talking about the value of Roofstock’s. And our real estate didn't go up or down when Ilan musk tweeted, because it's based on real math, writing real foundational stuff, you know,

Michael:

Yeah, yeah. No, I love it. I love it. So kind of speaking about speculation, we were chatting before the episode and talking about a topic that I think is really, really relevant to today that I want to dive deeper on. And that's inflation. And so, talk to us a little bit about, in your estimation, why you think real estate is such a great hedge against inflation? Because I think so many investors hear it all the time. Oh, it's a great hedge against inflation. But unless you really understand why I think it becomes so much more impactful to really get the reasoning behind it.

Paul:

Yeah, you know, I didn't understand it myself till I really dug in when this inflation started heating up. This is a, this is some $10 trillion bills, these are real from Zimbabwe. And you know, and there's other ones back here from Venezuela. And, you know, inflation is real, I don't think that United States will, in the short term, at least experience any kind of hyperinflation like that. But we obviously have real inflation.

I mean, I think I read that in June, the Consumer Price Index, which doesn't even cover, everything was up point 9% in that one month, and it's up like 5.8% for the year. And if you included all the stuff they used to have in there, I think it would be much higher Cantillion, I believe it was Richard Cantillon, was a famous economist, about three or 400 years ago, and he had something that was called I can tell you, in effect, he basically said that those closest to the printing of the money stand to gain or lose most from that printing.

And if you think about who's you know, the two most powerful forces in the world are the Federal Reserve. I don't mean just the US, but any federal reserve and the government. And you've got a chance here, by investing in real estate to align yourselves. Even if you don't like those guys, the government and Federal Reserve, you've got a chance to align yourself with them by investing in real estate.

Now, here's how specifically, you can look back 5000 years and I'm serious, they did a study on this and interest rates are the lowest they've been in 5000 years. Yeah, yes, you can go back to ancient Egypt, just Google it. And it's, you know, there's some semi credible, I'm kidding. There's some credible sources on there, showing that they've studied this back for 1000s of years. But even if it was just the last 100 years, what a powerful moment in time to have interest rates this low, my son recently got his first house. And now he's a young guy, and he got like a 2.65 or 2.7% interest rate.

We just closed on a commercial a large mobile home park with a 3.0% interest rate with many years of interest only. I mean, it's powerful. But think about this. If you can get your largest expense locked in for years or even decades, at a very low interest rate, and then watch the revenue climb due to inflation or words, the rents are going to go up right in line with inflation. And actually with the housing shortage right now, in America, they're going up higher than inflation. I mean, there's reports of lots of places where houses went up 20 and even 30%. Last year, I know one place that went up 60.

And so we've got rents that are going up, way higher than then inflation but leaving if they stay with inflation, imagine the increase in rents with your largest cost being fixed for either 10 years, 12 years in commercial or 30 years. In residential, it's a powerful, dynamic and the ability that delta, the difference between that increasing revenue and that fixed largest cost is you're increasing cash flow, and then increasing equity you have in this property.

And importantly, for me, we talked about speculation. Also, as that gap widens, you're increasing your margin of safety in case anything goes wrong. So it's three powerful reasons that inflation is a great time to invest in real estate, when there's inflation, it's a great time to invest in real estate. But when there's low interest rate debt, it's even better. I remember the late 70s and early 80s, when, you know, inflation was in the mid or high teens, but so were interest rates. Now we've got a very different situation. We've got increasing inflation, but low interest rates. Very, very amazing time to invest in real estate, take action, folks. Now's the time.

Michael:

Yeah, I love that just the visual of your arm saying, okay, here's your revenue, but your your costs and your expenses stay fixed. And so just for everybody listening, that might not even be familiar with the term inflation or really what it means. at its base level, it's the value of the dollar tomorrow is less than the dollar today. So if milk costs $1, today, tomorrow, it costs $1.03. It costs more money to buy those same goods and services. And so if you're not investing in something that generates a higher return, or that keeps up with inflation, your dollar gets left in the dust. And so a lot of people talk about putting their money in their mattress or leaving it in a bank. And you can actually lose money in a sense, because if the value decreases with time,

Paul:

Yeah, it's true. And I told somebody the other day who got a 2.9% mortgage or something, they were really young guy, it wasn't my son, it was somebody else. And I said, Do yourself a favor, don't ever pay that off. And he gave me the look, you know, like I said, don't pay extra. Don't try to pay it off early. And he gave me that look, because I think he'd studied Dave Ramsey, and So Robert Kiyosaki said this well, because I've for years gone, okay, Dave Ramsey's, right, but he's not right. And Dave, Kiyosaki said it well, we were in Belize together with the real estate guys about a month ago.

And he said, I'm friends with Dave Ramsey, and he's right, for the vast majority of people, they should pay off their credit cards and their bad debt. But there's also a good kind of debt. And that's the debt against an increasing an asset that's increasing in value, like real estate. And so that's where Dave Ramsey's thinking would get you wrong, you know, he'd say, don't have debt or pay it off quickly. And all that stuff. You know, getting fixed rate debt for a long, long time in real estate is a fabulous move. And it's a way that people have got extremely wealthy for many years, Sam, Zelle said, was one of the keys to his wealth. And he is the most successful real estate investor in America, possibly in the world. And Sam Zell said, that's one of the ways he got wealthy by getting low, low for him six and a half to seven and a half percent interest debt in the 70s. And having an increasing inflation against that.

Michael:

Yeah, I think I think it makes so much sense. And once again, people can start to wrap their head around that delta and how that Delta Works over time 99% in their favor, it starts to become blatantly obvious that, hey, this is a really great place to park money,

Paul:

Right? It's so true. It's so powerful. And even as I talk about it again, I just want to jump off this podcast and go buy something else, you know.

Michael:

Yeah, and something that we talk a lot about in the RoofstockAcademy is running the numbers and really getting a grasp upon Okay, well, how are my dollars working for me? What What is the return look like? And just at a very high level, I mean, if you're borrowing money at 3%, and earning a five 6% interest return on those dollars, you've just created a spread out of thin air. And you know, you've created arbitrage and that's what banks do, they lend money out at certain and then they borrow it at a different rate, and the spread is where they make their money. We're doing the exact same thing.

Paul:

Hmm, that's right. And the wealthiest people in the world understand this. And, you know, banks, whether they're loaning money at three and a half percent, or 13 and a half or whatever, it doesn't matter as long as they got that, you know, a couple points spread that that arbitrage is where the you know, where the profit is.

Michael:

Love it. So, Paul, let's change gears here a little bit, since I know that you're a multifamily guy. I'm a total the total multifamily guy as well. Talk to me about how you made that transition from single family into commercial multifamily, or how you've seen others do it really well, because I think for a lot of people, it's this whole new landscape. It's a whole New World, commercial mortgages. I could never I could never do that. Yeah. What have you seen successful people do?

Paul:

Yeah. So my mentor had about 110. I think it was single family homes, around Cincinnati and other places. And he realized, wow, what if I could buy 110 unit apartment building? Would that be more efficient, and he so he started drilling down and studying that realized, you know, one loan, one big parking lot to scrape snow off of one,

Michael:

One roof,

Paul:

One set of roofs to repair. Yeah. And so he thought it was a really good idea to go into commercial. And so he did that. And he found, you know, that he ended up selling his single family homes at that point. And a lot of people have made this transition, though, you don't have to, I mean, there's companies, you know, out there that have hundreds or 1000s of single family homes, and they're doing well also.

But at any rate, that the difference really is that one of the big differences I want to point out is this in the residential realm, your value is based generally on comps. So if I bought a house for $200,000, and I added, like 300,000, and improvements, you know, I put in gold plated fixtures and a big, expensive fence, I build out the attic, in the basement made an addition, you know, and I had 500,000 it but I was in a $350,000 neighborhood, it would be hard to sell it for a profit, you know, if I had 500 in it.

In commercial real estate, the value is based on math. And that math is quite simple. It's kind of similar to the P e ratio price to earnings ratio in stocks. The math is this, the value or the value increase is based on the net operating income, or the noi increase divided by the cap rate or the rate of return.

And so let's go over that. So the value the price is based on the income stream. And so it's the gross revenues minus the operating expenses, that will give you the net operating income, that's the numerator. The denominator is the rate of return. So if you're looking for an eight or 10% return, you divide by eight or 10%. Now it's really hard to get deals like that anymore. But cap rates these days are typically four or five 6%. So people are tolerating, if you will, a 5% return.

And so here's the math on that if you have $100,000 a year net operating income, not including the mortgage, and not including any depreciation. But if you have $100,000 noi, and you're willing to tolerate a 5% rate of return, that's a 5% cap rate 100,000 divided by point 05. That'll give you a $2 million value, and you'll have to pay 2 million to get $100,000 annual cash flow stream.

And so if you are the seller, you can think about ways that you could force appreciation Hmm, let me see, if I'm a self storage facility, I could add you know, I could take some of this paint this unpaved grass out here on the side, this three acres and create you know, RV and boats parking and create additional cash flow. If I'm a mobile home park, I could put in like we literally saw a guy we invested with him. He put in a one acre fenced, paved area and added boat and RV parking to a mobile home park added $10,000 a month and let's do the math on that.

Okay, this is crazy. So let's say it was a $5 million mobile home park 3 million in debt 60%. LTV, 2 million in equity. So he had 2 million in cash and we were one of the investors in this okay. Now he added a $100,000 paved fenced parking area. And he said to all the people who had three or four or five or six cars sitting in front of their trailer, you have to park it out here and you can't park your work trailer and your boat and your RV in your yard anymore. So they cleaned up the place which allowed them to increase rents By the way, but they also charge people and they were making a total of $10,000 after a while, renting these slots out in this paved area out front to the people in the park and the community. 10,000 a month. That's 120,000 a year 120,000 divided by a 6% cap rate and it's 120,000 divided by point 06. If I'm not mistaken, that's about a $2 million increase in value. Wait a minute, there it is $2 million.

They only have 2 million in equity in this so they just double the equity and over to the investors got 100% return on their money by this one simple change. Now, my friends, that's called forcing appreciation. It's a very, very powerful thing that commercial real estate has, so if sometimes you can raise rents by 10%. But with leverage, like I just showed you, you can increase the value of the equity by maybe 30%. Or you can add additional empty lots, you know, to a mobile home park, or like I said, parking to a self storage facility, or you can increase occupancy by 10%. There's so many ways you can force appreciation.

So buying from a mom and pop seller, let's say have a mobile home park, that you know that the owner doesn't have the desire or the knowledge or the resources to increase value, buying from them and paying them what in their mind would be a huge price. And then making these improvements can really juice the returns for investors.

Michael:

Yeah, that's something that I realized a while back when I first got involved with multifamily is that you're limited on the single family space to comps. If your neighbor's house doesn't take care of the neighbors and take care of their house that affects you. But in multifamily and commercial, if you're able to create because essentially you're buying a business, you're buying and selling businesses, and so that's why it's valued based upon the cash flow. So if you can create and creative ways to generate additional cash flow that has a lot of value.

And in that example, I mean, I'd love that $100,000 investment yields 2 million in value. And the cool thing about that, that I think I want to harken back to is that they don't have to sell that to realize any of that 2 million in value, you can go do a cash out refinance, you can establish a business line of credit and tap into that. So it's usable, tangible dollars that you can access for doing the work. So I love that example.

Paul:

Yeah, I mean, you're you're making me think about a self storage facility in Colorado Springs by doing something like that. They were able to just refinance and return all the equity to investors. Now the investors have no risk left on the table. There's nothing they can really lose, because they got their principal back. And now everything is pure profit from then on.

Michael:

That's awesome. That's awesome. So if we scale it down a little bit to smaller multifamily, so commercials of five units and plus, where do you see people really succeed in making that leap between single family to commercial multifamily? And then by that same token, where are you see people get burned?

Paul:

I think one way, and I'm not sure this will perfectly answer the question, Michael. But one way that it works really well is if you see intrinsic value. And here's what I mean, Michelangelo, the greatest sculptor ever said, I saw the angel inside the block of marble, all I had to do is chisel and chisel till the angel came out. And that sounds silly, but it's really, really powerful. Because basically, it's he was able to identify intrinsic value, meaning he didn't see it as a $300 block of marble, he saw it as a extremely valuable sculpture, and he was able to pull that sculpture out.

And so a great operator can see value where there is not any in order to the extrinsic value, the sale price is, let's say, a million dollars, but he can see, you know, a possibility of increasing that to say, a million and a half by doing something creative. And so I'm thinking back to your question now about the five units. If you can find land that is that like, maybe there's an extra acre there, but nobody seemed to have noticed that and you can go get permits, you know, to add five more units, that is where a lot of value can be created.

One time I bought a five acre parcel of waterfront property that was absolutely not subdividable. But I actually found a way to legally subdivide it into five one acre lots. I mean, there's obviously that was a huge, huge win.

I'm thinking of, Oh, I have a friend. Now this is a little different. But this is kind of cool. He was he had his clients. He's a large realtor in Minnesota. He was having his clients buy these, I thought overpriced, large single family homes near campus. And he I was in the car with him once he was on the speakerphone. And he was telling this guy to go ahead and pay 400,000 for the single family home that rents for 1600 a month and I said that didn't sound like such a good deal, Eric and he smiled. He said it's near campus, all we have to do is furnish it, put two beds in each room, we can rent it for like 600 a bed. And it's the math on that, like he'll make like, you know, his his gross revenue will be over 4000 a month on you know, a property that he paid 400,000 for now, that is a smart way of extracting intrinsic value out of a single family home.

Michael:

That's great. That's great. I love it. I'm I'm in the midst of a redevelopment project myself, it was a three unit residential with I think four units commercial three stories trying to out 20,000 square foot building. And I was realizing that the area was starting to pop, and you could even see it just coming down the street, the the transition and changes were coming. And so I'm making it into 15 residential units and two commercial units. So I talked a lot about it on the podcast and prior episodes about some of the brain damage and lessons learned. But once it's done, I'm very excited.

Paul:

Oh, you sure? Well, especially in these times, and adding inflation on top of that,

Michael:

Yes, yes. And I think just one of the pieces of intrinsic value that people can keep an eye out for, and it's something I talk about all the time when chatting with with newer investors in the academy is look for under market rents. And I think that's so counterintuitive. But if you can find an asset that's priced upon today's rent, but you know that it's undervalued, all you have to do is buy it, increase the rents, and now the investment should be returning even more than you bought it for.

Paul:

Yeah, that's absolutely true. You just reminded me You are fond is considering investing with a multifamily operator that does a couple things, he goes in to a municipality and he actually negotiates he'll find an asset that's like $200, under market rents, then he'll go negotiate with the municipality and get a huge tax abatement. And so he'll go in, then he'll be able to raise the rents by let's say, 200, over, say, two years, you know, you don't want to do it day one, necessarily. But if you can take your taxes, which is probably most of the time your second largest expense behind the mortgage payment out of the equation, he's able to get like an 80% tax abatement, sometimes in these opportunities zones, or whatever. It's a massive win for investors.

Michael:

Wow, that's incredible. So yeah, I think just to wrap this up with a bow, look for opportunity, where other people might have overlooked. And

Paul:

Exactly, I think it's the way to do it.

Michael:

Yeah, I think too, that there's this semi vicious cycle of on properties, if someone sees it and passes on the opportunity for whatever their reasoning might be, then it sits a little bit longer on the market, another person might come take a look at it not see an opportunity sits a little bit longer. And so by the time you get a look at it, it might have been on the market, 30 6090 days, whatever. And so you think that there must be something wrong with it. And so that's the reason you pass on it. Versus people might just not be looking at it through the right lens. And so I think give every you know, give every property give every opportunity a shot, and try to look at it through a really objective lens.

Paul:

Yeah, it's really true. My son buys land that way, and there's a guys who they're like six or seven land is a very risky thing to invest in. I'm talking about large land tracks, you know, in the mountains, but there's like seven uses for land. Now, you can do solar, you can do cell towers, you can do timber, you can do carbon recapture, and sell those credits to companies. And there's all kinds of things. You can rent to farmers, you can in the Blue Ridge Mountains where I am, you can rent to hunters. I mean, there's so much you can do with one piece of land that might have been overlooked by hundreds of people for years.

Michael:

That's incredible. That's incredible. Yeah. So remove, remove the box, and the opportunities become limitless.

Paul:

Yeah, right.

Michael:

So Paul, I know that you're a pretty big advocate and fight involved in the fight against human trafficking. We'd love to learn a little bit more about that.

Paul:

Michael, you wouldn't believe this man. You can take the record profits, not the average, the record profits of Apple, General Motors, Nike and Starbucks, add those together triple that number. And that's less than the annual revenues generated by human trafficking right now. It is a huge problem. I'd like to believe if I was alive in the 1800s, I'd have been like with William Wilberforce fighting to stop slavery. Or I'd like to believe if I was an adult in the 1960s, I would have been fighting for civil rights.

Well, this is a civil right, it is slavery. And it's happening right under our noses. So my company, Wellings Capital, is putting together a program where everybody who invest with us, we are attempting to free a slave for every new investor that comes in and then we're going to give those opportunity those investors access and opportunities to help that person, you know, get back on their feet, etc. So we're doing this through organizations, we're vetting. I mean, as a company, we've that real estate opportunities, but as a company, we are also now and as individuals, we're trying to also that the very most effective organizations who are getting this work done, and man really excited about being part of this.

Michael:

Wow, that's really exciting. That's really, really exciting. Thank you for the work that you do. I mean, that's really incredible stuff. And so where can people learn more about how to combat the issue? you other than, of course investing with your company, what are some things setting steps that people can can take action on to help combat the issue?

Paul:

Great question. So the first step I would take is I would go on YouTube or anywhere else online and find the movie Nefarious. Nefarious does a great job explaining the problem laying it out there demonstrating, you know, from videos around the world, from Las Vegas to Thailand, what is really happening.

Exodus was put out by an organization that I highly recommend people check out. It's called Exodus Cry. And that's Exoduscry.com, and you should be able to go there and learn all you need to to get started and fighting this.

Michael:

Fantastic. Well, thank you. Thank you for that. That's, that's fantastic.

Paul:

You bet.

Michael:

And so to kind of wrap things up here, I know that you've written several books, and are quite an accomplished speaker, and you're involved with bigger pockets would love if you could share that the titles of your books with everybody listening?

Paul:

Okay, great. I wrote a book on residential real estate in 2008. That's more localized here for Virginia. But I wrote a book called a very humble title about multifamily. I don't know what you think. But it's called the perfect investment. And we found out that the perfect investment isn't necessarily perfect if it's overpriced. And so be careful with that title, watch out for that guy. And then my new book coming out from bigger pockets publishing in October, is going to be called storing up profits, how to capitalize on America's obsession with stuff by investing in self storage.

Michael:

Amazing, I love it. This seems to be an asset class is beginning a lot of attention. In the last couple of years.

Paul:

It really is, you know, self storage and mobile home parks are getting, they're sort of like on the heels of multifamily for getting maybe too much attention. But this book is attempts to just lay it out for a beginner or for somebody who wants to invest in it remotely.

Michael:

Okay, that You took the words right out of my mouth, I was gonna ask is this are these books great for beginners who are looking to learn about the asset class and about how they might be able to invest in it?

Paul:

Yeah, both of the books are designed for people who want you know, it's as a beginning primer for somebody who wants to get into the asset class, but they also double as an opportunity for somebody who wants to find a great operator and invest with them. It's kind of given a baseline of knowledge, to know where and how to invest.

Michael:

Awesome. Well, Paul, this was great, man, I so appreciate you coming on and taking the time to hang out with us. Any final thoughts for investors that are just getting started? And primarily in the single family space?

Paul:

Yeah, I would, you know, so when I heard about single family investing, it was 2000. And I was kind of in this weird time, we had started a nonprofit organization here in Virginia. And we were trying to figure out next steps. And my friend, and I said, you know, what, we've learned a little bit about this, read a lot, you know, read a little bit, read some books, read, you know, done this and that, we need to go take action.

And so what we did is on December 20, 2000, we went to our first home auction on the courthouse steps of Martinsville, Virginia, there was snow, there was ice. And we didn't take any money because we said you know what, we're just not ready yet. We're not ready to jump in. We've got to just be careful. And so we went with no money at all. Well, we went and comped the house first. And we came to the conclusion it was worth $65,000. It looked like it was in perfect shape. We peeked in the windows of the vacant house. It didn't look like it needed anything that we could see.

And so we went to the auction, we said, of course, we didn't know what we were talking about. But we thought man, if this comes out anywhere, like 50,000 or below, it'd be amazing. What came out at like $33,000. And there was nobody else bidding on it. We didn't have any money, so we couldn't take action.

Well, we were able to manipulate. I mean, talk the auctioneer into going to Taco Bell for lunch while we ran into the bank and got a cashier's check. And we actually, we actually bought that house. And we had to give them you know, like $3400 down you know, it was about 10% down. And literally Michael Three weeks later in January, we put it back on the market and had a for sale by owner sign in the yard Monday at 8:30am. And we had a full price buyer for $65,000 by noon, and we were off to the races.

So I'd say this, if you've been studying this a while if you're just looking around kicking the tires, take action, jump in, get involved, because there's literally never been a better time that I know of to capture this incredible delta between inflation and low interest rates.

Michael:

Love that a better time may have been 6000 years ago prior to that study, but a second to that.

Paul:

That's right. Good. Good point.

Michael:

Awesome. Well, Paul, thank you again for coming on. Really appreciate you. Sharing all your knowledge and wisdom with folks really appreciate you combating the fight against human trafficking, both really noble causes. And we look forward to I'm sure we'll chat with you again.

Paul:

All right. Thanks, Michael.

Michael:

Alrighty, everybody, that was our episode a big, big, big, big thank you to Paul. It was a lot of fun, learned a lot. We talked about some really great issues facing kind of humanity as a whole as well as real estate specifically, and we definitely look forward to having him on for future episodes. As always, if you'd like the episode, please feel free to leave us a rating or review wherever it is using your podcast. If you're checking us out on YouTube, hit the like and subscribe button at the bottom of your screen. And we look forward to see you on the next one. Happy investing

Why You Should Buy Investment Property Before Your Primary Aug 11, 2021

The conventional wisdom is that your primary home is one of your greatest assets and a worthy investment. However, many seasoned real estate investors disagree with this and see a primary home as a massive liability. In this episode, we go over the most common reasons many people tell you to buy your primary first and provide some alternate ways of thinking about this question.

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Transcript

Emil:

In today's episode we're going to be talking about a debate that's been raging another debate that's been raging on should you buy your primary home? before you buy an investment property, we're actually going to be talking about why we all bought an investment property before we bought our primaries, all three of us we had the same situation. So we're going to be talking specifically as to why we did that. But first, before we get into what we think those those things are, we're gonna we're gonna talk about why you hear people say you should buy your primary first.

So I'll kick it off a lot of the time. I'm actually I experienced this when I bought my primary residence. When you live in a home, it's it's a much different feel that you learn so much more about your property, right? You learn about the house, like how house works, the systems when things break, how to potentially fix them yourself, how to find contractors, how many, how much those things cost, how much does it cost to snake a toilet or get a tree trimming all these things, which when I bought my investment property before, I didn't really know those things right? I was kind of just relying on my property manager to call around get a get a quote, I had no idea if it was a fair quote or not. But after living in my primary, I've learned a lot of these things that you don't learn when you're renting, right just how a home works and how to fix all these things.

Tom:

I got a quick follow up on that point. Emil, what is harder and what is easier on just kind of the physicality of home ownership?

Emil:

What is harder?

Tom:

Yeah, just in like upkeep or maintenance or whatnot, what is harder and what is easier?

Emil:

Oh, man, I I don't know if it's just where I live. But I have had such a hard time keeping our grass alive. Like I've tried watering it more and more. We have a ton of grass in the backyard. And every summer is really hot in the summer. But like I cannot for the life of me keep this grass alive and like now our entire backyard is dirt and I had no idea like you think you just turn the sprinklers on couple times a week and it stays alive. All these like random things outside to keep your backyard and stuff looking nice. I thought was much easier than it really is.

Tom:

I have a mole superhighway in my yard a mole zebra. I think it's a it's a thoroughfare maybe a highway maybe it's a thoroughfare sorry. Good. That's a great answer. That's

Emil:

Backyards are tough, man.

Michael:

Yeah, you've got to give it electrolytes you got to give it right.

Emil:

I've gone into rabbit holes on YouTube and the internet and there's like so many crazy things you can do to keep your your grass alive and healthy. And the truth is I honestly don't care enough to like get that crazy about I'm like whatever it dies. We'll just reseed it and start fresh like every year like i don't i don't care enough to do all that crazy stuff to maintain it.

Tom:

Zero scape, just zero scape, right? It's like rocks and you know you're in southern rocks.

Emil:

I work for it. I just got a quote to get it all turned into turf, but it's like 1600 square feet. So it becomes very expensive. It's like 910 grand to do all turf. And I don't know how much longer we're going to be at this house. So we're punting on now and I'll just probably pay like 200 bucks to get a receipt in next year or something.

Tom:

Sorry, I totally interrupted and I'll answer the easier part. I'll just give me the answer just to give some closure to my comment. Changing h fac filters. Super easy, super good for your HVAC and just set up maybe like Subscribe and Save on Amazon to put your filters to arrive. So as soon as they show up. Great. installing your HVACis gonna Thank you later. So okay, back back to the conversation.

Michael:

Tom, are you in? Are you an HVAC Filter salesperson?

Tom:

I’m an Amazon effect filter salesperson subscribe and that shows that your door ...

Emil:

That’s smart, that's the way to do it.

Tom:

Yeah, I just answered my question around the easier part. So but but great answer on landscaping that's very hard.

Emil:

Think just like turn the sprinklers on it's all good until magical. Nope.

Alright guys, what else? What are the what are the common reasons people say buy your primary before you buy an investment property?

Tom:

So this is probably the most common one is stop paying rent, you know, pay yourself rent. And it makes a lot of sense when you are paying rent versus paying down a mortgage. In a way, you're kind of just lighting that money on fire. I mean, obviously, you get the benefit of having a place to live. But that money where it's going, you know, when I take out a big of a mortgage for my primary, I'm paying back some debt, like I'm paying back some money that I borrowed to acquire the house versus when I'm paying rent, it's just gone into the into the ether into my landlord's pocket. So that's, you know, probably the most common one is to stop paying rent, pay a mortgage instead.

Emil:

For people who subscribe to this, I highly encourage them to go look at an amortization table to see how much interest you pay up front versus your equity. Like, you know, I think the average that is like people move every five years or something. And so if you look at how much interest you're, you're all front loaded on interest, right? Like towards the back end, you're paying more principal, you go look at the amortization table, and rent is not down the trash man, like you're paying a lot of interest upfront, just like it's rent. So that is, I've never liked that argument personally.

Michael:

It's such a good point. It's because I think a lot of people fall into that trap of, Oh, I'm getting so much equity in my home, or I'm buying so much principle pay down every single month. And then like you said, if you look at the actual numbers, and it's, I mean, doesn't move the needle a whole lot, even in the first seven years.

Tom:

Yeah, I think that's another episode in itself, just talking about looking at time horizon of owning something and being more strategic about what type of loan that you get. So Alright, that's my that's my paying rent. That's that's the argument. And we got a little good little counter argument already just embedded in the episode. Michael, why don't you go on to the next points?

Michael:

Yeah, awesome. So another another, I think big benefit that is pretty tangible, is if you buy your primary first, you can start building equity in that home, which is kind of similar to what you just mentioned, Tom, and that you don't have to pay rent, but all that a lot of the dollars that you pay every month, and what would be rent is now going towards paying down the principal of that loan. And also you should be hopefully things I'm appreciation. And so you're kind of getting to double and the equity growth, one in terms of appreciation, the other in terms of that loan pay down. And then at the end of some time period, you can use that equity, whether it's more of a cash out refi or HELOC to then go invest.

And so some people might argue that owner occupied homes tend to appreciate faster. I'm not so sure I'd agree with that. But I think that that's definitely an argument that can be made that has legs. And so if you go buy a primary, and then you are using planning on building equity, continuing to, to grow over time, and then go use that equity to invest down the road, you can get two birds for the price of one.

Tom:

Awesome

Emil:

as someone who bought a primary two years ago, a little over two years ago, I can attest to that, like, man, the last two years of appreciation, equity growth have been really, really nice in California. So you know, during the right time, that's a very valid argument. Mm hmm.

Tom:

Love it. Alright, transition into why go ahead. Sorry. Sorry. No, I just took your line.

Emil:

Come on a Tom.

Tom:

I love this topic. I get excited.

Michael:

Too excited.

Emil:

I'm telling you, should I let this one but alas, the baton passes to me. So all right, let's just talk about

Michael:

oh, great Olympic reference.

Emil:

Right, dude. All right, let's just talk about why didn't we all invest? Why did we choose to buy investment properties before we bought primaries? So for me, I think the biggest benefit, one of the things that I knew I wanted to do or that I think was the best thing about buying investment property. I think it just trains you to think about investing and getting and making money, treating it like a business generating returns before you go and spend, right.

Like we mentioned earlier, you're paying a lot of interest up front when you buy your primary. You're spending I look at a primary home not as investment but as an expense. And so, for me buying an investment property was about bringing money in making money investing before I went out and you know, upgraded my lifestyle. I think that was a big lesson for me personally, I'm glad I did it.

Tom:

Yeah, it's a it's a beautiful little encapsulated business, you know, with a little little p&l a little money coming in money going out debt, all that good stuff. Love that that kind of education piece of it.

Michael:

Emil, do you feel like that if you had purchased your primary first, you would have been even better prepared to own the investment? because like you said, you had a better understanding of just the physical structure of the business that you were you were buying? Honestly. I think, of course, I was drawn if the big one.

Michael:

Of course I want your honest answer.

Tom:

I want the fake one.

Emil:

No, no, you know, like if I, if I'm very honest, if I, like, I may not have bought an investment home somewhere else had I bought my primary first, you know what I mean? It's almost like ignorance, in a way lets you dive in and learn things. Whereas when you learn about all the little things that can go wrong, and all this stuff, it almost like causes analysis paralysis, you think about it too much instead of jumping in. So honestly, I think if I bought my primary, it may have prevented me because I would have been like, thinking about it. And like, I don't know, I think it just would have prevented me honestly.

Michael:

That's a really great thing to think about it and definitely goes in the pro investment property first section. So good timing with that.

Tom:

Does this investment property have a mole superhighway in their backyard. Yeah.

Emil:

Yeah, how am I going to keep the lawn alive? Dang it. Investment Property doesn't matter.

Michael:

I'm just picturing you guys remember, like ant farms?

Emil:

Oh, yeah. Love those things.

Michael:

Like the little the little metal or plastic?

Tom:

What happened to them? Did someone knock them down or something like?

Emil:

I think we just don't have kids that are that your kids will have those at all. It'll be like a fun blast from the past for us.

Emil:

Alright, Tom, what was yours?

Tom:

My reason why to buy an investment property first versus a primary is the flexibility in living. So I'm looking at an article in The New York Times it's a it talks about chant, challenging the dogma to owning a home, this came out in 2013. And they talked about this inverse relationship between home ownership and unemployment.

And in Europe, it's really interesting that in countries where there is typically a lot higher home ownership, they tend to also have higher unemployment. So what I'm getting at this and I think what the thesis is, by having the ability to kind of move around and not necessarily be tied to a specific property that your own, economically, it opens you up to be able to much more easily move around, right. So wherever there's jobs or whatnot, I mean, I think things have changed for a variety of reasons why it's a little bit easier to do remote, remote stuff. But I was just making throw in a little data into my argument, or a little some study into my argument.

But by owning a rental property before your primary it you don't have to kind of get pinned down with other I don't know needs to like upkeep the house, you're very much still very free to to move where you want to want to be like Michael and drive around in a van all over the country, you can do that, you know, move to Europe, wherever. So the the flexibility that it affords you by still taking advantage of all the tailwinds of real estate even more because you're collecting rent and still, you know, not necessarily be tied down to an area so flexibility and living.

Emil:

Very good one.

Michael:

Yeah. I think that makes a ton of sense in being able to just go take a job, wherever that's better suited to your needs are better suited to your personal life. What have you as opposed to being restricted to Okay, well, where can I commute to from this location?

Tom:

Yep.

Michael:

It makes sense.

Emil:

Alright Michael, wrap us up.

Michael:

Okay, so again, kind of looking at the financial aspect of buying an investment property prior to your primary. I mean, like you said the the investment is making money on a REIT. Either monthly basis or it for me, and I think all of us being casual investors, that's what we're targeting. So every single month, I'm getting a little paycheck. And if you collect enough of these little paychecks, that becomes a fairly sizable paycheck. And so something that I wanted to do was let my investment properties actually pay my mortgage. And so I was trying to invest to own and crew enough of these little paychecks that would eventually pay whatever the monthly mortgage payment was.

And that's just how I thought about investing in owning a primary. And I said, Okay, if I've got a chunk of money, I can either go place it on a primary, or I can go place it on a investment property, which of those two things is going to pay me? And there's only one answer. So I said, Okay, this, this makes sense to do. And the more we get little paychecks, the faster you start to accrue sizable paychecks, and then you can go buy your primary after that.

And the other thing, too, is I think with with kind of the cool programs that we have to purchase primary residences in the US, you can get into properties for 3% 5% 10% versus an investment property, you have to put 20% down. And so there's a bigger, there can sometimes be a larger required cap capital requirement to get into an investment property, but again, then it starts paying you immediately.

Tom:

Dig it.

Emil:

Love it, can I give a bonus one that I just thought of?

Tom:

Yeah.

Emil:

Depending on where you live, we all live in California, expensive place where we want to live, maybe a little bit more expensive than where we want to invest. And so I think it would have been, this is another big reason I bought an investment property first was I had nowhere near enough capital to buy a primary at the time. So an investment property and I bought my first property for less than $90,000 in 2017, you know, I only needed 25k down. So it allowed me to get into the real estate game before I could locally with a primary.

Tom:

Great point, very situational.

Kind of tangentially related so you know, another option is to do both. House hacking is a way that a lot of people get started in real estate investing in that is you know, either buying a single family with extra units or buying a multifamily and living in one and renting out the other units or other rooms or whatever, that's a if depending on you know, your situation, that can be a great way to hit multiple birds with one stone, doing a house hacking, or by buying a house your primary and then you do need to move great turning into a rental property. So those are sort of two ways to thread the needle of kind of doing doing both and I know they're fairly common out there and because it's it makes a lot of sense. can make a lot of sense.

Michael:

One more point just on the house hack to you I think it's so awesome because like you said Tom, it combines a lot of different concepts. And the US is so, makes it so easy for people to own their own primaries on the front end. And then the US government is also very tax friendly to investors, less out to homeowners and so when you can actually do both with owner occupant financing, it just the returns start to become pretty amazing very quickly. So if that's something you're interested in open to definitely look to learn more about it. We could probably do an entire episode just about house hacking. But it's it's a very very powerful mechanism that you can get used to get started.

Tom:

We will do yeah!

Michael:

We will do an entire episode. Yeah.

Emil:

Michael Did you mean more tax friendly to homeowners versus investors are more friendly than

Michael:

No to investor so as an investor every dollar you spend pretty much as a deduction versus as a homeowner when you're when you're receiving your back lawn. That's not a write off.

Emil:

Good point.

Tom:

Love it and you're getting the the best of both worlds with the financing of owner occupied and the tax I'm just repeating what you just said.

Michael:

Moving some words around.

Tom:

When break the episode down we probably just say like 10 words and just shuffled them the entire episode is.

Michael:

Just a stream of consciousness with 10 words.

Emil:

Alright guys, well done. I think we I think we nailed everything we needed to on this topic. Thanks, everyone for watching. And we will check you out on the next episode. Happy investing

Tom:

Happy investing.

Michael:

Happy investing

Here's What You Need to Know About Investing in Tulsa OK Aug 07, 2021

In this episode, Corbin Marcotte from The Investor's Broker, tells us what we should know about investing in the Tulsa OK market. Learn about the particularities of the market, a real estate agent and seasoned investor. We cover return metrics, the different areas and asset classes, who you are competing with, and what makes Tulsa an investor's market.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum and today I'm joined by my co host, Mark Woodling. And we have a very special guest with us today. Corbin Marcotte with the investors broker is going to be talking to us today about all of the things we as investors should be aware of in the Tulsa Oklahoma market. He is one of our Roofstock certified agent partners out in the Tulsa market. And I am very excited to hear what he's going to share with us about the market as a whole and what investors should be keeping their eyes peeled for as we go into a deep dive in the market. So let's get into it.

Hey, Corbin, thanks so much for taking the time to come hang out with market I today. Really appreciate it. Yeah, absolutely. So you're out in Tulsa, Oklahoma. Right.

Corbin:

Correct.

Michael:

And we You and I were chatting a little bit before we started recording here about your background. But for those that weren't able to be part of that conversation, would love to get a little bit about your background, what you do in real estate and kind of what your personal the personal side of real estate for you looks like.

Corbin:

Right? Absolutely. So I kind of have a interesting story. I started out actually bought my first house when I was 16 years old, and started buying stocks when I was 15 bought my first house when I was 16. And started kind of way you did a me and my brother, we did a flip and turned it into a rental. And then we did another flip and turned it into a rental in this in a town outside of Tulsa claremore which is a really great market. It's a little university town. And we went from there, we kind of split up me and him decided we didn't want to do that anymore. So at that point, I got licensed.

So I was 20 years old when I got licensed and started selling real estate at that point went from Coldwell Banker to Keller Williams. And, you know, I built the sales team through the sales side, all the while I was doing some investing, not super aggressively, but I built the new construction, I did an owner finance deal, a couple things here and there, learned a little bit about wholesaling and things like that. And then I just really focused on the brokerage the sales side, and I grew this team, and I just realized I wasn't having the best time, you know, I was doing traditional sales. It was okay, but I just wasn't in it. And the things I got the most excited about, we're always the investment transactions. I liked analyzing the numbers, I liked seeing value add opportunity, I felt like there was more of a value creation in that area.

And so, at that point, I decided, you know, I'm gonna open my own brokerage, I'm going to name it the investors broker, and I'm going to full niche down working with investors here in the Tulsa area and probably expand out over time, you know, we actually have an office in OKC, as well, but primarily here in Tulsa, just selling investment properties. You know, we've sold them all from large to small, you know, little $25,000 houses up to I did a 46 unit apartment complex not long ago.

So handle them all. But I'm an investor myself, you know, I'm actually in the office of my nine unit apartment right now. And so I have some small apartment complexes by downtown. I've done the single family and I've just kind of transitioned myself up. But, you know, single family is such a great, reliable space here in Tulsa. That, uh, it's hard to beat I think.

Michael:

Oh, that's awesome. I just got to know something before we move on. How does this 16 year old buy a house? I mean, now you're making me feel bad. You know, what was I was playing with, you know, Legos and stuff when I was 16 goofy friends.

Corbin:

You know, it was kind of an interesting thing. My parents were regular parents. My dad was a fireman here in Tulsa. My mom managed like some retail stores, things like that. So they were really into the financial area. And when I was young, I just decided that I was kind of rebellious as a kid. I like to skateboard and things like that. And so I always thought about things differently. And I knew that I didn't want to work for other people my whole life. You know, I knew I wanted to kind of do my own thing.

So I was referred some books on business when I was 15 by my brother's friend, and started reading these business books, and they opened my eyes to the world of, you know, you can start your own business, you can be your own boss, and I loved that idea of that freedom that it provided. And so, I started buying stocks, I mowed lawns, I worked for a farmer from the time I was 12. I, my dad was a really hard worker. So I learned from him, you know, working hard as valuable. So I worked for this farmer, I saved up some money, then my dad start a lawn mowing business, I saved up some money doing that. And me and my brothers went in halves, and bought a house there in Claremore for $8,000. and fixed it up ourselves over the course of basically a year. And yeah, that's how it all went down.

Michael:

That's awesome. That's so cool.

Mark:

That's one of the best stories Corbin because it, you got to move out of your parent, you could have moved out of your parents house. So I almost see it as you planning for that right age 18. Right.

Corbin:

So years later, I'd rented that house out for four years or something. Yeah, about four years. And I sold a house and I actually moved into that house and I house hacked it I rented one of the rooms to one of my friends that was going to college there in Claremore. And so he paid my mortgage on it and I lived there for free.

Michael:

Okay, there's so I have so many questions that I want to ask you. But we I know we're here to talk about Tulsa. But the one other follow up question I want to ask you, so you bought it with your brother for eight grand? How much did you put into it? And materials? I know you did all the labor. But then what did it rent for?

Corbin:

Yeah, we did a we did a lot of work on it. I mean, it was extensive. I mean, from the floor to the ceiling, we read it at all. And I actually I worked for a contractor, I got a job off Craigslist working for a contractor. And I learned how to do construction. So I took that knowledge and went and fixed up the house. And he was a good enough guy that he actually helped me on some of the stuff you know, and and let some of his time. Honestly, one of the better contractors I've ever met really good guy helped me with that.

And we put about, I think we were all in about 55,000. And we rented it for $950. I think the first two years and then I think we bumped it up to like 1050 or so in 1050 bucks for the next couple years before we sold it when we sold it for 100,000. So we made about 45 off of it.

Michael:

I love that. All right so we we could do a whole episode just about kind of your personal background. But let's let's dive into Tulsa here. Someone never that's never been to Oklahoma. I would love for you to kind of treat me like a total newbie, because I am. Talk to me a little bit about Tulsa as a whole give us a 10,000 foot level of what's going on in that market. Who are some of the big employers Why are people moving to the market are moving away? What do you what are you seeing in the market?

Corbin:

Right, right, Tulsa? You know, I feel like I was born in the right place at the right time living in Tulsa and being a real estate investor and having The Investors Broker. I mean, it's just an amazing real estate market right now. I've loved it. Because, you know, Tulsa, kind of if you look back 510 years ago, really downtown Tulsa was nothing. Nobody wanted to come to Tulsa. It was just a dead zone.

And they kind of initiated this vision 2020 for Tulsa. Right. And they started in 2008-09 roughly. And what they started doing was revitalizing downtown Tulsa. You know, there's like, over in South Tulsa, there's a mall, and it's Woodland Hills Mall, that kind of used to be the hot area over there. Well, you know, these are 80s 90s 2000s built homes. There's not a lot of opportunity in those. I mean, for turnkey, they can be great. And don't get me wrong, you know, depending on the model, that area has some great property. But the downtown area started getting revitalized. And it took all of these areas that had been really C class property for a long time and started making it you know, B to A class so rapid appreciation.

And Tulsa with the George Kaiser Family Foundation, which if you've looked at Tulsa, it's one of the top things you'll hear about. He donated $256 million and built the gathering place which has been ranked the best us attraction for several years. And it's a free Park that's hundreds of acres. It's amazing. It's like a free amusement park. Almost kids love it. There's ponds. It's right on the river. And so they did this massive development over there. That's just this amazing spot that got us national attention.

And then downtown Tulsa His foundation as well obviously he's an oil guy. You know being from the old oil capital of the world is what Tulsa is known as. He has a foundation that funds for artists to move to Tulsa. And he also has Tulsa remote. So he's been paying people $10,000 to move to Tulsa. If they meet a criteria, most of those are their economic drivers. These are people that do real estate stuff. They're people that own their own businesses. They're driving the economy and the remote workers. And then he's been given him a $10,000 bonus to buy a house in Tulsa.

And so that's been amazing. They just brought in another 1000 people on that program. And that's been great. Tulsa's economy's just been doing wonderful. We just opened one of the it was the largest hiring of people in Tulsa was the Amazon center that just opened up, you know, we got national attention. Tesla was looking at building their cybertruck facility here. We came in second behind Austin. And you know, people are like, Oh, it's too bad. You didn't get it? Well, that got us national attention. So all of these big companies, when they see that Tesla's thinking about moving here, they're going, Okay, why are they thinking about it?

Well, because they realize the cost of land, the cost of the property, the tax rates, everything like that makes it a very attractive place to live, you know, they can find 1000 acres, that's within 25 minutes of downtown Tulsa, which is the cool spot to be, so they want their workers to have a place to go to, like downtown Tulsa, it's attracted a lot of stuff. Some of our largest industries are like aerospace, American Airlines just did a huge expansion out at the airport. And you know, it's like in Tulsa, everybody jokes, everybody knows somebody that works in American Airlines because it's such a large employer here. There's, you know, the energy sector, obviously, there's a lot of oil and gas.

And because we were the oil capital of the world, you know, in the early 1900s, people think that all that's in Tulsa, but really, that's not even the biggest sector and Tulsa aerospace is bigger than the energy sector in Tulsa, which they're also doing some really cool innovations with energy, I think there's going to be some changing from oil and gas to some of the newer technologies. A lot of that's being developed here. Then there's healthcare, there's technology, direct tv is a giant employer here in Tulsa, Bank of Oklahoma. And yeah, those are some of the the major employers here in Tulsa.

It's kind of a broad view. And, you know, we were just in Forbes for being the fourth fastest appreciating real estate market in the US. So another national attention, which is, I mean, prices, it's gone up, you know, 25% in the past year, roughly, and depending on the neighborhood, and everything, of course, but just rapid expansion and also, and rents, rents have gone up to you know, I owning my properties. You know, I've seen a three bed, one bath, you know, last year, in the areas I'm in, I would have thought was, you know, about $900 just rented a three bed, one bath for $1400. Holy smokes. So, getting some dramatic rent increases as well,

Mark:

I was just on a website called Tulsa's future.com. And it's basically the economic development group that just compiles a bunch of data, it said that the cost of living is 12%, below the national average. So if you have rent increases, that are hanging in there, but it's still low cost of living, it's kind of a win win, right? You're bringing in people that you can still afford and not spending their whole paycheck on the rent, but the rent is going up, which is great for you. So compared to the price of housing, that's kind of the win win situation.

Corbin:

Yeah, yeah. It's, it's just so affordable to live here. You know, and even, you know, our cost of transportation, everything around horses, it's just affordable, which is one of the reasons I like it so much. You know, I mean, you can get a house for people can buy a nice house for $150,000, you know, and then they can turn around and rent it out for $1500 bucks. So, you know, there's good rates of return steady appreciation. And, you know, one of my favorite books, the ABCs of Real Estate Investing in there, he talks about, you know, talk to the Chamber of Commerce, talk to the people in the city. And that's where you'll hear, should I invest in this market?

You talk to the people at the Chamber of Commerce, and they're stoked on what's happening in Tulsa. I mean, they're thrilled, and it's because of all these great things, all these great partnerships. And downtown's became, you know, I moved downtown because it's became an amazing entertainment area. every night of the week. There's things to do. There's wonderful restaurants, you know, and in 2020 We were set to open 25 restaurants, we're coming just to the downtown Tulsa area. So tons of new places opening up, of course, 2020 kind of threw a wrench in those plans, but many of them still opened.

And also, that's another, you know, economic factor is the way the government everything's handled the Coronavirus and Tulsa, you know, our eviction processes has stayed fairly easy. If you do have trouble. You know, I bought a complex that had existing problem tenants in it. And, you know, I was able to get those people out in 30 days. And, you know, it cost me about $200, to get them out. Whereas, you know, if you're looking at some of these coastal states, you're paying 1000s of dollars, that takes you a year to get somebody out of a property, you're losing all that rent, you know, here, it's like, you might miss out on a month worth of rent, if somebody starts, you know, not being a great tenant. And so the process for that's very easy, it's a landlord friendly state. And, you know, we didn't close down our restaurants, things like that didn't close down in Tulsa. And so our economy kept going.

Michael:

So Corbin you kind of touched on it a little bit already, but curious to dig in a little bit deeper. So for investors that are looking for cash flowing properties, I mean, what did what are the different kind of neighborhoods or sub markets within Tulsa that people should be aware of? And then what is your average? I'm doing air quotes for anyone that watching this on YouTube. What's the average purchase price that someone could expect for called a three two? Because that's kind of our, you know,Colt 45? And then what would the rent look like in some of those different sub markets?

Corbin:

Right, so there's a West Tulsa is a very Tulsa's grid is set up very efficiently. So when you go to learn Tulsa, it's a very easy city to learn. You know, we have downtown and then there's East Tulsa, West Tulsa, Midtown, South Tulsa.

Michael:

Easy enough,

Corbin:

That's pretty much the break up. Yep, very easy. And was Tulsa. There's a lot more manufacturing on the west side. So it's a lot more blue collar style. There's tons of manufacturing plants on the west side actually live just west of downtown. So I'm kind of over in that area. And, you know, you're going to look at, you know, purchase prices over there for three, two, or maybe around 120. It's maybe you know, the blue color style, that's going to be a little lower price point. And those are written for probably 1500 1400 1500 bucks a month on that side of town, that's West.

And then East Tulsa, there's east of Tulsa, there's a chunk of other kind of manufacturing stuff. There's a lot of construction workforce over there, things like that. And so that area, it's kind of similar, maybe a little higher price point, the houses tend to be a little bigger over there. So the houses in West also a lot of your average house, you know, is around 1000 to 1200 square foot for a three bed, two bath. On the east side. It's more like, you know, 1500 to 1800 square foot for their three bed, two bath, larger houses. And those, you know, they're selling for around 150 for three, two, and they're written out for 1500 1600 dollars a month.

Midtown is kind of a higher price point. Everybody, you know, we we make fun of the Midtown people because they're all fancy, you know. It's a it's a nice neighborhood. That's where you get close to that gathering place Park, I mentioned Brooksides over there. Really nice area, there's some really high end stuff in that area, they call the old money part of Tulsa. And there's some really big houses but you know, you can find houses, there's, you're getting like a three bed two bath, they're around 210 for a small three bed, two bath in that area. And their rents are going to be higher, they're going to be closer to 1800 a month or so. So you're not getting quite the return. But really great area, really great appreciation and you know, they just they never have any trouble selling or renting out. The high end. They're more A class, I would say the Midtown area is.

South Tulsa. That's new money. And so that's the you know, a lot of larger houses. That's like the Jinx area, the South tall so the Bigsby area. Lot. That's where a lot of new construction pushed out and the hierin in South Tulsa. So you know, it's hard to find a house for under 250 in that area. And they're bringing rents, you know, 2200 bucks a month, things like that. You know, Jinx is the best rated school district around that's in the south Hall. The area. So that area is just really nice and a lot of high end restaurants and nice things like that over in that area.

Michael:

Right on.

Mark:

So Michael, I want to ask a quick question to Corbin. So you know, so the listeners at home really understand who you are, you're a part of the certified agent network, you know, so you're basically one of our partners, but you're the one that identifies the properties that go on to roof stock, that are in the roof stock select program. So maybe, you know, if they go there today, they can see probably about 20 properties that are in the Tulsa market, but you're the one that handpicked them. So maybe give a little idea to the listeners of you know, what you are looking at when you were identifying some of those properties, because there's quite a bit of variety, you know, north, south, east and west that you picked out?

Corbin:

Yeah, yeah, yeah, yeah, we, you know, I like to appeal to everybody, and everybody has different choices and what they're looking at, you know, some people aren't very comfortable with an older house, some people are very comfortable with an older house. And, you know, and like, there's no old houses and South Tulsa. So just picking properties based on for the class of property, we got to meet a criteria of a return on investment, you know, and the nicer the property, obviously, we can accept a little lower return, because there's not as much cap ex, it's gonna be a nicer property, you know, you may be paying a little more in taxes on those properties, but trying to set it up so that, you know, there's a diverse group.

And if you're comfortable with a little B class, we don't really do like, you know, what I would call like, C, or lower the lower end, you know, we really try and stay, maybe the lowest we do is like C plus, low B, and then up from there. And, you know, give that spectrum from where you can get a higher return, but the property may be a little older, you know, it may need a water tank, there may be things like that down the road that are gonna happen sooner than buying these nicer, higher end homes, and trying to make sure we get that that right rate of return for the investors.

Michael:

That's great.

Mark:

Awesome.

Michael:

And in that same vein, Corbin, what do property taxes look like in Tulsa, and maybe some of the if there's different counties that make up Tulsa. And then a second part of that is, what expenses might be unique to Tulsa, that investors should be aware of,

Corbin:

You know, it's funny, I talk to people from out of state all the time, obviously, you know, and I even I think when I was first talking to mark, I was telling him about our taxes here. You know, our taxes are very affordable compared to most places. You know, when I talk to people from Dallas, or, you know, anywhere in that area, their taxes are almost double or triple what we're paying here, you know, for a 15 $150,000 house, I kind of look at like $1500, roughly, okay, for taxes. Yeah, right. in that range, I kind of base off like a 1% rule type thing. And it's kind of roughly what to expect.

Michael:

Okay, that makes the number that makes the math really easy. And then do you know, is there any kind of reassessment or change in the property taxes year over year?

Corbin:

Yeah, I believe that in Tulsa, the most they can bump is 2% a year. Now, whenever a property transfers, ownership, obviously, they're going to reassess based on the value that was purchased. So you know, depending on the last time that property was sold, if it was sold 20 years ago, the taxes are probably gonna bump fairly, fairly well on that purchase. Now, you know, if it was sold two years ago, it's not going to be a very much difference in the tax rate,

Michael:

That's great to know. So for everybody listening, this is a super critical point, because I know a lot of investors and I talked to a lot of investors and they'll say, Well, I go on Zillow, and I look at the historic tax that's been paid over the last couple of years. And to your point, exactly, if that house was purchased 1520 years ago, the tax rates going to be based on that purchase price. So we need to bring that forward into today's dollars at today's purchase price to get an understanding of what your future taxes are going to be so great, great point. Thanks for clarifying.

Corbin:

Right and there's just to hit on the county's most of Tulsa is Tulsa County. But if you happen to step to some of these other areas, you know, one of the I mean, we post in the suburbs of Tulsa too, because everywhere is the 25 minute drive in Tulsa, you know, we don't have any traffic. It's like, I can go to Claremore in 25 minutes, and that's a great rental market. You know, we just sold one on Roofstock in Sapulpa, which is just right outside Tulsa, great rental market, and good area, and she really got a stellar house actually I was like, Oh, this place is nice. It was freshly remodeled.

And but those counties is like a Rogers County, Wagner county Osage County, they're going to have cheaper taxes than Tulsa. And so your, your percentage wise is is quite a bit less my properties in Osage County. And, and they haven't realized how much work I've done to it. So I'm on the low end. But you know, I think they have me assessed at like, 100,000. And, you know, I think I paid like $600 a year in taxes. $550 a year in taxes is what I paid last year. So some of those, some of those outlying counties are very cheap in taxes.

Michael:

Okay. Also good to know,

Mark:

In addition to some of those taxes real quick, what are the common things that you see on the inspection report that come up that maybe is a little bit more customary for your local market? That shouldn't scare buyers? But you know, they're gonna see it in? It's gonna, it's gonna be something that's kind of par for the course.

Mark:

Yeah, yeah. Termites is one. There's an Oklahoma we have very, and I'm not an exterminator. But just kind of paraphrasing. What I've been told by exterminators is in Oklahoma, we have very slow moving termites. And so but they're everywhere. There's no avoiding termites in Oklahoma, they're everywhere, they give a number on how many are per square how many colonies per square mile in Oklahoma. So it's not if it's, when are termites going to hit your property, but because they're so slow moving, as long as you're taking care of treatment on a regular basis, it's almost never going to affect you.

So as long as you get it treated, have a termite inspection, I definitely recommend a termite inspection and have it treated, you know, once a year, they'll come out, they'll do a spray, and that'll take care of that problem. And kind of protect you now, you know, I have seen properties where nobody did anything for 100 years, and they're eaten up, you know, but, I mean, this, this building, I'm in my nine unit, I had termite damage in here. And this building was built in 1920. So it's 100 years old.

And you know, we were able to rip out replace the wood rot, and it wasn't too extensive because, and it's never been treated, they just overtime, they just kind of move on to the next thing. So you know, that's definitely something to watch for.

Roofs, we get a lot of hail here in the Tulsa area. So you know, making sure that the roofs checked out checking for hail damage. Now, that's an opportunity where if there's hail damage, likely the seller only has to pay their deductible. So you might be able to negotiate for a new roof. If there's hail damage, or wind damage there is when, we're talking about the tornadoes beforehand. And you know, yeah, everybody from out of states like tornadoes, it's gonna be crazy, you know, the movie Twister. You know, it's really, it's really, I mean, so rare that a property gets damaged by a tornado. But we do get a chunk of wind damage, primarily that's on roofs. And so just making sure that the the shingles, you know, it's pretty apparent, often they'll curl, things like that, that's another Insurance Claim set up. So making sure that you have the proper insurance, when you buy the property, that's going to take care of that roof. With a fair deductible is going to be important.

You know, I would say everything else is pretty customary, you know, little leaky faucets and little things here and there that are wrong. On the one we just did. The front porch posts were old. One thing to think about too, in Oklahoma is almost nobody puts gutters on houses. And it, it's beyond me, it drives me crazy. Every time I buy a property, I immediately put gutters on the place. Because you know, that's going to be the number one cause the foundation issues is poor drainage. And so getting that water away from the house is very important. You know, a handful of them do, but I'm always watching out for gutters. And to make sure I'm getting that water away from the house.

Michael:

Maybe Maybe it's the foundation contractors that are in cahoots with the Home Builders that say all right, well pay not to put gutters on it because we'll be in business later.

Corbin:

Right? Yeah, yeah, it's crazy. I just, I've and I've had so many people, you know, buy here and there like there's no gutters on anything, but they're very affordable. You know, I mean, I just did a house with a walkout basement. And it was about 1200 square foot upstairs and another chunk downstairs, and two storey on the backside and cost me $950 to put gutters on it. So that can be a good investment for sure.

Michael:

That's awesome. That's awesome.

Mark:

I was gonna ask a little bit about your competition because you know, we can get into the real estate deals all day. And you know, the properties that you see on roof stock or either exclusive listings, but the ones that you're identifying are the ones on MLS. So how competitive of a market? Is it? How much inventory is on the market? You know, and what's what's a realistic expectation for a buyer that wants to come in and make an offer and say, Hey, what's what's gonna be an offer that can compete? You know, so what do buyers need to know there?

Corbin:

Yeah, yeah, you know, like most everywhere else, right now, it's challenging. And, you know, we submit a lot of offers, and don't get a ton accepted, you know, you got to submit several offers before you're going to get one accepted. Because people are just, there's a lot of migration happening to Tulsa. And so there's a lot of people that have sold homes and states with much higher real estate prices, and then they come here and buy houses in cash. And they can't believe how cheap it is for How nice of a house it is. And so they'll pay, you know, 20,000 over asking price.

So that can be challenging. And, you know, a lot of what I try and target, though, are not those properties, I'm trying to target properties that, you know, maybe are more attractive as rental properties than they are for, you know, a personal residence, like one of those opportunities can be in Oklahoma, everybody drives big trucks and stuff like that, you know, so garages are really important, we're like the Do It Yourself state, you know, everybody changes their own oil and build stuff and everything like that. So that's like, everybody wants a garage, you know, well, if you have a rental property, almost, I would say most of the rental properties don't have garages.

So, you know, a house without a garage, you're going to be more likely to get an offer accepted, because you're not competing against the people that are buying to live there, and they're willing to pay more, whereas we're looking at return on investment, you know, really, you're not going to get much more of a return for having a garage. So if anything in almost offsets, because you pay more, and you don't quite get that same bump.

So that's one of the opportunities is locating those properties that, you know, you're not as competitive against, but, you know, full price offers are to be expected, even on the properties that, you know, have those little nuances that maybe make them better rental properties. And, you know, whenever I get an offer, I'll look it over, I'll look at the property, I'll talk to the other agent, and then I'll reach out, I'll send an email to the buyer, I might give them a call, depending on how Hurry hurry it is. And I'll tell them, here's what I'm thinking, you know, I see you submitted this offer. But I talked to the agent. And he says there's five other offers coming in, you know, if you really want this house, if your numbers can make sense, I might suggest we you know, we make a higher offer. And of course, it's up to the client at that point what they want to do, but I want to empower them with that information. So they can realize, okay.

You know, and you never know, you never know, that's one of the challenges of the way the market is right now you you don't know somebody is going to offer 20,000 over, all you can do is run your numbers and make your best offer, you know, and then a train some of these properties I upload, maybe they've been on for 30 days or so, you know, we are I feel like one of the rare markets where some of the properties, maybe they were rented out and they just got a tenant out some different things like that, where some of these properties have set on the market for longer, or maybe they had it listed too high. And they finally started doing some price reduction. So it's been on the market for 30 days, 60 days, those properties, we can offer a little less than asking price a lot of the time and still win those deals. It's all about me filling out how many other people are looking at this right now, you know, what do we need to do to make sure we get the best deal possible?

Mark:

So just setting a realistic expectation. And I know list prices are you know, sometimes they're high, sometimes they're low. But you know, when looking at a property, what's the average percentage of list price that offers are getting accepted? Add that? Yeah, just give a little context to the buyers

Corbin:

About the average is about 105% in the current market 105% of list price to sales price.

Michael:

Yeah. Great to know. Interesting.

Mark:

Yeah, we hear that across a lot of the markets that we're in right now. So in my last question is do you have ibuyers? Do you have institutional buyers in the area? Or are you really up against the the mom and pop investors and then owner occupants,

Corbin:

You know, so we're, we're starting to be looked at and I've had some conversations, you know, obviously I'm one of the first people they talk to when they see the name of the brokerage and so I'm starting to talk to some of those larger institutions. But really, Tulsa hasn't met their metric yet. You know, and that's a million people basically their metric. And we haven't surpassed that. So a lot of those larger places are not looking at Tulsa. So a lot of it's competing against, you know, smaller time investors, people without that much leverage, but they're, they're starting to move in slowly, you know, and I think now is a good time for Tulsa. Because five years from now, it's going to be hit by all those people, you know, and that I've already seen it happen, you know, the out of state investors, because of the solid properties and good deals. They're moving in, they're moving money into Tulsa. And it's driving up prices, you know, and once it hits the level where the institutional investors can come in, they're gonna make another big push, you know, we're gonna hit a whole new level of, you know, the real estate market here. So I really think now's a good time, because it's going to be drove up once that does happen in full force.

Mark:

And that's one of the reasons why we called you to bring these properties on from the MLS. And knowing you know, your your brokerage is what caught my eye too. So I'll be the first to say I fell for it. So good job. But you're backing it up with with his expertise. But yeah, I was just studying again, that Tulsa’s future website, they said that Tulsa MSA, comprises of seven counties, and it's an aggregate population of 995,000 people. So right, when it hits that million mark, or wherever the next census update is, get ready. It's gonna take off.

Michael:

To the moon.

Corbin:

Yeah, yeah, we're right below it. And so I think that's kind of got some of them starting to go away. They're close enough, you know, but a chunk of them, you know, they just have this system, and it doesn't meet that number. So they're not there yet. But it's, I mean, there's a lot happening

Mark:

To me, if there's no i buyers, and there's less institutional capital, this is our chance to bring, you know, out of state buyers in without having that crazy amount of competition, like you would have in Dallas and Houston and Charlotte, and Atlanta, some of those bigger markets. So yeah, I think this is a sweet spot for sure.

Corbin:

Yeah. And one more little more positive I see of Tulsa is, you know, historically, because we're a very steady location. You know, there's not we don't have these crazy fluctuations, you know, historically, I'm not saying that's not possible. But, you know, we have not had these crazy market fluctuations, you know, we're just kind of slow and steady, and just more people move in, more businesses open up. It's real. It's a real study market compared to a lot of places in the US.

Michael:

And I'm curious Corbin, does The Investors Broker also have property management connections or property management arm of the business?

Corbin:

Right? I have, I work with property managers, I did the property management, and I pulled back to just do it for myself. And so I leave that to the pros. You know, it's one of those businesses that what I found is you almost want somebody who has a large property management business, because they've earned the level of efficiency it takes and, and to run a large property management business, you have to be efficient, because their margins aren't huge. It's a it's a wild game to be in.

So, you know, Key Renters one of them. I work with Renters Place, you know, I think the most recent one was like Ascension. And so there's some really good property managers here in the Tulsa area, that I would definitely recommend people to.

Michael:

Fantastic, fantastic.

Corbin:

You know, when if people need contacts for insurance agents, I mean, I even you know, I have a gutter guy, I got some contacts like that. So if somebody needs something, I'm more than willing to, you know, refer them and let them make their own decision.

Michael:

Great. Yeah, I think that's one of the biggest hurdles that folks are trying to overcome being out of state or remote investors is, yeah, I love the Tulsa market. It sounds great, but I don't know anybody there. So reaching out to someone like yourself or utilizing some Roofstock’s contacts, hopefully can overcome that pretty easily for folks.

Mark:

What are the expectations that you have as an agent that you really need buyers to be prepared for, you know, what, what is it that's going to help them say I'm ready to invest in Tulsa or I'm ready to start purchasing, you know, any properties through you on roof stock.

Corbin:

You know, I've had a really good experience and working with everyone from Roofstock because of your educational piece. I think people understand. urgency is going to be a big deal. You know, once you get that over, when I send the paperwork, we got to get it signed, we got to get it submitted because there's these offer deadlines or things like that. And so just being quick about handling everything, you know, earnest money It's going to be wire transferred from out of state buyers. So, you know, making sure that's done within the 48 hour deadline is really one of the the main things of ensuring happens. But other than that, you know, just just being quick on the draw.

And, you know, have the conversation, if you have questions, if you if you're wondering, you know, what, should I bump this offer up? Where am I at, please send an email. And I'll let you know, you know exactly what my thoughts are on it.

Michael:

Awesome.

Mark:

That's awesome. And you have a nother employee that's coming on board that's going to be working with you on the roof stock account named Garrett Ayres, is that correct?

Corbin:

Right. Yeah, yeah, Garretr, it's been a longtime friend, me and him had a real estate team back in the day at Keller Williams, when we were there. He's a smart guy. He loves the investment space. And he's been doing some traditional sales, but he's to the point where he's ready to make the jump and go all on the investment side.

So he's actually in the moving over process right now. And he has, you know, much more availability of time and things like that, and is just very diligent, and very ethical solid guy that I could trust anything with. So I think he's gonna be a really, really great added benefit. He actually comes from the tech industry. So locating deals is almost a good niche for him, you know, he's able to find those nuances. And he's great on really digging in on the computer. So I think it's going to be really great to have him on.

Michael:

Oh, that's good to hear. Very excited to see where are you going, Garretr? Go. And just the last thing for our listeners, Corbin if folks want to reach out to you have additional questions, what's the best way for them to get in contact with you?

Corbin:

Yeah, probably my email address, which is corban Corbin@tib.com like the investors broker realty.com

Michael:

Awesome. Corbin. Thank you again for taking the time to hang out with Mark and I and answer all of our questions. We're getting giddy over here. So I gotta let you go. But we look forward to stay in touch.

MarkL

Awesome. Corbin. Hey, thanks for joining us.

Corbin:

Cool. Thanks so much.

Michael:

Awesome, everybody. That was our show. A big big, big thank you to Corbin. A lot of fun. I know that I learned a ton about the Tulsa market. We definitely doing some deeper dives into the market as a whole and having some follow up conversations with Corbin and his team. As always, if you liked the episode, please feel free to leave us a rating or review wherever it is you listen to the podcast. And if you're checking us out on YouTube, feel free to like and subscribe. Or leave us a comment on any kind of episode that you want to hear in the future. Happy investing

The Art & Science of Choosing A Real Estate Market-Revisited Aug 03, 2021

Picking a new real estate market is a huge challenge when you are starting out. Learning about the returns, the economic growth, the geographic attributes, risks, and all that must be considered can be overwhelming. In this episode, we share what we find to be the most important things to look at and critical questions to ask yourself when settling on where you will put your money to work.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Emil;

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. My name is Emil Shour. And as always, I'm joined by

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today's episode is going to be a little bit unique we're going to be talking about it's actually a follow up episode. So if you scroll way back in the archives, we did an episode called the art and science of choosing a real estate market. That was Episode 21. And today, we're going to be doing a little bit of a follow up talking about some additional things we've learned and thought of, in thinking about choosing a market that we think are super important, especially for new investors, who are still in that phase of selecting a market. So let's dive right into this one.

Alright, guys, so all I'll actually kick this one off, I am going to be talking about property taxes, and specifically choosing a market where the property taxes are reassessed based on market value. So I'll bring up an example from my own portfolio. And then another example, I've heard through our good friend Michael Zuber.

So I invested in Indianapolis in 2017. And when I invested I did not know this, I learned this the hard way. But Indianapolis actually reassessed his property value every other year, and they base their property tax on that. So every other year, they look at the market value of your home, whether it's gone up or down, and they say, Okay, here's your new market value. And let's just say property tax is 2%. We're charging you 2% on that. So your taxes have gone up or down.

And since 2017, it's only gone up, which is great. From a profit standpoint, if I were to go to sell, it was great from a cash out refi perspective, which I've mentioned in the past. But it also, you know, when rents don't rise as quickly as your values do, and your property tax goes up, your cash flows getting potentially crunched more and more each year when that thing gets reassessed.

So this is something to be mindful of right? When you're looking at a market call the county assessor talk to investors who are in that market and learn what a win is, obviously, you want to know, what is the property tax rate, but be how often are property values reassessed. So how often is your property tax going to change? If at all, I don't think every state does this, it may even be on a city level. But just something to find out.

The other example I was mentioning, so Michael Zuber, I was chatting with him. And he mentioned a friend of his who invested somewhere about a decade ago, and that market has exploded in growth. I'm sure you all can imagine, you know, which markets have have gone crazy over the last 10 years. So his friend is in one bought a decade ago, was cash flowing about a decade ago. But now with this, this is a state where property taxes are super high already. And values have gone up like crazy and rents haven't kept up anywhere close to the pace of value increases.

So now, this investors basically has a portfolio where the values have gone up a ton on paper, he's doing really well. But his cash flow has basically been wiped away. And so he's he's at a point where he's thinking, who do I need to sell to go fund cash flow market? Or do I kind of sit and wait for the market rent to catch up? So point here, just make sure you're informed? Make sure you know how often property taxes are going to reset. And go into you know, choosing a market eyes wide open knowing, you know, it's not going to be fixed forever.

Tom:

I feel for that guy that is cashflow got hit but like I don't know. I mean, he's appreciated so much. I'm not losing any sleep for Yeah, Mr. Right? Yeah,

Emil:

But let's say you're a cash flow investor, you're trying to supplement your income and like, let's, I'm just gonna use easy math. Let's say you're at $5,000 a month in, in cash flow from your, from your portfolio there. And then your property taxes change, things change. And now you're at like, let's call it 1000. Right? And maybe you semi-retire or something based on that previous cash flow. So it's like, it could, you know, change your position. Or like, I don't know that that's crazy to think about, like if you were like semi retired because you're like, Oh, I have a cash flowing portfolio and now I don't really I don't know, that's kind of crazy.

Tom:

Darn I just like, you know, doubled by equity or something. I hear you, I hear you. But like, you know, all those are happy, happy person problems.

Michael:

No, most definitely, most definitely. So I mean, I'm so glad you brought this up. It's something I talk about in the Roofstock Academy all the time about the importance of calling the county assessor, just understanding how you know how property taxes are calculated. And if you're a brand new investor listening to this, you're probably thinking, Oh, my god, there's just this is like another thing I need to add to my checklist of things to be thinking about. And you could easily be falling into the analysis, paralysis, coma, with just adding more and more to that list.

So something we were chatting about before the episode was my my prior career, I worked as a professional fire protection engineer, we would often look at meet with clients and have all of these recommendations to share with them, like just laundry laundry list of things that they needed to do differently or better. And what we talked about is internally is just getting the big rocks, right, just get the really big stuff, right, and the rest of it will probably fall into place. Okay. And I would categorize this as a big rock.

When you're doing an evaluation or property or analysis on a property, you're looking at your expenses, property taxes can often be one of the biggest and far and away one of the biggest. And so we need to focus on the really big things. Again, property taxes being one of them. So what are they today, but what also do they have the potential to become in the future. And so, again, not intending to scare anybody not intending to contribute to analysis paralysis, but I think it is so important to highlight that this is a this is a big deal. It's a big issue until you want to get it right. And as an investor, the buck stops with you.

So you need to be capable, able and willing to go get the answers and the proper answers. So again, to drive the point home to beat up already pulled through. I don't know if that's, that's a phrase, but we'll go with it. Because dead dogs just sound too, too sad. It's something that you want to go spend time energy and effort figuring out.

Tom:

One thing I love about this talking with you guys about this sharing on the podcast is sharing mistakes that we've made in the past. And one of the mistakes that I've made in the past is going and looking up what the property taxes are and not realizing that there's a big difference between owner occupied taxes versus investor taxes. So many states areas, actually the counties offer what they call a homeowner exemption. My saying that right, Michael, I think I am where it's, you know, the tax might be cut in half.

Michael:

Yeah, they call it a homeowner exemption or a homestead.

Tom:

Homestead That sounds very, like you're, you know, planting a flag into the ground and claiming a lot. So,

Michael:

This is my hectare.

Tom:

Yeah, you know, the last, the last thing I'll plug on taxes is if you currently own properties, and are looking to see if you can push those property taxes values down within Stessa has some partnerships. I think we'll we'll name them at the end of the episode as they don't have it in front of me right now. Where some partners who can help if there's opportunity to lower your property taxes, it's a company that will help you with that appeal process. So we'll mention that in the ending credits of the episode.

Emil:

Nice. Tom, you want to actually take the mic and talk about your other tidbit in choosing a market?

Tom:

Yeah, my last tidbit and choosing a market. So within each market, there is a different type of return profile. Right, some smaller markets there tend to going to have higher cap rates and higher cash flow, and more competitive markets are going to have less cash flow available. And what we've seen where a ton of appreciation has happened in is in those markets where the cashflow is smaller, be it you know, Atlanta's your Dallas's your, these these bigger, Florida's these bigger markets.

And my you know, the longer that I'm doing this, the more I kind of realized as a longer term investor, you know, with values, there's going to be ups and downs, but over the long horizon that it tends to go up into the right. So what my tidbit is, is if you are in a position an acquisition cycle, I would I have had been putting more stock on, you know, market fundamentals that are bigger markets and trading that for a little bit less cash flow.

Now I'm not saying I want to create in Michaels Zubers word alligators where they're negative cash flow, but there's a lot of smart institutional money going into these properties where the cash flow is a little bit thinner. And if I'm, you know, at the point where I have some capital to deploy, I'm okay Putting a little more weight on the market fundamentals even though the cash flow might be a little bit leaner. I know oftentimes, as a newer investor, you could, you know, you see these these high cash flows in these markets that are like really little. But man, there's a real boon to be had for over time, the appreciation going going up, which tends to happen a little bit faster in markets that are that are larger.

Michael:

That's a great point.

Tom:

A little bit long winded. But I think, at a super high level, it's, you know, of that spectrum of appreciation versus cash flow, if you're holding for a long time. There, the returns on the appreciation are very real.

Michael:

Yeah, I think it's such a great point. And also, to just piggyback off that, I think so many newer investors, myself included, when I was first getting started, put so much emphasis on the cash flow, and so much focus on the cash flow, that if you're targeting $150 a month cash flow, and you're ending up at your run your numbers at 120. You might say, No, it's not worth it. But at the end of the day, I mean, that's $360 a year that you're giving up to get into potentially a great deal that will appreciate. And as long as that appreciates more than $360 a year, that was probably the right call for the long term growth model, and the growth mindset.

So again, I would urge people not to get so locked in to a specific dollar amount, especially if it's your first deal. Of course, it's important and like he's mentioned, Tom, don't go buy alligators. Don't go buy bad deals, just for the sake of getting deals done, go buy good deals, but be a little bit flexible with yourself. Just with regard to your, your experience in the market, as well as kind of where we are in the market cycle. things just aren't the same as they were two years ago. So don't bring two year old expectations to today's market, because you're going to be severely disappointed.

Emil:

Solid, alight Michael wrap us up. What's your tidbit?

Michael:

So my tidbit is, and I talked about it all the time in the academy, there's two ways that I really like approaching finding a market or finding a deal. And one is you can let the deal dictate the market, or the others, you can let the market dictate the deal. And so if you're gonna let the deal dictate the market, this is what I did when I first started investing because I was traveling all over the country for my prior job. And I said, Oh, wherever the good deals are, I'll go by I don't care where it is, geographically, if the numbers make sense, amen. And it just got to spread out, it was a pain in the butt. So later on in my career, I said, Okay, well, I'm gonna let the market dictate the deal. And one of those two ways is going to feel easier. And kind of what I mean by that is, if we're going to deal to shape the market, again, that's going to find where the numbers work, and then zooming out and saying, What is this market? Is this acceptable to me, based on my investment thesis, my investment criteria.

The other way is, hey, let's go do market research. First, let's go find a market that I'm really interested in, and then dive deeper and determining if there are any properties locally, that meet my criteria, both ways are going to be iterative, in that you're going to come up empty handed both times. So you're gonna go find awesome deals with killer numbers that are in markets that you want nothing to do with. And conversely, you're gonna find these amazing markets. And as you dive deeper, you're gonna find that, you know, there's no deals to be had there.

If we look kind of at the market level, San Francisco is a great a great example of that. So you see, there's a diverse economy, there's a lot of stuff going on there, given the population change, we're going to ignore for just a minute. But from a high level, you could think that, yeah, this is a very strong, robust, economically robust market. And then to come to find out that your average sales, a million dollars in rent is 4500. So those numbers really don't pan out from a cash flow perspective.

So again, either way, your approach is going to be iterative, but one of those two is probably going to feel easier. You're either someone that really likes the high level macro stuff, and you like learning about markets. Or maybe you're more numbers focused. And you want to get into the nitty gritty details and go look at deals first, and then zoom out to the macro to learn about those markets.

So just as a tip to get the ball rolling, pick three or four markets if you're starting from the market, or pick three or four deals in different markets, and just start to go analyze those and learn about those. And my guess is you'll hopefully start to find out more than you would expect. And it helps prevent analysis paralysis, and that you can just start learning and start making informed decisions by doing these analyses.

Tom:

Circling back to a meals point, this ties kind of well into it in getting spread out on too many markets. Like if you're targeting a ton of different markets, that's a ton of different sort of tax implications to or tax rates, whatnot, because they can be kind of unique by market and sub market. So a good a good podcast ties back to some earlier themes in the episode and I'm going to do that right there.

Michael:

Bow tie.

Emil:

So do you guys think it's more important to choose the right market? Or is it choosing a market and getting to know it? Well, networking, is it more about what you do in the market, or is it about choosing the right market?

Tom:

I think what you're saying is like, Is it better to spend a lot of getting the time to understand a very specific market? or spend a lot of time and just analyzing many different markets to find that perfect one. And I think where you're kind of alluding to is like, risks around paralysis by analysis, versus kind of getting in there and getting your, you know, proverbial hands dirty or whatnot. Am I picking that up? right?

Emil:

Exactly. I'm saying like, should you spend hundreds of hours analyzing and dissecting and saying, Okay, this market has all the right factors, employment growth, supply, constraints, yada, whatever, right? If you're choosing a remote market, or is it like, Alright, here's my shortlist of three. Here's one I like, I'm just gonna go and learn and get really good at this market know what a good deal looks like? Learn all, you know, talk to different PMS, talk to different agents, talk to different investors there and just like know it really well and become a good investor in that market.

Tom:

The latter. I think, I like that kind of question. I think you're kind of like teeing up the, the direction is, it's I think, as an investor, it's easy to get lost in analysis, by paralysis by analysis. And there's a lot of people that have a lot of success and a lot of different markets. So you know, in the upfront, top of the funnel, right, I would whittle that down fairly quickly. And then spend the majority of your time understanding, you know, what's what's going on to that market like monitoring sold properties in the same profile, that you're looking for looking at new listings, in the same profile that you are looking for. So I would say the latter for sure would be my input,

Michael:

I would agree, I think that your time is so much better spent getting your hands dirty, because I would argue that there will always be a better market. Like, if we're looking at market specifics, there will always be a better market, and I can almost guarantee you, there will always be a better deal. And so if you get really hung up and caught up on getting the perfect market in a perfect deal, you'll probably never do anything. And I would also argue that you can likely make lemonade out of lemons.

So even if you bought in what would be considered a quote unquote, bad market, if you've got a great team in place, and the numbers make sense, and you can still make it work. And that's only going to happen is if you're doing the legwork to develop a team and develop relationships locally. And again, you could spend your whole life trying to find the perfect market.

And the thing of it is like we're seeing market demographics change over time. So by the time you've done your research, the initial market that you started learning about could have changed in that time. So again, I agree with Tom wholeheartedly, just go find a couple that you're interested in, and then just go go do it, go pull the trigger, go make moves, because nothing's gonna get done otherwise.

Emil:

I ask this as a kind of a trick question. Because I honestly think both are right, I think you can be someone who analyzes the crap out of a bunch of dots and says, alright, this one looks primed for growth. And you can be totally right. And you can be someone who's just like, like a move quickly, dog had, you know, like, get in there. And I'm just going to choose a market get started, get really good at it. And you can succeed. There's both I've seen people do both. I've seen people just like choose a market get really good at it. Do awesome. I've seen people who like really scrutinize and analyze every market, they choose to market it appreciate the time, you know, rents go up a ton. And they're right.

So I kind of proposed that as a trick question just to see what you guys would think I wasn't trying to lead you one way or another link both work,

Michael:

We fell right into his trap, you Joker.

Tom:

Sneaky Emil.

Michael:

One last thing I'll say, and I think we've talked about it on other episodes. You know, I consider myself a reasonably intelligent person, you know, but I by no means any kind of genius and predictive analytics only get you so far. But I would say that so much of the legwork from a market data and analytic standpoint has already been done by people that make that like are getting paid to do this that have masters and PhDs in doing this. And one of the things I love to see is people riding the coattails of people more successful for themselves, or people that are doing things or have access to information that they don't have access to. And so one of the best I think, is like a whole foods or Trader Joe's, you know, they have entire teams dedicated to market research. And if they're going into a market, you you bet I'd be willing to bet the farm that they've done their homework, and they've done that research.

And so if you can just follow and find out where the whole foods is are going just as an example, right? That type of insight can be super valuable. And then it prevents me from having to do all of that market research and analytics. And that's information that's relatively easy to obtain.

Tom:

Like one of those fishes that you know, jump on the back of a turtle that goes to where the foods that and you want to be. You want to be the fish you don't want to be the turtle you want to be.

Michael:

That's it. Turtles get caught and fishing nets all way too often.

Emil:

Alright guys, this is probably a good spot for us to end this weekend wisdom. So thank you guys again for tuning in. If you're watching us on YouTube, make sure you subscribe if you haven't already, so you get notifications whenever we release a new episode. And if you're listening to us on whatever podcast it is, make sure you subscribe there for the same. And with that we will catch you on the next episode. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing

Here's What You Need to Know About Investing in Augusta GA Jul 31, 2021

In this episode, Tyson Schuetze & Ryan Widener from Auben Realty tell us what we should know about investing in the Augusta GA market. Learn about the particularities of the market, from both the real estate agent and property management perspective. Learn about the return metrics, who you are competing with and what makes this market special.

Augusta Presentation Link: https://drive.google.com/file/d/1kLKtIshCvtPXbDgKKC7neH5zsmU72tT8/view?usp=sharing

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Pierre:

Hey Everyone, welcome to the remote real estate investor podcast. Today we have host Tom Schneider and Mark woodling, covering the real estate markets of Augusta, Georgia and South Carolina. Today we brought in two experts Auben Realty’s, Ryan Weidner and company founder Tyson Schuetzy. And they're going to be speaking to us about the markets from a real estate agent and property management perspective. So let's jump into the episode.

Tom:

Tyson and Ryan, welcome to the remote real estate investor. Great to have you guys on.

Tyson:

Thank you for having us. We appreciate it.

Tom:

Yeah, so we got a lot of great stuff to cover today, talking about the market. But let's go ahead and begin let's talk about a little bit about your experience, experience as an investor, as a property manager, as an agent, all that good stuff and how you guys got into it? Sure.

Tyson:

Well, I started off in in 2009, originally got into real estate around 2006, I was living in New York City and trying to get into investing there working as an agent. And one of the things I realized was the the market was going to be a tough nut to crack, you know, the minimum sort of cost of entry to get into any rental property was a million dollars. And so I was really struggling trying to figure out how I could become an investor and start investing in real estate.

And started actually investing in Syracuse, New York, it was one of the closest markets that I could find where I could find the the yields that I want the cap rates, good cash flow. But it was also a five hour drive further north. And I didn't feel like Syracuse had the best market dynamics in terms of future growth, job growth. It wasn't number one on the radar for where people were moving, you know, when everything I was hearing was about sort of Southeast and southwest migration.

So long story short, I had a friend who was a successful apartment complex owner investor in Augusta, Georgia, and offered me the opportunity to come down here and learn underneath him for a couple years. And so I moved down here, didn't know if I was going to be here, you know, a couple months, couple years, and ultimately really sort of fell in love with the market and the potential. And so that was in 2006. And so I was kind of practicing my craft primarily flipping houses initially, because this was the glory days when everybody was a genius. And you could slap a coat of paint on the house and sell for $10,000 more 2008 rolled around, and there was a kind of rude awakening of what we were going to do next. And what I was going to do next.

I was fortunate enough that most of my flips, were an entry level price points. And so I was able to transition them into rental properties.

Tom:

Did you have that in mind? I'm curious in doing your flips, you know, I've heard that story from a couple of people where you know, the roof falls out from pricing. Did you have that in mind going into like your flip business like that this could transition? Or was it just sort of organic as the the price to sell wasn't there? Okay, I'll hang on to this, I'd love to hear your kind of thought process in, in doing that flip businesses and transitioning.

Tyson:

I think ultimately, the mid and long term goal to flip business was always to buy, you know, rental properties, right? That was always kind of the objective was I wanted to create a scenario with passive income streams, right. But starting out, you know, when I didn't have a lot of capital, a lot of the flips, were just going into creating the business doing the next flip. And so it was something that was kind of always on the distant horizon, the market changes kind of forced my hand really, you know, because I had houses that I couldn't sell, or didn't want to sell at, at whatever sort of the market would dictate, you know, the sales price, so ended up holding on to them.

And what happened was I tried to use other property management companies in town, and I really was just frustrated with the results. It's It's funny, I've talked to other contemporaries and friends in other markets that add some of this sort of similar experience, but I felt like a lot of it was just kind of placing a sign in the yard and and waiting and so I decided to try managing a couple properties for Have myself really not knowing that much about the process, but just trying to figure it out on my own properties and sort of using my properties is a test case.

And we started to have some success. And what happened was, because we were trying to operate with a sort of investors mindset, limiting days on market, a lot of the people that I knew sort of in the community that had been flipping houses, or had been private money, and some of my deals or other deals started gravitating towards us, as more investor friendly property management company. And we just really started growing faster than we could keep up with in the early days, I mean, every year, we were sort of doubling in size. And we went from a property management company into adding in other divisions to ultimately help and get our investors profitable.

We had a basic sort of philosophy was, the more money our investors make, the more houses they'll buy, and it just is in everybody's best interest. So whenever we were kind of looking at fees, or ancillary sort of businesses, we were looking at and saying, Okay, how did how can we create a scenario where it's a good revenue stream and profit center for us at Auben, but it's also in the investors best interest. And I think I was very fortunate to be in a position that a lot of owners aren't generally with their companies is that I was both running the company, but also a client simultaneously. And so I could kind of shift the perspective around. I think the other good thing is there weren't a ton of sort of rules as to this is how you have to run a single family property management company, you know, it was that there are a lot of people out there, figuring it out. And there were a lot of places you could go to, for good conversations and dialogue. But the area was also ripe for innovation. You know, there was, there was not like industry standards.

And so, you know, as somebody that's sort of imagines himself to always sort of be internally, you know, and externally, and you are always curious, um, you know, I think it was a perfect kind of scenario for us to kind of say, Well, what if we could do this? What if we pivot over here and kind of try this would this be in our owners best interest. And so we did that for a number of years. And then ultimately, where we had our biggest breakthrough was working with some other clients from other markets that were well capitalized that saw the opportunity in Augusta, specifically, that some of the local investors didn’t, right. And so we had some people that were from Chattanooga, from Florida, from California from other markets that really came in.

And I think we're able to see that there were just some really good dynamics in the Augusta market, there will be good short term midterm and long term. And so that was really the big catalyst to it was investors that were, you know, savvy investors that invested in multiple markets in different countries, different cities, different states. But, you know, they weren't really used to the single family model. Augusta wasn't really on their radar until we had sort of built up a good relationship, rapport, and trust by showing them and exposing them the market dynamics right.

And I think that once they saw how favorable the Augusta market is, and was it really you know, most of the time that the market kind of sold itself right you know, the the opportunities to get the yields that they were getting the opportunities to buy replace below replacement costs that you know previously existed and still do i think is always what you know, has has drawn people to Augusta. It's it's not the most glamorous sexy market, people know it for the masters and really not more than that. But I think that the fact that it's been off the radar a little bit has served itself well to being extremely stable and strong market that still has a tremendous upside. So we've really enjoyed, you know, watching our investors returns over the past 10 or 15 years, and still are extremely bullish that the next 10 or 15 years will look like the previous so…

Tom:

Definitely a lot to unpack there. And I love the story, the the founder story where you're basically solving your own problem and realizing Wow, a lot of other people have this problem. And the other thing I like about it is You know, very specific to the remote investor. You know, you're on that super early in New York not seeing the type of yields that you want testing out in Syracuse, realizing just all the tail winds down for the southeast. There's a book we talked about an economist, John Burns, he wrote a book called Big shifts ahead, and it just talks about all the tail winds for the southeast. And the Augusta is a really great market that encapsulates a lot of those benefits of lower cost of living, and all of that good stuff.

We'll get into more details about the Augusta market in a minute. But let's hear a little bit. Let's hear a bit a little bit from Ryan.

Ryan:

Well, I'm born and raised here in Augusta, Georgia, and my father has been in real estate forever. And I, I was in Las Vegas in 2002. My father got real busy in the REI business. And I remember getting that call of son, can you leave Las Vegas and come help me in real estate? If it wasn't my first happiest moment in real estate.

Tom:

Was that always a family business? Well, previously, we had a hunting and fishing store growing up and then my father got into real estate. When I was maybe 15 years old. Like I said, he started a big Rei business, bank foreclosures. And, you know, they entail a lot of paperwork with a lot of detail. And that's when he when he called me and asked me to come back and help out in real estate.

Tyson:

The Windeners are well known for if you're looking for investment property, you went to Ryan's dad, and then now Ryan. So you know, it's one of those things, I think that the knowledge was there, through, you know, helping helping dads. Right. We got

Mark:

So how was the transition from the aureo market in Las Vegas to the aureo market in Augusta back then?

Ryan:

A lot more. That's for sure. That and that was that was one reason, just looking at the numbers and knowing the numbers back home and what I was looking at in the Las Vegas market, which at that time was the fastest growing city in the United States. And, you know, just really got to where if you didn't get in early there, then you weren't getting in. And I think again, back to what Tyson said earlier that Augusta not being the big glamorous city has made our market attainable, especially for out of state buyers. But I'm even here locally, with investors as well.

Mark:

So Tom, real quick. So the reason why we reached out to Tyson and Ryan to join the certified agent network was because Tyson had a name in the industry that Matt Thomas who works on the certified agent team. He knew he had heard of Tyson, he said, Hey, if there's somebody you need to talk to in Augusta that's growing their business significantly, and really an emerging company. He's a guy you need to talk to. So I talked to Tyson, he said, Listen, we have a growing business, but we're willing to grow more.

So not only did he bring on Ryan as the certified agent, but they became one of our preferred property managers. So I mean, they're doing a lot of business with us right now because as we've always seen in Augusta, it's just it's got that great price point. You know, there's there's a nice variety of homes because there are some beautiful homes near the Masters or Augusta National, all the way to, you know, C class areas that still have amazing returns for the right price point.

So it was great because Roofstock had done a lot of business and in Augusta already, but we were doing it was a different price point. So it's nice to bring in these properties are coming from MLS because it gives buyers a variety of different property types that they can really, you know, pick and choose and see the different return types. So anyways, that's a little backstory, from our perspective of how Tyson and Ryan came on board in so far. I think Ryan's closed well over 10 properties just in the last few months, and probably is on averaging about five closings a month at this point.

Tyson:

We got six under contract over the weekend. So those numbers are going up.

Mark:

I'd like to hear it

Tom:

For sure. The last question that I have about your guys's background before we start jumping into the market specifically is how did you guys get in touch to partner up?

Tyson:

So you know, I guess as a smaller community in terms of, you know, the especially the investors and and Ryan and I had known each other for a while we actually had some institutional experience working with a hedge fund based out of Charleston, in different capacities there. But I think ultimately when when Mark approached me with the opportunity, I wanted to make sure we had the right agent for this. And so I went and approached Ryan about specifically working on this book of business because I knew Ryan, you know, being an investor himself being an Augusta native, having worked with clients from other remote markets previously, you know, it would just be a sort of natural fit.

So I think ultimately, you know, that was a really good sort of connection or reconnection and we're able to make is, Ryan happened to be in a position where he was looking to make a change. And this opportunity came along at the right time, where we were able to put that together. And then ultimately, my goal, you know, with Ryan and the Roofstock buyers is then to ensure that the rest of our team is there to support the asset just so we can continue our philosophy of ensuring that the assets perform well, which lead the clients to purchase more so you know, but Ryan and I had some mutual friends, we've worked together on different deals, you know, we've worked together in different capacities, I did done deals with his father, so there was a there trust in history there too, you know, as far as knowing that he would be a good fit for this role. And I think he's really come in and excelled from day one, you know, and I think is the fact that he is an investor and he's seen the different market cycles and Augusta, I think the most exciting thing is right now, Augusta seems like it's really turning the corner.

You know, it's always kind of been slow and steady. But there's there's been a lot of sort of momentum with, with jobs, with investments with the revitalization of downtown, etc. That, I think, you know, causes us to be even more optimistic about the future.

Tom:

Perfect transition. And you know, I love that business model. You know, you make customers happy, they're going to come back and bring more business, perfect transition on the economy. So you know, as you said, everybody knows, in April, Jim Nance and all the golfers come in to Augusta. And what's happening economy wise, outside of those those few weekends in April, who are the big players? What's the big industry, let's learn about that.

Ryan:

Well, just recently with Amazon has come into our market, they just opened up a second building 270,000 square foot building in Appling, Georgia, which is close to Augusta, we've got five major hospitals here in Augusta. We have the medical and the dental school of Georgia here. So we have a lot of college kids, we we have the Savannah River site, and a Fort Gordon is here. And they just their Cyber Command Center that they're opening is bringing in roughly 30,000 people to Augusta over the next couple of years. So we really have a revolving market here, we've got a lot of people coming and going. And that's always good for real estate.

Tyson:

One of the, you know, for Gordon's always, I think been the kind of anchor here is as being the military base. And I think one of the concerns in the past was, what if the base would ever close what kind of impact that would have on a gust what we've seen over the past five or 10 years is Fort Gordon's really become the center of sort of cyber security, right. And in addition to the military presence there, there's been a large presence with the NSA, the National Security Agency has moved a bunch of their jobs and positions down here from Maryland and other parts of the country. And then also, we're seeing what happens sometimes, you know, when a automotive plant comes and puts their sort of flag down, you get all of these other satellite businesses around to support it.

We're seeing as Augusta becomes more and more of a Cyber Intelligence, you know, community and area with for Gordon, in the NSA, we're seeing a bunch of cyber startups, and we're seeing other tech companies that are coming in that are totally private sector organizations, but are coming here because there's a high quality of living, there's a good workforce, and there's a good sort of knowledge base and understanding about cutting edge technologies that are relevant there. So we're seeing more and more of that.

There's a new college downtown that's focused on, you know, educating the future of sort of cyber school, you know, so I think that, to me, also bodes really well for the future. You know, it's not just a military base that's likely to ramp up or scale down, in times a conflict, you know, intelligence, security, all those things are pretty much permanent things, regardless of the administration regardless is kind of what's going on globally, that will always be sort of a presence in need there. And I think that sort of a, you know, understanding is given people even more confidence in the market.

Tom:

That's great. Diversity is is really such a special thing that you know, when picking a market and going through military specifically, kind of future related military and cyber healthcare manufacturing with Amazon and distribution, education college. Amazing.

Next question just kind of market related. And this is something that probably is a little bit easier to look at home looking on Google Maps is how would you designate the different kind of pockets? If you were to look at a high level map? I see. You have 520, sort of the freeway circling around the city. If you had to kind of identify four or five kind of major pockets within the city, and what type of returns kind of at a very high level, would you mind kind of walking through some just general pockets within the city as someone's looking at investing?

Tyson:

I'll let our expert take this here. The route is roofstock, certified as speak to this better than anybody? Yeah.

Ryan:

Well, what I found recently, we were developing some new pockets in Augusta, as well as our traditional pockets. Columbia County for instances is growing drastically. A lot of the military people coming in and out are focused on Columbia County, I believe due to the good school rating systems and and Roofstock points that out it steering them a little more towards Columbia County with the newer homes and in those sentences. So we've Columbia County has been been kind of the top Roofstock market we we also have in Richmond County. We have what we call the Somerville, the hill area, some of the older more prestigious homes. And we're finding that with the market being a little limited lately, as far as listings, we're finding the prices have gone up, but the rents have gone up as well. So we're kind of balanced there.

And then we have some of our you know, I would say lower price range homes in South Augusta. We've just seen a tremendous growth in in the rest coming in. said we've really had a balanced market everywhere right now.

Tyson:

Yeah. And we're in the process of also turning on there's a there's a nother pocket in the gussto market the if you go beyond just the city of Augusta, the MSA of North Augusta, Aiken, just on the other side of the river in South Carolina, that we manage and interactive with, there's some great pockets over there as well. And then there's been some new industries that are are already there in the process there there's a couple more sort of manufacturing and facilities over on that side of the river. And it's literally Augusta is is divided from the Georgia and South Carolina side by the Savannah River. And so it's a, you know, five minute drive from downtown Augusta. So you'll have a lot of people that live in the South Carolina side but work in Augusta or vice versa.

And Generac, which is a a home generator company is opening a large facility over there. Firestone has a large facility over there. So there's, there's a lot of industry there and continues to come there a part of that is, is South Carolina is very business friendly, and is offering some some very attractive tax incentives to some of these larger corporations to bring them down. And then the employers like it, because, you know, they their employees gonna have a high quality of life with the wages that they're they're able to earn here, based on the lower cost of living.

You know, this whole area, compared to cities of its size nationally has a much lower cost of living, which is also driving a lot of the growth as well. And and retirees, we're getting people that you know, are are bypassing Florida or not making it all the way down to Florida and stopping in markets like Augusta because their money can go a lot further.

Tom:

It's cool being a border state city where you can kind of, you know, the best, most more business friendly, more, you know, living friendly, it's and just to kind of give some context people that are listening Columbia County that is in the West kind of North area. And I say I'm looking at my Google Maps just making sure that's right. When you were talking about that area, and Richmond County is a little bit further south of kind of central.

A question about the property management size. Where do you where which areas you guys manage the most amount of properties is it up on the south carolina side to the north or to the south? I'd love to hear where the majority of the inventory that you guys manage as rental properties.

Tyson:

So historically, I think that most of the investment opportunities were in Richmond. County, Richmond County, which includes South Augusta west Augusta, downtown central Augusta, you know, had some higher yields there, and homes that were more in need of repair and renovation. Larger you know renovations for people that were looking to sort of build in some sweat equity. What we're seeing more and more are is what Ryan alluded to earlier. Columbia County has a lot newer builds, right. And we're seeing people that want to come in and have an asset that's producing a return from day one goes straight to Columbia County and not look at Richmond County.

Also, Columbia County, there's a couple areas there that have some of the best and highest rated schools in the entire state of Georgia. And so, you know, there are a lot of people are migrating straight to that area.

Also, what we alluded to earlier with the military, with the medical communities, a lot of these jobs can be somewhat transient, and people will be here, they may be here for a couple years, but they don't necessarily want to buy, but they want a really nice home in a nice area. We want their kids to go to a good school, that's just continuing to drive the rental demand and Ryan was referencing earlier, the prices are rising in those areas. But the rents are rising in tandem with that.

And then when we talk about the prices rising, it's still at a responsible rate, that we're not concerned that there's going to be any major sort of crash at any point, even when, you know, we had the 2008. crash. Augusta, you know, had always been steady state. And so when the correction occurred, it wasn't like falling off a cliff, like some of these other markets, because it just been much more moderate growth. Right. And, and so I think that, you know, if an investor's coming in here with a long term perspective, I think that adds to sort of the confidence of the market dynamics.

Tom:

That's great.

Mark:

Hey, Tom, and let me sneak in real quick. So we are just about to open up in Aiken, South Carolina, or, you know, the town of as I always get confused, North Augusta but South Carolina, right. So that'll help you remember it, but we're getting the data feed there. So soon enough, Ryan will be underwriting properties and posting them to roof stock for the roof stock select properties. So get ready. So by the time the podcast comes out, we should be live with new properties in that market.

Ryan:

We're really looking forward to the Aiken county market, North Augusta, Aiken, Greenville. These are a lot of kind of, I don't want to say untouched pockets, but I think there's going to be a really big boom over there.

Tyson:

Yeah, and, and Tom, you'd referenced it earlier, but 520 got expanded in further over on the south carolina side that is allowed, you know, transit to be easier for people to commute to work on all parts of Georgia. So we're getting people that may work in a most western part of the Augusta market out in Columbia County, but live in Aiken. And I think that's a lot more feasible with some of the expansion that's gone on at 520. So and to Ryan's point, I think there's there's some areas a little bit off the radar over there where there's tremendous value in returns for our, for our Roofstock, clients.

Tom:

I love that in areas that haven't been as invested in is heavily it's, you know, there's just that much more opportunity. And that's, that's great to hear of that opening up.

I'd love to hear you know, kind of splitting on the the two different markets there in North Augusta which is on the south carolina versus the Georgia side. As an investor you know, what are your considerations between investing in Augusta on the south carolina side versus the Georgia size be property taxes is actually an interesting one, you know, between the two.

Ryan:

A little higher over on the south carolina side you'll find South Carolina and in putting a lot of money into their downtown, mid north and guest they've got the new baseball field there the green jackets baseball field a lot of new restaurants.

Tom:

Is that a triple A team or a double A team? The green jackets sure AAA changes a couple of it.

Tyson:

At one point I think it was single a for the San Francisco Giants now it's with the Atlanta Braves and I think it's single a and I believe it I think it's single A.

Tom:

I was just traveling with some friends and went to a minor league ballgame and man those things are just so fun. You know just right on top of the guys it's the best sorry Go ahead. Go ahead. I interrupted

Tyson:

The park is right on the river and it's it's it's beautiful setting to watch a game you're right on the field. Linux right in downtown. And as Ryan was saying, There's bars and restaurants around it. So it's been a big boost to North Augusta. One of the things about the South Carolina taxes is, there's different areas over there where if you're in the city limits, there can be a city tax, in addition to the you county tax, where if you go outside of the city limits, you can benefit that, you know, you won't have to pay that city tax.

But generally, you know, we look at all that within relation to the rents, there can be some pockets over there where there's some higher rent rates, because of just desirability to live over there. And there being less houses in general, on that side of the river.

From a property management perspective, Georgia has a little bit more friendly landlord, legislation. Georgia is one of the most landlord friendly states in the country, maybe the only state that's more friendly than Texas. You know, that's not surprising, because it's Texas. But South Carolina has friendly landlord legislation, but Georgia's really very favorable.

But you know, I think what I would tell you one of the cool things about Augusta is you have the ability to get some diversification even within the Augusta market. And I know quite a few people, myself included, that will have investments in each of these little markets with slightly different nuances. You may get a more, you know, a higher yield in Richmond County, more appreciation in Columbia County, and a balance of sort of the two in in Aiken. You know, it's kind of how I…

Ryan:

Yeah, I agree with that. Something like that.

Mark:

Yeah. And I think that's really useful, because our buyers are going to come in and look at the market and that level of detail right there where they get a choice between two different states, whether it's taxes, landlord, friendliness, the school, yeah, schools, I think that's so important in the unincorporated part, I think that's an interesting strategy where people do like a little more land these days. So, you know, as long as it's in a good school district, it's a little bit on the outskirts. I always think that's a great play. But my question for you guys, is we could talk about the rosy picture. But what are some of the common issues that you fall into that, you know, you see from the property management side, especially, you know, what do our buyers need to know about, you know, whether you see foundation issues, or there's just, you know, there's maybe, you know, unstable grounds, like the soil types are just interesting. Yeah, give us a little update on, you know, what you're seeing out there that are common for investing?

Ryan:

What's been easy with, with Roofstock is the, the inspections are very thorough, and it really outlines you know, during the purchase process, we're doing, you know, a lot of amendments to address concerns, we're putting some of these issues back on the cellar, due to the extensive inspections we're getting, which kind of heads off a lot of the problems.

Also, with property management here, and you take that, but it's really easy. And I've directed all my buyers to, you know, a lot of a lot of investors will want to, you know, try to find a contractor that may not, you know, maybe a little less expensive, but kind of cut the corners as to where we have a Roofstock inspection, and we have our own property management team. That is a very thorough inspection from the start. That kind of heads off a lot of the problems that can happen down the road. You know, roof leaks, busted pipes, things like that. Are the buyers are aware of everything from the start.

Tyson:

Yeah. And I think as far as the Augusta market, you know, you do have an older housing stock here. Right. So you just need to be aware in some of these neighborhoods, you know, especially some of these in Central West Augusta. You know, the Somerville area that Ryan alluded to earlier, you have houses that are 100 years old, right. And so making sure that the mechanical systems are good and strong.

We have some pockets where we can have some foundation issues, but yeah, Augusta most of the ground running, it's a it's a hard red clay. So assuming it was put in correctly, generally, there's not as many issues there. You know, we have the typical sort of southeastern market issues with high humidity, you know, ability for moisture content, if not managed appropriately. The HVAC units are going to run constantly from April to October so they better be functioning or, you know, it'll it'll definitely affect the tenant satisfaction, but I think in general, you know, Augusta has A lot of brick houses here that are well built, you know, a lot of houses on slab, the crawl spaces, you know, you do have to be mindful of the fact that, you know, it's very common to see houses that had previous termite infestation. I'm not sure I've ever bought a house that didn't have previous termite infestation, but you just want to make sure it doesn't have active infestation.

And so, you know, I think there's some some things there. The market continues to be extremely strong on the rental side. And one thing is because Augusta has always been off the radar. You know, we didn't have the major builders coming back in after the last collapse, you know, there, there weren't the major national builders, you know, we're bypassing Augusta and going to some of the markets that were close by Atlanta, Charlotte, you know, Greenville, Charleston, you know.

Augusta is within a couple of hours of a bunch of major markets that I think have always sort of overshadowed it. It's good for, you know, people that want to travel and go these other markets. But I think it's also kept the housing inventory from being a little bit always behind no matter sort of where the market cycle is. And so, yeah, the houses that Ryan's clients are buying through Roofstock, we're pushing rental rates, you know, we are pushing really top of the market. And we're still seeing extreme demand multiple, you know, approved application short days on market, and think that that will continue.

You know, I think that also we'll see how it plays out. But if there is more willingness for people to work remotely, Augusta has the ability to sort of siphon off people from a lot of the markets where people were having to go to Atlanta to get a good job, right, or having to live and work in Atlanta. And Augusta can provide a much better quality life, lower commute time, lower traffic time, to a lot of those neighboring markets that I think could could help as well. We'll just have to see how that sort of plays out.

Mark:

What about competition? I think that's what buyers want to know, who am I competing against? Are their ibuyers at a national level, like the Zillow is a red fins open door offer pad in your market? Or do you think there's a good number of institutional appetite out there? What do you see from that level?

Ryan:

We deal with it a little bit. I mean, we, you know, the hedge funds are coming in everywhere, but my Roofstock clients wanting the better schools and you know, the properties that are under $5,000 in repairs, so we're at a little higher price point than in a lot of the competition. So we are competing with some home buyers, you know, our offers are anywhere from, you know, three to 6% over list price. We're using some escalation clauses things like that to help protect, you know, my buyers but I think with the kind of turnkey homes that we're looking for, we do bypass a lot of that a lot of the new institutional buyers coming in.

Tyson:

I think also Mark here we benefited from a gust always you know, being off the radar a little bit that a lot of those funds went to Charlotte, Atlanta but didn't come to Augusta and and Alban's footprint, we're in other markets beyond Augusta, we're in Chattanooga, we're in Columbia, we're in the process of opening up Charleston, is we've always focused on secondary and tertiary markets, where we feel there's the best mix of existing cash flow and potential future appreciation, right. And we still feel all of these markets in the southeast, particularly the secondary and tertiary markets have those sort of dynamics of both a solid return right now, it's not speculative, but a good upside given, you know, future growth potential. And so I think that some of the funds are recognizing that and there are some here but I think there's funds in every market. From my understanding, talking to people in other markets, our institutional presence isn't nearly as large as some of our neighboring cities.

Mark:

And I echo that strategy is that that's something we're really trying to do is open it up in more secondary tertiary markets because we do notice the Atlanta's the Charlotte's, those major markets have so much competition. So you know, you may have a multiple offer scenario that has two or three offers versus a market like Atlanta where there are 10 20 30 plus property or offers coming in. So I do like that we give our buyers is a better chance in these markets for just as quality of inventory, maybe not as huge of an economy but still a very, a very stable economy where people typically stay for a long period of time, maybe not with the, you know, the the military base, but I think they're just more stable areas where they're truly communities for families. And, you know, people are going to stay there for a long time.

Tyson:

It's worth noting to mark that we're getting a lot of military, you know, people that come here and like the market so much that they're buying here, knowing that they're going to travel more, and then come you renting an out for a while and coming back and living here. So we've seen that quite a bit. We have quite a few clients that that's been the case, you know, they, they liked the market, they liked the investment, they know they're gonna leave, they'll run it out for a couple years, and then come back and live in.

Tom:

It's a great transition. We've got just got a few more minutes on today, but I feel like this episode could keep going for a long time on people, you know, coming back to the market, like what, as what's the draw in living here? You know, we talked about the green jackets, the AA game, you sit on the river, what's the other kind of like, you know, fun things to do in town, if I was to come come into Augusta and check it out.

Ryan:

I think I think the main draws the low cost of living, draws people back. You don't have I think our crime rates are a lot lower than a lot of the big cities. And we just we have a lot of new growth. You know, Top golf just showed up. Dave and Busters, you know, we just have a lot of a lot of new growth and a lot of new companies coming here.

Tyson:

I think also there's a you know, in addition to low cost of living, it's a high quality of life and what it mean more specifically by that, you know, we're on the Savannah River, there's a lot of activities there from boating, kayaking, canoeing, you know, there's, there's several lakes close by that people spend a lot of time at going out to lakes on the weekend, there's a good trail and park system with some greenways good running past biking trails, there's some good mountain biking trails here. You know, given its proximity to some of the larger markets, we're also able to draw off that in some positive ways, we'll see we'll get you know, musical artists that prior to real estate, I was in the music business and we get artists that are stopping by on a Wednesday or Thursday on a way to playing a Friday or Saturday show in Charlotte or Atlanta.

So, you know, there's a good arts community scene here as well. The downtown is experiencing a good bit of revitalization. You're seeing a lot of people coming down there and starting new businesses and really building in some community there. And I think that it's a it's an exciting time to be here. You know, I think that the biggest part I think is also you get some of the benefits of living in a larger city without some of the hassles or headaches.

You know, there's there's not major commute times traffic at its worst is very moderate and very manageable. Yeah, I moved away from Augusta in 2014 to Charleston and I think it It took… I love Charleston but it also made me appreciate a lot of things even more about a gusta you know and i think that there's a lot of new people here and new energy with people that are growing up in Augusta and electing not to leave and and shaping Augusta into what they would sort of like it to be you know, there's several theaters that have opened downtown new music venues. You know, lots of really exciting things I think going on.

Tom:

Love it. So my last question for today and I'll let Mark close if he has any any final ones is okay, so you have to and I want you guys both answer this questions that both answers question so there's two restaurants you're going to you're only in town for two days. One of the restaurants is oh man I need something you know kind of greasy I want something you know I want to get whatever my fingers dirty whatever. And the other one is fancy date night so two places to go eat at and Augusta putting putting you on the spot here.

Ryan:

Well, I would for the for the fancy fun dining. I would probably be downtown I'm Frog Hollow. Yeah, just fine dining great food. Little on the higher price point but you get what you pay for definitely. And the Downham gritty meal would probably be the Waffle House. I know me at Waffle House.

Tom:

I know me a waffle house. Ilived in North Alabama for you know, eight months or so. So yeah, I love it.

Ryan:

That's right open any hour so…

Tyson:

Uh, yeah, I think I could I could name several here cuz I definitely liked dining out and whenever I come to town I Dine Out consistently Frog Hollow is phenomenal place. There's a there's an area of town called Suri center that has a variety of kind of, you know, different places, there's a place Italian place there is great called Olivia's. There's a, it's far as the down and dirty or budget friendly, I'm going to go off script and give three different spots because I can't can't limited to one.

Tom:

Sure.

Tyson:

But there's a phenomenal Korean place called Happy house that's got excellent Korean food. And then there's a famous or infamous burger center called sports center that is, is not to be missed. I mean, it's one of those places where they've been using the probably same burger grease for 50 60 years. And when you leave there, you'll smell like what you ate for the rest of the day. But it's well worth it.

And then my all time favorite is a little German deli place called Hilderbrands, it's been around for 100 years, that's probably it's a, it's an older woman that's been running the place forever. And it's you know, it sandwiches, but it's just, it's a it's a time warp, it's going back in history and seeing a sort of 100 year old deli. But you know, I could also name a couple more, but I already went well over my allotted, you know, requests.

Mark:

We'll have to add some more to the show notes. But just to make sure if anybody does come in town, they have the full map. But just on that note, you know, you guys did put a great presentation together. And we'll make that available for all the listeners in the show notes. So thanks. Thanks for doing that. But also my my last bit of advice, One question is buyers should make sure to go to the Augusta, Georgia Chamber of Commerce, learn about what's new, what's changing in the area, there's always good information there. So these gentlemen have provided us with some excellent information. So use them as the the local news and knowledge, you know, whenever it comes to real estate investing, but yeah, thank you guys for doing this.

My question is, if there's one thing that Ryan could tell buyers, that is just the most important one little nugget of information before investing in your market, what would that be Ryan?

Ryan:

I would say right now the most important thing is list price really isn't getting your offer. Just know that just like everywhere else right now where we are fighting for our contracts. And I would say probably being 3 to 5% above offer price. And, again, I've been using the escalation clause to help protect not overpaying. But you know, if you're doing all your homework and going through and clicking that button, that's the most important piece I could do right now.

Tyson:

And I would just add that, you know, as far as investing or being willing to sort of go over list price, I think we've had the benefit of being in market for you know, 15-20 years, we've seen what the Augusta market has done historically, I think and how it's written out recessions, corrections downturns, which you know, I think long term if you're an investor long term, the market is so fundamentally sort of sound and stable that it's it's just an excellent market. You know.

I invest in multiple markets that Auben is in and as a presence but the Augusta market is by far my favorite right and last piece of advice would be if you are coming to town and choose to try to come to town or on masters week, plan ahead. Whether you're going to those restaurants or trying to book a hotel, it's it's a different animal that time of year to be sure. all bets are off as far as getting in anywhere at any reasonable price. But there's plenty of other times that are good to come to a guest as well.

Tom:

for another episode, the vacation rental.

Ryan:

And to piggyback on that I just like to add if you're gonna spend say, a million dollars here in Augusta then $350 on a plane ticket. Yeah, come come look at the market. Let me let me show you what, what we're doing here and how things are just to give you a little better peace of mind of where you're putting your money.

Tyson:

We'd be happy to host anybody here we enjoy. meeting our owners face to face is definitely not a requirement. But you know, I feel it can be really good for continuing to build trust and relationships. So we're always open to doing that and we've got some furnished rental properties we keep open for our clients to come stay in too.

Tom:

That will lead to good good final final question is what's the best way to get in touch with you guys wanted to take you up on that offer?

Ryan:

I can be reached 702239 4900 email is RWeidner@Aubenrealty.com.

Tyson:

Emails the best for me and I can be reached at Tyson@Aubenrealty.com. I'm less involved in the day to day operation to this stuff. We've got a big team that helps that, but I'm very passionate about helping investors with, you know, their investing journey. And if there's anything that you know, would be helpful with that and be happy to discuss at any point,

Tom:

Awesome. I feel I think there's definitely another episode with you guys on this wonderful investor journey presentation that you guys shared a little bit earlier that we'll add in the show notes, but I think it will result in another episode that we'll put out so Tyson and Ryan, thank you so much for coming on.

Tyson:

Thank you guys.

Pierre

Well, that's our episode. Thanks so much for tuning in. Thanks to Ryan and Tyson for joining us today. Thanks so much for tuning in. Happy investing.

So who really won our single vs. multifamily rental debate? Jul 29, 2021

Last year we hosted a debate over what is a better asset class - single-family rentals (SFR) or multi-family rentals (MFR). In this episode, we look back on the performance of our portfolios over the last year to see which asset class performed best.

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Emil:

Hey, everyone, welcome to another episode of The Remote Real Estate Investor. My name is Emil Shour and I got my co hosts with me today who are

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today we're gonna be doing a little bit of a look back episode. So we're slowly crawling out of the pandemic and we're going to do a look back at our single family rentals and our multifamily rentals and we're going to do a comparison How did each do during the pandemic? Alright, so let's hop into this episode.

Alright guys, before we hop into this theme, let's let's do quick updates. Always love hear what's going on in your portfolio. So Thomas, kick us off what's going on, man?

Tom:

What is going on? So not a whole heck of a lot I mentioned before have done a bunch of refinancing and big milestone, it's a new month. So the new payments came in a little bit thinner on the old cash flow because those loans are a little bit bigger, but the interest rates are a little bit lower, but net a little bit of a higher payment. So you know, getting getting used to that and still in acquisition mode, underwriting properties doing all that I'm doing the work like doing the investing work. So Go Bears? Yeah.

Emil:

You're in a couple markets. Right, Tom?

Tom:

I am. I'm in three markets, Atlanta, Pittsburgh, and Orlando, Florida. So debating adding a new one, but I don't know, I'll probably take a note from a meal and just densify densify. But I don't know we'll see. You know, I'm not limiting myself right now.

Michael:

And are you looking at multifamily Tom or single family?

Tom:

Looking at both. I am looking at both. I mean, I don't want to steal the wind from the episode but single family has been awesome. So you know, and it's simple. Great. Probably 70 30% I go 70 70% I go single family some more. But we'll see.

Michael:

All right. All right. All right.

Emil:

You anticipated my question I was gonna ask if you are going into marquee already in or if you're looking at new markets, or what's kind of your next step. So good anticipation.

Tom:

You know, it's such a funny double edged sword with appreciation is awesome. You know, you have these properties are appreciating value, but it's it's time for Acquisition time. It's like, oh, man, everything's appreciated a lot. There's still acquisitions to be had, but not not like the good old days. good old days, Wild West.

Emil:

I feel like, every real estate investor will say that for the end of time, just like the good old day like it. We're gonna be like, Oh, man, remember and remember in 2020 or 2021? Gosh,

Michael:

I was so cheap back then. Yeah.

Tom:

Here's the thing is the good old days, like always, like, I mean, we're probably in such a weird time where it's been, you know, hockey stick for a little bit, is it but it seems like it's always like four or three years ago, like we look back three years ago. Oh, man, that was great. And he looked back three years from now. Oh, that was great. Like, I think we're in a particularly weird time. But I know the good old days is always just a few years ago, no matter where,

Emil:

Unless you're in 2011 2012. No one was looking back to 2008 2009 2008 2009 thinking, Man, those were the good old days.

Tom:

Yeah, if you were buying that was the good old days. And I think it's probably more circumstance that were just such a weird stretch of 10 years, 1012 years, but that 2009 2008 it was that was one of my earlier jobs working for one of this fund that was buying and you listen literally like couldn't walk out. You couldn't what can miss a saying that I'm totally botching, like you broadside of a barn was just everything was just crazy. high cap rates. You couldn't miss Yeah, I think you You said it right. So anyways.

Emil:

What a time.

Tom:

Take the baton from me.

Emil:

The good old days,

Michael:

The true good old days.

Emil:

Michael, what about you, man, what's going on.

Michael:

So I'm in the middle of two single family flips. So I've got one out in Kansas City that's now listed on market for sale on the MLS, which is exciting. And I got another flip out in Birmingham, Alabama, that is now been listed for lease I'm going to sell that with a tenant in place as a turnkey rental. So that should hopefully get leased up. Ideally sooner rather than later. But it sounds like they've got beginning a lot of applications which is exciting. So those are kind of the two big projects I'm working on. I sold the six unit which was great. So now I'm able to focus on one of the other 11 units that I have out there.

I need to repave that parking lot which is a bummer. I got Notice from my insurance that they're going to cancel my insurance once I get that done here very quickly. So hoping to have that wrapped up, ASAP, and then just focusing on the development project and seeing the big bills roll in. But we're almost done, we got a big hurdle, we got some new electrical service brought in. And that was something that we were waiting on for a while, both in terms of getting the part delivered, and then some work couldn't happen inside the building until that got installed. So we're seemingly over that hump, and then just a waiting on the last of the insurance settlement to see where that cookie crumbles, so to speak.

Emil:

How did your insurance company find out that your parking lot needed to be paved?

Michael:

So they came out and did an inspection when I initially bound insurance, and like the way it works is so stupid, like, it's so backwards. So basically, you go binded insurance, you go bind with the new insurance company, they come out and do an inspection and tell you all the things you have to do in order to keep the insurance otherwise, they're going to drop you. And it seems like if they are going to be accepting you for insurability, they should be doing that inspection on the front end and say, Hey, if you want to come on board if as you need to do a, b, and c, but after they've already g otcha. Then they say oh, by the way, you need to do ABCD, whatever. So I did a bunch of that stuff. The parking lot was really expensive.

This was last year, or maybe two years ago. And they said, hey, you've got to do this. And I said, it's just too expensive. It just can't happen. I did everything else you've asked, but this is the one thing I can't do. They said, Okay, we'll give you till next spring, which is now 2021. And then we had a quote to get it done. And so we're now we're getting it done. But that same day that we got the quote, they came back and said, Hey, you need to have this done by today. I was like, wait, what you get like, there's got to be like, you need to be a little bit more proactive and giving folks heads up. So they extended it another month.

But that's the last, the last extension I'll get so it shouldn't be a huge, huge deal. But if it's a couple grand, we got a quote to rip out the whole thing and repave it and bring all new asphalt that was like 15,000. So we're getting away with this is a great example. Repair versus replace. The repair aspect repair option seems to be a lot more beneficial. Just more cost effective right now. And it's a it's a parking lot. It's not like a you know, as a parking lot. Yeah, like it's not, it's gonna add zero noi at the end of the day. So which is a bummer. But again, it's one of the things you have to do.

Emil:

Yep, just like busted pipes.

Michael:

What do you got going on Emil?

Emil:

For me, I got some good news. I got some good news. Recently, we, my single family home in St. Louis was up for renewal, the tenant agreed to a 2% increase in rent as a single family home, which is going to kind of play into this episode will be a good segue. So they're staying put agreed to 2% increase. So that's getting signed. And then I think I've been talking about the triplex unit for a while we've got a couple bids in. I actually have a call with my property manager right after we get off this podcast to finalize and start moving forward with that turn which should take about four weeks to get done. So a little bit longer than I was expecting but.

Michael:

Nice. Do you want to save it for the episode? Do you want to tell everybody kind of what the bid looks like and what the rent increase you think you might get is?

Emil:

I think we should I think we should make that its own episode. I think it'd be fun to maybe do like a post mortem. Like, here's how it all went down. I'd love your guys's feedback on like, what would you have done differently? versus like how did it go? I think that'd be a cool episode for us to do in the future.

Michael:

Awesome. Love it keep everybody in suspense cliffhanger. We're gonna start calling you cliffhanger Emil.

Emil:

All right. All right. All right. So what I like to do man you know I work in Marketing so you know you got to keep people on their toes got to keep them coming back.

Tom:

Create the urgency!

Michael:

Yeah, scarcity.

Emil:

It's like there's a word for like open loop there's something it's like basically a cliffhanger where you just keep like, anyway let's get on with this episode.

Michael:

Yeah. I get so many great isms.

Emil:

Alright, so we're gonna be talking about basically how how did our different properties perform single family verses multifamily. Tom, you are almost all single family. Michael, you are predominantly multifamily. And I'm at this point basically split right down the middle of three single family houses and then a triplex. So three and three. So I think it'd just be fun for us to talk about, like, you know, how did things end up? Tom, you're our single family. Master why don’t you kick us off. How did it go for you the last year, year and a half?

Tom:

Yeah. Last 12 months have been remarkably boring. I mean, we talked about it kind of expecting this big cliff. Boring in a very good way. We expect this cliff of kind of like vacancies and not being able to pay and I'll let you guys speak to your portfolio when you speak but like, I don't know, at least within the properties I have there there was no issue. I did have one turn, but it was kind of a more or less like a scheduled turn. It wasn't like because of any like hardships, it was just because like the people were moving. I had two renewals, the other ones were on longer than one year contracts. And both of them renewed at a higher rate one of them at like a pretty significantly higher rate, it was like seven and a half percent increase or something on the rent, which is just like the best as a as a as a landlord.

So, a really ho hum, boring in the best of ways, kind of a year saw a ton of appreciation. I when I refinanced four of the properties i as i mentioned earlier in the episode and on some previous episodes, and even after doing like a pretty aggressive cash out refi I'm still like under 70% loan to value and receiving these you know notes from open doors and these I buyers of like, Hey, we want to buy your property at like above what I refinanced it at SFR has been a total home run.

Not a lot of like downside to be said. But you know, with with, as we've talked about in previous episodes, you know you have these honeypot of a year, you know and they are they're going to help cover the years where the roof needs to be replaced, or the H fac does. So it was super positive year with regards to rental appreciation, price appreciation, still being disciplined, you know, not getting too over my tips by getting too big of a cash out refi. But all in all a lovely boring ho hum year.

Michael:

That's, that's awesome. And has there been one particular market in the market that you're in that you've seen has just blown the others out of the water? Are they performing fairly equivalently.

Tom:

So Orlando has just been doing really well. And so is Atlanta, a smaller market that I'm in up in the Midwest in Pittsburgh, hasn't seen the type of appreciation. And I mean, there's a there's a lot to be said to, to having sort of a balanced view, and not just chasing cash flow. Because these these properties have appreciated so much more and so much faster. With these big eye buyers coming in, they're just driving the prices up. So the bigger markets have performed better on an appreciation wise, and I'd say not too big of a difference on with regards to to rent, but I mean, meaningfully, probably, you know, in the last year, they've been pre increased in price, probably 15%. Were these other properties that I have in up in Pittsburgh, you know, they've maybe they've been they've increased maybe 5%, which is still like, awesome. Like, if you can do that, you know, rinse and repeat all day. But the bigger markets have just achieved these just massive appreciation.

Michael:

Yeah, that's awesome. And just to give some of our listeners a little bit of perspective, I want to put some numbers to to all of this. So when we talk about cash flow versus appreciation, we have investors that are biased one towards, you know, towards one or the other usually. And I've always argued that cash flow is great for today, you can live on it, it's tangible dollars right now, but appreciation is what generates really massive wealth. And so if you've been seeing 15% appreciation over the last year, let's just take a number and call it 150 grand. And if we take 15% of that, that's $22,500. So if we take 70% of that, which is about what you could cash out in terms of a cash out refi, that's $15,750. So you might be how you may have the ability to tap into an additional call at $16,000 at the end of one year via appreciation versus on the cash flow side of things. You might walk away on $150,000 property with I don't know two grand in cash flow.

And so while Yes, I would argue that they're both important cash flow is a great defense, cash flow is usable dollars today, being able to take an extra $16,000 out of that property and go put it into something else can be so much more impactful, long term to generate really massive wealth. So I think it's important just to keep that in mind, especially when we're talking about such unbelievable appreciation numbers when we have seen rents stay strong, but not they're not going through the roof. Like the appreciation value side is.

Tom:

That's a great point. I mean, there's a saying I think I've tried to say before, it's like you know, a smart rat has multiple hole holes to run to, you know, one whole being the appreciation one whole being the cash flow on the yield. And I don't know in my experience so far like the appreciation side has been definitely out weighed where a lot of the return has come in through that, you know,

Tom:

Are you referencing what we're talking about before the episode how I was saying, I look like a wet rat? Is that what reminded you? A wet rat has multiple holes to go to?

Tom:

Yeah, yeah. Michael has some, some Fabio long hair. This is probably more relevant for the YouTube watch. Right. And he said he felt like a wet cat. I think it was.

Michael:

A wet rat.

Tom:

Yeah, but a smart rat has multiple holes to run to they you know, and the equivalent investor, you know, running towards a both appreciation or cash flow.

Michael:

Yeah. Makes a lot of sense.

Emil:

Tom, you might have mentioned it, but you have any vacancies over the last year and a half?

Tom:

I had one. Yeah. So I had a one. As I said, it wasn't tenant. It wasn't like, you know, payment related. It was just somebody was moving. It was maybe slightly longer than I had written like in vacancy, like, in pro forma wise, I'll maybe estimate like a month of vacancy. And I think this was closer to 45 days, but it released a slight increase in the rate, in the rental amount. But there was some vacancy. But again, it wasn't necessarily pandemic related. And there ended up being a little bit of an increase in the amount of what the rent was.

Emil:

Did you have any speaking on late payments? Did you have any tenants who had late payments had to catch up anything like that?

Tom:

Yeah, I've got one tenant who has kind of a funny schedule. So we just more or less like move their payment schedule, like, around like, two weeks or something just because of like the timing of like, when they're getting paid. So like, if you look at the balance sheet within my portal, have my property manager it looks like they're always a little bit behind, but they always pay regularly and we just shifted on when they're paying. But no, there's no beyond that thing, which is, you know, not a problem. No real issues around cash flow and payments,

Michael:

Noice!

Emil:

All in all pretty solid year and a half. I mean, real estate investing, speaking obviously.

Tom:

Yep.

Michael:

You didn't feel like the grass was greener on the multifamily side of things this year. Hmm. Yeah,

Tom:

I like to dabble in some stuff. So. I mean, I wouldn't be surprised if I go mid family, but it's like, part of me is like it is not broken. Like why fix it? Why?

Michael:

Because it's a better toy.

Tom:

Yeah. The other saying though, is if it's if it's not broken, you can still fix it….. There's a fox in that house. There's a cat in the Okay, anyways. I might dabble in the multifamily just because I feel like I want to exactly if I'm a dabbler. Anyways, we should we should switch it to someone else. Emil, are you the next right person? Because we're kind of transitioning to all multifamily.

Emil:

I want to I want to give Michael the floor cuz he's a heavier multifamily. And then I'm a 5050 with my current portfolio mix. So yeah. Michael you go next?

Michael:

Yeah, so we talked about it last year, probably around April, when things got really, really crazy. With a pandemic here in the States. And everybody was predicting, like Tom, you mentioned this wave of non payment or late payments, and all these, all these types of things. So I was bracing for the worst, I think, like so many other investors. And I was just really clenching my teeth and waiting for this tidal wave to hit and it never did, thankfully, and I'm knocking on wood here that it continues to go that way. But it's been very smooth sailing, for the most part.

So I had some really high end units that I had just finished renovating right when the pandemic hit. And so I was really nervous and having a little bit of issue getting them leased up. Because again, they were on the higher end for that particular market. And so we gave a couple of concessions, we lowered the rent a little bit, to incentivize people to move in, we were able to get them filled. And then renewals came around a couple months ago. And I said, Hey, we got to get these things closer up to market. And so we were able to get seven to 10% increases on pretty much all of those across the board, which has been really exciting. And then I've had several other multifamily properties that have had a couple vacancies. And as those tenants move out, and we turn them with relatively basic turns, we're getting another seven to 10%, pretty much across the board.

So 7% is kind of that the bottom floor of what I'm shooting for rental increases, both on new leases as well as on renewals. And thankfully, we've had a lot of folks renew, because just the rents in these markets that I'm in have gone up and so the deal that they're getting even at the rental increase is still really great.

So again, that's something to be thinking about for other landlords is the cost of getting a new tenant is often so much more expensive than people realize. So between the property management fee that you'll pay for a new tenant placement fee and the turn costs and the cleaning costs and the vacancy when you factor all of that in, even at a higher rent, you can often still be behind as opposed to just keeping the rent the same, or giving a slight increase to still stay under market rent, but above where you currently were.

And I mean, I know you and I have talked about this at length. And I know we've talked about it on other episodes, but I really encourage people, I felt like the Hawks, I really encourage, really, I would really, really, really encourage people to go through that exercise. Even if you don't have something coming up for renewal, just, you know, play that game and say, Okay, if I could get $100 a month rent increase on this $1,000 a month unit, that's a 10% increase. But what does that truly cost me if I have a month of vacancy, it turned cost here, property management placement fee here, you'll start to realize, I think that in most cases, it doesn't necessarily make sense, which is very counterintuitive. So again, go through the exercise.

But so I was I was fortunate enough that the rents have gone up, they've really kind of skyrocketed around me, which has been made it very easy to both keep folks in place as well as get rental increases at the same time. So I've been very fortunate I have not had a lot of vacancy, where I've been really getting hammered is on my multifamily renovation project, because the cost of materials have just gone through the roof. So this is one area where being in multifamily has just totally sucked, to put it bluntly.

So if you're building homes, you've probably feeling that too. But from I would argue, I would assume most single family investors are not doing new construction, they're just doing maintenance or rehabs or repairs. And on a single family, that tends to be a manageable margin for the additional cost of materials. When you're physically constructing 15 units inside of a commercial property. I mean, it just it's a bummer. So but again, overall very, very happy with the vacancy, very happy with the rental increases and very happy with the amount of rent that's been received and lack of non payment and lack of late rents.

It's funny where I did feel it is in my single families. The two single families that I own, that are long term buy and hold are in California, Southern California and an expensive market. And both of those had issues paying. And so we gave a rent reduction to one person that was the condo I owned, which I sold earlier this year. And then in the single family, the true single family, they had issues paying and so we gave them a break, and they're still quite behind. So my property managers looking at getting them put onto a payment plan. And also looking at getting them some rental assistance, because there's several programs out there, you just have to apply for them. But I had that was pretty interesting that really the folks that struggled the most were but again, I think it makes sense in that it's a very expensive market.

Emil:

And California shut down a lot more than other places, right. So I'm sure people were more negatively affected by the shutdowns in California versus, you know, in the Midwest where they didn't have as strict of shutdowns. And that was it.

Michael:

I think that absolutely, absolutely

Emil:

Interesting. Okay, so, yeah, you already answered kinda all the questions. I was gonna ask Tom, like, did you have late payments and this and that, that's really interesting that it was on your single families and that they were the California ones.

Tom:

On the construction side, too. I mean, I thought that was really interesting in that, you know, with with multifamily there oftentimes is more Rnm if the leases perhaps are shorter in and then on the other side of the matrix, if you're doing more development work versus turnkey, like there was way more pain in that just because of the supply chain and materials costs and all of that. It you know, it's it's like a matrix with all of this. It's okay, single family multifamily. Okay, more turnkey versus more development. And I think like in that quadrant, it's that the more development stuff is felt a little bit more pain from all the secondary effects that we're seeing from country going through a pandemic. very insightful. very insightful. Michael.

Michael:

Pretty insightful for a wet rat, huh?

Tom:

Yeah, pretty insightful. For a wet racket, the new. I'm gonna I'm gonna start giving more compliments. You know, I think that's uh, oh, that's very good questions you had earlier.

Michael:

One thing I will say on kind of, because Tom, you're talking about the appreciation on the single family side of things. So on the multifamily side….

Tom:

Good memory Michael, you're right!

Michael:

That’s too good. On the multifamily side, there has been a significant amount of appreciation as well. And when we talk about appreciation in the multifamily space, we typically would call it a cap rate compression. And so we see cap rates are either increasing or decreasing, expanding, compressing, and so when you have a cap rate compression, the cost to a new buyer increases because the equation is noi, which is net operating income. Which is simply your annual income minus your expen ses, not including your mortgage payment divided by the cap rate equals your sale price. So when we decrease the denominator and make it a smaller decimal, I know this is really math heavy episode, but the sale price increases. So play around with those numbers if you're not familiar with the concept.

But basically, I've had numerous agents reach out to me in some of the local markets and say, Hey, are you interested in selling cap rates are going crazy. And so I have a property that I purchased in 2018, it was a five unit, I bought it for a song, put a little bit of work into it. And I think I've talked about it in the past. But the thing cash flows like an absolute machine, I've got some really great long term debt on it, it's a 10 year fixed note on it amortize that 25 years. And for the commercial world, five years, 10 years is fairly common in terms of fixed, and it's at three and a quarter percent interest rate, which is really, really awesome in the commercial side of things.

And it's, it's doubled in value, basically. So over that three and a half year period. So things are very, very hot in the multifamily space as well. And part of that was just because it's in a good market. And part of that was because we did a bunch of work and manipulated the noi, and it really stabilized the building.

Tom:

Is this the one that you're you're you're you're selling because of the appreciation that you got?

Michael:

No. So that was a six unit. And that was one we rehabbed, we bought it as a buy and hold rehabbed it, but then just decided that it wasn't it was kind of a pain in the butt. It's kind of a headache. And so we said the market that area isn't as exciting as we thought it was. And we can just make a quick buck on this. I can pay back my cash partner, get them their money back plus profit, and I can walk with some profit too. And just spend my time, energy and focus elsewhere. Thanks, guys.

Michael:

All right, Emil, the 5050 man,

Emil:

So my single family has been more like Tom been pretty awesome. So I talked about it on a prior episode, I had the Indianapolis single family that I did a cash out refi we pulled out all our cash and then some. And because we lowered our rate like a point and a quarter or monthly mortgage payment only went up like 2030 bucks. So cash flow wasn't affected too much. So basically did a full cash out refi just thanks to Mr. market, which was awesome. That tenant also renewed their lease recently for a two to 3% increase. So that's been great.

The Jacksonville property that one we thought the tenant was going to leave like a couple months into the pandemic, it looked like they were moving for a job or something. Turns out they ended up staying at like a very slight bump. I think it was like a 2% rent increase as well.

And then St. Louis, which I just mentioned at the beginning of the episode, we just got a thumbs up that they renewed their lease at a 2% raise. So all the single families I've had all three of those, they've had the same tenant since I bought them so they're going on like three, four years of having same tenant which is awesome. Gotta love that about single family.

Michael:

Awesome.

Emil:

No issues with payment. I mean, one tenant had let like early on, I think they paid like two three weeks late on one payment and then they caught up and everything was good. So it's been ho hum in a very nice simple way on single family. On the triplex, which I bought in November, we had our tenant just leave. I think it was a probe knows may they just, we just found out when we were doing some work that the unit was vacant, like they just left in the middle of the night or whatever. They took all their stuff. They didn't trash the place but they just left without giving notice.

And it was funny I asked my property manager I was like is this is this normal? And they're like honestly, we've had this happen like two or three other times and it's been only during like the last couple months in multifamily around St. Louis so seems like more pandemic related for like smaller multifamily units that they've managed that they've seen this but again, you consider two or three times to happen. That's very, very small. Like we just got bad luck. Not the worst thing in the world. This thing is way more under market rent. I think they were renting at like 495 a month. We're going to be doing some renovation I'll tease a little bit of this future episode we're talking about I'm thinking with the renovations we're gonna do probably get it up to around 650.

Michael:

So this way you didn't have to pay cash for keys.

Emil:

Exactly. I mean, in in Missouri, you don't have to do that. It's a It's very simple. You can get once the tenants lease is over, you can give a 30 day notice to ask them to leave. In fact, so that same property there is a triplex one side it used to be a four Plex, they converted one side into a townhouse. So it's like a top and upstairs downstairs townhouse. That person they said they were not going to renew their lease, but they didn't give us a date on when so they've kind of just been month to month for a while and because we don't want this to drag on into winter. Where it's much harder to rent and you don't get as much rent, we're issuing just a 30 day noticing a essential month month and not planning on renewing, just asking that they leave.

So it's one of the nice things about Missouri, you know, very landlord friendly rules. It's not like we're kicking them out, we're giving them a full 30 day notice. And we extended them a renewal and they just chose not to accept it. So we've asked them to leave, which is nice, much harder. I think California, everyone knows can do that stuff.

Michael:

Very different beast. Yeah.

Emil:

So that's, it's it hasn't been bad at all. I mean, you know, people get up and leave. It's part of it. I'm not gonna say that's just a multifamily thing. So overall, I think it's been nice. The single families like Tom said, all the appreciation has been amazing. you couple that with low interest rates, and you get to do cool things like a cash out refi and basically not change your payment, and pull out all your money. So single family had a really good, as we all know, we've talked about so yeah, I'm glad. I'm glad I have a little bit of both. I'll say that.

Michael:

If you had to choose one that you were more thankful to be in is a multi or single family over the last 12 months.

Emil:

Single Family for sure.

Michael:

Single Family. Yeah,

Emil:

I've heard of less people having issues with their single family, lot of appreciation, basically, in every single market. Whereas multifamily I've heard more people saying, you know, we've had issues with collecting payment none of us have, which has been great. But that from other investors I've talked to seems like multifamily more. So that issue if it did

Tom:

Not super related, I just kind of like a weird Rnm repairs and maintenance things on one of the units. I feel like I've been very much Oh, you know, you know, blue skies and butterflies and all kinds of good stuff. I just had a, a break in on one of the units. Thankfully, everyone was okay. But it's like, Yeah, I don't know, they just sent some pictures of like, the door, like kicked in. I think it was a nobody was home, thankfully. But it was, uh, you know, that. I think everybody's okay.

But, you know, still still, even though it's, you know, you know, positive, there's still like, some costs and like bad and getting scary stuff, you know, happening on on some of the properties. I don't know, there's just, I just looked at this the other day, where they were sending someone out there to fix everything and get it all right, but I don't want to, you know, make the illusion that like, everything is always like so. So great. I know, there's things that things that happen and Yeah, I know, I just made me think of it. It was the first time I've ever seen that. And one of the units that kind of repairs and maintenance thing. Again, thankfully, yeah, everyone. Okay, but there's still, you know, stuff that stuff that comes up.

Michael:

Yeah,

Emil:

Great point, it ain't all rosy.

Michael:

And so for that time that you reported to your insurance, you're just paying out of pocket is is lower than your deductible?

Tom:

I've never reported that kind of thing to my insurance, I should because it might as well as like, put it towards my deductible, right?

Michael:

So the insurance property insurance works a little bit differently, like as compared to medical insurance, so it's a per occurrence deductible. So if you have $1,000 deductible, and you have a $500 repair, they're not covering it, and they'll actually they'll put it on like your oftentimes, they'll put it on your like permanent record that, hey, this, they had a claim but didn't didn't wasn't covered because of lower than deductible. So I always check to see what the repair is going to cost. And compare that against my deductible. And if it's way lower than my deductible, or even around my deductible, I just eat the cost I don't even tell the insurance company because I don't want that to merit on my permanent record. versus if it's way higher than that deductible. And you know, it's gonna be sometimes you can't wait for a repair quote, like my younger brother just had a big pipe leak and the problem is I call the insurance is gonna be big so he you know, of course called him he got a repair person out there immediately and it was covered.

But for breaking stuff, it's normally changing the locks replacing a door, the lowest property deductible I've seen is like 500 bucks. And so that's likely going to be the repair to that is likely going to be less than your deductible. So if it were me, I probably wouldn't even report it.

Tom:

Yeah, I wasn't planning on it, but I never even crossed my mind of doing that. But I like it good. Got it. Got to take away Yeah. On that got that dollar that per occurrence. structure.

Michael:

Yeah, yeah.

Emil:

All right, guys. anything. Anything else? Add or is this a good spot for us to wrap this one up?

Michael:

Yeah, I know. This was great. I mean, it's awesome to hear that the single family has been going gangbusters. That's what we hear about in the news. And that's what we're hearing from from you all. So it's very, very exciting stuff. We'll have to do another post mortem in 12 months to see who will reign champion the next time bum bum bum!

Tom:

I like it, the mid year episode mid year check in episode. I like it.

Emil:

I like a good idea. Alright guys, thanks for sharing your experience love episodes like these where we just kind of dive into stuff that's been going on in our personal portfolios, was surfing with a buddy of mine and he was like so what's your what's your podcast about I was like, you know, we kind of just talk a lot about what's going on in our, our own lives and worlds and yeah, we'll you know, we'll talk about high level stuff, but it's a lot about just our own experience. And he was like, that's really cool. You don't hear a lot of podcasts like that. So yes, I don't know. I don't know what else.

Tom:
You're complimenting. There we go!

Michael:

It's it's that a lot of that but also like a lot of isms, you know, so if you're looking for some decent isms come check us out.

Emil:

Yes, Uncle Tom's isms?

Tom:

Yeah, making up isms: it’s a rat in the hen house. A wet rat.

Emil:

Alright, guys, ready here. Alright, so we're gonna do that future episode. And if you want to make sure you don't miss out on it, make sure you subscribe to our YouTube channel if you're listening on YouTube. Or if you're listening on your favorite podcast, make sure you subscribe there. Happy investing everybody. check you out in a future episode.

The 3 Virtues of Winning Portfolio Deals with Clayton Wyatt Jul 22, 2021

Single-family rentals (SFR) are having a moment, with significant momentum in rent levels and values. Build to rent is the gateway drug to SFR, with new groups entering the sector left and right. Aggressive assumptions and favorable deal terms are necessary to execute a portfolio transaction. Considering this, how do investors get in on the action in such a competitive market? Roofstock's VP of Business Development, Clayton Wyatt has answers for you in this episode.

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Transcript

Michael:

Hey, everyone, welcome to another episode of remote real estate investor. I'm Michael Albaum, and today I'm joined by Roofstock, VP of Business Development, Clayton Wyatt. And Clayton is going to be talking to us today about some of the things investors need to be aware of, and things they can do to win portfolio deals. Alright, let's get into it.

Clayton Wyatt, thank you so much for taking the time to join us today. Really appreciate it.

Clayton:

Yeah, happy to be here.

Michael:

And so I would love if you could give our listeners a little bit of background on who you are as an individual and what your role is at Roofstock specifically.

Clayton:

Yeah, who am I as an individual, I don't know if I want to bore the audience. But I mean, I'll give a little bit of background, you know, came from real estate, private equity and investment banking, you know, background, you know, Rich and I both spent a lot of time at Jeffrey's covering the single family rental space, including, you know, waypoint which obviously Gary was the the CEO of and, you know, all the way, way back to when waypoint was ramping up to go public. And we ended up merging them into, you know, a spinoff from Starwood into a public reit, and, you know, covered them as a public company. So when, you know, rich, and Gary and Gregor had co founded Roofstock, I stayed behind and had done some, some read coverage, mostly in the residential space, but also started a cover, you know, some prop tech companies, as we started to see more of these technology companies getting into the real estate space.

And so, you know, groups that were like an Opendoor, or an Offerpad, or, you know, Point or Unison, or some of these mortgage companies really starting to see a lot, a lot more of those, those groups come into the space, because residential is a massive asset class. Right. And so similar to, you know, Roofstock there was there was a big Tam available for for groups to cover. So it's been a little bit of time there. And then, you know, finally got an opportunity to come over to Roofstock, about three years ago, and primarily spending, you know, my time in the in the business development team, which, you know, obviously, we handle the portfolio transactions, but also a lot of the, the JVs and interesting relationships that we've got going on there, including, you know, the recent announcement we had with JLL, that made an investment into rootstock, and then obviously, we set up a joint venture with them and with the acquisition of stessa. So I would say, majority of time spent there, but also, you know, at a at a corporate level, you know, any any capital markets activities, so rather that's, you know, US structuring, you know, debt or equity, but also on the investment services side, where we have clients coming in that are looking for advice on putting credit facilities in place or debt products, spending a little time there with with the broader team.

Michael:

Right on.

Clayton:

Does that work for an overview?

Michael:

Yeah, that was great. That was great. And so for those of our listeners that might not be familiar with the private equities market, what is covering something mean, you talk about covering a read or covering SFR? as an asset class?

Clayton:

Yeah, So just as an investment, you know, banker, you're, you're really a, it's a client, you know, driven business. And so covering a company is really, you know, you're the point of contact for that company for all the services that, you know, the bank can offer to them. So rather, it's advisory on selling a large portfolio, or accessing the public markets for either equity or debt. You know, we're a coverage officer in the sense that, you know, if, if you want to do any of those services, we sort of help you set up any of those products or access those markets.

Michael:

Perfect. Okay. Thanks for clarifying. So today, what I really wanted to chat with you about is what you're seeing in the marketplace, in terms of how to win portfolio deals, both on the institution side of things, and then also for your individual or retail investor. What are some things that have changed in the in the landscape and what are some things that folks are doing to win portfolio deals?

Clayton:

Yeah, so I mean, a couple of things that I would say just stepping back First, you have to recognize the size of this market. Right. And single family rental is not a new industry, it's not a new marketplace, but it's been new to institutions, just over even the last decade. And SFR, we've been saying this for a while, but SFR is definitely having a moment. And the market is very hot, you're just seeing record amounts of new capital, particularly at an institutional level flowing into the space. And if you compare that to, you know, other real estate asset classes, there's there's a massive gap between the the percentage of ownership at an institutional level versus the smaller retail, you know, investors one off investor.

So within let's just look at multifamily residential as a comparison, I think the the quote unquote, institutional ownership in that space is 30 35%. And it kind of depends on how you classify institutional investors could be a little bit higher, within SFR, it's still two or 3%. So you've got this, 10x, opportunity or more right, to to capture more of that class from an institutional level. And once use in any of these real estate classes, once you've seen institutional money come into a space, it's not like it retracts and then exits the space, right? It just continues to be more and more institutional, so that that's a huge opportunity, I think from a, you know, from a retail ownership or a smaller, you know, investor ownership, because that means that your portfolio is likely going to be worth more money, you know, tomorrow than it is today, because of this cheaper cost of capital, you know, coming into the market.

And so it really has been, you know, from one of the trends, I guess, it's been a supply problem, not a not a demand problem, right? So is with an ever increasing amount of money coming into a, you know, sort of a fixed asset, you know, base, you're going to have more competition at every turn. Yeah. And so I think that's one of the major trends that we're just we're watching closely. And as we take out portfolios for sale, we're just seeing more and more investors interested and more and more, quote, unquote, real buyer showing up to bid on processes. And I think people are looking for ways to differentiate themselves, and for ways to, you know, get get proprietary access to different deal flow channels.

I think from a, you know, how do you, how do you win more deals in the market? I think it really is, goes into that differentiator, right. So you can, you know, in any in any process, you could pay more money for a deal, right, you can be a more certain buyer. I mean, ultimately, if you pay more money for a deal, you're gonna win that deal, right? If you're the if you're the, it's kind of, you know, simple to say, but if you pay the most money, in any process, you're gonna win the deal. But I do think that when you're a seller, getting that, that certainty of close is important, as well. And so when we always tell our sellers, and we tell the buyers that are bidding, it's really three things, it's, you know, how do I win a deal, it's price, terms of the contract, and then certainty of close, right, so you can win, win, win or lose a deal on those three deal points. And I think that applies to, you know, anywhere from the, you know, a 10,000 home portfolio deal all the way down to a 10 home, you know, deal or even to a, you know, a single, a single home. So, from a perspective of what are we seeing, and what does it take to, to win deals? It's really those three things,

Michael:

Yeah I'm curious to just get your personal insights and opinion as to why do you think SFR has become this explosion? airy, if that's a word asset class, into the institutional world, and the multifamily commercial industrial has always kind of been there. But why now, all of a sudden, are we seeing institutions so interested in the single family space?

Clayton:

Yeah, I mean, I don't know if that's a word, but we could we could invent it here. And we could we could try to get it into the dictionary,

Michael:

We'll go with it.

Clayton:

Well, I think it's, it's it's a couple of things. This has always been an asset class. And it's always been a really important way that investors have been able to to grow wealth over time. It's just now becoming more relevant or, you know, apparent institutions. Because, I would say in large part technology, and companies like a Roofstock that can create a marketplace can eliminate some of the friction Out of the transaction or out of the management and the ownership of these assets.

If you, you know, back up to, let's say, you know, 2011-12-13, when companies were, you know, institutions were buying these assets, and then getting ready to take them out as public companies, there were a lot of investors that really do this as a trade for institutions and didn't believe that you could manage, you know, a scattered site portfolio of properties, at the same efficiency, or at the same scale as multifamily properties, which, you know, could be units all in one building vertically, right? Technology, change that, because you could now, and it's been proven out now, like, I don't think that there's any question anymore of, can you can you manage a, you know, 80,000 unit portfolio of single family rental, at the same level as you can manage 80,000 units of multifamily. And so I think you have have that, let me, let me put a pin in that for a second.

But the other piece of it is, we've just been through a crazy pandemic, where on its face, I think everybody would have thought real estate, you're going to see another massive dip in real estate values, and what actually happened over the last, you know, 12-18 months, values went up, right, and it's, it's a supply problem, we over the last, you know, decade, we have under built in terms of supply. And so why you see a lot of these home builders rushing to build even more, even if you look back at the last decade, we there's, there's so many more homes that need to be built to even catch up with that normal, you know, curve in terms of the amount of product that that we need, as a as a country. So I think that's, that's magnifying the problem.

But in terms of this is an asset class, the reason it's so interesting to institutions is because you can manage it at scale, the technology's there to do it. And it's, it's a hedge against, you know, downturns people, the value of home has become so much more important even during this pandemic. And I think it Listen, it was apparent in the last downturn, that the rental income is very durable, even during a real estate depression when prices go down. And so, you know, during this, this pandemic, it was actually it was a huge winner, because not only were the was the the rental income durable, but prices were actually going up, right during a during a downturn. And so, I think those those things have kind of made this an important asset class for investors. And, you know, you also see this, you know, iterating, in, in, in different forms, right, like the build to rent, you know, asset classes has become much more, it's kind of like the the in vouge thing to do right now. Right, is to own build around to go accumulate assets. Yeah, from my perspective. And why is that? Like, that's, that's not a new concept.

I mean, if you look at Europe, they've been doing builddirect for decades, right? It's, it's just in the US, where I've been calling it the gateway drug to scattered site, single family rental, because if you're a, you're a residential multifamily investor, you're used to having 200 units in one building. And so you weren't quite as comfortable saying, I'm going to go buy 200 units in Phoenix in a scattered site, where I have to manage all these these assets in different places across the MSA. But if I can buy 200 units that are contiguous, and it's a build to rent community, it's an easy way for you to start getting into that, that single family rental portfolio. And I think that, you know, that's important because it gives investors a comfort level that you can you can own and operate these similar to, you know, other residential asset classes.

And so I think in the future, it's not just going to be Is it a single family rental, you know, residential portfolio, or is it a multifamily residential portfolio, it's just residential. And rather, it's, it's it's multifamily or single family, you're owning a house for somebody to rent, right. And that's an that's a very important thing. Because where you wake up and how you feel about your home, like, I think it permeates so many other areas of your life. And, you know, the best thing you can do is provide a roof over somebody's head that, you know, gives them a safe and happy like place to live. And so that's never going away, regardless of if it's multifamily single family or, you know, we figure out ways for people live in, you know, co living situations or what have you. So I think it's an asset class. That's, that's been important for years and years and years, but it's just been institutionalized and technology has helped accelerate You know, our ability to do that efficiently?

Michael:

I think that makes a lot of sense. Makes a lot of sense. Alright, so let's jump into talking about a little bit more in depth some of the three points that you brought up in terms of what it's taking to win a portfolio. So, so price terms, and then certainty of close. So let's start with price. Where are you seeing these portfolios go with regards to list price, versus what they're actually being purchased for?

Clayton:

Yeah, that's a hard one. Because, you know, list price is difficult. And I think in some scenarios, having a list price could even hurt you particularly in, in, you know, in an appreciating market, right. So if yours, you're setting a list price, you might be setting that list price too low,

Michael:

Someone could be willing to pay more,

Clayton:

In some cases, it's Yeah, and and on an individual asset basis, I think it's a little bit easier to set a list price, because you've got, you know, sort of some insight into what that looks like. But at a portfolio level, I think it gets a little bit more difficult because you, you're starting to see capital, underwrite the cash flows. And we have this broken system of appraisals or bpos or AVMs, that, you know, generally do an okay job on, you know, just law of large numbers, like you're gonna get some wrong up or down. And on average, it's pretty good.

But it's really built for, you know, the one off home that that's probably going to be occupied by an owner occupant, it doesn't take into account, you know, what folks are willing to, to receive in terms of cash flow, like on a yield basis, right. And I think that's a huge problem. Because if you're not evaluating what that cash flow stream is worth, to any institution, and in a market where institutions are, are looking for yield, or you know, where debt is so creative, that they're able to pay lower cap rates and cap rates are compressing, then you're gonna miss the valuation of these portfolios. So, you know, again, I think it's very difficult for, for, for me to just bogey like what what are all portfolios trading at in terms of like a quote unquote, list price, because a lot of times these AVMs are, are actually not very helpful in terms of determining where the price is going to go.

And I do think it's actually a little bit of a tale of two cities here, because there are the portfolios that fit very well, for an institutional investor in terms of, you know, what are the top 10 markets in the US that the portfolio is in? What's the vintage of the house? What are the areas that it's located in? Is it a high school score neighborhood? You know, is it a high neighborhood score, is it you know, is it in a market where rents are appreciating very quickly.

And I think groups are very willing to pay up today, for those dynamics in a in a well defined stabilized portfolio, and we are starting to see groups pay up, pay a premium, quote unquote, for a stabilized portfolio. So, you know, there's cases where we're seeing, you know, if you back up two years ago, I would, you could say, you might see us pricing portfolios, or guiding on pricing and portfolios at a at a discount to a BPO value. Today, I would argue that for the best portfolios, you're actually seeing a premium to BPO. And, and on an individual basis, it might be a little bit a little bit closer to, you know, that appraisal or BPO. But on a portfolio level, you've got a couple dynamics that are are working in your favor in terms of being a seller of portfolios, because the cost of capital today is is very low. And it particularly on the debt side, you're seeing institutions able to, you know, securitize these portfolios and get debt at a leverage point that's in the mid to high 80s. And at a sub 2% cost of capital.

Now, obviously, there's some some expenses in terms of structuring that dealing and and and selling it into the market. But if you've got a 2% cost of capital on the debt side, and you can get very high leverage, that's gonna make, you know, a portfolio very, very accretive on a current cap rate basis, and so we're seeing compression of cap rates. We're also seeing That because rent is, you know, accelerating in some of these markets very quickly, that groups are able to really underwrite the loss to lease, or that discount to quote unquote market rent. Because there's a there's a real tangible increase, you know, year over year or lease over lease in terms of the, those rental bumps.

And so I think it's, it's a combination of all those things to say, you know, don't I, the one warning, I would say is, you know, don't don't miss price the portfolio or set your, your bar, you know, necessarily too low. But I do think it's helpful for sellers to be realistic, you know, I'd be remiss without without hitting the other side of that coin, which is, there are portfolios where it's a little rougher, and if it's not right down the center of the fairway for these these institutions on where they want to buy, what markets they're in, you know, what the product type is, as soon as you start to, you know, diverge from that a little bit, you're, you're starting to see bigger discounts, you know, to a, quote unquote, market value for those portfolios.

So rather that, you know, small multifamily units or townhomes that don't necessarily fit a investors buy box, or is it you know, lower rent band homes or a little bit older homes. So I do think those things come into play. But for the very best, you know, well located portfolios, we're seeing premiums to, to to a BPO or quote unquote, market value.

Michael:

Man, that's awesome. So in a nutshell, to wrap that up with a bow, that we are seeing premiums being paid on the best located and best manage portfolios, because we are seeing rental increases shoot through the roof, coupled with very low cost of capital for these buyers, institutional buyers. Is that a fair way to sum it up?

Clayton:

Yeah, I think that's right. And so to, to just highlight maybe the two points, I think that we even shot out, there's like, you got to really underwrite the upside, because it's real. It's not just, you know, theoretical upside. And there's embedded, you know, gains in some of these portfolios. And it's, it's, you know, don't focus on these these AVMs because these AVMs are flawed. And it's really about the cash flow that you receive. So, you know, real cash flow matters to institutions. And that's what's important versus you know, what some automated valuation methodology tells you.

Michael:

Yeah, interesting. It's, you know, I back in 2014, or 15, I bought a portfolio for four duplexes right next to one another, and they were bank owned. And so we were able to get them at a discount. And it sounds like So Long gone are the days of Oh, well, you're buying multiple properties and the portfolio, you should be getting a discount, because you're doing the seller favor. The Costco effect, if you will, buying in bulk. It sounds like that's, you know, that's no longer in play here, which is so interesting.

Clayton:

Yeah, I don't want to say that completely gone. Because obviously, like a distressed portfolio, a, you know, some of these loan pools that are purchased, where it's a non performing, you know, loan pool, you're still gonna see discounts like that, and where there's, there's quote unquote, hair on a deal. You know, you're gonna have to work through to get get those portfolios, but I'm just saying, like, you know, previously, where you might have a perfect, quote, unquote, perfect, you know, SFR portfolio where it's, you know, great rents, great real estate, new product, and SFR was getting a discount, just because it was a new asset class, like those days are gone. Right there, you're gonna, you're seeing a convergence of multifamily cap rates and the SFR cap rates.

Michael:

Got it. Okay. All right. And do you think the same is applicable on the retail side of things for retail investors and maybe looking at a portfolio of 510 15 properties? Should they expect the same things? And would you advise, recommend folks looking to underwrite in a similar fashion? And that the upside is, is this tangible as well? Or does does the dynamic shift? When we go into that smaller retail investment scale?

Clayton:

I gotta be a little bit careful here, because you know, that that individual investor, you know, still has to be fairly disciplined in terms of, you know, what their cost of capital is and what their return thresholds are. Right. So I would say you still have to think about that on a personal, you know, level. But yes, I mean, if there's, if you're buying a group of 10 properties that's in you know, Phoenix, Arizona, and the, you know, the in place rent is 12 $100. But you know, that the market rent is 15 $100. You should be underwriting the upside, right? Because that's a market where it's a very tangible You know, upside in the market rent and and it's not as big of a risk to to underwrite that upside if it's really there, right.

So I think that those sorts of things matter, and then finding ways to operate your portfolio even more efficiently, you know, that we always talk about, you know, the gross yield or the net yield, right? Like, what's your noi margin? Well, if you've, if you've found a way to operate a portfolio at a, you know, a 70 plus percent margin, and somebody else is underwriting it at a 50% margin, right to be extreme, you're going to more often than not beat out that other that other buyer, because you've got a more efficient way. And it's actual more dollars of cash that are coming into you as an investor.

Michael:

Yeah, yeah, I talked about that all the time in the restock Academy is look at the current rent, but also look at what the true market rent is. And if there's a huge disparity there, there's real potential there for true value add, and maybe you don't even have to do anything. So I always look look to see if you can't see those those opportunities through that lens as a positive, as opposed to Oh, well, the market rents 1500 but the property in places only getting 1200. That's a demerit sure, if you can switch your thinking, you really have a lot of opportunity.

Clayton:

Yeah, I think that's right.

Michael:

Okay, great. So let's move on and talk about terms. What are you seeing now? And how folks are winning portfolios with more aggressive terms?

Clayton:

Yeah, it's super interesting, because I think, you know, early on, in structuring these deals, we may have done, you know, all of ourselves a little bit of a disservice, because we, you know, we viewed these, these portfolios of assets, really as individual assets, and they are not getting priced or sold today as individual assets, right, like, in early days selling a portfolio, rather, it was, you know, $500 or 5000 homes, buyers? Well, number one, there was there was a smaller group of buyers, right, so So, you know, if it was any sizable portfolio, there was probably a handful, three or five groups that you could go to, and really hope that, you know, you'd have two or three of those groups, you know, in a, in a final round, sort of bidding against each other to take down the portfolio.

Today, I mean, there's 30-50 groups that can take down very sizable portfolios, I think the terms really matter. Like before you could cherry pick, and, you know, if there was 500 Homes for sale, you could bet on, you know, 300 or 400. And, and, and really, the seller would figure out, Okay, what I do with the remaining assets, do I sell it, you know, these 300, this, this buyer and these 200, to another buyer? Or do I sell, you know, some of those on a retail basis, it's a seller's market. And so you're, you're definitely seeing contracts become more seller friendly, to get to get deals done.

So, again, that and those terms, it can can differentiate you as a buyer in the market, if it's a quicker closing, it's a you know, a shorter diligence period, more money that's up, you know, in escrow that becomes hard, you know, sooner in the process, there's, you know, no kick outs to a portfolio, you're buying the entire portlet portfolio that's there for list. I think that that has become key in all these contracts. And I think that, you know, without getting into the, the individual details of what a PSA looks like, on these portfolio deals, I just think it's becoming much, much more seller friendly.

Michael:

So you're seeing institutions willing to overlook some of the warts, if you will, to take down the portfolio, because they're seeing the value upside, potential there.

Clayton:

Yeah, and some of it was just kind of, you know, like, you know, I know, there's a bad example now, but like having like, a huge environmental indemnification on a single a pool of single family rental assets, is is not going to be received well from a seller. Because these are homes that have gone through, you know, environmental checks, right? Like, is there a possibility that you've got, you know, some massive, you know, spill on a on a property, maybe if it's a vacant lot, but like on a on an at an in place, single family home, like, that's a limited risk. So just kind of eliminating some of these quirky things that maybe buyers got got away with in the past. It's pushing more of that, that risk from the seller, to the buyer in these deals.

Michael:

Got it. Right. It's really interesting.

Clayton:

And it makes sense, right? Because if you're a seller and you've got you've got two buyers and one's telling you I'm going to give you, you know, again, let me just be extreme like I'll give you a 10%, you know, deposit up front, no closing in 10 days. And, you know, there's, there's no, you know, liability post close or anything like that I'm buying it as is, versus someone that's saying, I'm going to give you, you know, a half a percent upfront, and I'm going to take, you know, 90 days to close. And you know, I've got all these other hooks and options in the deal, like, you're going to choose the one that has much better terms, and that that is a differentiating point in these processes.

Michael:

Yeah, I know I having recently sold a couple of properties, the path of least resistance is so often the easiest choice. And it's interesting, because you were mentioning these talking about these three different points, and one is the the price the terms and then the certainty of close, which we're going to get to in a minute, but you can really play around with two out of the three, to get a better to do better on that third, right. So if you come in with super aggressive terms, and a very high certainty of close, even if you're not the highest price, you still have, you know, the opportunity to win those bids. So I think if you can really be creative around structuring your deals, there's a lot a lot to be had here.

Clayton:

Yeah. So if you that's why that third point, I think, is very important, right? It's certainty of close, which is really saying, like, are you a credible group? Or, you know, do you have a reputation of closing deals? Or do you have a reputation of, of retreating and not closing deals. And so that's, that third point really ties the first two together, because if I gave you the best price, and the best terms in a deal, but I was a high risk to close, because you've never done, I've never done a deal on the sector before. And, you know, I'm just a new entity that that, that doesn't have that reputation of closing, that's gonna hurt you. Right. And or I should just say it the opposite way, if I've got a reputation of being a bad trading partner, and re trading deals, or not closing on time, or anything like that, that matters to a seller.

And so, you know, is that worth, you know, 1% 10% in a deal, I don't think it's 10. But, you know, maybe it's worth 1%, I think the each seller has to individually sort of weigh that risk. And they might say, Listen, I've closed with this, this buyer before, I know, they can get something done quickly. And so even though their their price or their terms may not be, you know, as good as some other unknown buyer, I'm going to close with them because I know they can get the deal done. And so that I think that does matter in this market.

And and I should say all else equal, all else equal on if you had the same price and the same terms, then you the certainty of clothes definitely matters as well, because that's the thing that's going to tip them over the edge.

Michael:

Right, right. And I think it's such an important point to drive home and for all the sellers listening, even that, you know, the one off individual sellers or retail sellers, it's so important to weigh this in your calculation when looking at offers that you've received. Because I know that I did it, I got multiple offers on a property I was selling, the first day it hit the market, and somebody offered way over ask. But they were known to do this kind of janky thing where then they jerked around a little bit once the appraisal came in. And then I got another offer that was slightly above ask, but they put some terms in there that are really attractive. And I said, you know, let's go for that, which technically, at the end of the day was less money, but I knew that the deal was going to get done. So I think it's important not to get shiny object syndrome and just look at the number when there's so much more that goes into a deal, a real estate deal.

Clayton:

Yeah, and this, and this is an important point for especially new investors coming into the market that say, Well, you know, I don't have a track record. And so, you know, is that gonna hurt me in my first deal? And, and maybe it does, but like, the best way to, you know, to overcome that is to, to do some deals, and, you know, make sure that you're building a good reputation as a buyer, and you're not re-trading in any deal. Yeah, like if that that is kind of like a poison pill. If you go into a deal, and, you know, listen, absent something that's really material that wasn't you know, understood or there from the seller in the beginning, you should not be retrading deals, you should avoid that at all costs, because that is really going to hurt you, as a buyer in the market. If If you come out of a deal. And you you you agree to go in at x, let's say it's 100. And then you you you change the terms it during diligence or closing to you know, 100 minus x, right? You You really have to start now building a reputation as a good buyer and not retreating deals because I think that's just your poison pill to the market.

Michael:

Yeah, that makes a lot of sense. And so How do you think about retraining with regard to kind of individual investors retail investors with one off properties that are now getting an inspection report to review after they've made an offer? So they made an offer at 100, they get the inspection report, it's got some hair on it, let's call it $10,000 worth of work that needs to be done to get the property safe and rent ready for your next tenant? Are you still thinking that re-trading is off the table at that point? Or is that something that you would you would consider?

Clayton:

It's such a dangerous game to play, going into a deal thinking that I'm going to get an inspection and bring the price down? After I get an inspection? A couple things like that's nitpicking on inspection list is is just trouble, right? Because you you inspect any house, I don't care how perfect it is a brand new builders inspector can find, you know, anything wrong with it, right.

Michael:

It's what they're trained to do.

Clayton:

And I think it's got to be, yeah, I think it's got it Well, there's no, there's no upside for them to miss things. Right. Like, it's, it's a cover your ass sort of analysis. And so I think, you know, there are going to be circumstances where you've got a material issue, and you're going to need to, you know, solve that. And if that's an a material issue, issue to you, as a buyer, it could be, it's going to be a material issue to another buyer and the seller, you know, items that the seller is going to have to fix, regardless, I think, are items that are up for discussion, but it all depends on, you know, sort of level setting going into a deal, right? Because if the seller saying, Hey, here's the deal, we know that it needs a new air conditioner or something else, and then you get in with a with a buyer. And the buyer says, well, it needs a new air conditioner. So I you know, I need another, you know, 5000 bucks.

Well, it's it's all I think just kind of level setting when you go into the deal. So you know, kind of, here are the items if any of it's a problem. I'm just telling you like that easy going buyers are going to win more deals. Right.

Michael:

Yeah, I think that that perfectly sums it up. I think that perfectly sums it up. Man Clayton, this was awesome. This was awesome. Any final thoughts you think for for investors out there that are looking at picking up portfolios or starting to think about investing in portfolios?

Clayton:

Yeah, I mean, listen, I would, I don't want to come off like, too negative here. And in terms of like just saying, Hey, this is this is a too hot of a market. And it's too hard to compete, because institutions have a cheap cost of capital. And so you know, you should, you should just not even invest. That's not the like takeaway at all, I think the idea is like, as a bar is having a moment, but I still very much view this as a 10x opportunity for investors, because, you know, we should be an aggregation mode, because the asset class works at the numbers that are out there today. Even though you see cap rates compressing, like, again, this market is going to go from a two or 3% institutional penetration all the way up to 20 or 30%. Over, my prediction is over the next, let's call it seven years, right?

So if you just stand back and say, you know, how many homes need to be purchased? It's in the millions, right? Over that period of time. And so there's a lot of homes that need to be purchased. And, you know, don't don't feel like you're not the institution, because guess what, you might not be the institution today, but you're the institution, you know, tomorrow, right. And so, you know, we can define institutional ownership at different levels, rather that, you know, you own 100 homes or 1000 homes. The smaller investors today are the institutions of tomorrow, right? If you look at multifamily, that's a very real thing. You know, the these groups can grow over time, we're still in a very attractive market for investors to own this, this asset class. And it's, it's only going to be you know, it's it's going to make more and more attractive over time.

At some point, are we going to hit like too hot of a of a market? And it's going to, you know, go back down? Yes. Because that's, that's, that's what real estate does. And it might be, you know, for some other reason that we're not anticipating today. But I do think that owning residential real estate is just a very durable way to collect current income and to build wealth over time. So it should be viewed as more the takeaway should be, it's still an attractive market to go out and own this asset class. Right.

Michael:

Love it. But no, and I couldn't agree more. And I'm just curious from your perspective, I mean, what size portfolio is really gaining traction and interest from institutions because we, we talk about institutions, we throw that term around a lot, but I think a lot of listeners might not be familiar with what that is or what size portfolio those institutions are. are interested in investing in So do you have a gut feel or a sense for kind of where where they look at what size either in dollar amount or door count?

Clayon:

Yeah, it's changing, it's kind of the wrong question anymore. Because, you know, before institutions didn't have the capability, the platform, the technology to buy, you know, portfolios that were smaller than, you know, let's just say 100 owned. Today, you know, there are institutions that are buying, you know, upwards of 1000 to 2000 homes per month, on an individual basis, one by one by one. So I don't think that it actually matters anymore. It's, it's more like the channels that you can deliver. So if you're a seller, and you've got one home, don't think that you don't, you know, you can't sell it to an institution. They're, they're buying homes on a one off basis. Right.

Michael:

Interesting. Okay. I would have I did not know that. Very cool. Well, maybe call depending on how you if you're a buyer or seller,

Clayton:

Yeah, I mean, obviously, Market to Market matters. But no, I mean, it's, it's, it's, it's a very efficient market. And, you know, you can sell and you can buy on a one off basis, or you can buy and sell on a, you know, a portfolio basis.

Michael:

Awesome. Well, Clayton, this was great. Thank you so much for taking the time this was gave me a lot of really great insights. And hopefully, our listeners got a lot out of it, too. I hope you have an awesome and we'll have to have you back. Because before the episode we were chatting about some of the additional topics we could cover and I think you'd be a great person to do that. So look forward to picking up the conversation then.

Clayton:

Yeah, absolutely. All right. Appreciate it.

Michael:

Alright, everybody, that was our episode. A big big, big thank you to Clayton for coming on the show today. A lot, a lot. A lot of meat on the bone there. Lots of good, interesting topics. I learned a ton. Hopefully you did too, as well. I know that I've been in the portfolio purchasing space for a little bit. If you are thinking about that, definitely give us episode a listen to and we look forward to seeing on the next one. If you liked the episode, please feel free to give us a rating or review or subscribe wherever you listen your podcasts and look forward to seeing on the next one. Happy investing

Our Top Tips on Navigating the Current Market Environment Jul 17, 2021

In this episode, we look at current market trends and discuss how they apply to our portfolios. We discuss whether it's a good time to buy, sell or HODL, is it a good time to refi or put money into a property to brig rents up, or whether or not doing nothing at all can be the best form of (in)action.

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. So we're a little bit over halfway through the year when this episode is going out. And what we're going to do for this episode is we're going to take a look at some stats, we are looking at the Stessa newsletter, we recommend everybody subscribed to that newsletter, where they have a lot of great sources of data. And what we're gonna do on this episode is go through the data talked about how it applies to our portfolio, our decisions on buying, selling and everything. Alright, let's get into it.

I'd love to hear before we get into it. What's going on? portfolio? All that good stuff. Emil, why don't you start us off?

Emil:

Yeah, so I was chatting with Michael The other day I gave him the rundown. But the triplex or St. Louis triplex, we had the tenant leave who I mentioned to you guys, and it's been a month, and we still don't have a bid in hand for renovations for this unit. And so just know, I was a little frustrated, you know, I had to call my property manager on Monday and just be like, Man, it's been a month, like, What is going on? Like, you know, most of you go through turn, it takes like a week or two to get a bid and then you start work. It's been a month and we we don't even have the bid yet, let alone starting.

And so I chatted with him, he's let me know that he's contacted like five or six general contractors they work with, and everyone is either on vacation or, or busy. I know right now is just you know, a lot of people are flipping from what I hear from people who do a lot of renovation, it's just really hard to get people in the trades working right now. So just rough man, just rough. Want this unit turn quickly. It's been a month sitting vacant. So that's one month now rent. So I mean, best case scenario, I don't know at least another three, four weeks till this thing's even ready to be leased out. So I feel a little frustrated. Try to be patient. But it's kind of the update right now.

Tom:

Is there anything you think you could have done different? Like, I don't know, going back like, a couple months from now? Or do you think it's just just kind of what it is? I'd love your post mortem.

Emil:

I think there's always something to learn, I probably should have like, I don't know, lit a fire under my property managers, but a little faster. And just like, you know, the thing, the thing that was tough about this one was the tenant just left so we weren't prepared. It wasn't like they knew when the tenant was leaving. So they'd be able to just go in, do their inspections, look at things send me video, blah, blah, blah. But yeah, I don't think it should have taken this long. I should have probably, you know, the buck stops with you, you know, your property manager, as good or bad as they may be. It's always up to you to kind of like drive things. So it's probably my fault for not getting on them faster and really driving them to to make this happen. So yeah, I just got to be quicker,

Michael:

Quicker on the draw quicke

Tom:

Quicker on the draw.

Michael, how about yourself.

Michael:

So the big development project is starting to click into place with a bunch of big hurdles. Now having been completed, we had to bring in new power. So the city got had to be coordinated with and cutting into the sidewalk. And that all got taken care of which is great to know, all the other trades can rock and roll. And then I'm working on wrapping up, I think one or two other units on an 11 unit that's getting rehabbed. So hopefully gonna get those leased out. Got some lease renewals coming up, we're able to push rents, which is exciting. And then I've got to get a parking lot, I think probably repaved or patched and then resealed at that same 11 unit. So that's a bummer. But again, kind of cost of doing business or getting quotes for that as we speak. And one was just like, outrageous. I was like, $15,000 through the parking lot. I was like, Yeah, no, not this year. So yeah, things are relatively humming along.

Tom:

After you know, going through a couple of renovation it's interesting how some trades could have such high beta on the type of bids that they get, like painting is one of them like I just did a big remodel at my house and like one of the bids was no joke like $12,000 and the other was like $3,000 it's like how Is there such a gap between the two? I think some of the stuff is like more consistent like cabinets and granite you know can be but some of them there's just just wild you know, range and what they come at.

Emil:

I had the same thing happened when we changed out the air conditioning in our house. We had three h back guys come out to were like 6000 to 6500 and then the third guy was like 1314 grand. I was just like, You got to be kidding me, dude. Yeah, like so far off from the other two.

Tom:

That's a good way to think about the time value of money, like, you know, the extra effort in whatever hour two or three of like getting that extra bid like, you know, you're paying yourself basically, you know, in that example, like 500 bucks an hour or whatnot to, to get that extra bid to get the difference.

My quick update, so I just closed a bunch of refinances. And as things go with remote investing and investing in general, you know, just little little things happen. So like my auto pay to my old lender clicked off when it shouldn't have when I'd already transferred, my auto pay to my insurance went off and paid them. So I've been collecting rain while contacting go through the phone tree of getting reimbursement checks from the funds that they you know, took from me when they shouldn't have.

But successful though, it's just kind of an annoying thing to go through. But that's why you have reserves in place to end in patience to claw back that money that they auto draw drew from your old vendors.

Alright, let's get into it. So not a super long episode. But we're going to go through as I mentioned, the the Stessa newsletter, you guys really great newsletter. So on this article that we're going to look through just some stats and talk about how it applies to our portfolios, buying, selling all that good stuff. So this is dated June 19 2021. And some key findings from the week, median listing price has increased 12.2% over the last year. So between 2020 and of June, and now 2021 of June, median price increased 12.2%. new listings is growing has risen 4% over the previous year. And the last few stats that I'm going to whip out is the total active inventory continues to shrinking, but it slid just 42% from this time this year. So total active inventory continues to shrink. And the last one is the time on market was 33 days faster. On average, that seemed like a massive, decrease 33 days faster.

Michael:

That's insane.

Tom:

Anyways, I'm going to go hot seat here on some kind of like takeaways from here. So Michael, you'll I want to be last. Michael, what are some kind of initial thoughts in looking through these stats,

Michael:

I just think that the appreciation that we've seen year over year has been outrageous. And that just takes the average is that 12% or 12.1%. So that's not even accounting for some of the really, really hot markets. Well, actually, that's what an average is, it's exactly accounting for it. But if you're in a very hot market, you could be seeing well above 12%, which is which is crazy. It's it's pretty amazing.

So we were talking a little bit before the episode about maybe some of the reasons to consider selling, or maybe some of the reasons to consider refinancing. And seeing numbers like that I think are both absolutely indicators of Hey, maybe it's time to think about selling and maybe it's time to think about refinancing, because the values have skyrocketed. And so when you have values going up and days on market going down and inventory going down, it's just a recipe for massive appreciation, which those numbers are showing.

So I know that I exited two properties. This year one was a condo in Southern California, that was a six unit that I've talked about, because of that fact that values had just gone up so much. And I said, You know what, let's take the money, I can deploy it better elsewhere, get it outside of California to work harder for me. And I'm glad I did at this stage in the game. If the values continue to skyrocket for another two years, I'll be one of those people that said, No, I should have held out longer. But you can't you know, hindsight is always 2020. And if it goes the other way, then I'll be even happier that I did it.

So it's just it's something to think about. And we were talking a little bit before the episode about thinking about how the dollars that are tied up in property is actually working for you. And so there's a measure a metric called the return on equity, which is something that you also want to be thinking about and calculating when you have a lot of equity in a property and determining is that still a great investment. Maybe it was when you bought it. But if things have changed, which they likely do year to year real estate, it's important to take stock of how is it performing currently, and determine for yourself as an investor is there additional opportunity that could be funded from that particular property, in the form of a cash out refi or the form of a sale. So I think it's important to again, keep stock and keep tabs on what's going on in the market.

So that was a really long winded way of saying I think for those folks that have a lot of equity in their property. It could be an interesting time to consider a sale. And the opposite side of that coin is okay, well if you sell out of a property now you likely gonna go buy something else, if you're gonna do a 1031 exchange and so if you're selling it to a hot market, but you're probably going to be buying into a hot market as well. So have a plan for both the exit, and then the subsequent purchase.

Tom:

I like it. I mean, I was having a similar conversation on the Roofstock Academy, the private Slack channel where someone was saying they were getting these crazy high offers from I think it might have been Zillow or some eye buyer. And by the way, I think that's a big reason as a, as been a big input on the pushing prices up has is all this institutional money, investors going in and buying prices? I think that's, you know, not only providing a floor, but also just raising up because I think that institutional and when I say institutional, I mean, like, you know, pension funds and other funds out buying rental properties is pushing prices up?

Where was I going? I know where I was going. So on the Slack channel, someone was saying, like, Hey, I'm getting this crazy high offer, like, above the appraisal, like, should I? Am I missing something? And you know, should I sell what not? And I think the the appreciate appreciation is is real because that institution, and to that question Michael was talking about, you know, should I consider selling, I think you should have a plan in place, especially when you're selling and you're not, you're planning to use a 1031. Know that you're going to do something with that capital instead of just kind of taking it out and putting it on the sidelines.

So, for me, you know, having a lot of really good appreciation and a lot of the markets that I'm in I'm going to do some not sell the asset, but do some refinancing, like I said before, but still, you know, take place and being bullish, have continued appreciation to be seen a meal, want to jump in. So some of the stats, all this thinking about buying selling all that good stuff.

Emil:

Yeah, I think Michael put it perfectly I don't have too much to add, I would just say that timing markets is insanely difficult. Like, you may feel like, Oh, this has to be a top, I felt that way two years ago and look where it is now. So timing markets is really tough. I think it's just like you said, it's a good time to take stock, maybe I'll use an example I had. So in 2020, I had, I was in four different markets. And I was like, You know what, this is too many spread too thin across too many dealing with too many property managers, I want to be in less markets, which property am I most willing to part with.

And so I decided to sell a property I had in Memphis to just be in less market. So this, I think this is just a good time, especially with a lot of money flowing around to just like take stock and just see which ones you want to hold on to, like you mentioned, which ones you want to refi and which ones are just like, you know what, not all properties are made to be held forever. Like, let me just sell this well, while things are good. So not too much to add there. Overall.

Tom:

Yeah, this is a home run, if you're like near the end of your kind of investing career and just like cashing out to either like live on it or whatnot. You know, for us, like I'd say we're still relatively early and want to stack more chips before we're getting out. It's, it's great. You know, it's such a two sided coin, because, you know, I want to go do more acquisitions, and I'm in having just finished the refinancing, like I'm flush to go do some more acquisitions, more acquisitions, but it's, you know, it's just a much tighter market. But just to Michael pointed out, there are some, it could be a good time to look into some, you know, other markets where that are not, as, you know, wildly hot, and there's some good cash flow, kind of depending on what your strategy is.

Michael:

You know, I'm gonna Veer, maybe, bear, bear with me. I think also in kind of looking at the market conditions. So many of us have picked a lane and investing lane and have really stuck there. Because it's been easy, or it's worked for a long time, and things have changed. And so now, I also think it's important to be considering alternative investment styles or alternative investment classes. And so if you've bought turnkey single family homes, that's been your lane, and that's worked really well for you, well, maybe now you're priced out of that particular asset class.

So maybe it's time to consider a rehab or a slight rehab or a cosmetic rehab. Because those properties maybe are less appealing to owner occupants. And so those aren't being bid up like crazy. And so that gives you a slight advantage or a slight competitive edge, or you take on a much bigger rehab or you go to a small multifamily or commercial multifamily, because the owner occupants aren't going to buy those to live in. So while it's important to figure out what works and what has worked for you in the past, it's also important to stay flexible, and be able to pivot because we do find ourselves in pretty much uncharted territory. So I think it's important to be flexible with yourself and even if you said, This is what I'm going to do, this is where I found my niche. It's important to not stop learning, but again, to be able to be flexible and pivot into something else.

And also, I mean, that's not to say like, I was just gonna say, to kind of follow that up and it doesn't mean that you have to totally give up on whatever was working for you previously because Who knows this might be a point in time, and things are going to change yet again. And so you can absolutely keep your your toes in the water your finger on the pulse of whatever it was you were doing previously, it's not like you have to have blinders on and say, Well, I did that this doesn't work anymore. No, I have to go do this. No, you can absolutely just expand the purview and say, Okay, well, this is what I was doing. Now, it's not working as well. So let me go learn how to do this other thing. But also, if that other thing doesn't work in the market conditions change, I can go back to what I was doing originally.

So it's not an all or nothing, it's not so black and white. But I absolutely encourage people to continue learning, continue getting educated, and continue learning about what different strategies are available and what might be a really good fit, given your current experience level, your current financial picture and the current time of the market. So again, soapbox demount, dismount,

Tom:

The last thing I'll add on is, you know, we're talking about considerations on selling and refinancing. That's not to say that you can't do acquisitions right now. But I would say it's just, you know, it might take evaluating a few more properties to find that one that hits your buy box that you want to own. So there's definitely, you know, still opportunities for sure to do acquisitions. But I know, just as things get a little bit tighter, and prices are continuing to go up, perhaps it's underwriting a few more properties than you would normally underwrite. Right? And just continuing to look at some some more volume.

Michael:

Yep. Sometimes you got to get really aggressive with the legwork to be able to get something to squeeze out. And then I mean, I think there's not enough emphasis that gets put on that the third option between tapping and equity or selling is that I was just like, do nothing. And I think we always talk about like doing something What's going on? What updates Do we have, you know, what are other people doing in the market, when in reality, so much of the time is like, literally spent doing nothing? Sitting on properties and Emil, I know, you talked about that in your in your cash out refi, I think it was your indie property, you basically got all your cash back, because you sat on the thing for five years, or four years, whatever it was.

So oftentimes, when the market is doing something exciting, whether massive, high or massive, low, we want to scramble to do something. But in reality, I think so much of real estate investing is is boring, and is watching the grass grow. So don't feel like you have to do something, again, I think we're gonna, we're hitting this point multiple times, but just take stock of where you are, and what it is you're trying to accomplish and see if there is something you can do. And if there's not great and don't feel bad about that.

Emil:

I got a fourth option that goes against what you just said, it is activity. But let's think about, What about reinvesting in what you have, right? Like maybe you haven't updated your property in five years, rents have gone up, right, you can, maybe you put 10 grand in the property, and now you can raise it $200. And you can figure out what's my cash on cash return there versus going and having to buy a new property, maybe you can get a better cash on cash, by putting money in your existing property, updating it and just raising the rent. So that's, that's maybe a fourth option too.

Michael:

It's it's a great point. And that's I've talked about it on prior episodes, that's what I'm looking to do, kind of currently is to do more with less, so to speak, in terms of acquisitions and unit calendar, that kind of thing, to streamline, and make better the stuff that you already have, can likely pay dividends way down the road, as opposed to go on to buy something else. Yeah, I think that's a really, really good point. That's a really good point.

To Emil’s point in thinking about how is that money best deployed, and what kind of cash on cash you can get? For those of you that aren't familiar with how to calculate that or what that looks like? Basically, if you take 20 grand, and you can go put it into a property, you can calculate how much is that going to generate? If you have a loan on the property, if you're buying it all cash or what have you, but take that same 20 grand go put it into a property in terms of updates, something you already own, figure out how much additional revenue you're going to be able to generate, and then just solve for your cash on cash that way.

So again, it's just the math is the same, but it just involves a property upgrade as opposed to a property purchase, you're still putting money into a deal, it just happens to be one that you already own. So then you can figure out what the delta is in cash flow. And that's your cash on cash return. And so you can compare that against buying something versus updating something or upgrading something to determine what's the best and highest use of those dollars. And then of course you can decide, hey, this might not be the highest and best use but I know it's going to be easier I'm going to make probably more valuable or what have you so really important to think about and again, great point Emil.

Tom:

Alright, well that's the episode if you enjoyed the episode, please like subscribe, all of that, we greatly appreciate it. And as always, happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

Here's What You Need to Know to Win in the Montgomery AL Market Jul 15, 2021

In this episode, Michael Atkins with Harris & Atkins Real Estate tells us what we should know about investing in the Montgomery market. Learn about the particularities of the market, return metrics, the school zones, taxes, common problems, and what you need to do to win in this rising market. Michael Atkins 334-318-0570

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Transcript

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor Podcast is for informational purposes only, and is not intended as investment advice. The views, opinions, and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Michael:

Hey, everyone, welcome to another episode of the remote real estate investor. I'm Michael Albaum, and today I'm joined by my co host, Mark Woodling. And we're going to be talking to our certified agent, one of our certified agents out in Montgomery, Alabama, Michael Atkins, and he's going to walk us through everything our buyers need to be aware of when they're investing in Montgomery. So let's get into it.

Michael Atkins, thanks so much for taking the time out of I know you're very busy schedule to join us today. Really appreciate it.

Michael A:

Yeah, yeah. It's nice talk to you guys.

Michael:

And you are down in Montgomery, Alabama, right?

Michael A:

Yes, sir.

Michael:

Fantastic. And I know that Mark, and I know a little bit about your background, but for all of our listeners who are new to would love to hear a little bit about who you are, where you're come from, and what your background is in real estate.

Michael A:

Yeah, so um, I got my real estate license pretty much as early as I could. And so I've been practicing for about 15 years. But when I started, I had a lots of hair, looked like a kid, no wrinkles on my forehead. And, you know, out there trying to advise people on buying and selling real estate and so that here's this kid trying to tell us what to do just didn't go over very well.

Michael:

I know how that goes.

Michael A:

Didn't have a whole lot of clients. You know, I ran across these folks that have owned about 20 houses. And they were looking for a new property manager. And they're like, Hey, you know, if you'll manage our properties, we'll buy houses through you. And I was a, I guess they found a great sucker for that. Sounds like a great deal.

And so I had no training, no experience, no, no, property management software, I just got like a box of keys. And, you know, hey, go have at it. And it didn't take very long for me to figure out like, Hey, I gotta figure out some some kind of system. And so I started operating with -inaudible- was buying them more properties, picked up some more investors. And this was kind of at a time when, you know, probably everybody that's buying a house right now would love to about bought everything on the market at that time. Most investors I ran across, didn't know what an Excel spreadsheet was, you know, the house looks great. Yeah, I'll pay cash. Let's just buy it.

And we're negotiating 5-10 $20,000 under list price. And there was no real strategic math problem that we're doing about purchasing properties, what we can rent it for. It was it was just kind of hey house looks nice, good bones, rent it for around this number. Sure. It sounds great. You know, so got up to about 80 properties, I was managing about 80 by myself. And it was a, it was a lot to do then it just felt like I was going from one emergency to the next of you know, hey, these people haven't paid rent, we got to start the eviction process. Oh, by the way, $1.38 over on this account, so it means I made a mistake someplace else. So I need to spend the next three hours figuring out what went wrong where and then, you know, now we got a bunch of vacancies. So I had to supervisees guys remodeling the houses, so I can get it back for rent. And now my phone's exploding because I have, you know, so many properties vacant need to rent.

And it was really like, oh, man, I'm, I'm, I'm at my, my peak of what I can handle. And, you know, I ran across another guy, Blake Lawley, he's my business partner with the property management company. And he was really passionate about property management. And we decided to team up and we grew it from, you know, he had 100 properties he could bring home. And that made us to 180. And we kept growing and we've been together for about three years now. And we're up to about 680 properties.

And so we have a whole team and staff to help take care of the different aspects of property management. I don't I don't have a whole lot of responsibilities in property management now. But um, you know, I've definitely been in the trenches, showing the rentals, meeting the people very familiar with most of the neighborhoods and Montgomery can go street by street and say I know that house I've been in that house I've been in one across the street. I've sold that one for that this one rents for this, very familiar with the market. That's kind of my background. That's that's how I lost my hair.

Michael:

And did you grew up in Montgomery?

Michael A:

Yeah, yeah, yeah. I grew up in Montgomery, went to Hooper Academy, a little bit south of town. And, you know, went to Auburn University, Montgomery, got my bachelor's degree there, and been practicing real estate here ever since.

Michael:

Awesome.

Mark:

That's awesome. Hey, Michael. And one of the things that you told me that really impressed me when we first started talking about bringing you on as a certified agent, is you knew every agent in town. So anytime an offers presented, you can make a phone call and really get that little bit of extra information that helps our buyers know where they need to be when making an offer. So I was always impressed with just your your ability to communicate. So being from the area and down in the trenches as an investor and property manager. That's, that's rock solid. And what we're looking for, for our buyers.

Michael A:

Yeah, is due to the volume of transactions that do that really allows me to interact with other agents. And, you know, I'm looking at the market every day. I mean, part of my routine in the morning is look at what properties just came on the market. And I'm looking at the agent, I'm looking at agent notes, and I'm trying to say, Hey, is this a deal? Do I have somebody interested in this? Would this be a good investment property? And, you know, that's, that's just part of my daily routine. Of course, I'm not looking at every house on the market, there's not a bunch of 300 $400 million investors out there.

But you know, the properties that are basically, you know, under 200,000, those are the ones I'm looking at trying to figure out, hey, would this be a good property for an investor to pick up add to their portfolio?

Michael:

And Michael, I'm curious, are you an investor yourself? Or having seen the industry? Are you so like turned off by it?

Michael A:

Oh, no, no, I'm, you know, it listening to your podcast is about maybe a way to budget money and save money, I would say that that's part of what is a move me to be a, an investor, because I didn't want to be reliant upon only my commission. So I felt like that could be a little bit of conflict of interest. So like, if I had a buyer that's looking to buy a house, and I really want them to purchase this house, because I got a car payment coming due.

So I sell real estate because I like to, I'm at the point where I'll enough investment property, so I don't have to go out there and work every day, I have income coming in from our rental properties in so you know, I'm indifferent. Whether you buy this property or not, the commission isn't something that is going to make or break this month for me. It's, I'm really passionate about real estate, and helping people get properties, investment properties or personal homes, because of the actual, you know, helping them. It's not so much about the Commission, the commission is part of the equation. But if I don't sell, you don't need to send me a thank you letter for. So I can pay my rent this month or payment make my mortgage payment.

Michael:

That's such an interesting point, I talk I asked this question of every agent, every property manager we speak to, and often get feedback and pushback from a lot of our listeners or other buyers and say, Well, if that property manager, that agent is also investing in real estate, why would they give a deal to me? Or why wouldn't they handle their own vacancies? First? And the answer that I've always given is, well, they understand the business there, if they're an ethical person, they're going to be treating you right. But I've never heard that answer before, from the sales side is, Hey, you know, I don't really need this commission, I don't have to sell this property to you to help, you know, feed my family or make my my payments. So I love that. And I think that's an even even more of a reason to work with folks that are investing and also either managing or selling properties. That's great, man, I love that.

Michael A:

So when I'm talking to a buyer, and I can feel that anxiety, or the nervousness, and you know, it is natural, I mean, you should have a little bit of anxiety or nervousness. And, you know, when I hear that or fill it, I want to go ahead and get to the point like hey, what, what, sir, where are we nervous about? You know, and so if there's something that's given them anxiety, we need to go ahead and air it out, figure out what the problem is, and see if we can't work around it or, or, you know, sometimes it can be super simple. You know, hey, I'm worried about this AC going out next year. Well, you know, while we get a home warranty, or let's go ahead and have an AC man, go out there and service it and check it out. Give us an estimated lifespan.

Those are just things that are kind of You know, it's not one of those things that I want the sale to happen so bad that I'm trying to overlook the little points of anxiety. So if we have anxiety, let's go ahead and talk about it, get it out there, get it figured out, you know, at the end of the day, if the sale is not, you know, if it's something you're not comfortable with, we don't need to do the deal.

Michael:

Now, it's great. That's great.

Mark:

Another thing that Michael and I had talked about when when we brought him on board was the having the property management background is such a key part of who he is, and how he fits into the model. He's not just selling you on a property, but he wants to see a long term relationship Go on, and potentially be the property manager for you. So he's not just gonna put you in a property just for the sake of the sale, like he's saying, but that property management piece is also an accountability piece where, you know, you're gonna be talking as often as you need, because this, this relationship could go on for a few years. So yeah, that's where we saw that the lack of pressure that Michael was putting on, but he's got his sales skill down, as you can hear, but it's not so much where it's a pressure situation. So that, although you know, people need to move quickly, and you got to put a little pressure on him in that instance, but maybe not so much about the pricing part.

Michael A:

Yeah, there's always a sense of urgency. So I mean, it's, it's almost, the transactions just have a natural progression, and you're trying to push it along, make sure we meet the estimated closed date, I think that if I wanted to convey something is that I don't need this commission. And I'm not pushing you to buy this house. So I can make commission, I'm pushing you to buy this house, because I think it's a good investment for you, or it's meeting the goals that you have.

Michael:

Now, I love it. And Mark, you bring up such a great point. And one of my personal biases, and preferences, frankly, is to work with agents who are property managers, or property managers who are agents, because let's just call a spade a spade agents get paid when they sell. That's how they make their money and property managers get paid when they manage. So if I can hitch my cart, to the property manager, and an agent, I know that that agents not going to sell me a lemon. Because if the agents only an agent sell me a lemon, they move on, well, they got their commission, they can call it a day. But if the agents a property manager also, and they sell me a lemon, well, now you just sold me a headache, and you just sold yourself a headache.

So I love the duality of that. So for any other agents listening out there, I encourage you all to look into the property management side of the business to because I think it is such a beautiful marriage. And it can often be so symbiotic. You get the short term commission aspect, and then you have that long term relationship as well, which, as Mark, you mentioned, can be so powerful.

Michael A:

Yeah, I mean, the last thing I want to do is sell your product that we're gonna have weekly discussions about the problems in property, and and yeah, yeah. You didn't notice this? Well, no, I guess not. It's one of those things, I'm really trying to find you something a good solid property. You know, there's a million different aspects to single family rental, but um, you know, trying to catch the big ones.

And then there's a, so I looked into property the other day, and it had several large pine trees in the backyard. And the pine trees don't bother me so much. But one of them was leaning over the neighbor's house, and it was a strong link, it was a very noticeable lane. And, you know, I was thinking, I was like, man, gravity is going to work eventually, you know, that it's not going to go away. And so it's one of these properties where, you know, that tree needs to be addressed. And, you know, it might slip through a home inspection, or, you know, somebody may look at it, not notice it, when I'm there and I'm seeing it, it's one of those things that, you know, we could argue over which insurance company is going to take care of it, but it that's a headache for somebody coming down the line.

And it's better to go ahead, talk about it, figure it out. Now, on the front end, instead of, you know, having a very frantic tenant, and, you know, lawyers and insurance agents calling you in six months about this tree.

Mark:

Oh, I was just going to suggest, you know, moving into kind of the market areas, because that's the part where I'm really interested. The properties are, you know, really going to come and go on the Roofstock. But part of what I was gonna say is, you know, we've found Michael after we found Montgomery, so sorry, Michael. Yeah, we had had to research the market first. And then we found you as one of the better agents in the area. So we reached out but, you know, one of the big things about looking at markets with Roofstock is, you know, we're looking for economic trends and a lot of really, you know, really sweet spots in markets that maybe there isn't a large institutional investor presence or ibuyers active and we found Montgomery. But what I want to say also is that it It's actually the third capital that we've done a podcast on in just the last, you know, few podcasts.

So we started off in Columbia, South Carolina, we just talked about Jackson, Mississippi. And now we're talking about the capital of Alabama, which is Montgomery. So, you know, part of the research I did was, hey, it's the second largest city in the state, you have, you know, government institutions, you have, you know, military presence, you have Hyundai as a major manufacturing facility. And all those things are flashy to us. But going a step deeper, maybe, Michael, this is a good opportunity for you to give us a little little information about, you know, what's happening in Montgomery that you think is really leading to the growth leading to job opportunities, or just the overall kind of investor sentiment that our buyers would want to hear about.

Michael A:

So we are home to the state government, that's one of our largest employers in in the city. We also have Maxwell Gunner Air Force Base. And part of that is their air war college. A lot of military guys who get stationed here for a year or two, and that's kind of important because they just, they're coming down for a short period of time. And it may be, it's probably not long enough for them to consider bying so they're part of our tenant base, and they'll come in every year. They'll be here for about a year, and then they leave. And usually they're great tenants. And they usually like the nicer rentals.

We also have a Hyundai manufacturing plant in town. And they employ a lot of employees in you know, not only does Hyundai but some of their tier two and tier three manufacturers as well. You know, I feel like those are our major employers right there. We have a couple of universities like Troy State University, Auburn University at Montgomery, Alabama State University, I was looking over some of the Census Bureau statistics, and I think 33% of our population has a college degree. I thought that was kind of high, maybe wrong. That's kind of the demographics to the city.

One of the things that we're known for is our property taxes are one of the lowest property taxes in areas for the country. I think why is known for it, but I imagine the prices, they're pretty, pretty expensive for why we have low property taxes. One of the things, a negative thing we hear about often is the school systems. The schools in Montgomery usually don't are in the red side of the level on Zillow. They're they're not, they're not going to have the five star schools for the most part.

But I think one of the, you know, the things to, to look out for that is they just passed a property tax increase. So it just talked about how low that property taxes we're in, I'm telling you about the increase in property taxes, well, they they passed, I think is a 10 mil increase. And so on average, that should be about about a $12 increase per month for the average house in the Montgomery area. And in doing that, they're going to raise several million dollars. So it's going to go towards the school. I think it's 33 million annually. And that's a, I think that's going to go a long way. And I think when they passed that bill, it came with some checks and balances to kind of hold the school system accountable to try to make sure that that produces results to increase the schools.

And so, you know, some of the investors that come to town ride around and, you know, the feedback I get from them is like, hey, Montgomery feels like this city, they exploded, you know, you know, a couple years ago, and it seems like you're on the cusp of that. And so I think there's several things that we have going on that that should lead to a productive and good, you know, positive manner moving forward.

Michael:

That's great.

Mark:

One of the things real quick, Michael is I studied the census as well, just before this call, and I saw that in the state of Alabama 68% of the population are homeowners and then looking at Jefferson County, which is Birmingham. It's 63% but Montgomery is 58%. So I think exactly to your point about the military base. You do have a revolving door of people coming and going all the time. So that will lower that but these are very high. They're just high quality renters that you're getting in that are looking to that higher price point.

So that's really interesting and makes makes me feel more comfortable in not going after those, you know, eight 9-10 percent cap rates but really feeling comfortable one, you know better neighborhood area scoring areas, with a little bit lower of a cap rate but still getting the solid return With the low tax base, and so forth, so all those things together add up, and definitely are reasons why we wanted to come to your market.

Michael A:

Yeah, and I'd say there's also influx for people from out of state as well, on just helping retail buyers find the house for them to live in. I've run across from a lot of people from out west, like Washington, Oregon, Colorado, and they're moving this way, they've sold their house, and they have a lot of equity that they built up over the years, and they're moving here. I've talked to people from Florida, have somebody from Boston right now. And, you know, since COVID, you have a lot of people that are working remote, so it allows them live anywhere in the world, I have a lot of low cost of living here, lower property taxes, and they can come to Montgomery and buy an amazing house for a reasonable price. And, you know, I'm seeing that a lot, as well.

Michael:

And, Michael, I'm curious to know, and for all of our listeners, kind of a couple different questions. So one, what is a typical purchase price, if you had to describe it for, say, a three, two single family? What would that property rent for? And then the third part of that is how should someone be calculating their property taxes as an investor, go?

Michael A:

Okay, um, so like a three-two brick ranch, you know, usually we're looking at anywhere from probably 79,000 to 130-140,000. And the rent range, for the most part, it's going to be around, you know, 850 to 1100. And most of its gonna come right in there, you know, maybe in the property manager, I want, I want to tell you that 995, I want that $5, under 1000, just because it sounds good, I don't know.

So, um, but, you know, Montgomery East is a little neighborhood that's pretty popular, those those houses are three twos, probably 12 to 1600, square feet, and situate, they're built in the 70s, and 80s. And they're gonna sell from anywhere from, you know, 80, to 120,000. And they're just great little, great little areas, they rent pretty darn quick. The price is the first metric you're looking at. And so, you know, there's things like renovating the kitchens, just putting in stainless steel appliances, or maybe, hey, let's go redo the tile in the bathroom, change it from this baby blue, green, to maybe a nice, clean, white looking tile in there. And that that changes a lot. And those things can usually be done within a few $1,000. And that may increase your rent 100 $200 a month.

Property taxes, the county revenue side is probably a really good asset for that. But whenever I'm putting these properties in, I'm trying to put the property taxes in there. And so, you know, a lot of times the property taxes are, you know, 2-3-400 dollars. And so usually, you know, even if they doubled, it probably wouldn't be a large metric for you to mess up your equation. The property taxes is generally a lower amount. I've had people from Florida, tell me that they pay $1,000 a month in property taxes and just could not take my word that this is the property taxes for the house.

Mark:

It looks like what you charge on a monthly basis in most states. So yeah,

Michael A:

Yeah. Yeah. So um, the smallest metric that you're gonna have to look at when you're trying to plug your equation in of what my are gonna be. And so on. Roofstock, I'm plugging that information in, I'm checking it, I'm verifying it, it's a number that you can be relatively, you know, deem it reliable.

Michael:

Okay.

Mark:

So I think that's a that was a great way to cover, you know, the basic everyday, you know, properties that you run into. But tell us a little bit about maybe two two things, one's caveat mtorr. Really, which is unique to Alabama and few other states. But also what are the most common issues that you run into, because I think we could paint a pretty rosy picture for everybody, but it's always good to see the things that you see most commonly come up that aren't a deal killer. They're things that you see all the time. So maybe you can you talk a little bit about those two things.

Michael:

Mark, do you speak Latin?

Mark:

For one sentence? Yeah, that's when you need to remember I'm an auctioneer. So as is where is those? Those are all things that are written in stone.

Michael:

You get burned once and you learn the hard way. You never do it again.

Mark:

That's all right. So that's it.

Michael A:

It basically means buyer beware. And so, you know, it's, I think that any buyer looking to spend this amount of money is going to take a certain level of precautions, and check out the house to a certain level. So you know, it's just basically saying that this sellers selling it as is. And so, there's a lot of facets to a house, and you're gonna have a home inspection, you know, most of the time, you're, you're already checking these things out.

So it is pay, I mean, it's telling you, buyer beware. But these are things that you're already gonna do. You know, if you're in California, New York, or Texas, Mississippi, in your buying and investment property, you're likely having it inspected, you're likely kicking the tires, you're having a professional look at a house and tell you what to be aware of, you know, in other states, you may have to disclose certain things or write a seller's disclosure here is not required. And it just kind of puts the burden on you to go over there and make sure the house is, you know, is what it is. And that's part of the reason why an inspection period is important and having an inspector go out and do a thorough job. And check it out. trying to think of anything.

So you know, it is kind of funny, a lot of the houses I bought, I don't get a home inspection. Yet, because I'm buying the most terrible house I could find it's, it needs a roof, it needs an air conditioning, it needs everything is what if something's wrong? Well, I already know it's wrong, it is broken, the whole house is broken.

Michael:

I want it to be wrong.

Michael A:

There's no need. Yeah, the home inspector is not going to tell me something I don't already know. Because I know that I'm gonna have to redo the electrical, redo the roof, probably gonna go in there and have some plumbing problems I had to figure out. And so, you know, that would be an instance where I'm taking all the risk, but I kind of already know that I'm at risk, because, you know, the house needs a ton of work, obviously. So

Mark:

So for the everyday buyer, maybe buying a more turnkey property or something that is rent ready, what are the most common issues that you would run into that, you know, really are common for, let's say, Alabama, you know, in Mississippi, we're talking about being kind of a little bit of swamp land. So foundation issues could be occurring a bit more often. But you know, is there anything that you see in the inspections for these more rent ready properties that you would just say is part par for the course?

Michael A:

Yeah, so the houses are, I call them the junky houses, because they're, they're in terrible shape, I would never put those on Roofstock. Because it's, if somebody wanted to buy this remotely, I would just insist on them flying here, like, you got to come look here, I don't like you need to see this in person, or you need to look at it. And then the second part of it, it's just not practical for them to buy something that they're gonna have to run contractors and make sure that works done because the purchase price is such a small basis compared to what will need to be spent to get it into a livable condition.

You know, the average property I'm going to put on Roofstock or putting forth to investors doesn't need much work. I assume that all properties need work in normally why I say it is, hey, you can come to the house I live in is in pretty good shape. But I think I could spend $1,000 right now today on fixing normal wear and tear. And so when we're looking for properties, put on Roofstock, I'm looking for the ones that need you know, not much work, you know, no capital repairs that is apparent, and then we'll rent well, and those are the main things I'm looking to identify when I'm looking for a good property for an investor.

And as far as the local areas kind of pitfalls look for, you know, we're in a subtropical environment is really humid here. We do have some, some of that gumbo soil where the ground will, will shift and move there different parts of our city that has different types of soil. Some of its more stable and you hardly ever seen any kind of foundation problems. Then other parts were you're driving up and down the road. And I remember talking to an inspector is Hey, look out there at road you see how it shifts and moves and it's kind of bumpy. So yeah, and he's like, it's doing the same thing underneath these houses. And so it's like it makes it real apparent where you might have foundation problems.

And some of the older homes that are constructed, you know, 70 100 years ago, you hardly any of We're on a slab, there on a crawlspace pure foundation, you can get up under the house, if the foundation moves, you can jack up up here and level out the house. Those don't concern me so much, because it's something that's easily fixable, you can get under the house and kind of level out the foundation or add a pier if necessary. A lot of movement that you notice in those houses might have came from where there was a water leak at some plumbing leak at some time, and is saturated ground appear sock and now the the foundation isn't exactly plumb.

And then, you know, there's areas of the city that has slab foundations, and there's a lot of movement. And you know, I'm going to veer away from those, you know, it's not so much about whether the tenant can live with a crack in the wall. It's almost that, hey, we go in there, we renovate the house, we paint it. And then six months later, we have more cracks, or all of a sudden we have a pipe that's broken into slab because the foundations moved in.

So those are things that I'm kind of nervous about. You know, I've also run into it where maybe somebody added on a house, I mean not house added an addition on to the house. And so they've had that addition in, but they didn't, you know the foundation wasn't set at the same time the original house was or they tied the bricks in, in. So now you see cracks in the bricks, or the addition is settled. Now I suggested the main house a little bit, you know, I'd go case by case on those because sometimes you can get a deal, you know that, that there's been some settlement there, but I don't think that it's going to affect the plumbing, or the house is gonna fall down, or there's any structural thing that's gonna make the house collapse.

But again, that's just my opinion, it ultimately it'd be up to the buyer. But it's one of those things that if I see any kind of cracks, or any kind of foundation moving, I want to air it out, I want to talk about it and say, Hey, this is what I'm seeing. And do you feel comfortable? Do we need to get a structural engineer out here to check it out. But, you know, the foundation is something that I look at it is very common in the Montgomery area. And, you know, it's a house by house, street by street thing. So I don't want to point out to one specific area and say, hey, these houses over here are all bad. It's one of those things that you just kind of have to be on the lookout for and check it out.

You know, something else that I think doesn't get a lot of attention is, you know, trees on the fence line, you know, those things can be expensive, they can be a few $1,000 to take those things down. Um, you know, whenever we're turning over property, that's one of the things that I try to pay attention to, and especially on my personal properties, like, hey, if there's any trees have grown up along the fence line, maybe my tenant hasn't paid attention to it is, you know, heck, maybe they like the tree, I don't know. But now it's the size of my arm, but it's gonna grow the size of a, you know, become a big problem eventually. So why don't we go ahead and trim that cut it back while it's a small inconvenience, rather than let it grow into a big problem.

Wood rot around the facial soffit or the brick molding around the doors. Those are pretty common. I mean, I think if we looked at 10 houses, I can find, you know, a little bit of wood rot on the face, or soffit or brick molding somewhere on none of those 10 houses. And so those are the things that aren't real scary, but it's almost one of those things that I just want to set your expectation, hey, just just because there's a little bit of wood right there, that doesn't mean the house is bad or the house is gonna fall down. It's just one of those things that we need to go ahead and address it.

Termites we have termites here. Some of the older houses for whatever reason, they don't tend to get termites that often. I don't know if they are they use some kind of strong chemical when they used to treat the older houses.

Mark:

Asbestos and lead maybe.

Michael A:

Yeah, you might not get termites, but you might get cancer. Um, but uh, you know, it wouldn't be uncommon for us to go look at a house and find termites and during the wood infestation report, and that's basically a past guy going out there. He's licensed by the state, and he's looking around and your home inspector. Oh, most of the time. They say they don't look, but they're looking you know, if it's, if it's something sizable they're going to tell you about or notate it. The pest guy when he goes out there, he's looking at the sheet rock. He has a little flashlight and he's doing a much thorough, much more thorough inspection looking specifically for wood eating organisms.

You know, it's scary to say, hey, my house has termites. And it's one of those things where you may have a square foot of this, you know, 1300 square foot house that has a portion of termites there, where it's gotten into a exterior utility calls it right there around the door. So pretty commonplace. In you know, you treat it and the termites are done, it doesn't mean your house is structurally unsound or going to fall down. So I feel like I've run across a lot of buyers that have anxiety about termites. And it's one of those things again, there's just kind of know what you're up against, or what you would expect if if you were to have.

Michael:

That's great. I think it's so important, because I know it's so market specific around the kind of nuances around common issues. And for some people, termites is a deal killer, but in the Montgomery Alabama market, it sounds like it maybe isn't such a big deal. And so I always recommend, hey, go quantify the issue, whatever it is, go figure out how much it's gonna cost to fix it, and then figure out if you should be scared and run? Because it sounds like you know, even if there is termites, it's a it's a relatively simple fix.

Michael A:

Yeah, I mean, I mean, sometimes it's the better thing that could happen because the termite Gao go out there, it will treat it, he's done most of the expensive things to get rid of the termites, and you can get a bond at a discounted rate. And the bond insures the house for against, you know, any damage caused by termites in the future. And so, you know, it's just this extra form of insurance that sorry, to unpaid for that point.

Michael:

That's great.

Mark:

So I think you've paid painted a really good picture on, you know, the things to look out for, and thank goodness, we have inspectors that you know, can be the boots on the ground, and, you know, you will go out there and visit the properties, but talk about maybe a little bit of strategy, what are the things that, you know, whenever you speak with a buyer, you wish they had this in mind, before they made the offer, because a lot of the times, you know, a buyer will make an offer on our website, and then we connect you with that buyer.

So where are the things that you really wish that you could get that message across, just to help them really strategize a little bit better, or come in and have expectations that are probably going to be met?

Michael:

Whew, um, you know, I guess I probably sound like a little bit of a negative Nancy, but it's really just trying to think of all the things that can go wrong. And, and lay those out there. On the front end, that way, the buyer knows what to expect.

I think the thing is just have an open mind, you know, if we're meeting the metrics that you're looking to get your returns, and, you know, all of a sudden we discover some problems. What do we need to do to get that solved? And instead of just saying, hey, this deal is, is dead, this is bad. I'd rather go back to that seller and say, Hey, can you fix this up? Can Can you fix this or resolve it? Rather than just saying, Hey, I'm not buying this house is a bad deal. I don't like it, which is fine, acceptable. It's just that if we're really looking to get a certain return, and now we've had an inspection report, and you know, there, there's x y&z wrong, how can we resolve x y&z and still, you know, get the return that we're looking to get.

So I've run across a lot of buyers that just after, after we have the inspection report and list out what repairs seem to be necessary. They just said, No, I don't want this house instead of trying to work through and figure out you know, how can we how can we fix this and move forward? And I think there's been several good deals that have been left on the table, just because they just got freaked out by the report. Rather than looking at like, Hey, I got a hurdle. How can I? How can I move it out my way?

Mark:

Right. And a lot of buyers are are making offers in markets where there is no room for negotiation, right? It's such a competitive market. And so I think going into a market like Montgomery, and hearing that from you, means, hey, you have negotiating power now. Now you can go back to that seller and possibly talk them down a little bit or get them to repair those items. So I think that's a great point that these things shouldn't freak you out in the inspection, they're there to be addressed. And if you get them, get them repaired, you know, when the repairs were done on those items, and now you have a timestamp, you know, on when those things were repaired? And, you know, hopefully there's gonna be a number of years before it has to happen again.

Michael A:

Yeah, I mean, it's one of those things that when you go under contract, that seller is a bit committed to you too, because they're basically saying, Hey, I'm not gonna sell this house to anybody else. And I'm also you. And so, after your inspection, you you present this inspection report to them, there might be repairs on there that they don't even know about. And so, you know, I've seen some people people are very particular that, hey, I'm so sorry, this house had this wrong with it. I didn't know about it, and we're going to fix it. You know that that's not not that's not everybody, but I've seen some people, they were very particular about their house. And if something was wrong with it, they want to know, so that they could fix it.

At the very least, if you're staring down the barrel of saying, hey, this needs to be fixed, or I need to walk away from the deal. At least let's go present that to the seller and say, Hey, we got to give them the option to say no, I won't do this. Because more often than not, they'll, they'll say, yeah, I'll fix, you know, half the items or, or all the items or some variants of that. And that at least gives you the option to move forward and continue with an investment that might be a great a great deal. Instead of just saying, hey, these things wrong with it, and I need to get out get away from this deal. I don't like it because there's a you know, $1,000 rotten wood around the facia? Hey, let's let's fix the facial. Let's paint it let's caulk it you know that there's some maintenance issues that should have been resolved, we can present it to the seller, see if they're willing to do it.

Michael:

Yeah. Makes tons of sense. Awesome.

Mark:

I'm enjoying the wisdom of Michael Adkins. This is a, this is pretty in depth. I love it. Because I agree, you're not being a Debbie Downer, you're just say, hey, this, this is the reality of owning real estate, you're going to run into issues, you're not going to buy the perfect property, even turnkey homes that you just renovated. have things that come up. So I think outlining this in a way you have where it's Hey, this is expected is a great approach.

Michael A:

Yeah, I just really believe in real estate. I mean, there's a lot of thought or trying to figure out how can I generate income, just in general. And, you know, real estate is one of the few things where I think you can buy it. And as long as you keep it in reasonably good shape, you could expect to receive an income from it perpetually.

You know, some of these other companies will well, Exxon Mobil can go invest in them, they got a pretty good dividend. Will they be around in 50 years? I don't know. You know? So it's just some of those things, look at how can you invest your money in general, beyond real estate and find something that's going to give you a return. And that's one of the things that I think are really attracted to real estate is that you have a little bit of control over it. And you know, people are gonna have to live somewhere, they're not making any more real estate. It's a finite asset. So it's not, it's not gonna disappear as long as you take reasonably good care of it.

That, I think that's part of the things that makes me passionate about real estate.

Michael:

I think you're in good company there, Michael. Man, that's awesome. Yeah. Any any final questions?

Mark:

So Michael, my last question is, why should our buyers be interested in Montgomery? What do you see being there that others don't?

Michael A:

Yeah, um, so I mean, I think we're a market known for our cash flow. We do have some really solidly constructed houses, there's a lot of three, two brick branches, they're probably 1214 1600 square feet. We have a lot of jobs here that'll maintain that population and make sure we have a good tenant base to rent those houses long term. And, you know, there's a lot of opportunity going forward with the, with the city.

Michael:

Can you share with folks the name of your brokerage and property management company, and then let folks know what the best way to get ahold of us?

Michael A:

Yeah, yeah. So my brokerage is Harrison & Atkins Real Estate. And my property management company is BMB property management. And, you know, my preferred method of contact is probably to call me on my cell phone 334-318-0570. Or, if you have a lengthy question, probably probably shoot to my email, Atkins.realtor@gmail.com.

Michael:

Fantastic. Well, Michael, thank you so much, again, for taking the time to chat with us today. Really looking forward to seeing how Montgomery continues to grow.

Michael A:

Yeah, yeah. Thanks, guys. Y'all have a great day.

Mark:

Awesome. Thank you.

Michael:

Alrighty, everybody, that was our episode for today. I hope you enjoyed it. I know I got a lot of value out of it. Tons and tons and tons of great wisdom information about the Montgomery market and what investors should be thinking about at they are going to be investing there. If you'd like the episode, please feel free to give us a rating or review whoever it is, is your podcast. If you caught this on YouTube, feel free to subscribe and give us a like, and as always, we would love to hear from you about future episode topics or ideas And things that you want to hear more about. Thanks again for listening. Happy investing.

Building A Strong Investor Profile To Stand Out to Lenders Jul 13, 2021

Chris Naghibi, the Chief Credit Officer of First Foundation Bank joins us to talk about what investors can do to build a solid investor profile and get the best terms on their loans.

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Transcript

Michael:

Hey, everybody, welcome to another episode of the real estate investor. I'm Michael Albaum, and today I'm joined by my co host, Tom Schneider, as well as a very special guest, Chris Naghibi, who is the chief credit officer for First Foundation Bank. And Chris is gonna be talking to us today about lending overall, and what we as real estate investors need to be aware of. So let's get into it.

Awesome, Chris, welcome to the show. Thank you so much for taking the time to come and hang out with Tom and I really appreciate you.

Chris:

Oh, thank you guys. Appreciate you guys having me on.

Michael:

Yeah, absolutely. So for all of our listeners out there would love to know and have you share a little bit about your background and how you got into the real estate space and kind of what you're doing today.

Chris:

You know, backgrounds kind of kind of schizophrenic, I look at my own resume. Sometimes I wonder like how this path has taken me where I'm at. I'm an attorney by trade. We started a bank in October 2007. And somewhere along the way I feel I felt like I fell in love with real estate. I've done it since I was a kid. My father, when I was 14, he handed me a cold call list and told me to call everybody and told me that for everybody, I got to give him an application to give me 500 bucks.

Well, the first day I made 1000, and he refused to pay me. But I never stopped falling in love with real estate and kind of the concept of the fact that we all have to know about it. And then I eventually, you know, branched out started a law firm, started my own real estate company, and I still work at the bank. We're publicly traded. And you know, it's just it's been a wild ride. But you know, it's my crazy, crazy background.

Tom:

What are some unexpected things in starting a bank? Like I love that, Yeah, we started a bank like what is what are your, I guess, three takeaways that you were unexpected assumptions? Or? I don't know, you can take them any direction. So three bullet points.

Chris:

There's a lot of assumptions. Yeah. Well, let me tell you three bullet points about starting a bank. It's hard. It's a lot harder than you think. I think people think regulators like Oh, the SEC, you know, or, or, you know, oh, it's have some little bit of oversight regulators are very strict. When you start a bank, you have to write a business plan out for three years in advance. And then you have to stick to that business plan for three years, except we started a bank in October 2007,

Michael:

Great time to get into banking.

Chris:

Probably not the best written business plan given the market, we rolled with it nonetheless. The second thing is, is relationships are so vital. You can grow a bank and you can do such a huge thing. But relationships so that choose from a currency, right? Well, if you're starting a bank, and you're trying to build something from the ground up, like any business, a bank is no different. Who you know, and how much they believe in, you really matters.

And the third thing, businesses scale differently. And banks definitely scale in a very unique way. It's a slow, you know, grind over time. But money builds money and interest rates are such an pure form of building passive income. And banks make such a huge amount of money from it, but it takes years to get there. So our original idea I will sell in five to seven years. Well, that didn't go very well did it? And it's been a you know, 14-15 years now. So but it's a long game.

Mochael:

Interesting. Yeah. Do you think, Chris that you got into becoming an attorney because your father, you know, breach of contract? You're like, I gotta you know, I never wanna let this happen again,

Chris:

Yeah, dirty real estate brokers. No, my dad. My dad actually went to law school with me. How's that? How weird of a story is that? My dad I'm really six foot five. My dad's five five fat little dude looks like Danny DeVito. I love them to death. But you know, he would look at him and go wait a minute that yeah, that's so anyway.

We went to law school together. It was a kind of a later on in life venture for him. And he was his way to motivate me because I just wanted to be in real estate. I you know, I was working. I didn't want to do this. And he's like, well, if I can do it, you can do it too. And that was a terrible idea. Because everywhere you go, you're now like the cute little, you know, idiot standing next to him while he's in law school and like, look at you. You're sad. He's so cute.

And well. He did it together. He actually works in my law firm to this day, but he's been a huge motivator for me to try to get more understanding of the business. I think when I was a kid, when I was working my dad The one thing that I really wanted I took the took home from that that relationship was his that he didn't know the entire business. He knew the single family side and didn't know you know, business lending or commercial real estate or multifamily real estate kind of my passion. And I wanted to know so much more and the more I started to research and get into it, the more he did too. And now we kind of geek out together on some of the stuff which is also weird, but that's what we do.

Michael:

Did you ever see that movie twins with Arnold Schwarzenegger and Danny DeVito

Chris

Yeah, that's like my dad except Well, I'm that's what it is. I'm not buff or good looking. But if that were the case,Yeah.

Michael:

That's great. That's great. So I would love to kind of take the conversation and focus a little bit into lending, because I think it's an area that a lot of real estate investors, there's just a lot of clouds, I think surrounding and people go talk to different folks and get different answers. And so it's tough to really nail down.

So from your experience, who is the best candidate to receive lending? If I'm going to really I want to be a real estate investor, I'm just getting started, how do I set myself up to go get a really great mortgage.

Chris:

So I mean, you're talking just for your just for your home or for like an investment property, because there's a very different investor profile.

Michael:

For as a pure investment.

Chris:

And I want to make sure we delineate that because I think there's a lot of confusion as it relates to buying a home for yourself to live in and buying a home, that's going to be an investment property for someone else to be in.

I actually went down this path. So when I first started buying investment, real estate, I was buying single family residential real estate, because I couldn't afford that, you know, bigger stuff. And I tried to figure out that profile too, because I wanted to be that guy, I wanted to be the profile. And now the chief credit Officer of a bank, I kind of defined the box, there's a couple nuances that I think people are confused about is they think that when they buy an investment property, that that property's cash flow is going to benefit them, and it's gonna make their application a lot more attractive to banks. Well, it doesn't work that way. It's based on your historical income, it's based on you know, what you've done? And can you do you have an ability to repay this mortgage, do you have the ability to pay it as a second property under your current cash flow.

So the first thing I would tell you, if you're, if you're looking to get into real estate, and you think there's gonna be exponential growth, it's gonna take your time, just like the making business, when we first talked about that, you have to have a good stable source of income, verifiable income. And if you don't, there are some alternatives for like, you know, hard money lending, there's other alternatives there. But if you want to take out financing, and whether you want to go interest only in a three to five year product, or you want to go on a 30 year fixed product, whatever your investment, you know, methodology is, you have to plan on being able to pay for the mortgage that you're getting.

Another question that I commonly see a lot is, you know, how much do I have to put down? And that varies so much based on risk profile, right? Like how much you need to put down based on risk profile of your own choosing? How much do you want to have in the property? How much can you afford? But also, where's that property located? And what are the rents like, you want to make sure cash flows.

So I'll tell you, if you want to buy investment, real estate, and you want to be the ideal candidate, you need to have cash flow, and you'd have an understanding of the market. Because your understanding of the market is going to be clearly shown in your application. Because if you're going to buy a property that makes financial sense, it's going to make financial sense for the banks for lenders, because the lender and the bank are always going to look at a worst case event scenario of default. If you default on this property, can we turn it around and sell it and not lose money, and more equity you have in the property, the more attractive it is, the more experience you have, that actually matters to a bank, you know, stuff like that.

Tom:

You know, in buying several rental properties myself and using different lenders, I found that the like the qualifying income has been inconsistent, where some banks haven't accepted the rent that was, you know, collected and some have, and some would count my other rentals that are, you know, have been leased out for a long time, and some wouldn't, I mean, is there like a lot of leeway in like underwriting process? Or is that something that's standardized at a federal level?

Chris:

Alright, so we're gonna get into some cheat codes. This is my favorite one. Got it? Good. So, this is a guy. Yeah, who started the bank, right? You got to find the portfolio lender, right? You need to understand a basic concept as a real estate investor as it pertains to single family homes. There are agency lenders, and there are non agency lenders, the agency lenders are particularly people who conform to Fannie Mae agency guidance, that's a very rigid box, right? It's like when you go to a big box, Bank of Bank of America, Wells, Chase, you know, whoever you're going to, they have a very tight window of what fits in their niche. And if you don't fit that, they're just gonna say no, and unless you're a private wealth management client, they're not gonna give you an opportunity to apply. And the answer is just no.

What I always tell people is one of the most undervalued assets for real estate investor is a community or regional or super regional bank, where somebody knows your name, and I'm not quoting cheers, it's just true. The bankers know you. Right. And the other aspect of a community or, you know, regional bank, or you know, whoever they might be, is if they are not selling into the secondary market, and usually that's a way larger banks manage their liquidity. Alright, sell some assets off, get some more liquidity, make some more loans, so it works out well for them. But for a smaller bank, you want to grow your assets in size, increase your interest producing assets. So how do you do that? You make more loans, you hold them in portfolio, but they know they can't compete with the wells that chase the B of A.

So their guidance, their credit policy, their their broad document, which outlines what they can and can't do is generally not based on agency guidelines, and there are a lot more flexible, they're able to make some of those discretionary decisions. Like you know what, Tom and Michael are good guys are investing in this. We believe this is a first one they might be short here on pi but we can make a policy exception to it and your personal relationship with matters, right? It goes right back to that first payment that we made relationships that she was former currency and we all have a relationship with a bank, you're just who have you chosen to have your relationship with?

Michael:

That makes total sense. So how would somebody if I'm a borrower and a buyer, I want to go buy investment property? How would I know whether the bank is conforming or non conforming?

Chris:

You can ask I mean, it's not, it's not a confidential thing. What I would typically tell people is that the more you get into real estate, and the more you start looking around, the more you start figuring out the relationships that are more personal. And as a result of that, you'll know who's really not an agency lender, because I'll tell you the dead giveaway, if you have to call into a one 800 number, and it's a call center, that's an agency bank, they're going to go traditional Fannie conforming guidance, if you're talking to an individual in a bank, and they're actually helping you out and telling you what's going on, that's usually somebody who's a local regional bank. But that's a very easy thing you can ask them, they'll tell you straight up, whether they keep it in the portfolio or not, there's nothing wrong with telling you that and disclosing that.

You know, in Southern California, I could probably name all of them in my area, just because I've got loans with all of them now myself, and I compete with them in the banking space. And as you become a more and more seasoned real estate investor, you need to know that, in particular reason why let's say you even even if you conform to agency guidelines, and let's say you have all the cash flow, you have all the net worth about six months of pi ti, and let's say you're able to put down more money, because these are non owner occupied investment properties. And let's say you're okay, putting it in your individual name, because agency lenders will require that or trust, you still have to have, you still get a limit, Fannie Mae has a limit of 10 properties are typically going to lend to you and after that, you really can't go traditional agency anymore, because you're considered to be too risky of an investment for the secondary market.

So you're gonna get, if you succeed at this, you're gonna have to know those community regional banks, because they're the only ones are gonna lend you at a certain point. And that's where a lot of these online gurus and people that are telling you, it's telling you these plans for 100 bucks, and they do all these things, these strategies are great. They kind of leave out that detail of there's there's a cap there unless you figure out the market.

Tom:

One more question in talking about community banks, credit unions, this may be a dumb question, but difference. I mean, I don't know that I'm looking to go get alone, like talking to a credit union versus bank. Are they like, sometimes like the same? Or? I don't know, if you could just kind of spiel on that. I think it's one of the things that people hear a lot, but don't necessarily understand the difference.,

Chris:

Yeah, well, I mean, they're different different types of institutions, right, and we look at them and we walk drive, we walk by them, we drive by them, and we don't really think much, we think bank, they hold money, I give them money, they lend out money, it's the bank, or credit union has a lot more of that relationship based feel that that's kind of why they are credit unions in the first place is they have to have a Nexus to you in the form of relation.

And the reason why that Nexus that relationship is so critical and vital to to to what they do is because everybody who comes in there has this connection. And because they have this connection, you're talking with individuals, you're not calling one 800 numbers, typically, unless you're doing with a very large credit union, there's a very few of those in the United States, they do have that flexibility, they do have different lending standards, they do have different lending guidelines, and you can usually have those conversations.

One of the biggest benefits, I tell people from credit unions you get though, as you get better interest rates, you typically get better interest rates, from the credit unions, you typically get a little bit more credit flexibility and a little bit more insight into what's going on. And you also have that relationship base level that you would get at a community bank, I would say that in if you're a real estate investor, and you want to go into something like an LLC, as your as your name on title, and you want to hold it there for passive income purposes, for tax purposes, you probably can't do that at at your local, you know, credit union, but you can do that at a at a portfolio based bank, depending on their risk profile their tolerances.

And in states like California, where there's a single action rule, basically like that, because they know that in a worst case, scenario default, they can take the property back from you. They're not to go to court, they file a deficiency judgment, take the property back.

Tom:

Make sense. As a remote investor, How, how would that change the calculus in evaluating, you know, the we're looking for local relationships or credit unions? And am I in my shopping more in my local? Let's say I'm in California? Am I am I talking to my local credit union to go buy properties in St. Louis, or something? Or am I talking to local credit unions or community banks in St. Louis, I'd love to hear your insight on that on on local lending versus kind of…

Chris:

It's gonna be a lot of repetitive, repetitive thoughts, you're kind of running through it. And I'll tell you, I have to do this too. So a lot of my real estate portfolio is in Oklahoma in Texas. I live in Southern California. So it's easy for me to get out there and get loans. If I wanted to go through Bank of America, which I believe I have on one loan, I can do that easily. Yeah, I can go to them, but I have to fit that box. And I'm at a pipe apart now a plus size now that that portfolio size is not going to resonate well with them. Banks typically looked at as saying this person carries way more mortgages, and which brings down my credit score a little bit because I've gotten, you know, all this outstanding debt. But at the same time, they look at me as an increased risk because people who have more properties just have inherently more risk associated with them.

So it winds up being this long conversation. So I've been forced to understand that market and get to know that market and the one thing I can tell you is if you want to be remote real estate investor, and you want to be completely hands off, you really have to trust your team, you have to trust your financing people in the market, you have to trust your property manager in the market, you have to trust the people that are there. And if you don't trust them implicitly, you know, you're far enough away to where you won't see what's happening. So I always tell people to go to the go to the area, you have to get to know their market, you have to get to know the bankers, yes, get another community.

So I typically go to markets that are new that I want to invest in, and I'm I'm a real estate agent, I'm a real real estate broker and I want to chop it up, I want to talk to the real estate agents and brokers that are in the area, I want to get their feel, it would be a very foolish errand to walk into a community. Let's say like in Oklahoma, I own a lot of real estate in a suburb called Edmond, which is in North Western suburb, Oklahoma city, I would be foolish to walk into that market, and acted like I knew what was going on. Like I knew who was moving in who was moving out what the flavor of certain neighborhoods was, as far as rent appetite goes, I couldn't, I couldn't do that. So I have to rely on local talent.

But in having those conversations, one of the things I always ask, who's your go to bank and why. And you start hearing the same names over and over again, in the market of who the players are that understand the real estate investor and understand what's going on and who, who's really trying to scale portfolios. And you go talk to them, you sit down, I did that literally the last time I was out there, I sat down with a bank, a smaller community bank, I think they were about 100, maybe $200 million in size, not a massive bank and said, Look, I want to talk to you guys about my relationship, and they gave me two offers right out right off, you know, the right off the bat, hey, we can look at a commercial line of credit for a million dollars where you could, you know, use this to buy real estate, and then we can refinance it off, or we can look at financing and your single family real estate as you go through, we're gonna want 5% more down.

And that conversations evolved over time, I've gotten to know them a lot better. And now I know that anything in Oklahoma I want to go to I go to them, they're gonna take care of it for me, and they already have my financials, they already have my information, I'll usually give them an updated tax return, if the time has come, I don't have to resubmit an entirely new application, I sign an application I update what financial they already have. You go to a big box bank, you're filling out all that information all over again.

Michael:

Yeah, it's, it's such a stark difference as someone also who has portfolio loans and standard loans. I mean, I give this anecdote all the time, when, when talking about portfolio loans. I literally called up my banker on a portfolio loan that I have. And I said, hey, look, the interest rates have dropped. I'm at four and a half, what can you do? He goes, yep, no problem. Let's do a loan modification drop you to three and a quarter. How's that sound? I was like, great. And yeah, you try that with a bank of america or wells? I mean, go through a whole refinance process, pay the points, do the song, do the dance. I mean, it is just such a different experience with a portfolio lender, and one that I'm a huge fan of.

Chris:

Yeah, we see that relationship, you could make that call, you could literally call somebody you have a point person, you could call, you can ask the question. And it's simple, how easy it was to get the answer that you needed, because you have that relationship based business. And that's how that's how all businesses should scale. But once you get to a certain point, you can't reach all people. And honestly, if you want to feel like a concierge level service, that's the kind of lender you got to be with.

Michael:

Yeah, yeah. So in Chris, in talking about this, I mean, I know that portfolio loans are amazing. community banks are really great relationship partners. What's the difference? I mean, we talked about the relationship side, we talked about kind of the structuring of the loan itself. Why would why wouldn't everybody go to a community bank as opposed to their their big banks and down the street?

Chris:

We start with this a lot. I mean, obviously growing a bank getting the answer that question is vital to us growing and scaling, right? And I'll tell you that there's the perception, particularly after the Great Recession, where everybody said, you know, hey, these banks could fail, I can lose all my money. Let's put that to bed right now, every bank has FDIC insurance and FDIC insurance and watering this down is good for about $250,000 per account, you have more than more money in that account. There's no guarantees on that on the insurance. And people are always worried about runs on money could this bank fail.

Banks are very highly regulated, whether that's the you know, the Federal Reserve, the FDIC, the DEA, FBI in California, wherever your regulators are, they're very heavily regulated their capital requirements, there's all sorts of significant things that banks have to go through in order to make sure that they can last.

So once you dispel with with the idea that banks are gonna go under, or they could go under, they're perceived as riskier. You have to deal with with the value proposition of these brands. Wells Fargo Chase, be vague, they are the Coca Cola of the industry. You walk into a restaurant, you say give me a coke. People think banking, they I'm gonna go to Wells Fargo, I'm gonna go to Chase they do it because these places have brick and mortar locations on every single corner.

And these brick and mortar locations are highly visible. Do you see them when you drive through in your neighborhood your friends go there you see people coming in and out. They're right next to a restaurant, it's easy to be intoxicated and fall in love with with that location and proximity and think that you got yourself a better situation but in reality, other than the fact that you can walk into a bank, you're generally not going to get better service as a matter of fact, the smaller community regional presences usually have a direct number like the contact you share your experience, right? usually have people who you know if you want to talk to someone like me, the chief credit officer Just give me a call. I share my mobile number with everybody and I've had a number of people call and complain that They didn't get the loan they wanted.

But nonetheless, it's but i'm open, you know, and we're, you know, we're not a small institution anymore, we're about 7 billion in size, maybe a little bigger. And, you know, you can still reach out and talk to me, you can ask me what happened, and I'll explain it to you, you're not going to get that with the wells, the chase in vivo, people feel like that brand, that brand name, that value proposition in them being big, makes them safer, or gives them a better product. And I can tell you that it really doesn't usually get a lot better product, because the product is designed and fits your needs. And you have the ability to reach out connect to people that at a smaller community regional bank and the world's digital now, we talk a lot about cryptocurrency, well, the US dollar is effectively digital people move it around all the time. And I can tell you that at a bank that's online heavily and not so much brick and mortar, they're not paying those massive leases, they can afford to give you better rates.

Michael:

Yeah, so I mean, that's that's segues really nicely into my next question, I was gonna say, Well, if you're getting a better service, it must be more expensive, right? If I'm going to go get a portfolio loan, I'm probably gonna be paying a lot higher interest rate than I would at a Wells or a Chase, right?

Chris:

Yeah. So when you're, when you're selling them a secondary market, like Wall Street would be evey. And you're pricing your portfolio, you're pricing the portfolio with how much can I sell this for in the secondary market, I'm going to package it together in a pool of loans, I'm going to sell it off in a security. And that's security's got to have a yield to the investors. And that yield has to be in line with market, otherwise, they get paid a discount, or they have to pay a discount for the person to buy from them. Or if the rates really good, they get paid a premium for them, you know, for the Wall Street to buy this, you know, pool of securitized assets from them.

So they're always thinking with that in mind, where a portfolio lender is thinking about the weighted average coupon of their portfolio and how they can get the best return for their investors. And if they're publicly traded for the shareholders. So believe it or not, that's a lot easier decision. When you're looking at putting something in a portfolio, you're thinking about a relationship, right? If our biggest challenge is not pricing business, it's getting business, I'm gonna price the business as good as possible to get your business to win your relationship. Because I want you as a real estate investor to come back and do another one with me. And I know it's gonna be difficult for you to go to a, you know, a regular bank and a regular size, you know, Wells Fargo B of A chase these big names, I know, it's gonna be difficult for you to do that.

So I'm going to try to do my best to win your relationship on price, because that's the one thing I really can compete on that and obviously, the exception side. So you're actually going to pay market if not a little bit less than market with some of these banks.

Michael:

Interesting. So as someone kind of getting back to who is the ideal candidate who's for lending? How can somebody start to form that relationship with a local portfolio lender with a community bank? I mean, I'm a guy, I'm just getting started, I might not have any deals under my belt. I walk in there. I mean, has anybody give me interested in even talking to me? How does that work?

Chris:

Yeah. Yeah, that's, that's a strange question I get all the time. So I spent a lot of time traveling around talking to kids about financial literacy. And I get this question all the time. Like You I don't have any relationships? I don't know anybody. And I'm like, you got a checking account? Right? Yeah. Can you have a relationship with a bank? Now, if they don't value your relationship? And you don't know anybody there? You should probably move that relationship.

And they're like, Oh, well, how hard is that? It's funny, we don't really set up bank accounts, unless you're a real estate investor or business owner. And even if you are a business owner, you're not setting up bank accounts, like every day. So you're like, Oh, my God, do I just take the money out? Or just close it? Does that affect my credit? No, it doesn't affect your credit, you take the money out, and you just go open up another one after you close your account with your local bank, and then you start building that relationship.

But very few people actually ask me that question on a daily basis when they're just getting started. And I wish they would. The easiest way for someone to get started with a bank is to find a bank that does what you want to do or specializes in it. There are banks that specialize in small businesses, there's banks that specialize in real estate, find the bank that fits the profile investor you want to be, and then ask them, Hey, what are your internal guidelines? What do I need, I want to buy this property, I want to buy a property that looks like this. And those bankers will tell you, because they want to win your business. They want to nurture that relationship.

So what I can tell you right now, if you're a first time real estate investor, and you want to get out there and you've got a primary residence, make sure you have an excess to cash flow, pay down your debts, do the simple, logical things. Don't look to the crazy stuff. I hear this all the time. The weird advice, don't borrow from your 401k or your retirement Don't, don't borrow money on credit cards, be smart, be reasonable, be prudent. It's short term pain for long term success.

Michael:

Love it. You know, in talking about banks that specialize I'd love to know when you started the bank, like what problem you're solving or what, you know, what sort of, I guess opportunity that you saw, kind of on the other side and starting the bank?

Chris:

Well from the lending side, so I serve as the chief credit officer and my main function is to design a credit program which would enable us to grow and scale at an accelerated rate while being prudent in sound in our investment decisions. And we refer to loans as investments in such a way that that we could accommodate a very robust business in the state and our local proximity for us. I happen to be multifamily real estate.

We got the second largest multifamily Real Estate lender in the state of California and we're branching out pretty, pretty significant. We just grew to Dallas, we're looking at a couple different avenues in different states. And we're already in Hawaii in Las Vegas.

And we've been able to grow and scale that business by making loans to real estate investors specifically, to overcome the same objections, we've been talking about the same problems that they first time real estate investor challenges that are there, those same problems, the same problems that 100 unit apartment owner has, you know, they want a relationship based business, they want to be able to deal with as little hurdles as possible. And they want to get to the brain trauma of a real estate transaction without feeling like somebody just you know, gave them a colorectal exam. And sometimes, sometimes getting alone can feel that way.

Yeah, I had a kid you not on my own personal primary residence, I went through a lender whose name shall not be mentioned. And it took them five months to go through my entire portfolio of real estate and come back. And they asked me for more information, five months, this process back and forth, I literally hated that phone number, when it popped up towards the end, like I didn't want to talk to this person, I was ready to pay whatever rate possible to not deal with him. But so that was a problem we were trying to solve is you have to, we don't sacrifice, credit quality for price, but what I will give you is one of the best experiences in lending realm that you could possibly ask for, you know, we're gonna give you that concierge level service, we're gonna give you the value proposition that you as a seasoned real estate investor deserves. And we're going to build our brand of the fact that you get a great product, you great service. And you know how to get a hold of me? Sadly, yeah, but yeah.

Michael:

It's so funny, you mentioned that I talked to folks all the time about, look, it's important to get a great product at a great rate. But if you literally want to bang your head against the wall, every time you have to call this person, it might be worth paying a little bit more just to have just to get the deal done or to get the service. I mean, so it's so prudent and so timing that you're mentioning this?

Chris:

Well, yeah, and I'll say that, you know, that real estate hasn't changed much in the last 50 100 years, like we still use this archaic methodology. And it Look, I'm a real estate agent and a broker as well, I do that on the side from a friends and family. And you know, I really love the business. It's its passion project. But what I do is really outdated, why I would get paid two and a half percent, or somebody else would get paid two and a half percent. I understand this industry norm, but by today's technology standards, there's got to be a better, more efficient way in lending is way worse. When the way we do things, you think about all the things that we're giving somebody, this is all digital, your tax return your financial statements, you should be able to just log in and plat and send them over. And everybody has that they have within a couple of clicks.

But it doesn't work that way. And the underwriting process is still not, you know, it's not electronic. It's not AI, it's an individual looking at these things, asking questions, and things get missed. It's a very, very painful process. It's shocking to me to this day that it hasn't changed so much in the last 50 years. I hope that it has changed coming that'll make our lives easier on the real estate side. And maybe the blockchain is the solution. We can buy and sell real estate quickly. But it's painful. And there's you can grow a business to billions of dollars in size. If you can just give exceptional customer service and be weary of people's frustrations like your own. How crazy is that?

Michael:

Yeah. mind boggling. I know.

Tom:

I'm thinking of some other questions. It's just keep popping up. So you know, as the chief credit officer for the past 14 years, has, how much movement is is there in the underwriting? I don't know criteria or things that you think about. I mean, we've had such a wild run over the past, I don't know, you know, 10 to 12 years, and then there was the depot, like, I'd love to hear how it's how it has evolved and the underwriting either criteria or let you go ahead and just riff on that

Chris:

You didn't No one's ever asked me that question before. So kudos to you, I will tell you that it has evolved a lot. particularly around the 2007-2010 range, people were freaking out because of the great recession. They're like, Oh my god, what's going to happen? And it's actually comes right up to just a, you know, lettuce last year and what happened with the pandemic? So, in normal response, okay, banks look at investment, real estate from a cash flow perspective, if you're a one to four, you're still a single family, they're still looking at your cash flow, as opposed to the property's cash flow, cash flow. And the only way to really look at your portfolio cash flow is look at what was on your historic tax returns.

But when you get into some of the bigger properties, and you start looking at, you know, five plus units, they start looking at the cash for the property First, the equity the property second, and then you as a sponsor guarantor, if it's a full recourse loan as a tertiary source of repayment. So the policy that we have set forth in the credit policies is very broad overbroad document in all banks have a credit policy, but really what what gets tweaked the dial the dials that get tweaked are things like your policy and procedure underneath that your guidance, the suggestions for daily activity and if you're an underwriter and you're working on something, what do you look at?

So believe it or not the de minimis dollar amounts and like things like debt service coverage ratio, the cash flow on the property for every dollar in cash flow, you know, your expense, that ratio, that hasn't changed a whole lot and the credit policy, it's always been a certain de minimis number for like multifamily. Let's say wonderful. On average for a little bit in 2007, you saw lenders go up to 125. They wanted to build in a little more cash flow reserve. But really what's changed has been kind of the the rate that we use to qualify you on the multifamily side. And on the single family side, it's been the optics and things like investment properties.

And the reason why those things have changed. They figured out that when things get bad, like in a pandemic, is an investment property more risk. Probably. If you have a higher qualifying rate on a loan, that means you actually have more cash flow in reality coming into your pocket, you're probably going to have you're probably going to bear through the financial wherewithal of a storm and the perfect storm was the recent one. In the multifamily world a pandemic happened right, then you have eviction moratoriums, and people like oh my god, am I not going to collect rents?

And Moody's and costar and reason everybody came out and they said, Okay, well, you know, what rent collections on the first of the month have gone down to about 70 80%. And people freaking out in banks had a knee jerk response, they wanted to see things like more documentation of tenants being there are they paying so now they're asking for updated bank statements, they want to make sure that you're you're accurate, tenants are actually paying they're not, you know, somebody who's taking advantage of the eviction moratorium. That became an additional level of scrutiny, that was not really a policy based thing. But that was just how it operated.

But believe it or not do the rest of the month, when you start looking at rent collection through the month, not as opposed to just when it's due on the first you're still above 90%. So a lot of this knee jerk reaction that banks were taking sounded like a real conservative methodology sounded smart sounded great. But in practice, people were still getting paid and eviction, which moratoriums across the country. And there are some people who I'm sure were impacted significantly, but the large majority of operators did, okay.

So it's constantly fluid, they're going to try to do the most prudent thing they can in a market while still being able to lend. It's very rare that regulators will step in unless you're a troubled bank or troubled lender and say you have to do X, you have to do y. The most recent example of that was the Dodd Frank Reform Act on the single family side, which is why ability to repay or your ability to buy a property is so critical. banks and lenders get really judged on that. So they have to make sure that you really can pay for this mortgage, because prior to that, people were getting stated income loans, they really couldn't qualify for it. There was no income verification and things were getting kind of nutty.

Well, today, you really, really can't do that they have to find a tangible way to show that you have an ability to repay. No, a long winded answer Tom.

Tom:

No, no, I like I mean, that's great. I was just thinking, you know, as a, like a lending company, man you have most ever, like really great insight on like, what that, you know, these multifamily is through the pandemic, their ability to pay back their loans. And, you know, we've talked a couple times in the podcast just amongst ourselves that there hasn't really been that big of an impact on our portfolios that we have. And that's interesting to hear you say, you know, maybe it's just the timing of the payback has been, I definitely get that there was probably people who who have had issues, both and be able to to pay the rent themselves and then be able to pay the loan. But we don't know we haven't been as impacted by it or haven't haven't noticed it.

Chris:

So I'll tell you this as a metric. And this is public knowledge, my telling you that you don't know we have a portfolio of several billion dollars in multifamily. Obviously, we are the second largest lender in southern Southern California. So we have a lot. I don't think I had a single deferral in our portfolio. And if we did, it may have been one out of the entire portfolio, somebody that called and requested a payment deferral.

I will say that certain people like agency lenders, Freddie Mac, for example, happens to buy the majority of the multifamily debt on the secondary market, they had a very loose policy as it relates to this, what they did is, if you call them up and said, Hey, I need a payment deferral, they would give you one and then you had 12 months from the expiration of the deferral, usually around three months to pay all that money back that you deferred, a lot of multifamily guys heard that and I'm like, that's just gonna increase my cash flow, you know, issues in the next 12 months, or they just come out of pocket for it and move on. And they didn't go that route.

Me personally, I didn't have any any issues, my tenants other than some slow pay. And a lot of and I know it sounds insensitive, that, you know, we were saying that didn't really impact the market and people weren't hurt. I'm not saying that you guys aren't saying that. What I'm saying is, is a lot of people took those stimulus checks, and they paid their rent, they pay their mortgage, because that's that's where they live shelter is the number one vital thing that we need next to food and water, right.

During this whole time, there's been a tremendous amount of insight into how the portfolio reacts and how it's responding. I another thing that I thought was really interesting, was with the remote work environment, right? Like, Oh, my God, people are gonna leave these dense areas. Is that going to affect my properties that are in denser, more metropolitan areas? And shockingly, No, I haven't seen rents decline dramatically. I haven't seen any of those things. A lot of the portfolio that I've seen, I haven't seen those things happen. Not saying that they won't, but as it sits right now, there has not been a detrimental impact on multifamily in I know that drives economists crazy, but that's just the real world.

Michael:

Yeah, similar for me with my multifamily portfolio in the Midwest. I know that in San Francisco and New York, kind of along the coast, there was a little bit of Exodus and a little bit of dampening effect but I'm sure it sounds like in Texas as well. It was in Oklahoma things were just skating along have just fine.

Chris:

Yeah, there was a little bit of an influx, you know, some of my stuff I decided a long time ago. And you know, this is not really a banking lending thing. I decided that Southern California real estate couldn't return me the money that I wanted from a pure cash on cash return perspective, if you want to look cap rate, look at that. But in the Midwest, I could go in and buy something for 45 $50,000, get a four bedroom, you know, four bedroom, two bathroom place, and rent it out for you know, call it 1600 to $2,000 a month with a really nice newer home, you know, post 2000 build.

And it just made so much sense from from a cash on cash return perspective that we really decided to branch out in those areas. Well, those areas happen to be really highly desirable in the pandemic. So I kind of lucked out in that sense of what happened. But yeah, it was definitely different myself in Southern California, you know, maybe slow pay a little bit.

But, yeah, it's shocking to see from a lending perspective where we have all this aggregate data coming in, and we're very, very debt data heavy as an institution, to have all this information coming into us at all times. Really kind of dispelling with the fears that are that the media are running with, and that you have out there. And new investors get thrown off by this, right? Because what, what's the number one that stops people from doing number one thing to stop you from doing things is fear. Right? And if you're a real estate investor, this is a very scary last year. Like what do you do interest rates are super low, there's bidding wars breaking out on properties, you know, everybody's saying the the property values go up next year three to 5%, you know, I should buy I should buy right now. But there's this whole I can't I rented out thing. I don't see any data that backs that fear up.

Tom:

Kind of kind of unrelated. But I think with your experience and kind of position that you're at, I'd love to hear your thoughts on the business of i-buyers. So that's for those who are not familiar, that's companies like Zillow now and open door where they're buying these properties directly and, and then selling them. So it's almost like kind of an arbitrage these these large funds that are buying and then selling it for me that just doesn't seem sustainable, like in that where there are downturns like I don't know how those businesses survive. Anyway, just from your experience in position, I'd love to hear your thoughts on that.

Chris:

You know, I, I spent a good amount of time geeking out on ibuyers. And just trying to figure out if I was missing, I have the same kind of conundrum that you do, right? Like, it doesn't seem sustainable, like what's going on here. So I spent any egregious amount of time my wife was killing me every single night. Because like I couldn't, I couldn't get off it like I just it boggles my mind that this is a platform that I don't understand, I'll tell you that, from my experience, buying a home is a very personal thing still.

Even if you're a real estate investor, the tangible relationship that you that you have means something to you, if you look at a home on paper, and you look at the numbers, it's really hard to make that judgment call. But physically being present or seeing it or, or connecting with the property of the people that you're with connecting with, it makes that a much more intimate personal decision. It's not like opening up an account and buying some stock, right? You have there's some steps along the way.

So because of that, I don't know that there's longevity in the process, we are coming into a new generation of buyers in that you have the Gen Z that are kind of getting to that. getting to that point, people are definitely waiting longer to buy that could just because the cost of housing is going up. But i-buying is a sensational topic, it sounds great in theory. But as a guy who kind of caters to a lot of those types of buyers, I can tell you that a lot of them want to talk to somebody and say, Hey, you real estate agent or you you know, attorney is right, what am I doing? Can I do this? Can I do that? You know, can I waive my contingency on appraisal? Is that crazy? It sounds crazy. Do I have a financing contingency? What What is that? They want to be able to walk that through in the ibuying platform is based on scales of economy, right? You have less individuals, you have more people in an online platform and less people to talk to.

Think about it like eBay. Right? You can buy real estate on eBay like she used to. But back in the day, do you really want to do that? Or do you want to pick up the phone and call somebody and have a tangible conversation? And sadly, everybody that I've spoken to from a cultural perspective feels better with the individual? Why do you think real estate agents can still command is you know, 5% of a transaction on average or 4%? It's because that that person's value to the transaction is being that conduit and sometimes you're a psychologist, you're just listening to people's emotions.

So the i-buying stuff from a scale perspective, it's interesting. I think what's got a lot more viability are syndications, and we've seen a lot of those as of late, you know, I think you see a lot of the online buying platforms that are that are interesting. What I haven't seen, I think is a phenomenal idea that somebody has really done. He's real estate property managers really need to find a way to get buyers in the market and be a property manager first. You know, not an equity partner and just a property manager first, I think you could drive a ton of business that way, right? If you're a property manager and your real estate agent and you're bringing in business to investors. I mean essentially it's like wholesaling with a license. You know, and you could bring a ton of business that way I think that's got a lot more legs on it as the you know, the time comes I don't think ibuying is the way the future at least not until perhaps the blockchain takes over in the transactions a lot more seamless because If you have a lender.

Tom:

I love how full circle we went on the relationship currency on, you know, as well as the kind of like, you know, a version and fear of making mistake.

Michael:

Yeah, Chris, the last thing that I want to chat to chat with you about or kind of ask as we try this episode kind of been building this profile of an ideal real estate investor from the lending side. So the relationship side, and now on the credit side, I'm just curious, what things can folks do to help boost their credit so that they're qualifying for the best mortgages? And then secondary? Are there thresholds or goals that people should be looking to hit in terms of their credit score? So if I'm, again, that new investor, maybe don't have a lot of credit history, or have a little bit of low credit? Where should I be shooting for what should my minimum goal be and then also, what things could I physically do to help myself get there?

Chris:

So yeah, Chief credit officer, this is the question I get the most. And I can tell you, there is an ideal profile. And there's a lot of there's a lot of kind of that old mythical information out there. That doesn't make any real sense in the real world. But we believe it to be true. First of all, real estate property owners, if you own a lot of real estate, they typically don't have the highest credit scores. So if you're aiming for an 800 FICO, you're probably not a real estate investor. Because here's what happens is one of the things in the algorithm that takes into account these for scoring purposes, is that your total overall debt to your available credit matters, right. But if you're a real estate investor, your job is to use leverage to build cash flow and build them to bigger real estate portfolio with time.

So you're naturally going to have higher usage of credit and a lot more trade lines as it relates to mortgages, at least until you get into the commercial world. They don't show up the same way, then most everybody else, so a lot of real estate investors that are seasoned successful people, they also get sued by tenants too. And that can show up on your credit score depending on how it works. And depending on what kind of lawsuit it is.

So if you're aiming for a perfect credit score, don't put too much pressure on yourself. Don't do that. There are little things you can do. Little thoughts that that that have just kind of crept up in society, the idea that credit is bad is probably the worst that had to dispel with credit is not bad. Okay? People tend to use our debit card and think it's a credit card, don't do that. Use your credit card, pay it off every single month, build that trade line up, closing trade lines, closing a credit card, closing an account and paying it off actually does bring your score down. So be cognizant of how many credit cards you have, how many trade lines you have, and keep them out there.

I have people on one side of the spectrum that come in with zero debt, high net worth clients, celebrities, they paid everything in cash, and they're like, Chris, why is my FICO like five? The answer is, you don't have any credit. No one's ever sending you any credit. You've never used it. So the algorithm is outdated. The algorithm that Experian Equifax and TransUnion these three private entities use is really outdated when you think about it in the context of Airbnb. And you think about Turo, and you think about other ways people can live their life now without actually having to use credit.

And it's shocking to me that we haven't updated the algorithm because it's such a baseline part of our society, there are companies that are working to change that with AI and future forecasting of what you will spend versus what you have spent historically looking forward versus looking back. What I can tell you right now is you have to, you have to build credit, you have to be strategic about it, you have to plan to spend with credit, use it pay it down with time, and you have to plan to have a FIFO in and above around Scott 720 720. and above, you're going to get great excellent rates there, you don't need an 800, FICO anything above 720. And you're going to get anything call it up 680 to 720, you should getting great financing, but it's not the absolute best rate in some circumstances.

But that's what that relationship base bank will help you out that credit union will help you out, you know, their flexibility to give you a top to your rate at 680 or 700. FICO versus the 720 in their little matrix is a lot greater. And they probably will if you if you ask them for it's as simple as you calling and asking for that modification. Another Another great thing about credit that I think people get confused about is, you know, they, they pay off all their debt. And this is so great, I paid off all my debt. And why is my FICO score like 100 points lower, it's because you're not actively using credit anymore, even though you had it and it was there.

So maintaining your credit is kind of more art than science in some ways, you have to understand the algorithm. If something's on your credit report. Typically what I tell people call the agencies dispute it look into it, they'll tell you how to get it off your credit report, they'll tell you the steps to do, you can go hire people to do that. It's a very predatory industry. So be very, very careful if you do do that. But maintaining your credit is the first thing you should do as a real estate investor, make sure you understand it, make sure you build it up. If you don't have a bank that you trust as a partner going forward, you should find that bank. If you do those two things and start to build income over time, you'll be able to buy a piece of real estate a lot easier than you think. But it's not going to happen overnight.

Tom:

I had a gym, a gym membership or an auto payment and I cancelled it. And they they and so I took my payment method out but they still charged me for like a cancellation fee. And they sold it you know, to another company for debt. I think it's like 50 bucks. And when I you know was buying my personal occupancy, I get this notification from my bank like oh, were you a member of total fitness and I'm like, Oh my gosh, so yeah, begrudgingly like sent them a check for $50 or whatever the stupid fee was.

Chris:

Well at least it wasn't Planet Fitness. I mean, you That's there you go one. Yeah, you know, it could have been it could have been that but yeah a lot man these little collections will show up and you can pay them off and then but generally when you pay them off, they won't remove them entirely. What I like to do is tell people what to call and negotiate that with the person who owns owns accredited Look, if you if I pay you off, you have the right to deal with the original creditor if you want to, even though they'll tell you you can't you have that right.

But you can leverage Look, I'll pay you I'll pay it off, just get it off my credit report, but call the credit reporting agencies and dispute it and a lot of times you'll find resolution there but yeah, it's and if you had that big box bank that wells chase b of A, they're gonna want a letter of explanation. Nobody knows I've written over the years those are fine. Chris, why didn't you pay this $20 account? Probably because I didn't know it existed guys. Yeah.

Michael:

This was a lot of fun Chris and if folks have more questions for you want to reach out to you or your bank? I mean, what's the bank called? How should they get in touch with the banker you?

Chris:

Yeah, first foundation bank. You can look us up online. We're the only one that I know of that name. So you can't miss us. You can also find me on my socials I'm very easy to get access to it's just my first and my last name. Chris Naghibi on everything Tick Tock. You know everything. Instagram, you name it. I'm on it.

Tom:

Awesome.

Tom:

Thank you, Chris.

Chris:

All right, guys. Likewise, take care.

Michael:

Alrighty, everybody, that was our show a big big, big thank you to Chris and first foundation bank. This was a lot of fun. We totally geeked out on some lending stuff. Hope you got a lot out of it. I know I did. If you like the show, please feel free to leave us a rating or review wherever it is using your podcasts. If you're catching this on YouTube, feel free to hit that subscribe button beneath you. And we look forward to see you on the next one. Happy investing

You Have 24 Hours In A Potential Market. How to Use them Wisely. Jul 10, 2021

As remote real estate investors, choosing a new market can be quite the process. Today we run the thought experiment on how we would spend our time if we only had 24 hours in a potential new market to research, analyze and assess the city.

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. On this episode, we're going to be talking about not being a remote investor temporarily and visiting the city. So the premise of this episode is going to be you have 24 hours to spend in a city that you're considering investing. What are you going to do? All right, let's do it.

Alright, so we have a fun episode today. But before we get into it, my name is Tom Schneider. And I am joined by

Emil:

Emil Shour

Michael:

and Michael Albaum.

Tom:

This episode is a fun episode. We are remote real estate investors. But we're going to take a look, sometimes it's you know, worth the exercise to check out a market that you're evaluating. And we're going to talk about how we would spend that time if we were choosing to go jump into a market and look at things.

So we have 24 hours is the rule of this episode. And we're going to talk about how we would spend that. So let's see what Emil, why don't you go ahead and lead us off in this conversation. And again, this is 24 hours to go visit a market. What are you going to do?

Emil:

Alright, so first thing I'm doing is meeting with the various people of my team, primarily property manager. So I think the premise here, Tom is I have not invested in this city before, right? So I'm a new investor, considering the city and I'm going to check it out, right? Or have I already invested here.

Tom:

That's right.

Emil:

And now I'm going to visit it,

Tom:

I'm dealer's choice for your case, we're going to have it so you are already invested. And for Michael, he is evaluating investing. So we're going to mix it up a little bit, and I gotta be omnipotent, and get to just kind of jump in and out wherever I want. So, okay.

Emil:

All right.

Michael:

Like it throws zingers in there.

Tom:

Exactly, yes.

Emil:

All right. So I actually had plans to go visit. So I've mentioned before I invest in St. Louis, I was planning on going to visit St. Louis, and then COVID hit and that's filled all those plans still on my to do list. But here's kind of my checklist of things to do when I go there. So I have a property manager that I like out there. But I would go and obviously meet face to face with my property manager always good to do you know, so far, it's only been talking on the phone and on zoom or whatever. But I want to get to know them meet the people on their team just put a face behind all the names. So that's, that's one of the things I'm doing.

I would also honestly, probably meet with one or two other property managers just to meet them. You know, we've talked about in the past, you know,

Tom:

You sneaky dog Emil!

Emil:

I just I know, I know, time and I'm just kidding. That's that is smart to do. Here's the thing, I'm not there all the time. And we've talked about in the past, things happen with property managers, sometimes things work out, sometimes they don't, I'd rather be over prepared. I'm not going to switch obviously, because I like my property manager. It's not about that. It's a matter of just going and doing some extra research and talking to people in case that scenario plays out in the future. So I'm gonna go talk to maybe one or two other property managers that were on my list. That's fallbacks. Just another thing I'm going to do…

Tom:

Give them your buy box to you know, tentacles everywhere.

Emil:

Totally, totally underrated strategy to find properties is talking to PMs, and they bring you deals.

I would also the other thing, I would do it well, since I invest there, I'm obviously going to go check out the neighborhood that I invest in, I'm literally just going to rent a car and just drive around streets a street and I'm I'm gonna have a notepad with me, I'm gonna write down, what are the streets that are experiencing a lot of people improving the properties or the properties that are already improved. And maybe there's maybe there's some dilapidated homes, they're right, where you could potentially buy the worst property on a nice looking block. And then I'm also going to just know down like, what streets were just bad, right? Like, you know, there's some cities you invest in where they say it's very block block, note down those blocks that you want to avoid within those sub markets that you like. So that's another thing I'm doing.

Michael:

Emil, I'm curious, are you going with your agent or with your property manager literally just sneaking up and down every street in a particular area that that you're invested in?

Emil:

I'm probably going by myself, if I can get them to come along with me. I would love that. But I doubt that they have six hours out of their day or whatever it may be that I'm just cruising around to like, do this kind of research. So I'm planning on it being solo, I'd love for them to come. But I just don't know if that's realistic, you know,

Tom:

It's funny, there's like benefits on both sides to it, you know, like, you're just by yourself, like, you don't feel like you need to keep moving along to whatever you can kind of double click into whatever you want. But with an agent or with your PM, it's like, you know, little more insight.

Michael:

I want to echo that point, because I've done both it, it's so often like you with an agent. And if you know that, well, then it's kind of easy. Maybe you're friends with them. And you can just kind of have a very flowy conversation. But I know just like in my own head, sometimes I'll be driving and I want to see something. And that's where my focus is. And in my head, I'd be like, shut up, shut up, shut up, like, I got to focus on this thing. So if there's somebody else in the car with you, or somebody else there with you, I don't want to feel like I always have to be talking, I just want to sit there in silence and focus on whatever I'm trying to focus on. So bright, that can be a really nice thing to do solo.

Emil:

If I had a choice between pm and agent, I would go PM, just because they have to manage the thing, you know, like agents trying to sell you the thing. pm is trying to manage the thing. So there, they have a little bit more skin in the long term game. So I like the PMs perspective, a little bit more in that regard. And they may, you know, they may be able to take you down a couple streets and be like, yeah, we have properties here. It's great. It's not great, blah, blah, blah, things like that.

It's kind of just like, literally, I would rent a car and just drive around. I think that would be the most beneficial thing I could do. Obviously, I'm going to do a lot of research I already invest here. So I've I'm gonna assume I've done my homework, right? Like I've I've looked out where property values are an area where I'm targeting, what are the rents in that area? What is the quality of that neighborhood using things like Roofstock’s, neighborhood rating are truly as crime maps, things like that to kind of hone in on a couple sub markets. And then I'm really just driving around seeing like, where cool shops and restaurants and things like that popping up and you know, near some of the areas I'm looking at that could drive rents up things like that make it desirable. So those are mine. Kind of the things I'm I'm looking to do.

Tom:

I love it. That's great, Michael 24 hours in a city you're evaluating?

Michael:

Yeah. So I and I have not invested there, I'm considering investing there. So I've done this numerous times, it's it can be a lot of fun if the trip goes well if you do a lot of your homework. And so first and foremost, I would say the trip begins well before you get there. And so having an agent that you've spoken to that you've selected from numerous agents you've interviewed is really important. And then having a property tours lined up in advance I think is a really good way to go about it.

And so what I did is I went out to the market in the Midwest, this is a while back. And I had one agent selected from numerous agents i'd spoken to she had properties lined up that we were going to go see from this hour to this hour. And then I also had standing meetings with different property managers that I was going to go interview in person of the ones that I had interviewed over the phone and had made a shortlist of.

So I went very similar to a meal went property to a ring instead of neighborhood to ring and looked at specific properties for several hours throughout the day. And then went and met with property managers after the fact. And then I was able to show that the properties that I had just seen and talked about the ones I liked, or disliked.

And so in addition, there's that research element when you're determining who your agents are just doing some research about some restaurants in advance, or some things that you want to see in the area, I think is really beneficial as well. And I am very, very fortunate in that my wife is the research queen, she always has his amazing itinerary set for us before we go places. And so my most recent trip out to the Midwest, she found like the top 10 best restaurants out in Cincinnati and was like, Here you go, you gotta go check them out.

So I think eating and dining at local establishments, in the words of I think it was a little mermaid that I want to be where the people are, to go see who you know, who is there, what's the what's the feel, what's the energy like? So I think that is is really, really important as well. And I talk a lot in Roofstock Academy about, you know, when you go to a market, you can't unsee an unexperienced things. And so if you have a bad experience, or get a bad taste in your mouth, that's going to affect your maybe want to invest in that market, which can almost be a detriment, because from a pure investment standpoint, it might not matter how the neighborhood makes you feel.

But on the opposite side of the coin, if you have a really great experience that could only bolster you know, your desire to want to invest in the area, which can be helpful as long as the numbers make sense too. So I think having a great experience and just learning the market being around can be very helpful and very beneficial.

And then also when you're just shooting the breeze with people, you know, in talking about different markets with different professionals or different agents, you say, Oh, you know, I love my favorite restaurant is so and so and they go oh yeah, it's right down there by whatever. You just have a better working knowledge conversationally and physically of what the market is like. So I'm meeting with my agent During properties, meeting with property managers and having a gastronomical 24 hours as well.

Tom:

I love the food aspect. I'll throw a couple of notes in there as well. And at a very high level, I mean, we've we've purchased properties without visiting them. You know, I wouldn't say it's necessarily like a hard requirement to go. But if you have the opportunity, I mean, why not? You know, one thing that we didn't talk about is, this is a business trip and those type of expenses. I mean, this is not tax advice. But with these type of business expenses, flight, hotel, car rental, you know, even food, there are some potential tax opportunities to as to be able to write off, deduct all that good stuff.

So, but again, this is not tax advice. But in doing that, there is some definitely some juice to squeeze with that opportunity of those costs.

Michael:

Keep track of everything.

Tom:

Yeah, totally keep track of receipts of everything, for sure. The other point that I really like about Michael and I've done a bunch of market tours, just working in the real estate space for a while is to you do a lot of your work ahead of time, and having like a really thorough agenda and schedule is you're going to get that much more value out of it when you go because your time is super valuable. So you want to have it pretty lined up with a pretty tight agenda by the time you get out there. You know, from from touring, to meeting with vendors, property managers, whatnot.

The other thing that I'll add in there is Be it a market that you currently invest in, or that you're evaluating investing in, I would recommend taking time to see like range of multiple neighborhoods. So for all of these, at least specially with these, like big cities, there are some pretty big swings, like in the neighborhoods, and I would try to see a range of cities.

So like, let's say you're going to Atlanta, um, you know, perhaps you're looking up north in Alpharetta or an area and you're looking at Stone Mountain, and then you're looking at, I would try to not just do one little pocket of a neighborhood and try to get some range into the neighborhoods that you're looking at. And then I would research them and kind of like, so you can set a baseline. So okay, this is a three star neighborhood. Okay, this is what a four star neighborhood in Atlanta looks like. Okay, this is what a two star neighborhood Atlanta light looks like. That way in evaluating future properties, you have a little bit of, you know, an idea of what that range is like, the the boots on the ground.

The other one with the property manager and the agent. It's great to get on the road. And definitely, you should do that while you're there. But I would recommend busting open a map with them, like while you're there and just kind of getting your feedback on the itinerary of what you're going to look at and get their input on. Because real estate is a moving target, right? And just kind of get their insight on like, okay, lately, we've been seeing a lot of transactions here, there's been some more vacancy here, there's been prices going up or rent, whatever. So I would recommend some time in the office with them kind of one on one and going through that.

And the very last thing I'll say on the culinary pieces, I love food, too. I love traveling different regional cuisine is amazing. And, you know, there's a lot of great resources out there, Yelp, one that I really like is the eater website. So if you do like, you know, Austin eater, or SF eater, they have a blog, and I think they keep it pretty well put together of like, you know, top 10 newest restaurants and do it like every month. So like that's a fun way to find new stuff. Word vomit done.

Emil:

I want to quick question for you, Michael, you know, you you mentioned, sometimes you can't unsee what you've seen when you go when you go look somewhere? Do you think that I could actually be beneficial and that like a lot of people invest? You know, like the paper, the numbers on paper look great, but they're not factoring in that, you know, sometimes a certain neighborhood could, older home, lowering whatever it is that causes a lot of things that don't show up on the spreadsheet are hard to predict. And I think like if you go and see those things you're going to be it's a lot harder to just go into it blindly. And just like, you know, trick yourself in Excel.

Michael:

Yeah, totally. I think I think that's a really great point Emil. Kind of the counterpoint to that is not so much of the specifics of the property itself. But let's say you go get on a flight to St. Louis, and you arrive, an airline lost your bag, and you go to rent a car. And that person at the car rental is just a real pain in the butt really rude and they and they don't have your reservation. And so now you're getting into a crappier car than you thought you were going to get without your bag and you show up to the hotel and I lost the reservation. And you're so you're sleeping in this tiny room and you're like man, St. Louis frickin sucks. And you just have a bad taste of St. Louis your mouth but has nothing to do with the property or the market itself.

So yes, I think to your point, you can see things in reality that you're not able to ascertain from a cap rate calculation are from a listing and that absolutely can influence you and can probably save you but just the sheer fact that the experience that you personally have and then you go there you go to the restaurant you got your order wrong. And the waitress, you know, the the waitstaff is really rude. You're like, Man, I've never come back St. Louis, this place sucks. That might taint you from making a really great investment. Because the numbers still make total sense. You just happen to have a crummy vacation, or a crummy work trip.

Michael:

Got it? Okay. So So I encourage people to not let the personal bias personal experiences influence the investment side of the things. But of course, don't go into it going on their numbers all work. So I don't want to look at anything else.

Something else to just be cognizant of is, you know, where you're going to these market tours, I think it is really important to have a an agenda and locale agenda, whether that's you've planned it or your agent has planned it. But I would also if you're planning it, if you're going solo, get input from from local folks in the ground about the different markets, because one of the things you do want to make sure is, hey, you're a visitor, and this is a foreign place use, you just want to make sure that you're you're being safe, and you're being aware of your surroundings. And so getting input on the places that you're heading, I think is important, just like you would do as a tourist in any in any foreign in a foreign place.

Tom:

That's a great point, Michael, on the the safety aspect, and also in looking at properties if you're going to go, you know, this is kind of common sense thing, but you know, if you're, maybe it's a house that's not for sale in a neighborhood, like don't be sketchy, you know, like, don't be I don't know, just looking into people's windows or whatnot. Use use your judgment and safety first. Yeah. And great point about asking about the different neighborhoods, so like, if you're going into an area that perhaps has higher crime, like, no kind of local, whatever boundaries, like if it's safe, if you're just yeah, be informed before going into an area.

Emil:

My agent would always say, these are areas I don't feel comfortable going at night. And that's probably a good good barometer to like, Alright, cool. Good to know.

Michael:

It was funny, just real, real quick, prior life anecdote. So I used to work as a professional fire protection engineer. And so I was going into this property that was vacant. And it was like this old, old, old, old, old abandoned warehouse and attached to office building like two or three square office building. And dude, who I was with was like, we were same age, and we were in our early 20s, whatever. And so we were shooting the breeze, whatever. And so we're walking through his warehouse and there was like, US syringes and like a chicken head inside of like a pentagram on the ground. And I was like, this is kind of weird, but we were like chatting, whatever, like my job is to look at this kind of stuff. So I need to look at the building.

So then we went into this office building and the power was off. There were no lights all the windows were boarded up, so it's pitch black. We both had our flashlights walking through and while walking, I'm like, why like what am I doing here? This is not like okay, this is safe. And the dude I'm chatting with like, meanwhile is up a floor above me and he's like, Hello, Is anybody here? Yes, a lot of times you find people in here and this and that. I'm like, like so not okay, like let's get out of here. We don't get paid enough to do this. Let's just leave. So for whatever that's worth be aware of your surroundings and if something doesn't feel right listen to your instincts.

Tom:

Safety first one of my favorite episodes that we've done is the Halloween episode where we all you know we give Yeah, yeah, yeah, of ghosts and creepy creepy things found highly recommend checking out that episode our our Halloween episode. cool guys, any so anything wrapping up our 24 hours in a city?

Michael:

I think just kind of to wrap things up, you're gonna be tired, especially if you're changing time zones, jetlag is a real thing, I seem to be very prone to it. And just I would say push through the tiredness, especially if you're just traveling, like the time there is going to be well spent, you're going to look back on it. And remember all of the information you gained or contacts you made much more so than the sleep you didn't get. And so I would encourage you to push yourself and work through that. And just make the most of the time you're there because it might only be for a 24 hour 12 hour, it might be a short timeframe. So go use that because you might not get a second opportunity.

Emil:

My finishing tip if this is a market you've been investing in, you go there regularly, you know, you've met with your PMs, I would on return trips, not mentioned anything to my property managers and I'd go I'd go check out my properties. See how they're, it's kind of like a check without them, you know, you tell them you're coming in, they're gonna make sure your properties are nice and clean. All the landscaping is taken care of, I would hope at least that they do that. So you know, just go visit and don't mention anything and see how your properties are doing. It could be a good way to kind of trust but verify.

Tom:

Love it. My last piece I'm going to say is do a post trip like little write up, you know, our little human brain are good at forgetting things and recovering things differently later. So on my flight back I do this, you know, I make a point of doing this before taking a nap is all kind of write down. Okay, what what what did I do? What were my takeaways from each thing. And you know, I may not look back on that paper like or that whatever spreadsheet or however I'm organizing it a long time. But something about writing it down. It's almost like I'm writing it into my brain. And I just remember it better on those type of trips. So, again, before you go, maybe set some clear objectives and like an agenda of what you're trying to accomplish. And then on the way back, take the time and write down what you what you discovered. And that way you're much more likely to take action and get value from it.

Michael:

There's a ton of data to support that time that writing it down is imprinting it.

Tom:

We're all big, personal productivity buffs and love to layer this stuff into our day to day investing stuff.

This episode today was brought to you by Roofstock Academy. Check us out one stop shop for learning to invest coaching on demand lectures. And then plus a bunch of other benefits like a money back guarantee that lasts for five years, as well as 20 $500 in marketplace fee credits on roof stock. So check it out at roof stock academy.com. And as always, happy investing.

Emil:
Happy investing.

Michael:

Happy investing.

3 Strategy Tips to Keep Your Real Estate Game Sharp Jul 08, 2021

Keeping yourself nimble is key to thriving in a dynamic market. In this episode, we cover strategy pivots, multifamily turns and consolidating your vendors to same time and energy to make your life easier.

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Transcript

grabbag

Thu, 7/8 12:44PM • 26:55

SUMMARY KEYWORDS

buy, multifamily, unit, property, lender, pay, rent, michael, bit, turn, deal, months, building, putting, investor, flip, long, strategy, rehab, tenant

Before we jump into the episode, here's a quick disclaimer about our content. The remote real estate investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Tom:

Greetings, and welcome to the remote real estate investor. On this fun episode, it's going to be a grab bag of topics, we're going to be talking about strategy pivots, we're going to be talking about turns in multifamily. And we're going to be talking about vendor strategies and getting less vendors and aggregating into single vendors by specific trade. My name is Tom Schneider.

And I am joined with

Emil:

Emil Shour,

Michael:

And Michael album.

Tom:

And let's get into it.

Welcome, Michael, welcome Emil. I love these type of episodes. Because basically, what we did before recording is, you know, we have a list of topics that we plan to get to. And this one is basically we all had three ideas that we liked a lot. And that we're going to we're going to get into so I'm going to let Michael lead the way on this very first topic, and a really relevant topic. As there's economic changes all kinds of stuff. It's the it's around strategy pivots.

So Michael, I'm gonna go ahead and let you start this grab bag, topic number one on the concept of strategy pivots.

Michael:

Thanks so much, Tom. Appreciate that.

So I think it's really important in just general real estate investing to have an idea of where what lane you want to go down, because as a lot of investors know, there are so many different ways to, quote unquote, invest in real estate. And that can mean different things to different people.

So there's the buy and hold their short term buy and hold, fix and flip, BRRRR investing, wholesaling, there's so many different avenues to go down. So I think it's really important to pick one or two and really focus there because otherwise, I feel like you could just get spread too thin, especially when you're new, because they're each Avenue is so deep. And so picking one to learn and going deep, I think is really valuable.

So that being said, personal story from my portfolio is I purchased a property about a year and a half ago. And I brought in a cash partner to make the purchase. I was managing the transaction, they provided the cash to the deal on the flip, rather the rehab, and it was supposed to be a buy and hold and the numbers were like outrageously good. We bought it for a song. My agent was then bragging to all his agent buddies about what we paid for the property. And everyone's like, no way, no way. So it became kind of a talk in the town and I had people offer to buy it off me for more than I paid for it day one kind of thing. Because even paying a little bit more, it was still a steal. So I said no, thank you, we're gonna rehab it, we're gonna get it turned.

And basically it was a six unit, we bought it for 90,000, which is like unheard of in this market. It was in Cincinnati, and it had one tenant in place that was paying like 400 bucks a month. And the unit break down the unit mix was really cool. And that there were a couple of three bedrooms, a couple two bedrooms and two one bedrooms. And so you're getting a larger unit count and not having to pay much more in terms of per unit purchase for the for the purchase. So that worked out really well.

So we put together a rehab budget, we found a contractor that could do it. They started working, it was going well. And then COVID hit. And when COVID hit everybody came home from work and what we realized we meaning mostly my agent, he said, hey, look, you know what this area is actually quite a bit rougher than I originally anticipated. I'm seeing a lot more activity on the streets during the day and in the evenings. Would you consider selling it? And I said, Yeah, sure if the price was right, let's you know, let's go see what's out there.

So long story short, the building has caused a lot of different headaches over time. It's an older building. So we had to make some additional repairs that weren't part of the original rehab scope. Big surprise there. Anybody who's done a rehab, extensive rehab will tell you that there are things that come up so budget for that. So thankfully we did. And so it's just been a bit bit more of a headache than I anticipated, the agent anticipated to rent has been a little bit tougher than we were originally anticipated.

So on paper, the numbers look phenomenal. And now that it's getting fully leased, the numbers are fairly phenomenal. But it's just one of those properties. It's more of a headache than anything else and there's just always something going on. And so I said you know what better to sell it, make a really nice profit and walk away. So we're under contract right now to sell that property. It's been in out of contract another time. Due to these the other buyer wasn't able to get financing, but so I'm able to go back with my cash partner, pay them back fully as well as get them a really nice IRR and return on their investment for literally doing nothing other than than funding the deal. So again, it was supposed to be a buy and hold it was gonna be like a 25% cash on cash return even With an all cash purchase, I mean, the numbers on this thing were just phenomenal. But again, it's just been kind of too much of a headache to deal with one thing after another, and I said, You know what, take the profit walk away, my energy and focus is better spent elsewhere. So this is turned into a longer term fix and flip, which the nice thing about that is that it's over a year. So that'll be it should be long term capital gains, as opposed to short term tax at my income level. So it should be a big win.

Tom:

I think opportunity costs, right. So like, if you're constantly putting your energy back into this one unit, there's definitely a price to that. And if you can get out now and get a fairly substantial profit, why not?

What I think is really interesting about that story, Michael is, right, I think a lot of people have had to strategy pivot in the past, usually, it's the other way around. So in your case, you bought it to buy and hold and ended up flipping it. But in with a lot of the investor that investors that I have talked to, they were fixing, and flipping, and then the prices fell through the roof a lot, you know, 2009 2008, and all of a sudden, they can sell the property for more than it's worth. And they ended up being buy and hold owners.

There's a great saying I heard it might have either been Gary our CEO at Roofstock, or it might have been Gregor. But a safe mouse is a mouse that has multiple holes to run to. So it's, you know, if you get so thin and specific on a strategy, like let's say you're fixing and flipping, and it doesn't pencil, if you needed to weather, some storms to hold it, you can get yourself into a lot of trouble. And you know, the biggest place where you get in trouble in real estate, if you're not capitalized enough. So you're running these thinner margin buyer holds. And all of a sudden, the value isn't there, for whatever reason, you really put yourself in a bit of a liability.

So you know, as a lot of people say, Oh, is this a you know, good time to invest prices are raising a lot, you know, my input on that on this story is to have that flexibility to be able to pivot your strategy. So, you know, if you're planning to do this flipping, make sure that there's enough room that you can weather the storms for, however long if it turned into a buy and hold, but it's interesting, here's the backwards version of that.

Michael:

Yeah, I've always been a buy and hold investor. And so I've always approached deals with that guys and would prefer to never sell until the depreciation is all physically exhausted. And so I just sold a couple properties last year, and I sold the property this year and this will be the next one on the docket. But every time I do it's like, it kind of hurts a little bit. But again, like you mentioned, it's the opportunity cost is is significant on this.

And then also something to think about is people always say you make your money when you buy which I agree with to an extent. And so when people are looking at deals I think look to minimize the downside when you can and granted you know, I bought this building for a song I bought it from someone who didn't understand multifamily. They didn't want multifamily so they were willing to part with it.

Tom:

Did you say you bought it from a song?

Michael:

I bought it for a song for a song for a song. I think that's an expression right? You will say that like I got it for really cheap.

Tom:

Oh, I got a song like the first song.

Michael:

Yeah. A good deal. Yeah, I, I went I went to the seller and saying to them, and they're like, Here take the property that was Yeah.

Tom:

That's new to me. You could be totally making that up. And I would be totally on board. I'm like, yeah, it seems like okay, Bought it for a song? Yep, sorry. Go ahead.

Michael:

And we got our first song well, and the dance had to had to include the dance part of it too, because they weren't going to part with it for nothing.

Tom:

Totally unrealated sequitur. Have you ever gotten a police ticket from a camera? I think it's the most anti climatic thing. You know, if you're gonna charge me three or $400 I want the show I want the policeman I want to see the lights, you know, get the adrenaline going. Don't just send me a bill in the, you know, that I received two weeks later, with some you know, fuzzy photo, give me good experience that I'm going to, you know,

Michael:

That's too funny. zest for life.

Tom:

A zest for life, you know, get that adrenaline going, I want to get when I get what I'm paying for anyways. Sorry, continue. You got it for a song and dance!

Michael:

Yeah, got it for a song and a dance. And it was one of those things where like I was mentioning I had people offering to buy it for me for like 120 even just like the day after I bought it. And they heard what I had paid for it. So it was one of those situations where it's really tough to lose when you buy it at such at such a discount. And like you could flip it without doing anything and still make a profit. So I knew that there was so much meat on the bone that it was it was going to work out okay. And granted it didn't go exactly according to plan. But again, if you buy it right, it's it's tougher to lose, especially when you have multiple exits.

Tom:

Alright, Emil, do you have anything you want to add or can I flip this over onto your topic?

Emil:

No, I have nothing to add. I love that story. I remember Michael, when you and I kind of first met I think you had just bought that are in the process of buying it and my, my mind was blown that you could buy a six unit apartment building for $15,000 a door and that was that wasn't even really…

Michael:

Like you're a liar you're a liar.

Emil:

And like, you know, you look at pictures, I'm like, Oh, this thing must literally just be falling apart and you know, needed some work but not not like, the properties I've seen where they're selling for 15 to 20k a door that like, you know, like, burned to the ground. And you're, you're starting from scratch, basically.

Michael:

Yeah, there's no floors. It's just one big building one big shell.

Emil:

Yeah, exactly. Exactly.

Tom:

So speaking of inexpensive cost per door, and meal. Let's talk about. So you have traditionally been a single family investor transitioning into sprinkling in some multifamily. You. Let's hear you riff on talking about the turn aspect of multifamily. So I think you have a triplex scope. Go ahead and run with this

Emil.

Emil:

Yeah, let me let me set the stage. So I bought a triplex in November, I had to change property management companies, I had a property management company after three months did not like what they were doing, went to a new property manager. And I think I annoyed some of the tenants, you know, just change it, you know, they had three property managers in like, three, four months, which obviously sucks for them. But I need to find somebody who is competent. And I can work with long term. And we had a tenant who was on month a month, just get up and leave, we actually didn't even notice No, nothing, we didn't even find out until we had a plumber, they're doing a fix of the sewer line, who noticed that the the unit was vacant when they went to like go knock on the door to to get access to something. And then they told the property management company.

So we found out in a really strange way, going through my first turn on this multifamily. And so my property manager did a walkthrough sent me a video, and I'm looking at, you know, I don't I don't think this person was there for more than two or three years. And, you know, you just look at all the damage, you start to size up, like what is the cost of this turn going to be and you start to weigh it against how much rent this units bring in. And it's one bed one bath apartment, probably it was under market rent, it'll probably rent for like, 575, 600 once we get it cleaned up, but you think about like a $3,000 turn, right, which is not agreed, like, that's not uncommon, but you know, there's, there's some work to be done here. So I'll say like 3-4k, you think about like your cash flow you're making on that individual unit and how long it takes to get that three to 4k back.

And so it's kind of just like one of these things where, you know, as you gain experience, and you're learning and, and things happen, I'm starting to question like, you know, in multifamily, yeah, you can buy it for cheap, but when you're when your rent is only $600 a unit or whatever it is, like these turns in these, you know, bigger capital expenses, they just, they crush you. And so it's just something that I'm, I'm kind of looking at right now, you know, I've only had this property for six, seven months, we'll see how it does longer term, but it's just kind of one of those feedback loops from like, okay, you know, should I be targeting things where the rent is 800 to 1000, even though it's going to cost me more, just like there's so much more cushion of cash flow that's going to pay for these things.

And just, you know, the the percentages on Excel look good. But when real things happen, like you see why a lot of investors who used to buy cheap properties over time, they maybe move to like Class B and it's, you know, for these reasons, I think, at least

Tom:

Yeah, I love using rent as a firewall, like a funnel, you know, a filter. Yeah, and I never really thought about it in that context of rent versus what your turn cost is going to be. And being able to I mean, obviously there's there's higher purchase price that you're going to have if you're buying a property with a higher rent. So that's like a little bit of a barrier to entry. But there definitely is a safety aspect of having more meant more rent that you're collecting more money to pay for turns when that stuff happens and potentially having have less time in between turns. not always the case but.

Michael:

Emil, I know it's I know it sucks right now, but I can tell you that it does get better. And it's a you have to be as Tom mentioned long term greedy and that $3,000 right now sucks, but something I would implore you to do is get with your property manager and really scrutinize what's going to be done in this turn. And think about putting in more tenant proof type stuff. So if you have to replace the carpet, don't replace it with carpet replace with lvp go put in there something that's waterproof, something you'll never have to touch again.

If you have to replace cabinets go put in higher grade tougher cabinet Because tents are rough on cabinets. And so if you have to replace them every single year, that sucks, versus spending a little bit more and getting a higher quality, more durable cabinet, look to do that type of stuff, because you'll do it once today. And then you shouldn't have to touch it again for a lot longer versus you go the cheap route today, you're gonna pay for that over and over and over again. And traditionally, the longer lifespan stuff tends to just hold up better to tenants.

And then you can also talk about a larger security deposit. There are counties and state regulations around how much you can charge, but just think about that kind of stuff as well as you're going to be releasing that unit.

Emil:

Totally. Yeah, great. Great tips there. Luckily, we have hardwood and tile throughout the unit. So it's not like shouldn't be the big expenses. It's just a bunch of little things and a couple of leaks. And so like I'm just estimating on the high end. Okay, so we have to open the wall is there's a plumber who has to come in plumbers are charging crazy amounts right now. So it's just like, I'm just doing the mental math and like putting it at 3-4k and waiting for full scope of work from them to like, get a get a bid and a budget. But yeah, good. Good tip. I mean, totally. Yes. Agree.

Michael:

Since Tom did a side note I want to one too, bid and a budget sounds like that from Austin Powers smoke and a pancake. Bid and a budget.

Emil:

I'm curious, like, you know, Michael, you've you've been in multifamily, the longest? Is this something you've kind of experienced yourself? And is now why you're moving into higher quality? Or have you been in class C? And you're like, yeah, you have these things. But like long term, it smooths out and it ends up working out just fine.

Michael:

Yeah, long term, it does tend to smooth out sometimes it's one of those things like the first 18 months of repositioning a building, just kind of suck. There's no, there's no better way to put that. And I mean, you're buying, the reason you bought it is because it was somebody was mismanaging it or you saw an opportunity. And so to get those opportunities to flow through the pipe, so to speak, just takes time, this isn't something you can do overnight. And so you might have to turn through some refer tenants to get some great ones, you might have to turn through some refer deferred maintenance to get the building physically where it needs to be. And that just takes time and often money to do so.

And so once you get once you get it humming along, it becomes much better. But this is just the speed bumps, learning curves, growing pains that you go through with a non stabilized multifamily asset. If you went and bought something turnkey, you would have paid a lot more for it, and it probably would not have been as attractive to you.

Emil:

The other thing I always try to remind myself like every, every time you have a turn, it tests your your mental fortitude, you're like, oh god, why do I do this, just put in the s&p 500. And don't think about it ever again. But it's like this, this is part of it. This is why this is the barrier to entry. This is why a lot of people don't end up doing it. But the people who do and stick with it long term, I think, you know, we know all the stories and that's why they're able to build wealth and all that.

Tom:

Speaking of s&p, I thought that I was much more risk tolerant than I was, so I just I refiled a bunch of units very recently. And I like dumped it all into a big index fund. I'm like, a significant amount of money for myself. And I like was just checking it every like 30 minutes I'm like, I can't I mean that's one of the things I really I think I've come to appreciate about real estate is the slow moving nature of it you know, we're talking like a two year leases or one year leases and it's not something for me to look at it every 30 seconds.

So anyways, what I did with it I just I started with a an incredibly aggressive allocation of like 100% equities like, but I've moved it because I'm going to redeploy it into buying more real estate into something more conservative allocation, I think it's like you know, 40% cash or 40% equities and 20% bonds or something just watch more responsible and seeing now the market move and like you know, as equities going up going down the bonds are going up it's just like yeah.

Emil:

It test your emotions 100%

Tom:

I thought I was super risk tolerant but as it turns out, Tom is not!

Michael:

Nothing to tell you how risk tolerant you are until you throw your own money away!

Tom:

Right yeah, totally totally. But anyways, hopefully all keep updates on the podcast on redeployment movements with that so anyways have any more an adult allocation instead of the fast track? Just give me a crushing.

Michael:

That would be great if they labeled labeled those allocations as such like toddler, infant, preteen, adult!

Emil:

Stages of life.

Tom:

Yeah. All right. So I've finished a recent activity where I'm pretty excited about it simplifying my life. is I have streamlined a lot of the national related vendors in my life where before it was really a hodgepodge of lenders, a hodgepodge of insurance. And a couple of things happen. So one thing happened is a company started buying up my loans on the secondary market, and I found out that they originate loans as well. So what I've done over the last 12-18 months is refinance these loans into this lender and any new loans that I've added, I've just originated them with them.

So now I have one lender, good customer service, easy to work with easy to go through refi and application process, you know, a reasonably good portal for getting tax time and all the setting up auto pay and all that stuff. And I'm really happy with how that's turned off. You know, I might be able to shave a little bit of margins, I their rates are pretty decent and origination costs, I think are are reasonable. But just for kind of simplicity, it's it's been a nice little boon to making things a little bit easier by just having one lender instead of this kaleidoscope of lenders all over the place.

And I did the same thing recently with insurance. So had a couple of good coaching sessions with Michael, shout out to Michael Roofstock Academy coach, you guys check that out?

Emil:

Have you heard of him?

Tom:

Have you guys heard of him?

Michael:

Yeah, I hear that guy’s a real schmuck.

Tom:

Yeah, but you know, he's, he's good. You know, he's, he's, you know, he's good. Just kidding. He's fantastic. Anyways, so anyways, Michael helped me go through this process of identifying, and, you know, setting, talking about important things to think about when setting an insurance policy and shopping around. And what I ended up doing was consolidating everything with my insurance provider that does my cars, my house, and I think my actual monthly cost is pretty similar to what it was, but the coverage is just massively more larger, if that makes sense. It much more comprehensive, where I'm paying a very similar amount, on a monthly basis, but it's just extremely like I think my deductible before was like $10,000. And now it's like $2,000, you know, that pillow at night just gets a little softer and softer. of doing that. And the What am I say? Yeah, the the air is a little sweeter, just having one lender to deal with one insurance vendor to deal with.

And in the process, I, you know, discovered they have a really cool underwriting tool where, where if I'm evaluating future properties for insurance, I could just plug it in. And they will come up with a policy without needing any other work. So really great streamlining, both on the defense of the existing portfolios and incorporating them into my future acquisition.

So at a super high level, if you're able to streamline your vendors, those national related vendors, be it insurance lenders, I recommend it, I just did it and I feel very good about it.

Michael:

Tom, are you able to quantify the time savings that you anticipate as a result of this as opposed to not having to chase down multiple vendors for your renewals? Or is it more so mental cleansing?

Tom:

I think it's both, you know, on the time side, like, it probably isn't that much more more work. So I don't know, I'm gonna make up a number, I'm gonna say, oh, it took an extra two hours per year, just because with some lenders, you have to go through a phone tree. And it's just absolutely miserable of trying to like talk to somebody and get information. But where i, where i think on the time, is not a specific time, but the actual, like gumption and doing stuff like I would put stuff off forever, because it's like, I don't want to get into that phone tree of XYZ loan company. You know, I'm saying and just keep putting it off, putting it off putting it off.

But now it's like I said, like, the actual time and me doing it probably is really 20 minutes, but oh my gosh, that idea of just sitting on a phone tree for 20 minutes, it just like makes my blood boil. But I'll actually just do it because it's like faster, I can talk to somebody right away and you know, have a good portal that I can do stuff. So, you know, timing wise, like I said, probably not a huge difference. But the ability to get over kind of the mental hurdle of just doing it the ladder as you were saying, big difference.

Michael:

And aspect to that I don't think you may be considering is that's managing the current portfolio. But when you go to add additional properties, I think you're going to see a massive time savings there and energy savings because like you mentioned with that quoting tool, now you can just throw a property in there and get a quote, you don't even have to talk to anybody. And so you can pick up the phone when you're ready, say this is the address, match it to my other policies go!

Same, you know, and then your lender has all of your docs and all of your files Anyhow, I mean, I just think that you are going to see massive savings both in terms of time and money because you're you're now a bigger client to both of those companies. Both lender and the insurance, you've got a little bit more weight you can throw around and be a little bit more demanding.

Tom:

Yep, yep, yep, yep. So that is what I my little topic was anything else you guys want to touch on today?

Emil:

I just I love yours, Tom. I think as we get older as our lives get busier as responsibilities and all these things grow, simplification like, just to sleep better at night to not have to like, rummage through four different portals or Like, who do I talk to you for that? Like, I'm glad you brought this up, because it reminds me of some areas where I could do this as well and just get some extra peace of mind.

Michael:

I think Yeah, I, I'm gonna double down on that. I think it's makes it so much easier. And I think that the putting it off, leads to sloppiness with regard to just general portfolio management, so to speak. And so if you can make it easy on yourself, you'll do it just in all aspects of life if it's easy, people do it. And so make it easy on yourself to pick up the phone or to do those renewals. I think your your future self will thank your past self.

Tom:

So I think on that, you know, putting stuff off it's like it's like a reverse muscle You know, you're like building a muscle to be like that and and discipline that. Like, is that a thing that makes something up for a negative muscle?

Michael:

Yeah, totally.

Tom:

Thanks, everybody, for listening. I hope you enjoyed. And if you enjoyed this episode, please subscribe like us. Also, as I mentioned before, check out roofstock Academy would love to talk to you guys there. We have over 50 hours of content. We have one on one coaching, group coaching all that good stuff. Check it out, roofstockacademy.com. And as always, happy investing.

Emil:

Happy investing.

Michael:

Happy investing.

Why A Solid Personal Finance Strategy is Key to Successful Real Estate Investing Jul 06, 2021

In this episode, @thefinancesavior shares how getting a solid grip on your personal finance strategy can translate into growing your real estate portfolio in the most efficient way. We cover everything from boosting income, tax benefits - like the 1031 and 721 exchange, diversification, using other people's money, and hedging against inflation.

Check out Salvador Bentolila at:

https://www.thefinancesavior.com

https://www.instagram.com/thefinancesavior/

----

Transcript

Michael:

Hey, everyone, welcome to another episode of the real estate investor. I'm Michael Albaum, and today I'm joined by my co host, Tom Schneider, and a very special guest with us, Salvador Bentolila, and he's gonna be talking to us today about his real estate investment journey, personal finance, and how he's married the two into his own personal coaching business. So let's jump into it.

Michael:

So Salvador, thanks so much for taking the time to hang out with us today. Really appreciate it.

Salvador:

Yes, thank you so much for having me. So we're looking forward to this conversation? And, yeah, I mean, hopefully, it's gonna be a productive and helpful topic for everyone, in terms of the intersection between real estate and personal finances.

Michael:

I don't doubt it. I don't doubt it. So I know you and I kind of go back because you're a member of the Rootstock Academy. But for all of our listeners who might not be familiar with your story, your background would love for you to kind of bring everybody up to speed about how you got involved in real estate, which and what you're doing now, because you're kind of doing some interesting things.

Salvador:

Yes, yes, absolutely. So personal finances has always been a topic of interest for me. And it kind of accelerated accelerator when I moved to the US. About six years ago, I started realizing how complex the system is here, it can get complicated, very quickly. So I started, I started reading a lot, taking courses helping friends and family. And over time, as I you know, I still work at my regular day job and started to get to know more people and eventually, you know, personal finances is one of those topics that usually comes out in, in conversations. And I started realizing that it's often a topic that people are not so much familiar with.

And, you know, I'm not here to blame anyone, because it's something I didn't know either, something that isn't regularly taught in schools. So recently, in the last couple months, I started to develop this coaching program for personal finances where my goal is just to educate people about all the different topics that go around it. So things like very basic things like how to create a budget, how credit work, how to pay off your debt, how to minimize your taxes, how to invest your money. And, you know, there I cover all of the different, let's say, investment classes from stocks and bonds, and real estate and commodities.

And a little bit also more about my background, then no real estate is also something that through the Roofstock Academy, that I started recently getting involved with about three years ago. So it's a topic I'm super enthusiastic about. And when I started this, this coaching program, I saw there was a nice intersection, which is what we want to speak about today.

Tom:

I'd love just for context, telling everybody kind of, you know, what is that? What is the regular day job? And is that still going on? And just to give a little more context?

Salvador

Yeah, sure. So I am a civil engineer, and specialized in water, I mostly work with wastewater treatment plants, we do some upgrades for in terms of protection to provide protection against resiliency. So I've been in the industry for about eight years. And there's a little bit of intersection there between construction and the work. Sometimes you have to do real estate properties. And mostly, you know, it's property managers or contractors taking care of, but but it's a it's a use, it can be a useful background, to have every once in a while.

Tom:

Totally probably thinking about like systems and balance and just I don't know, data driven love it.

Michael:

Yeah, I was gonna say I'd be curious Salvador, can you share with everybody what your experience in real estate has been to date thus far,

Salvaor:

There's a very steep learning curve. In the beginning, it takes a lot to take that first step and a lot of discipline and you need to have a lot of motivation. As I was starting out, I can tell you was like a roller coaster of motivation. You know, one day I would wake up, okay, let's do this. And then a another day, I would like go get cold feet and put put the kind of the project on hold.

In the Roofstock Academy. We talked about the analysis paralysis. So that's also that happens as well, because now you get so much data that's available for you. And another. It's another thing that I experienced. So I think for me, it was that the Roofstock Academy was definitely helpful, especially the coaching and the coaches that are available there for them. Immerse, it's something that helps in getting that motivation going and achieve your goal. So that's been more or less. You know, so far, it's been going well, and I think I plan on keeping being a part of kind of a project.

Michael:

Awesome. And so curious to get your thoughts on, on the personal finance side of things, how you view real estate as a benefit.

Salvador

Yeah. So before that, I forgot to say before about this coaching program that I started, you can check it out. It's called @thefinanceSavior. My name is Salvador and the translation to English is the Savior. That's why I call it that way. There's a page on Instagram that you can check out what I tried to post Bailey concert concepts there just to going back to the goal to educate people so they can make informed decisions one day at a time. And there's also a website, as you will see the different coaching programs and classes that are available.

So and and yeah, Mike, to your to your question. My goal. So yeah, there's so many benefits that then I want to hear some of them today, I think. So disclaimer to everyone and everyone listening here just to to know that everything we're discussing here, it's just going to be for educational purposes. And please don't take it as any type of, of legal, tax, or professional design advice. And it's always important to do your own due diligence, I think this will still be helpful. As a starting point, the first benefit in real estate that at least that I see is that the income, the income both, you know, there's so time you can boost your income typically that increasing your revenue or reducing your expenses. and reducing your expenses is it's easier to do but but there's a limit to it, right? There's always so much you can reduce because you always have bills to pay.

And in on the other hand, increasing your revenues or your income. It's harder to do but but there's no limit, that real estate gives you voice on that latter part of the equation, increasing your income. And it goes back to what we started with saying that there's a steep learning curve, and it's hard to do it. But you have that advantage of that. They're there, there's no potential. So that's kind of the first benefit that I see. And it takes time, but because it compounds over time, you can accelerate very quickly.

Michael:

Awesome. Awesome. Love that. And so how did you view this as a benefit to your personal portfolio? How were you able to boost your income?

Salvador:

Yeah, so. So at some point, and to me, for example, the real estate was the last asset class that that I explored. And I don't know if this is the same for everyone, maybe some people are fully invested 100% of their money is invested into real estate, or maybe some of them, it's also kind of the last, and I think, nowadays, with things like REITs, or, or a Roofstock, this is becoming more accessible to everyone, and you'd help me increase my income just because that properties, the properties that you acquire, they give you extra cash flow on a monthly basis.

So that's, that's the nice thing about it in terms of boosting your income, and it's completely passive ride, you don't have to, you just have to get the rent, which is which is tough, in and of itself. But once you do that, that's how you boost your income. Do you agree with that? How was your experience, Michael or Tom?

Tom:

Totally, totally agree with that. And I think, you know, a lot of people it's, it's way more work buying a rental property than buying stocks, I mean, Roofstock is working very hard to make it not as difficult, right, and taking a lot of the operations out. But, you know, at the end of the day, if I want to go buy some shares of Microsoft or shares of some Vanguard fund, you know, it takes me 30 seconds to pull up my phone and do it, you know, on some app versus buying real estate.

You know, I think a lot of people kind of intuitively understand those extra benefits, you know, with income and tax and all that stuff. But there's just this overhead and I think for for people like us and yourself and other you know, probably people listening that have the gumption to get up and you know, be uncomfortable if need be comfortable being uncomfortable, right and doing some of those initial steps. There's there's some real benefit but Yeah, I agree for a lot of people. Real estate is is definitely a ladder entry into personal finance and wealth building and all that but even though it is, you know, probably one of the most proven paths of building long term wealth, it's just that you know, That extra extra challenges that you have in that it's it's a Yeah, double edged swords. But I mean, I, I think definitely for me the benefits outweigh the the extra extra work that it takes.

Michael:

I'm going to push back a little bit on that. And I and just to one point that you made.

Tom:

Push away Michael push away.

Michael:

Oh the pusher the pusher has arrived. The benefits are people understand them or they they're they're innately understood. So I think that that that is not the case. Otherwise, I don't think we would be having this conversation. I don't think otherwise Salvador would be educating folks, I think that people can wrap their head around very easily the income potential that is available to properties, and also the appreciation potential, because those two things exist in the stock market. And so we can draw very easy parallels between the two, I think what they fail to recognize is the loan pay down that you get to the buying equity every single day, essentially, because of leverage, because we can't use leverage in the equities market unless you're buying on margin. But that's, you know, above and beyond your typical investor.

And then the tax benefits. Those are tough to quantify because it's based on your specific income and geographically where you live and a lot of other things that surround your financial position. So that doesn't exist in the equities, worldly stuff, to the best of my knowledge. And so those two things are kind of new, and specific to real estate. And so that's I think the other half of the pie that people have a really difficult time wrapping their head around. Okay, now you can clarify, is that what you meant?

Tom:

Point point, Michael, I agree. I agree. I think, I think people… I will rephrase it all, redact and rephrase. So I think people intuitively understand that real estate is a great way to build wealth. But to your point, I think that there are some aspects that people might not even realize which the loan pay down piece another way that I like to put it when talking to people, you can say like, okay, you can go borrow $100,000, and someone else will pay it off for you, like, where else like whether, like types of wealth building, you know, ways is that real, you know, buy your house $100,000 debt, and then the rent that somebody else is paying is going to pay off that, that borrowed money? So, good, good point. Yeah. And the tax pieces is great, as well. Salvador, do you want to riff at all on the tax benefits?

Salvador:

Yes, yes. Well, actually, thanks for that. That's a great segue. And that, Tom will, we will, you know, that's the whole point of this session to explain for the different benefits. So they don't think it's, it's super straightforward and, and taxes, as you and Michael, were just saying, is the second advantage that I wanted to talk about today, with the first one was doing, you know, get a boost in your income, and other taxes.

And there's kind of three, three main things I want to touch upon. The first one is the deductions like you with real estate, you can, there's so many deductions that you can take about your income. And so starting with all different expenses that you have, so any type of repairs, if you travel, maintenance, insurance, utilities, if you're paying for it, commissions, all of that are going to reduce your income, that your taxable income, and therefore your your tax liability. If you go out for to a restaurant, you cannot deduct that out of your personal income taxes with rental properties, you know, let's say you having a meeting with your property manager, it's considered part of the business, then you might be able to deduct that.

And then there's the depreciation, which is a very, very large expense. So the IRS allows you to depreciate about 1/28th of the value of the property every year, excluding some part of the land, that's not appreciated. But that's a very large expense. If you buy Tom, you were talking about $100,000 property before, I think that's about $3500 a year that you can depreciate and, and most likely, without depreciation, which is a non cash expense, it's not money that's directly coming out of your pocket, you're going to be operating at a loss. So effectively, you're going to reduce your tax, your taxable income and your tax liability, you're going to have a loss on paper, but you're still going to have money in your pocket. So that's a great advantage also.

And then another deduction is is abbreviated as UBI, which is a qualified business income deduction which you need to meet. It only applies up until a certain level but it's an additional 20% that you can take.

On top of the deductions you have the referrals, right. It's very popular and I think touch upon in different articles through our roof talk about the 1031 exchange, which is just deferring your capital gains taxes, when you have a property that has up shader over time, and you want to sell it, but you don't want to pay capital taxes, capital gains taxes today, you can replace a property with, like kind property a similar property. And and then allow you to defer that those taxes until a later date. So it's, it's, you know, of course there's some criteria a timeline to be met, it has to be done through through a third party. And Michael and Tom Feel free to to jump in. If you have gone through this, what kind of what your experience has been, but it's a it's a very powerful mechanism to, to defer taxes, because now you're saving that extra 15-20 or, or 40%, after tax reform that you can use to buy a much larger property.

Tom:

Yeah, love 1031s. I mean, it's, you know, like I said, the the mind blowing thing of borrowing $100,000 in somebody else paying off, like a 1031 is like buying a bunch of stock, having it go up a ton. And then using all the gains to buy some more stock without, without needing to pay any taxes on it, it's like the the rules within the space are just so beneficial. On the real estate said.

Salvador

And then another deferral that I wanted to speak about, which is less heard of, at least for me is the 721 exchange, which allows you to, let's say, you buy a property and it's not performing or you're like, Ah, you know, owning real estate directly, it's not really a thing for me, you can transfer the value of that property wanted sold into shares of a REIT, which is a real estate investment trust. So your money will still be invested in the in the real estate market, but not directly. And that's another way that you could potentially defer capital gains. So two deferral mechanisms.

And last, the last tax advantage that I wanted to speak about is the SECA taxes. So SECA taxes are social security and, and Medicare taxes, which are usually taken off of your if you are, you know, W2 employee, they're taking the straight way right away from your from your paycheck, rental income is not hit, but with with this type of taxes, which, as a W2 employee can be about 10 and a half percent. If you're self employed, because you don't have a company that pays for the rehab, it can be around 15%. So it's another considerable part of your income that you were saving with the rental properties.

Tom:

That's cool. I wasn't aware of that. Seven 721, you said is where you can convert the into a REIT? That's, that's interesting. Yeah, I was I wasn't aware of that. That's

Salvador:

Yeah. So I also became familiar with recently, I haven't experienced it. But as I understand these, the mechanism that allows you to transfer your the value of your property wants to sell into shares of, of a REIT, which for for our audience, are really just a company that they own, they operate, and you know, the maintain, and finance real estate brokerage properties. So basically, they take care of everything, and you just buy shares of them. So your money then is allocated throughout the portfolio of properties.

Michael:

Yeah, that's really interesting. I hadn't heard of that, either. I'd be curious to know if it has to be similar values to the 1031 exchange. I mean, if you've got if you sell a property for 200,000, and have 100,000 worth of debt, when you go to do your 1031 exchange, you need to buy something that's at least 200,000 or greater. On the upleg. For this, if I have 100,000 in equity, and I have to pay back 100,000? You know, I'm left with 100,000. Basically, do you know how that works? salvadore? Do I need to invest all 100,000? Or do I need to go that invest 200,000 in REITs?

Salvador:

I don't know the details of it. And you know, it's something that I'm looking forward to, to learn more and to learn more about it. So I can definitely keep you posted up our recording station and the angles on what research do you do?

Tom:

I'd also interested you if you could go the other direction, like take shares from a read to investing directly without capital gains.

Michael:

Ahh that’s a 722 exchange!

Tom:

Michael is making stuff up? Is that really what it is?

Michael:

No, I literally pulled that out of thin air. So if I was gonna say call out to our listeners, if anybody knows, if that's possible, please let us know. Right? It's in the comment section, email, Tom and myself. We would love to learn more about that.

I mean, the one thing I do know is that with the Oh, the opportunity zones, that's a way to sell out of the equities market and invest in real estate, but only in qualified zones. And there's very specific rules about it, but you can't avoid capital gains on that. And so for anybody interested that's made big gains in the equities market and does want to invest in real estate and you're looking to liquidate some equities, looking at opportunity zones. That's definitely something to have on your radar.

Salvador:

Yeah, yeah. I mean, this can be a topic also to be covered, added to the Roofstock Academy as well.

Tom:

Love it.

Michael:

Yeah, absolutely. I think we need to get somebody on the podcast talking about opportunity zones.

Salvador:

I meant the 721 exchange, but both of them.

Michael:

Oh, yeah that to that too. Yeah. All right, this to the list. So let's get this on the rails Salvador. Because we're, we're in the weeds here, man. So what are what are some of the other benefits that you've seen? For real estate?

Salvador:

Yeah. So two more I wanted to, to speak about is the one of them is that diversification that that real estate provides you So Michael, my initial point that real estate, to me was the last asset class. And this is because you need, you know, typically, you need a little bit more capital than if you're just buying a stock or a bond, or some of the other traditional investments. And so when you do that, you you kind of spread your money a little bit more hedge yourself a little bit with risk in case there's a downturn of the market. Historically, real estate has been very low correlated to, to the stock market, we saw that throughout the dynamic, of course, of course, the stock market has now recovered, but even when it crashed during March in April of last year, I don't think the real estate market went down as much. Even you know, it's actually been up.

There's other factors involved, like interest rates and refinancing, and people moving out of urban areas. But it's another protection that you can use for your overall portfolio, when you're talking about investing your funds as part of your personal finances.

Michael:

I think that makes a lot of sense. And for those that might not be familiar, can you explain a little bit more about when you say the real estate market isn't correlated with the stock market? What does that mean?

Salvador:

So what that means is that if stocks tend to rise or fall with time, then the real estate market is not necessarily going to follow that that same trend. So, for example, when you buy we're talking about Vanguard funds before, when you buy a Vanguard fund that tracks to the stock market, like the s&p 500 index, that fund that you own is gonna do exactly or very, very closely to what the s&p 500 index is doing. The real estate market, it's not related because it's a different asset class. In fact, the the market has the stocks are categorized into 11 different sectors. And real estate is a, it's a sector of itself.

So, of course, there are companies that trade in the stock market and are related to real estate, but in general is a separate asset class that you can, that you can take advantage to diversify your portfolio. That's, I guess that's, that's what I was trying to say, does that help that play for you?

Michael:

That's great. That's great.

Tom:

Definitely. You know, one thing I like it kind of speaking of is diversification of owning real estate directly is these leases that you have on renters, you know, oftentimes, they're one years, maybe even two years. So it moves slower, right, where the stock market is bouncing around all day, every day and, you know, whatever during trading hours. And within your, you know, the the fixed income aspect of real estate, like the rent that you're collecting, like it's more or less like locked in unless there's some cataclysmic event where, you know, whatever. Not a cataclysmic is probably an extreme word to use, but some event where your renter is unable to pay rent, you know, there's there's issues, but generally, like COVID, I don't know, thankfully, I think a lot of SFR single family rentals didn't experience it as much as some of the bigger multifamily.

But just generally speaking, on the diversification point, like I feel like since real estate, it tends to move a little bit slower, right with like one year leases. It's just also significantly less volatile on the the rent collected. So my just two cents on that diversification. It's Yeah, moving slow the benefit of slowish. Yeah.

Salvador:

Yeah, that. That's super helpful. Thanks. Thanks for that, Thomas. And then I think the last point I wanted to touch here in terms of the benefits well, Tom, you already spoke about capitalization how you can borrow money to kind of multiply your purchasing power. That's, I think, super. Another benefit here.

The one I wanted to touch upon in that and I think it's relevant, nowadays more than ever is also to help yourself against inflation, recently with all the money that's been put into the economy, due to the pandemic or the stimulus and the trillions of dollars, so there is that concern That in the following years or this year's inflation will be higher than normal. And we know inflation just reduces the purchasing power of our dollar.

So when you put your money into real estate and you rent it out to someone else, typically salaries are adjusted with inflation as well. And these data happens, then that means your tenants will also be able to tolerate that increase in rent that that as well, as far as they have, they are aligned with with inflation, too. And then that extra profit is passed on to you as the owner. And so you're getting, you know, you're netting out zero to covering yourself against inflation.

So another point that I think is, you know, super beneficial in terms of personal finances, instead of as opposed to when you have your money sitting around in the bank and spending very little interest.

Michael:

Yeah, I think that's a great point to bring up Salvador. And another way to say that, and something that kind of just slapped me upside the head when I heard it broken down this way is like, Look, if you think about Tom's $100,000 property that he's borrowing money to purchase, let's say the mortgage on that is 500 bucks a month, and he uses 30 year fixed debt to purchase that. Every single month, his mortgage payment is going to be 500 bucks, day in and day out, that's not going to change.

But the things that are going to change in Tom situation are likely going to be as income from his job that he works, if he's w two, he's likely going to earn more because his wages are going to go up with inflation, the rent is also going to go up, because like you said, Salvador, people are earning more. And so we need to adjust further cost of living, so the rent is likely going to go up. Which means that Tom is gonna be making more money in terms of dollars than he was from years prior. But his debt is one of his biggest expenses is going to remain unchanged. And so the fact that you get to use somebody else's money to make yourself more, that's likely going to increase over time, but the thing that you have to pay them back for is going to remain fixed for the next 30 years. Oh my gosh, like, it just becomes so powerful.

And when you look at like forecasting, and net present value and future values, and you put an inflation factor in of two and a half or 3%, I mean, it starts to really take off because inflation is compounding. And so when you think for 30 years, you get to have the same payment that's fixed It just like it's just so mind boggling and eye opening, when you actually start to look at the numbers and what that means. 30 years from now.

Salvador:

Right? Yep. Yeah, completely agree. Good. Good way to to compliment that. Thanks. Thank you, Michael. Tom, do you want to say anything?

Tom:

Good time to jump into the next topic? Unless you have anything else you want to add?

Salvador:

Yeah, yes, I was actually just gonna, you know, sum up for for everyone that the benefits. Because I know we're speaking, we're moving touching upon many points. So we spoke about boosting your income, the tax benefits, diversifying your portfolio, capitalizing kind of borrowing powers, and then hedging yourself against inflation. So those are the five benefits I wanted to speak about today. And now also how to approach it right? Like similar to personal finances, you have to approach real estate in a certain way I recognize people may have different ways. list with your input also offer some some starting point for our audience here listening to to our session.

How does that sound to you guys?

Tom:

Love it, lead the way? Let's do it.

Michael:

Perfect.

Salvador:

Okay, and the first one is to look or think about your real estate investment with an entrepreneurial or a business mindset. You have to keep track, look at it as a business as a company and really keep track of its performance, your what's what's coming in, what's coming out. This is going to allow you to see where you're standing at. At any point in time. Is it performing according to your plan? Come, let's say an opportunity to sell. Is it worth it for you now? Are you above or below the point where you're forecasted to be?

So that's, you know, I think that's the first point that I wanted to talk about, for example, in my case, I super rigorous with this and try to keep my files as updated as possible. Also, recording all the different expenses and revenues to make sure also for for tax days is super helpful, but but let alone that for for yourself as an investor. It helps you know where you're standing at any point in time.

Michael:

And Salvador, I couldn't agree more that I think it's so important to run your investing like a business and really treat it like a business. My question for you is, and I'm curious to know how you've seen other people do this. How does somebody go about getting educated on what a business should look like and how a business should run because I think that this, this is a big, big, big gap in our education system just as a whole, I think university.

I was just chatting with somebody who lives in Singapore, who's from the UK, who helps speaking on financial literacy. And he was saying, look, this stuff isn't taught in school. So you're not going to learn in most schools how to run a business unless you go take specific business courses or entrepreneurship classes. So for your everyday person that's maybe just getting out of school or didn't necessarily go to school, but knows that real estate's a great investment? How can they equip themselves to run a business or to understand how they should be running a business?

Salvador:

Yeah, so obviously, the first answer is going to be internet, you know, but there's so many resources out there that it can become overwhelming. So in the end, you'll realize that it's not, it's not something too complicated, there's, there's actually just a couple, you just need to understand how the financial statements are put together, how they're linked between each other. And you can do this through I've learned, for example, my case by reading books, and taken courses. And so that's how that has helped me tremendously. And I've applied that knowledge into the real estate business, it's actually something that I coach people about, also to how to put together the financial statements.

So I think it's the information is out there. And there's really a lot of different sources. So I think it's just having that, that motivation, and taking that step to learn that and definitely something that everyone can learn. I'm not saying I don't think you have a specific type of degree or specific type of knowledge. Definitely learnable. But by everyone that that's my opinion.

Michael:

I love it. And you and you did it, too. So that's, I think the beauty of all of this, this conversation is you're living kind of breathing proof that this is possible.

Salvador:

Yeah, no, I'm not an accountant. I don't have any financial degree or background. So I mean, I do have knowledge, but it's all been like past education. And as I've learned, through the years, nothing that was taught in school or very little.

Tom:

Yeah, yeah.

Michael:

Appetizing.

Salvador:

Good. Okay. So the other point, I wanted to talk about this, how to integrate it with, with with your life and with different types of events. So so as we were saying before, real estate can be something when you purchase your first home, your first investment, it can involve a significant amount of money. And so as life goes on, you can also have different events that don't involve a large amount of money, like when you get married, or let's say you're moving, or maybe you're having a children,

Tom:

Babies!

Salvador:

Baby, yes, I was gonna, I was gonna say that. And so I think, just integrated, right, make sure you don't want to get engaged, and then your wedding time comes and you don't have any money, because you've spent it all into real estate, just make sure to integrate those sides of, of your those aspects of your life. And make sure that if you're married, also to manage it as a couple, once you once you are a family, and you're now responsible for your financial decisions and for your future. And as long as both or all parties in the family are in the same page. I think it helps you progress a lot faster. It reduces Of course, you know, reasons for creating friction and stress in the relationship that could be also more costly down the road, aka divorce, you know, can be costly sometimes. So just integrated have a plan. Of course, it's all about plan but integrated with with different events that are going around your life. And make sure to manage it with a couple with your partners already. Is that second point I wanted to jump on today?

Salvador:

Michael or Tom, do you have any thoughts on no personal experiences house? How's that been going for you so far?

Michael:

Sure. So I think it's a really important point as well. And I have I'll share kind of my personal experience, and then I have a follow up question for you. And then I would love to hear from Tom. So for me, I was involved in real estate well before I met my, my wife before we started eating any of that stuff. So I really brought her had to bring her along, after we got together and help educate her and show her, Hey, these are the things that we're working on. And this is I want to help involve you in planning how we go forward.

And she's really jumped into that with both feet, which has been so exciting and rewarding. So we do make decisions as a couple and we talk about things as a couple with regards to real estate and planning going forward.

But I think that that I might be a bit of the exception, not the rule. I think in a lot of couples, a lot of relationships. There is one person that's more excited about real estate investing than the other. And so I'm curious Salvador in your experience, how you've helped coach people through that or how you've seen people overcome that hurdle because so many times I hear, oh, my partner isn't interested there. Let me make all the decisions. What do you say to those types of people or my partner isn't interested in investing in real estate, they don't think it's a good investment? How do I get them to come aboard?

Salvador:

Yes. So in those situations they have, they have been more the exception or that then the rule fortunately, in those situations, what I usually try to say is to try to explain the benefits, just like what we were speaking about, in the first part of our session today, the benefits of what real estate can bring them in terms of the future, what you know, and I understand that, you know, this is this, this goes back to delayed gratification, you're sacrificing something today for a benefit that you're not gonna see maybe a couple of years or several years down the road. And for some personality types, it's harder to grasp that concept of sacrificing today.

And so my advice is just to get super informed and educated. So you have all the ammo for when you face that conversation with your, with your partner, and make sure that you can explain correctly in a convincing manner. The benefits of whatever financial goals you have, whether that's real estate investing, or stock investing, or anything else.

And, and of course, also, you know, as long as it makes sense for, for the couple, but really get educated. And I think it's okay, if, if one, one person in the couple takes control of it, I think there's you know, in a marriage or in a couple, some parties take responsibilities or charge or different duties or kind of areas on the life of the couple. As long as the other person is on board. I think that's okay, so that's been my advice. In my experience. What about you, Tom?

Tom:

I totally agree, I think in some cases, one person in the couple might be more engaged with it. But as long as there's transparency, and I think that to Michael's point, on getting over the barrier of getting comfortable. I totally agree with what Salvador has to say. But I would also really put yourself in a position to be successful in communicating that. So you know, I wouldn't do it when somebody is hungry in the middle of the day, like I would do it. Like, you know, if you guys are morning, people during the morning, you guys are eating people, or if your partner is an evening person, dude in the evening, like put yourself in a position to be successful in having that conversation.

A tool that I like to use is this fund flow tool, where, you know, we have our different sources of income and like rental properties. And, you know, every once in a while, we'll take a look at them and, you know, see how the fund flow. So I think, like I said, I totally agree, there's gonna be cases where one person's more engaged than the other. But as long as there are transparency, and trust, and all of that good stuff. You know, there's a lot of different combinations of the way that a couple can be successful and working together.

Salvador:

Okay, so thanks, Tom, for that input. super helpful. So two last points I wanted to touch on before we're wrapping up. The first one. And there's a lot of there's kind of two teams in this one is a topic that's often discussed in the Roofstock Academy is to separate your, your personal and your business assets. And I'm talking specifically a level an LLC versus having on yourself, man, I don't really want to get into the details here. There's, I don't think there's right or wrong answer, everyone has a different situation, this is one of the topics where you really just should talk to an attorney and lead that person besides what's best for you.

The point here is just to, to keep, keep things separate, you know, separate bank accounts. And and, and these will help you going back to the very first point would be to track the performance of your investment. As as, as accurately as possible. Don't don't don't start coming owing because then it's going to be very hard. So that's one point.

And then the last one is to have a financial plan. Make sure that you have enough cash reserves built into you on the right property you'll you'll be surprised and Mike and Tom I'm sure you know about this, how many different reasons you can get a call for from your property or manager or your attendant about things that go wrong and you need to put up you know, of course, spend money to like a rule for a water here or anything else.

And so just like you have an emergency fund for a personal finance too, in terms of personal went to cover any unexpected expense. cash reserve is going to save your day when you need to come up with extra funds.

Your financial plan should also have projections against you You know, where you should be standing at at any point in time, when is a good time to sell or to keep the property and have a target DTI, which is your debt to income ratio? Michael was talking about this earlier that cash is going to be your limiting, limiting factor as you try to grow your portfolio, and the more favorable, terms you're gonna get when you ask for, for credit and your loan. So try to keep that as low as possible.

And then last but not least, is that whole part of the state planning, and which is just going to the domain? What's going to happen to a person's assets, when that when that person passes away? Who are they going to belong to if they're going to relatives, or, or friends, or whoever the person wants to designate another topic that I think should be touched on with, with an attorney. And because you can get complicated varies by state, but it's just going to save a lot of time for when that moment happens. And I know it's hard to think about that. But it saves a lot of time and and taxes also, from when those those assets are passed on to.

So that was the last point, Michael or Tom, do you have any thoughts on these approaches and considerations that we spoke about or the financial plan before we kind of wrap it up?

Michael:

Yeah, I think this makes so much sense to touch on the estate planning. I know this really caught me off guard as I started investing in real estate, it's just one of those things that people aren't, again, it's not taught in school, it's not talked about, you really have to go looking for this type of information. It's not kind of just existing out there in the general world. And as most people start to invest in real estate, their assets start to become significant, which is a great benefit.

And so the two pieces of this pie, the way that I see it is the part while you're alive, and then what you're planning on doing with it after because a lot of people invest in real estate to generate generational wealth. And that's really great. I think that's a really awesome cause noble cause one of the reasons I invest in real estate is for the same reason.

And so to help that generational wealth stay for future generations, we need to look at, see what is involved with protecting it, and making sure it's cared for. And an estate plan is really how you do that. And so there's the, again, the two parts of this the living and then once you've passed, and it's gone to whomever it's supposed to go to, you want to make sure that they have an easier time using it and benefiting from it because that's the whole reason one of the reasons that you set it up in the first place. So don't do a really great job on the front end, only to have it squandered on the back end, because of taxes and all this kind of a thing.

There are so many things that you can do to help protect yourself and your family and the ones that you're airing the the the investment to. So I think definitely, definitely, definitely spend time energy money on an estate plan and making it worthwhile.

Salvador:

Definitely agree with that. Tom, you wanted to say something?

Tom:

Yeah, great point about the estate planning. And, really, you might be thinking like, Oh, I don't need to do that, like I'm not dying anytime soon. It's one of those things, just you just Sure, like, you don't need to get like super in depth and detailed, but it's probably better, especially as you're starting to build your wealth. And it gets more complicated. Leave a nice little gift on your way out for for those by just simplifying and setting that up.

And it's, you know, once you do it once, that doesn't mean you can't change it and do it again later. But I would recommend going through the exercise of just getting that estate, you know, some sort of baseline setup. And then it could be something that you update every whatever five or 10 years or it's not a waste of time to do it just because it's one of the few things you will guaranteed to use at some point.

And then the the other points that I particularly liked was the running projections, what I think is important in running your projections is to sort of document it and then compare how you performed versus your projections. The only way to improve in anything is to to have to know how you're doing you know to have like kind of a clear scorecard. So run those projections document your expectations and then when you have the real numbers take a look and compare that's really the only way you can only expect to improve what you inspect or what you you know measure. There's a good saying in there in that word soup that I threw out and I don't think I hit.

Michael:

Inspect what you expect. Something like that.

Tom:

I don't know yeah, but put projections measure and then compare. And the last the last thing that is just so important I think I already mentioned at once this episode is making sure that you have a cash reserves. The biggest way that you can lose in real estate is need to do a fire sale because you need the money. I saw it happen with a friend. It's like man, you just basically lit like $20,000 on Fire, like don't don't need to do a fire sale, you know. So make sure that you have the reserves the appropriate reserve besides that, Salvador great list, I dig it.

Michael:

Just the last thing I want to say on the estate plan. If you get a quote, to, you know, talk to a couple different estate planning attorneys, and it might seem expensive, but what I encourage everyone to do is go Google search, how much does probate cost when someone passes? And I think it'll make a lot of sense to then go set up the estate plan on the front end? Because it's just like, you don't want to do it. Just take it from me.

Salvador:

Yeah, well, I was actually just just gonna wrap it up. Thanks, Tom, for that last comment, I think I just wanted to leave the audience with some final thoughts. And feel free Michael and something jumped in. And if you have anything else.

Three thoughts I wanted to give away. The first one is to get started, don't don't procrastinate. I promise you, it won't. It won't be any easier tomorrow. So if you have the time today, get doing it. I was a victim of it. I procrastinated due to various reasons, analysis paralysis, or getting cold feet, whatever. And I'm sure everyone has their own. So I'm just gonna started because we know that the compounding effect becomes more powerful with longer periods of time. So it's in your own benefit to start ASAP.

The second one is to make your plan and stick to it the ideal lead do this at the beginning of your journey in the in the real estate investment world, it takes a lot of time to make your plan you have to kind of define your buybox that's another concept spoken about in the in the Roofstock Academy. And, you know, you spend a lot of time on it. So make it worthwhile. Once you've done your plan and define it, make sure to stick around, it'll also serve as your north to tell you what, where you have to go from here and where you want to be in several years down the road. Sorry.

And the last one is scale as quickly as possible, but avoid risk. We know also back to the effect of compounding interest as scaling becomes super, super impactful in your life. And also am like like without before cash is going to be limited. So make sure that you scale quickly. But also don't put yourself in your your personal life or your cup, your family lives at risk. Because at the end, if you use financing, it's a lot of money that you're going to be responsible for. So those are my three cents and what to call it and Michael or Tom, feel free to add anything else before we wrap it up here.

Michael:

I think those are awesome. three cents, man. I'll take those all day. That was…

Tom:

Agreed.

Michael:

Yeah, absolutely. You said at the beginning of the episode, but if folks have more questions for you want to reach out what's the best place for them to get in touch with you?

Salvador:

My Instagram page called @thefinancesavior. And you can also check out the website thefinancesavior.com. So you'll see there the content that I post daily and kind of the topics I touch upon. And so feel free to message me or follow me spread the word if you know anyone that could benefit from it.

Michael:

Fantastic. Well definitely do whatsoever. Thanks again for hanging out. That's really appreciate you taking the time and helping spread the word of financial literacy. I think it's really important. So we look forward to chatting again soon.

Salvador:

Definitely. Thank you so much for having me by Michael and Tom. Until the next one.

Michael:

All righty, everybody, that was our episode a big big big thank you to Salvador. hope everybody got a lot out of it. I know I did. The 721 exchange was something brand new for myself and Tom so we're gonna definitely be looking into that. And if you enjoyed the episode, please feel free to leave us a rating or review wherever it is you listen to your episodes, and we look forward to seeing on the next one. Happy investing

3 Tips to Have Complete Confidence in Your First Offer Jul 03, 2021

Making an offer on your first rental property can be intimidating. It's different than buying your primary residence, your investment can be made or broken at this point. In this episode, we give 3 practical tips for you to gain confidence in your numbers and start your investment journey off on the right foot.

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Transcript

Emil:

Hey everyone, welcome to another episode of the remote real estate investor. My name is Emil Shour. And I've got my co host with me,

Tom:

Tom Schneider,

Michael:

and Michael album.

Emil:

In today's episode, we're going to be talking about how to feel confident enough to make that first offer. This is something we see all the time newbie, someone who's interested in real estate, they're looking at properties. And they'll they'll either run it by a friend of theirs, or they'll send it to us in the academy. And, you know, they'll say, Hey, I looked at this one looks pretty good. What do you think? Should I make an offer? Right? That's the main question, should I make an offer. And so the goal, this episode, we're going to give you our top tip, each of us is going to give you our top tip, so that you feel confident that when you find the right property, you will make that offer that first offer. So let's hop into this episode.

Alright, guys, so I don't know about you, but this one has come up for me time and time again, right? Like someone will send you a link send you a link to a property on roofstock or Zillow, or realtor or wherever and just kind of be like, what do you think? Should I make an offer? Have you guys had that happen before?

Tom:

Is this a good property?

Emil:

Yes!

Tom:

Is this a good deal?

Emil:

There you go.

Michael:

That's probably the number one question I get in the academy is students asking that, because nobody wants to buy a bad deal. Nobody wants to be that person that bought, you know, an alligator bought a bad deal. And so that's, I think, what's on everybody's mind. But I'm excited today to talk to you guys about how to get over that. And then maybe some different questions that they could be asking either of us in the academy or of colleagues or other investors.

Maybe that would be good to chat about as well as what other questions can be asked to decipher? Is this a good deal without just saying, Hey, this is a good deal? Because good is such a relative term.

Tom:

Yeah. And having confidence? I mean, that's what the episode is about, like, what are? How do you build confidence in the process and all that good stuff, submitting an offer.

Emil:

Totally. And just for the record, I did this as well, I sent it to people I knew who were who had experienced buying real estate. And I did the same thing. So I'm not saying you know, it's bad that you're doing this. It's a very, very common thing. I've done it. I don't know if you guys did, but it's common. And our goal is just to help you feel a little more confident so that you can you can walk in and put an offer in and feel good about it.

Michael:

No, I totally did this. I mean, I I still do this. The questions I'm asking are more sophisticated. Now, thankfully, because I'm learning. But I think it's important to bounce ideas off other people I think I don't want to ever be think that I know everything or that I'm the smartest person in the room. And so think that Oh, like why bother asking someone I already know the answer. No, I think that's totally the wrong mindset.

But again, I think calibrating the question to get more of a useful response, as opposed to is this a good deal? I think is really, really important. And that comes with time, because when you're just starting out, you don't even know what questions to ask, let alone what the answers mean.

Tom:

Pealing in the onion peeling in the.

Michael:

That's right. And hopefully not crying.

Tom:

Sometimes that's okay, too.

Michael:

Yeah, that happens. You know, it's good.

Emil:

All right, guys, who, who wants to kick us off with their tip.

Tom:

So my first tip, and again, this is to drawing confidence into submitting offers, is be in establishing a maximum bid in a thoughtful, pragmatic, kind of data driven way. So what are some ways that you can establish a maximum bid?

For me, I'm looking at a couple of return metrics. And I want to set my maximum bid to hit that return metric. And when I am evaluating properties, I know exactly what's the maximum amount that I can pay to still hit that return metric. And we've done a bunch of rabbit webinars and shown this function in Excel called goal seek really cool tool that runs a regression to come up with the maximum amount you can offer while still hitting a particular return metric. So for me, I have confidence when I submit offers, using some conservative assumptions on costs, as well as rent collected and all that good stuff, coming up with a very specific max bid, and then submitting my offer and perhaps even negotiating and not exceeding that max bid.

So that would be the My first tip in, in submitting an offer with confidence is establishing a max bid and having the confidence to say no, I'm not going to offer any more than that and using that as sort of a to play off of in the negotiation and the initial offer anchoring process. So.

Michael:

I think that makes a lot of sense, Tom, and I'm just curious to know for you personally, like, how do you anchor that max bid? Because I think what a lot of people in the question, they're asking, Is this a good deal? What they're really asking is, is this priced appropriately? Or am I paying the right amount for this property.

And so that can be seen a number of different ways for some people that can be, hey cash flows really well with the debt that I have on this thing and the current rental amount. And so that's going to drive my numbers, or maybe it's going to be based on an appreciation play. And so I need to be buying this thing under market value in hopes that I'm buying equity in day one. And so both those things can impact what your max bid looks like.

So for you, how do you anchor your max bid? Is it based on the cash flow? Or is it based on the appreciation or equity that you're anticipating to purchase?

Tom:

It's on a lot of things? So like in that submitting that offer, like there's a couple of data points that I have I have, what's the maximum I'm willing to pay for it? I have what the list price is, I have how, you know, kind of the general hotness of the market, right? Like is this, is this a place where I need to go a little bit over listing? I have within the process of evaluating I've established what I think a an appraiser would value it out based on recent comps. And then I don't know if I already said this already, but how long it's been on the market, right? So depending on all those different factors.

So like, let's say I have a max bid, that's 120% of the list price, but the property has been sitting on the market for a while with that information, I might want to submit an offer at you know, 90%, or 80%, or whatever of the list price, I know that I have a good chance of winning this property just because my maximum bid is well above what the list price is. And the it's in a market that's not that hot.

This is obviously a makeup situation, because a lot of markets are quite hot right now. But my point is, you know, in submitting that initial offer, there's all of these different data points. And one of the most important ones to establish and which is my number one tip is what is your maximum bid that you can make, but you put that into context with other information such as, like I said, What's the list price? What's the What do you think that appraiser is likely to value the property at what is the market doing all of that kind of stuff?

So I think I answered question, Michael, in in kind of getting two more layers back on the onion on what the, you know, appropriate offer amount is but it one of the fun things with this is the art and science aspect to it. Right. So the art is kind of threading that needle between the list price and my maximum bid and, and all of that and the sciences, you know, establishing those specific values.

Michael:

Totally. And your your answer to my question begs a follow up question. And I'm curious to hear from you both, is how much weight Do you give to the list price? And why?

Emil:

I don't give it much weight in terms of you know, it doesn't it doesn't matter to me what you want for your property, it's a matter of how much can I pay to get the return I'm looking for right? I'm an investor. This isn't about me, falling in love with a property wanting to live there, you know, owner occupant, I guess it's a different story. But as an investment, it has to meet the criteria that I'm looking for, like Tom mentioned, right max bid, or, like, what can I offer to get whatever return I'm seeking.

So whatever, you know, you put as a list price doesn't matter to me, obviously, one caveat there. Let's say you're looking at a property that's $250,000. And to make the numbers work, it needs to be bought at $125,000. And it's like a nice new property and all that I'm not going to waste anyone's time and go write a $125,000 offer, right? Like, you're wasting everyone's time at that point.

So I guess what I'm trying to say is it's not doesn't it's not important what the list price is, but it's also not like, you should just go start slinging 40-50% at list price offers all over the place and see what sticks.

Tom:

I think it does matter. And you kind of just made the argument for me why I think it does matter. Because I'll exclude a lot of properties. If that list price is just it's such a delta, between what I'm willing to offer it for the same point that you said like, Don't waste anybody's time. I mean, that list price is effectively the first offer that's made, you know, when you submit an offer, that's really the second one like the first offer is what the list price is. Like I just repeated myself. It's just like, there's an echo in this microphone.

Michael:

Yeah, you just said yeah, he said it in a different way.

Tom:

Say it in a different accent. Just kidding. Alright, so yeah, that the list price is really effectively the very first offer that's being made to a potential buyer. So I I definitely put some weight to it and that it'll, it will kick out a bunch of properties that are just not in the range at all.

Emil:

It's just like, Don't let the the list price influence what you're making your offer at. But it's also like yes, the list price will help you sort through a lot of bad deals and say okay, throwing throwing all these out, they're not good deals.

All right, I think yours lends pretty well into My top tip, Tom. So I'll go next.

Michael:

we should have a section called top tips, top tips.

Emil:

My top tip is to analyze at least at least 20 to 30 properties in the market that you're looking at. So let's use Indianapolis as an example. Let's say I've decided, Indianapolis, we've talked about in prior episodes, choose a market, right? Like, it's not helpful for you to compare a property Indianapolis to one in Jacksonville, and compare. It's not apples to apples, right? So choose a market and then go in and analyze a bunch of properties there, I think.

We also talked about in a prior episode, how do you set up like running your numbers, right? always run your own numbers? Yes, roofstock. And other sites will help you in estimating these things. But we always encourage you to run your own numbers. So I would I would do that for at least 20 to 30 properties to figure out what a good deal is versus a bad deal, right? So if I analyze 20 or 30 properties, and my main metric is my cash on cash return, I see that like, let's say the average is seven and a half percent. And then that means there's a bunch of properties that maybe give me a five and a half percent return. And there's a bunch of properties that maybe give me an eight or 9%.

Now you kind of have an idea of and this is what Michael Zuber talks about all the time, and I love it. What is a bad deal, an average deal, a good deal and a great deal, right? You have a barometer for what is a good deal actually look like because you've analyzed a bunch of properties in that market. So that's my number one tip is go look at a single market analyze a bunch of properties. So you know, oh, man, this is a good deal compared to all the other ones I've looked at.

Michael:

When you say Good deal. You mean good deal for you, or good deal for every individual investor as opposed to an overarching good deal?

Emil:

I mean, good compared to, and again, I'm stealing this from Michael's Uber, because I just think it sums it up very well. Good compared to the average, right? So if you look at a bunch of properties within a market, and even a sub market, right, like, a big enough market, you're gonna have things all over the spectrum, right. So like, let's say you're looking at only three star neighborhood plus, right? What is the average return in those types of zip codes? Right? Is it a 5%? return a 6% 7%? So now, you know, the the average? And then anything below that is a bad deal. Right? It's it's below the average anything that's above that is a good anything well, above that is a great deal. That's kind of what I mean by those terms.

Tom:

In that advice Emil, are you only looking at new active listings? Are you looking at sold listings? When you're saying getting to that number of evaluating 20 properties? Would you go into that a little bit deeper? Double tap that?

Emil:

Yeah, I would.

Tom:

Classic office speak double double tap that. Go ahead. Sorry.

Emil:

I would look at active because if you're looking at something 612 months ago, especially in a market like today, prices have changed a lot in the last five, five months, six months, whatever it is. So I would look at personally active listings, or maybe maybe even pending, as well, because that's recent enough. But I wouldn't look at something six to 12 months ago, personally, in a market like now, would you guys.

Tom:

I think I would look at of the active ones I'm a value evaluating, I would be really keen to know what they actually sold that just because I mean, you know that list price, it's it's like I said, it's really the first offer, like it's not actually what it would have traded out or what it's sold out. So I would agree, I wouldn't want to go beyond six months, or whatever an appraiser would wouldn't look out, I wouldn't want to look at. But I think knowing the actual sales price is really important in that cohort of 20 properties or 30 properties that you're looking at.

Michael:

Yeah, yeah, absolutely. Absolutely. But yeah, I'm on the same page, six months, anything older than that is ancient history, at the pace of, of the changing market nowadays.

But Emil, I wanted to kind of circle back to the point kind of question that I was asking before. And so something I harp on in the academy and tell me if you guys agree or disagree is that, you know, a good deal is only a good deal in which the lens in which it's viewed. And so Emil, you could be looking at the exact same property, as Tom and I both have a three star neighborhood, same exact performance. And if we have different goals, it could be a great deal for you and a horrible one for us.

And so I'm always very careful and try to be cognizant of using terms like good, bad, better or worse, because it's relative to the investor based on their goals, where they're starting from and the lens in which they're viewing things from. And so a great example of is I'll have people ask me all the time, oh, Michael, there's a property on Roofstock. It doesn't cash flow. So it's a bad deal. Who would want to invest in that? And I say, Well, there are tons of people that are looking for tax benefits and tax breaks that would absolutely not want cash flowing property, because that'll change their tax burden. They're looking for property that doesn't cash flow, but likely will appreciate. And they go, Oh, I hadn't thought about that.

And so I think the the goal in mind, and the perspective is really important. And so that's what I was kind of trying to tease out from you is that when you talk about good properties, or average deals or bad deals, can only be specific to each individual investor, right?

Emil:

Yeah. But I actually think to your point, even if you're if you're looking within a specific market again, right, like, let's say you're looking at Los Angeles was really hard to find a cash flow property with 20%, down, right, you can still use the same thing to say, of all the non cash flowing deals, here's the average, right? Here's the average whatever return and then your aim should be to beat that return. Right? If that's the average guy in that market, you should aim to do good or great compared to that local market.

That's a takes out the the subjectivity of good or great because you're doing on a market level, you're trying to beat the average deal. done in that market.

Michael:

I got it. Okay. All right. So if we if we apply the same level of scrutiny, or the same variables, rather, so if I put 20% down at three and a half percent financing, this is my kind of average return, as opposed to on a per deal basis. Okay. Okay, that makes sense.

Emil:

On a per deal, right? So you analyze 2030 properties, right? And you find again, it's like, my cash on cash return for this market is 7%. That's the average after I've analyzed, I don't know, let's, let's say 50 deals, because you want to be really thorough. Now, then your goal is to go to do a good a great deal, which is what every investor wants to do. How do you go beat that, that average number, that average number in that market?

Michael:

Got it? Got it? Okay. And I think you said this already. But just really to drive the point home, asking for a friend, the the, the 20, or 30 properties need to be consistent in terms of that neighborhood score, in terms of quality, because as soon as you go compare a one star neighborhood to a five star neighborhood, that then throws off the quote unquote, average, right?

Emil:

Exactly, you should, you should try to niche down to like, zip code or something, right, like to neighboring zip codes, or something where it's a small area within that sub mark, because if you do the whole market, you're it's gonna be all over the place. So I would, I would try to like, niche down into these sub markets,

Michael:

Perfect. And then getting getting really specific on bed count, bath, count, vintage, all that kind of stuff, as well as important because the variability is going to throw off the price point as well?

Emil:

You can you could even just look at it like 23 bed, two bath, single family homes, and then 24 bed, two baths. And how do the returns line up between those two, which one's a better investment right now.

Michael:

That makes a lot of sense. So I dig it, for whatever that's worth.

Emil:

Thanks, Michael, wrap us up, take us home.

Michael:

So my top tip of the morning for us all is to be proactive in building your team. And what I mean by that is, when so many of us are under contract for a deal, that's when we go start talking to local property managers. And I think it should actually be done the opposite way. So I would say, go find a market and part of your market is diligence should be talking to local property managers. Because if you can't find a single property manager that you want to work with in that market, I would argue that you probably shouldn't be investing in that market to begin with. Because I would say that the investment lives and dies via the property management.

And I'm totally guilty of this. I mean, I did this, I'm talking about this, because I did this. So I got so excited about these deals. And I didn't have a good property manager, I was totally juggling and fumbling at the 11th hour as the deals were closing to get these things with a manager, that was agreeable. Once I did that, I realized the manager sucked, I fired the manager, six months down the line. And we talked about this on prior episodes. But if I had done things differently, if I had got things squared away on the front end, these investments would have been so much easier just to deal with in that six month timeframe, and probably even to now because things would have been run tighter to begin with.

And so again, just have these conversations on the front end before you get under contract if you can. This is kind of in a perfect world scenario, I understand that sometimes we got to, we jump into things and we know it's gonna be a sure thing. And then we deal with it after the fact. But if you can involve the property management, in the inspection conversation, involve the property management and the tenant placement conversation involve the property management company, in evaluating the neighborhood and in the market as a whole to get an idea of what's going on in that market. I think talking to local folks on the ground is really, really important. And I would argue that property management is one of those key roles. And just continuing building the team. You could also do the same with agents or contractors or CPAs or any other professional that you might want on your team.

Reach out to people whether that's references or Google reviews from Yelp or Angie's List or bigger pockets or in a Slack channel in the academy, there are so many folks out there that are already doing this, you don't need to go reinvent the wheel. So just go out and have these conversations on the front end. Because again, it'll likely influence your decision on whether or not to invest in a particular market.

Tom:

Great point, Michael. Oh, excellent. segue, especially as a remote investor. And I'm, like, extra aggressive with my property manager and asking them for help. So like just looking at like roads and like neighborhoods on the very tippy top of the spear like, Hey, I'm looking this property on Van Ness or whatever, you know, do you guys manage any properties there? Oh, great. How are they doing? How is rent been trending? Stuff like that? Like, would you consider living there?

So important as a remote investor to have those localized in years and bring them in super early? So great point, Michael.

Michael:

Thanks.

Emil:

Who do you guys think team member wise, is vital to figure out before you start making offers, if anyone?

Tom:

The property manager would be no brainer. Lender a medium length second place? Just because if you're using debt, you know what your buying power is? You know, it's not a close second place just a pm as a remote investor, but it's not a long, long distance. Second place.

Emil:

I agree. I think having the pm lined up have those conversations, I would try to choose a pm before I start going out making offers. I didn't do this either, Michael. So this is stuff or rewinding the clock and saying things we wish we did. I think good to have a conversation with a lender figure out like, like Tom mentioned, what is your buying power? What are rates? What are they having hovering around? So you can do your, your analysis correctly, right when you're crunching the numbers, but you can always shop the loan around once you're under contract like that one, that one's not as important beforehand.

Michael:

Yep, I agree. I'm right there with you both. And I would say to Tom, to your point in, in kind of building that team and chatting with property managers, a question that I get all the time from members of the Academy is, Michael, is it okay? If I reach out to these property managers, even though I don't have a property under contract or have a property for them to manage? Are they even gonna want to talk to me?

And it's a very common question. It's a very common misnomer. And I always say, Yes, I think that they would absolutely want to talk to you, if they are interested in learning more business, anybody that's not willing to talk to you about the area about the market until your quote unquote client or quote unquote customer, I would say, may not have the best business practices. That's not how I would run my business. And so you are a potential new customer, you're a potential new lead for them that reached out to them. So why in heaven's name, would they be turning you away?

So I'd say that speaks more volumes about the property manager as a company or maybe as an individual. And that's not something that you should be worried about. And if they slam the door proverbial door in your face, then just go find another one. But I think that that even begs the question, begs the reason even more, that you should be speaking to property managers ahead of the transaction ahead of offers if possible.

Emil:

Alright. We mentioned this in earlier in the episode, but like, what are what do you guys think are like some good questions that someone who's kind of brand new looking to make that first offer feel confident? What are some other questions they should be asking, besides, should I invest in this property? Should I buy this property? Should I make an offer?

I'll kick it off. I think one of the most important things you can ask is I'm investing in Indianapolis was an example. Right? So I'm investing in Minneapolis, who should I talk to in that market? I think that's one of the important ones, right? Like networking, talking to other investors, tells you people who've invested there talk to property managers in that market, maybe talk to some agents there, whatever it is, I would ask Who should I talk to? I think that's a good one.

Tom:

My question would be is having eyes wide open going into it on the risks and the downside, I guess, just kind of knowing your liability, like risk wise. So like, if you're buying a property that needs a little bit of work, or something, knowing what those like total liability, because I'd say the biggest risks of investing in real estate is not being well capitalized enough. Like if you need the extra money, and then the needing to sale sell kind of like in a fire sale. Like that's really like one of the only ways you lose is just not being well capitalized enough and needing to sell under distress.

So making sure that you know, like what that potential liability is and go back to your original question. It's Yeah, finding out like what that potential liability and making sure that you're well capitalized, man, is there just like an echo in this microphone? I think I repeat myself. Sometimes, actually. They say like, repetition is like the mother of acts of teaching or like talking about.

Michael:

Yeah, it helps drive the point home for sure.

Tom:

Yeah, just say it a little differently. Say it slower or faster, higher pitch, lower pitch. Yeah. So to repeat myself one more time. Know where your liabilities? Okay, go ahead, Michael.

Michael:

Yeah, I think those are both great. And and they're kind of overarching themes just to get really specific question that I would be asking and kind of touches on both of your your questions is, how do I calculate my after sale property taxes as an investor? I think it's such an important question to be asking. And to get it right. Because so often on a cost basis, and as part of the expense ratio, your property taxes is your biggest expense. And that's a forever expense that is going to be coming every single year day in and day out, doesn't go away with time, it likely grows with time. And so we want to make sure that we get that right from the get go.

And that's one thing I see a lot of new investors, again, myself included. Totally faceplant on, that can be a haunting, incorrect analysis or an incorrect decision. So getting that right from from the word go, I think is hypercritical.

Emil:

I'm going to add someone on that because I mentioned on a previous episode, and I'm learning it now, there are certain states certain cities that reassess your property tax. So California has something called like prop 13, where your property tax stays the same from when you buy it. Other states so I have a property in Indianapolis. So Indiana or any now I don't know, if it's a state thing or a city thing. They reassess your property every single year.

So when your property is appreciating and things are great, guess what your property taxes going up too. So something to keep in mind as you're thinking about property tax, I think can keep going up as the as the market goes up, too. So something to factor in.

Michael:

I always say you know, people complain about high property taxes or this and that. It's like look at the end of the day if the numbers make sense, who cares? Yes, it's a big number and less would be better for your investment but also you're getting strong rents you're getting you know if the numbers weren't great, so just keep I just understanding how it works is the most important part just getting educated. And going into it. Tom, like you said eyes wide open is is what you want to do.

Emil:

Good note for us to end this episode on. Thanks, everyone for sticking around. Hope you made it to the end. hope you got some valuable tips and hopefully you're feeling confident enough now or confident enough to know what to do go do the work, and then make that first offer. With that we'll catch you all in the next episode. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

Here's What You Need to Know About Investing in Jackson MS Jul 01, 2021

In this episode, Ryan Porter with Next Home Realty Experience tells us what we should know about investing in Jackson real estate. Learn about the particularities of the market, return metrics, the school zones, taxes, common problems, and what you need to do to win in this hot market.

Ryan Porter:

RyanPorterhomes@gmail.com.

601-238-6620

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Transcript

Michael:

Hey everybody, welcome to another episode of the remote real estate investor. My name is Michael Albaum and today I'm joined by my colleague, Mark whittling. And we're going to be chatting with an agent out of Jackson, Mississippi. Ryan Porter. local guy knows a lot about the market and is just killing it out there. So let's jump into it with Ryan and learn a little bit more about the Jackson Mississippi market.

Alrighty, Ryan Porter out of Jackson, Mississippi, how you doing, man?

Ryan:

Man doing great. So glad you guys could invite me on the show.

Michael:

No, we're happy to have you and thanks for taking the time. Really appreciate it.

So let's just jump right into it. Man, you are a Jackson, Mississippi born and raised?

Ryan:

Born and raised Rankin County just out of the Jackson area and lived here all my life.

Michael:

Awesome. And I'm curious, how did you first get into the real estate game.

Ryan:

So a friend of mine gave a book to me around Christmas Rich Dad, Poor Dad. And I'm sure a lot of people got into real estate with that book. And I bought in hook line and sinker several, several years ago. And it was one book led to another and I just never stopped. I've been scratching and calling ever since. And it's been a really, really cool, fun ride.

Michael:

That's awesome. I think so many people share that similar experience. I know I did for with Rich Dad, Poor Dad. I just kind of smacked me upside the head. And I was like, Man, what have I been doing up till now?

Ryan:

Right?

Michael:

It takes just simple book to figure it out and explain it to me.

Ryan:

They tried to tell us with monopoly, but we had to be pointed out it's

Michael:

Right. Right, right. So you're an agent, you're a property manager, you're an investor. Talk to us a little bit about all the things that you're working on.

Ryan:

So last year, I teamed up with a next home franchise and started a brokerage here in Brandon. We've got 22 agents. Now we teach a lot of investing class. That's a lot my background. And a lot of our agents are invested minded. We teach how to we'll do field trips on newer agents to show them how to video a house for someone that's out of town, how to work with clients, they'll never see that house.

So they'll have that special skill set to be able to point out potential problems going down the road, or a potential problem right now it says hey, this is just not a good fit for out of town, this house may need a lot of maintenance, something like that. We want to teach those agents. So we've, we've started that with next home, we've really had a lot of success, we've got a lot of really killer agents.

With our property management. I've teamed up with one of my high school friends that we've remained friends throughout our life, he's got his real estate license with us it next time we started a broker, Property Management Division. Super excited about next rental we used to build software we spent several several months doing our homework on property management, probably another year, doing our personal properties and just our local friends and acquaintances properties to where we felt comfortable. Okay, we could pretty much take anything on, we've seen so much within the last three years of running property management that it's just a really fun job for certain people.

Our employees we have, they love their relationships with the tenants, we've learned that if you can get that right tenant and teach them how to take care of a home in a way that we're not just putting them in a rental home, we want to show them how to take care of a home because one day they're gonna buy a home and we want to be there with them, potentially maybe buy that home. So that'll give a win win win to everybody, the people renting the home and the investors.

Mark:

This is the story how I connected with Ryan. I saw he was an educator because one of his agents named Bo was all over whether real estate investor Facebook groups. So I reached out I said, Hey, Bo, I really like what you're working on. Who do you work for? Tell me a little bit about you. So he said, so I told him about the certified agent network. And next thing you know, we're connecting with Ryan. And Ryan is just as you can see an educator. He's the kind of guy who's got the experience so he can walk the walk talk the talk at the same time.

But we asked him to be a part of the certified agent network because we knew he had the educator approach and that's what our buyers are really looking for. So you know when they they can talk to an agent and have that ability to connect virtually and not have to you know pony up, side to side. You know, they could do it the way that they feel comfortable. So we knew is a natural fit to bring them into the certified agent network. And that's where we're going today. So Ryan's been successful and just watching him kind of grow and do his own thing has been awesome because he doesn't need training on our side, he just walked in said, I got this and got a ton of properties under contract already.

Ryan:

Mark, when I didn't know a whole lot about Roofstock when you came to me, but when I got the link to the university, I was just blown away how you guys had taken everything to do with investing from day one to closing day to, whatever and put it in the format that you did, where it really broke down and investor, let them know what they were getting into told them. And I just like this is how I like to do business, we want to educate our investors where they're making smart choices. That way, they will make money, and we will make money and everybody will be happy.

So I really loved the way you guys have built your format. If I was an investor just starting out or whatnot, you just can't beat the training that you guys have thought of everything on how to pick your property manager. That is such a huge, huge chapter. Because that property managers everything buying a house, that's simple. I can point you to 15 houses tomorrow and Jackson that you could get a 25% cash on cash return. But unless you've got somebody to manage that property, well, that's going to drop down to 12 really quick.

So I love how you guys have built the templates on how to ask those questions. And we're starting to see that as we're working with these investors. They are very knowledgeable they've been through they know the questions to ask. So I love working with experienced people. I love working with anybody I love teaching, like you said, but it does make it easy when these investors know what they're doing, because they've been through your portal. And they know what smart questions to ask.

Michael:

As you say, as soon as we get off this call, we're gonna we're gonna go look at some of those 25% cash on cash return properties Ryan!

So, Ryan, I love that you talked about making that partnership with kind of a win win win with the education side, both for the investor owner as well as for the tenant because I think so often there's this almost adversarial relationship where owners see the tenants as the enemy and the tenancy the owner as the big bad landlord, but you're kind of breaking down those barriers. And it sounds like having a lot of success, fostering some great relationships.

And you know, it's not that hard to do. Honestly, at the end of the day, people want a nice place to stay, they wanted to be treated, right? We try to pick nice houses that we try to get those items taken care of a before they buy the houses in inspection, have a house rent ready, somebody can move into it and not really have any problems. If something pops up, just take care of it as simple as that those people are happy. it's not rocket science to have a good property management company. It is rocket science to have everything organized, where you can provide that quick response time. So you can answer when they do call. That's all they want. Is anybody wants is somebody to hear what they have to say and fix it.

Michael:

I'm gonna put you on the spot here. Because I agree, I don't think it I don't think it's rocket science. But I think anybody who's been in this business long enough as an investor has come across their fair share of really poor property managers or property managers that they don't want to work with again. So what in your estimation separates the really great property managers from the less than great property managers?

Ryan:

I think the biggest thing would be communication. If you can get somebody on the phone, you can usually get an answer. That's been the biggest thing that I've heard when somebody said, I can't get ahold of my property manager. It's been a week. I'm like, what I don't understand that is 2021. Everybody's glued to their phone, that person was ignoring that call. So if you're ignoring somebody call, you're usually hiding something. So that goes back. I think if you're communicating with everybody, everybody's on the same page, then there's really no confusion. And as long as somebody is just not acting a fool, what you do run into people like that you try to screen them out. things do happen, people lose their job, but there again, I tell that person, I don't care what you're going through. You text and tell me every single day if you're going to be late or whatnot, but I need to have that communication. Once that stops. That's when we'll start assuming and and that's not good. And I asked my ex girlfriends that assuming stuff is not good.

Michael:

No, I love I love that. I think it makes a lot of sense because I think you're for me anyhow, that I would agree makes a really great property manager. If there's bad news, call me Tell me Don't let out about a week

Ryan:

Yeah that's a house, you know, we can fix it. When it boils down to it, there's not much a house can tear. I will say that there is, but just communicate it and fix it. There's an answer to everything.

Mark:

I got a quick question for you in Jackson, Mississippi. I mean, you're in the south, it's hot. But you know, here I am. in Dallas, Texas, we have foundation issues and something that not all investors really know about. What do investors need to know in Jackson that are the big, the big risks that you're always call it out and making sure buyers just know before they get into a property?

Ryan:

Just know. Yep. So if a house has Foundation, or has had Foundation, and we get somebody that bids on it, I like to call that person in, I want to talk to that investor and just let them know, because I understand in Arizona, their dirt may not settle. And they don't even know what a foundation problem is probably like, I don't know what a basement flood issue would look like. I've never seen a house being a basement.

So with Mississippi, we all are in that delta type. swamp land, I guess you would say. So we've got a lot of dirt here, there's just not great. Now, as a builder, when they're building a home, they'll take all that bad dirt out, packs nice, fresh dirt in, pack it down. And they're supposed to give so many feet. But unfortunately, 20 30, 40 years ago, they didn't have those rules, it was a little bit of the Wild West. So you can have literally a neighborhood that had this builder build this house, and this joker did great work, he was proud of his work, this house would never have foundation problems, the drainage is well around the house, the water's not coming against the house, the house next door, this builder came in and threw it up didn't care about his drainage, the level of the house may be off might be the low down the block. He's probably if he's not had foundation problems he's going to so we want to avoid the house that has any drainage problems around it.

That being said, you can have a house that's had foundation problems that's been repaired, and that house be just fine, the drainage has been fixed. Whatever that builder did has been fixed, we've got nice pilings, a lifetime warranty. Still, as an investor, I'm not going to recommend any house that could even potentially give foundation problems. To me, that's the worst mistake, that's the death zone. If it's potentially gonna have a river going around it, that will just wash that dirt right out from under the slab. And that's just no good for anybody. So foundation is something that I think is where you need the boots on the ground to go view these houses to look at their past look at the neighbor's house to see if they've had foundation problems. See maybe if you can find who built that house. And that type thing.

So it's it's house to house but foundation problems are huge, huge thing that we look at when we're looking at a house and different areas are a little worse than air others. And older homes are a little worse than the newer homes. That being said some of the newer homes built in certain areas do do have some problems.

Mark

Yeah, I think it's a great point to look at the neighbor's house because it may not be your drainage issue is theirs, but it becomes your problem. Right?

Ryan:

That's right. And just little things like that tree overgrown and leaves falling down, getting in the way of that drainage. So trying to spot those problems. Even if I try to assume that our renters are not going to rake the yards, I just assumed the worst that the leaves will fall they'll cut them with their lawn more when it's summertime. So if there's a a French drain that needs to be raked out once a month to keep this house from having foundation problems, that's not going to be a good rental home, that's going to be a good home for a person to move into that's going to take care of that home to keep that stuff because that's his investment. So those are things with foundation. We're very very careful when we get involved with something like that.

Michael:

Are there other things Ryan that are specific to Mississippi That you see as very common issues that maybe to a California or to a Texas investor might be a big deal, but they just are regularly occurring issues that you tackle no issue maybe like moisture intrusion or warping. I don't know something to that effect.

Ryan:

Yeah, I think foundation would be the biggest issue. We have a little bit of mold. Sometimes I don't run across that very often. If so, it's on where the outside rooms or whatnot. air conditioners are a huge deal here. They're usually ran from March till probably sometimes in December. So almost year round, people are going to use their air conditioner. The air conditioner lifecycle is probably, if you get a new air conditioner in take care of it had it serviced once a year, you can get 10 to 13 years out of the air conditioner. Still, sometimes, you know, you'll have that's a big service call is air or air conditioners, yeah, usually, January, February or March, we're going to get a call. And when it gets really to that 105 degree days, it's hard to get a house down to 72 degrees sometimes if it's not insulated just right, if it's an older home.

So we try to prep people as part of our move in when Bo brings a new client in utility and explain to them about the air conditioner that you know this is not a brand new home, it's probably not going to get 62 degrees if it's 100 outside and explain how to change the air filters to keep it at that lowest point. So air conditioners and foundations. I think that's our two biggest things. roofs are just pretty normal everywhere. We do have tornadoes, or hail storms a bit bit. There's just nothing you can do about that.

Michael:

I love that question mark because so I bought a property a triplex up in Alaska years ago. And I used to work as a fire protection engineer. And I went up there and I was up there for work. And I was looking at the property and the agent was showing me around and he says, Oh yeah, and here's the fuel tank for the diesel fired boiler that's in the basement. I was like, What? There's no way we're having diesel fuel sitting by this property?

And he goes, No, no, like, that's what people do here. And so coming not being a local, you don't know. And so that's, I think, a really great question. And a really great talking point is you might see that and think Yep, not gonna touch it. But that's just par for the course in that market. So understanding those types of things, I think is huge.

Ryan:

Absolutely.

Michael:

Can you talk to us a little bit Ryan about kind of the numbers as an investor so if I'm an investor looking into the Jackson market, from a purchase perspective, on average three to you know, not the main, you know, into different neighborhoods, maybe talk to us what the purchase price map and what might some of the rents might look like as well.

Ryan:

We've got two or three in the Florence areas, little suburb blocks south of Jackson, when you get out probably, I'm going to say the really good schools zones in Rankin County, you'll see anywhere from 150 to 200,000 that's kind of where I guess I like to be I think a lot investors like to be around at 150 to 200,000, 2-3 with a garage, a nice 1015 year old home that's similar dated or this move in ready. We'd like to see anywhere from 1500 on the 150 up to around 200 like to get around 1850

Michael:

Awesome so we're kind of flirting alright that 1%

Ryan:

Yep, yep, absolutely. In this market you know that i think that's that's very decent. You know, a year and a half ago, we were getting a lot better numbers. Houses are just bring in maximum value right now. But also, renters are easy to get to there's not a shortage of renters went through our app out it's usually taken snatched up pretty quick.

Michael:

You beat me to the punch. I was just gonna ask both on the purchase side and on the leasing side. How quickly Are you seeing things move?

Ryan:

Yeah, they move quick. People are complaining people are getting beat out of leases. I got a call this morning run up, tried for leases on my own. I need help finding a rental home. He was just out applying on his own off of Zillow or whatnot. And it's not like it used to be used to you could look at your phone, dial that number and go rent that home and there wasn't a line now it's apartments are booked up. Houses are pretty booked up. It's It's hard to get a house in any fashion right now.

Mark:

What I like about the Jackson market is you really have three big counties Heinz, which is really where Jackson is out east is Rankin, and up north is Madison. And they all have different personalities. And so maybe Ryan give us a little idea of what you're going to get with each of those and you know, how the schools are compared and just overall cost of living.

Ryan:

So, starting in Jackson, I love I own a few. That's where I started my investing was often McDowell road. Great spot, I used to cruise up and down and when I was a kid, the numbers are great in that area. The last house I bought was around $40,000. And I've got a nice $850 renter, the area, you know it's hit or miss. As far as street to street, you may have this street, it's a little bit abandoned house abandoned house, you know, you don't want to really be around a lot of abandoned houses in any market.

So I try to go to the upcoming streets, one that I may see a couple for sale signs on that's a good sign those houses are about to probably get rehabbed. So we really try to go select right there, northeast Jackson's a little bit harder market to get into, it's a great flip area, a great way to do a BRRRRs up did a few BRRRR in that area, the numbers just match up. If you're set with a lender to get a free home may not have gotten a few of them. You get up so I like to BRRRR the Northeast Jackson area.

Rankin it's a great school zone. The public schools are great. The housing is around $200,000. You can find nice deals around 130 to 150. Sometimes, and those you want to scoop up quick because if it's in that school zone, there's demand for it. Every school zone he can in Rankin County, it seems like there's a demand for housing for rental housing in that area.

And Madison, it's a little bit higher in homes, you do get a lot better rants in that area out that county, it's a little bit stricter on their landlord policies, you have to apply for a permit different, just different loopholes that we jumped through, though and help you jump through. It's a great market, though, that you're going to see in Rankin and Madison, that's when you'll really start seeing your investment long term for when you want to sell that home, you'll get a great return, the housing really has skyrocketed.

Several the areas are just moved to USDA financing. And just that area alone when you go from FHA, VA USDA, and now that opens up for a buyer to get 100% financing. That just opens the market up to so many more people in this area. Because in Jackson, in Mississippi as a whole there are a whole lot of people with approval letters, but not a whole lot of people with 3% downpayment in their checking account. So having that USDA having a home when I'm an investor, I look at several different things. So I want to see if I can find the area that may be coming up for USDA soon, our buyers in that area, those houses are definitely going to be worth more in three years or four years, I can put a renter in it, let him pay my note for a little while, make some money, and watch that house really, really appreciate. So that's one thing we're watching for in the Madison area right now is that USDA, they're doing a few things.

Michael:

What great insight, Ryan, I mean, it reminds me almost like an opportunity zone. It's these geographic areas that are now getting opened up to additional investment that wasn't there previously. I think that's awesome. I think that's awesome.

Mark:

So when one thing that I want to point out, not only to the listeners, but you know, to this group, you know, Ryan's actually picking a lot of properties that are going on the Roofstock select program, which is you know, he his hand picked a good number of those and he's the one running the numbers from a rental perspective and then the rehab. And then he's pushing those through if he thinks it's a good investment property.

So maybe Ryan Give, give the listeners a little idea about what you're looking for that you feel is kind of that that opportunity that other investors maybe aren't seeing? Because you know, these are on the market MLS properties that are in our select program. So there's a lot of eyeballs on those properties. So what are you looking for That maybe you can give a little explanation to our buyers about.

Ryan:

So when we're looking in MLS a, I want to see the houses that just hit I want to be the first one to get it out, well you guys can see it before right now there's going to be multiple offers usually on a reasonably priced house, and especially if it's in a very good schools zone.With that we want speed, we want to get it on as quick as possible. And we want numbers to be accurate. Also, Bo, and I like to get on our phone late at night. And we'll tag team and we'll go over each address and look at that house, we'll look through each of the pictures, we'll come up with a repair by budget based off for what we can see.

And then also we'll both check the rental rates, we want to both do our own compare at the end. And usually we can take a property from when we first start looking at it to when we hit publish, it's gonna take us 10 minutes to go through the taxes and whatnot, we're gonna we're not just going through slapping houses on we really want to be exact, because I understand as an investor, I'm a huge BiggerPockets guy, huge BiggerPockets, calculator, I'm a numbers freak, I want to see how those numbers line up. And if those numbers aren't, right, that's a big deal.

If I tell you, you can get 1500 but you get down here and can't find anybody. But for 1400 I just blew your whole plan out of whack. I don't want to be that guy. So we want to make sure that and a lot of times we undercut for that reason, I don't want to tell people that and expect more. But whenever I'm running my numbers on anything, I like to undercut you know, and overdeliver so when we put a property on there, we're very certain we can get that rent for that property. Well, we've looked into it.

And then once somebody is serious about it puts an offer we're gonna go out and look at the property do a nice video posted on YouTube, send it out to the buyer. And when we do that we're actually looking at that house just to confirm Okay, we can get this for this house we've looked at the area have looked at the neighborhood that's part of our inspection process. We're not just hiring that inspector in that first 10 days to go inspect that house we're also inspecting the house just to make sure it's a good deal for our investors.

Michael:

That makes a lot of sense and that's really great background to know that it's not just getting thrown up there grab that random that there is actually investors looking at this underwriting it and saying okay, we're going to stamp of approval this Can you talk to us Ryan and all of our listeners a little bit about I think something that should be on every investor's mind if it isn't but property taxes How do those look in the greater Jackson area for the different counties you have?

Ryan:

So Jackson area is definitely the highest in taxes and I hear a lot of complaints honestly I think it's right you take a Jackson's are very old city and the utilities are very old it's the water problems have made national news the pipes are just to hold there's no way around it. And if you take all those pipes under all those roads, there's just no way to go in and repipe a city it's just not feasible so they're constantly patching on it and I think that's just the way it's going to be as far.

As the sewer it's kind of the same way it's it's old so we look again at house by house we're doing that it the sewer system and water system and do the best we can on that but the taxes are high for that reason, and they're probably not going down anytime soon. They're probably gonna keep rise to keep combating and investors gonna pay 1500 ish taxes in that home. The government will give you a little bit of break on your tax. Just by living in that home. It's kind of a bi sticky to the investor his taxes will be higher. But Madison's obviously the highest property values are higher in Madison. u is not a far fetched higher than Rankin. It's not as high as Hans but it is because most of the homes are valued are a little bit higher than Rankin.

Michael:

So is it fair to guesstimate around one to one and a quarter percent of the purchase price if you were just doing some real quick back of the napkin math to determine what your property taxes might be.

Ryan:

There again, we like to check that and each county has different ways we can check taxes Hans County, we can see the exact rate on Madison and Rankin county you can call the tax assessor's office say this is the address Can you give me them non-homestead rate for this house, get that answer pretty quick.

Michael:

I love that you said that it's something that I talk about all the time in the academy is don't use the Zillow number, don't use the Redfin number because that could be the homesteaded prior value. And if it's based on purchase price, that owner is locked in. So pick up the phone call have a conversation. How do I calculate my after sale taxes as an investor?

Ryan:

That's right. That's right. Just give him a call. Those ladies are happy to help.

Mark:

Yeah, a lot of our listeners want to know who Ryan Porter actually is we got your investment background, but they also want to know you're married, you have kids, you have a boat you take to the reservoir because they have a pretty awesome reservoir. What what kind of fun do you have?

Ryan:

Well, actually, I do have a boat. It's parked in my backyard. I live on the reservoir. I love getting on a pontoon. I had two girls, we actually spent Sunday on the water cruising around, watch the sunset. I'm not married. Married to my work. I really stayed at my computer all the time. I love getting on the road, checking the houses out. It takes a lot of my time and I'm not disappointed. My girls are my life.

Got one that's in the banking career. She's trying to get work her way up the lending ladder with a local branch and my youngest is just going into 11th grade. I'm super proud of her. She's really been my mini-me with real estate. As I was coming up through the ranks with me and my open houses, baking cookies, we would go all out she'd have a great time.

Michael:

That's great.

Mark:

So she looks at you as the rich, the rich dead. she's she's listening. She's watching. She's learning. That's great. That's all possible. That's, that's important. Yeah, we want to get to know that the ryan that's, you know, behind the scenes, because, you know, we work hard but important to play hard to. So that's, that's awesome.

Michael:

I love that. Ryan, if folks have additional questions for you want to reach out to you directly? What's the best way for them to do that? Get a hold of you.

Ryan:

So my cell phone or email, like I said, it's 2021 it's always beside me. My cell phone 601-238-6620 text or call. If you call us leave a voicemail? Chances are I'll probably have to get back to you or email. Check it pretty much regular throughout the day at RyanPorterhomes@gmail.com.

Michael:

Awesome. Awesome. Well Mark, any final questions or thoughts around for let him out of here.

Mark:

I think we're good. I'm just appreciative of all the hard work because he's one of the newer certified agents that's joined us recently to broadcast these select Properties. In already in the first 30 days, they get seven properties under contract and you're feeling a lot more offers than just those 70 got under contract because it's it's a wild market. But you know, we appreciate what you're doing. And these are ways that we can always broadcast all the good things that are happening. So you know, buyers can tune in and then give you a call after this.

Michael:

What are you seeing buyers do to win offers? How are they being strategic? What insights tips tricks, can you get folks that are looking to make offers in the Jackson market?

Ryan:

So we actually teach a class on this once a week at our brokerage next time we get together as agents, all of us and we talk about Okay, what have you done in the last week or for last? What have you seen as listing agents that other agents are doing all four Why's the Step Up Calls is a popular one. I tell investors that if it's a hot house and has multiple offers a let's make it easy as we can be on seller as far as closing time. That's a huge deal. You tell me your parameters on when you'd like to close? Let me see when the seller would like to close and try to make it easy as possible on them. That's what they really like is easy closing dates.

As far as the finger goes. I don't try to recommend a price. But I will tell an investor to do their numbers and look at the house. And if it's a solid house getting that rent, where are you comfortable, where do your numbers line up to where you can make this much profit a month and this will make you happy. And let's go in at that number.

I'm a huge again, I'm a huge math guy I like to see my numbers work and it's something satisfying whether you're preparing to flip a home or BRRRR a home if you're just buying a straight out rental to have a plan on paper and say okay, the house is gonna cost this gonna cost this device can call CES to fix it up ran it. My property manager has been it's going to cost this at the end of the day, my checking account is going to get this much deposit in it in it each month. To have that plan come to fruition and on All those numbers actually work mass is super satisfying to me. So we want to take it from that point where I want your numbers to make sense. Don't go overboard to try to win this house, do not fall in love with the house, fall in love with your numbers on paper and stick to that.

So we want to keep them at bay. But at the same time, we want to get as many houses as possible. So we want to be flexible on our closing date. Don't ask for any closing cost, and our communicate with that other agent and really sell our investor Hey, this is what everybody wants an investor coming in and giving you top dollar from California. Man, I'm on sale you to these guys. And they're going to be excited about selling their house to this guy.

Michael:

Awesome, awesome. I love that.

Mark:

To me, that is the that is the value right there. The certified agent is you know, getting your foot in the door and knowing who that listing agent is and calling up and saying, Yes, give me some info, give me a little information, what's going on, you know, and just letting them talk a bit. So you can go back and make that best offer.

Ryan:

That's right. That's right. And I can usually let them know, you know, hopefully what it'll take to be in that top running.

Michael:

Which is so huge, which is so huge.

Mark:

And that that is huge because the buyers know whether they're in the running or not. If they are not, then take the money and put that towards the next property and move on. But you know you you don't want to tie up money that doesn't have a chance.

Michael:

Well, Ryan, thank you so much for coming on, man. Really appreciate you. This was a lot of fun. And like I said, I'll be definitely reaching out to you because the Jackson market sounds like it's on fire. Awesome.

Mark:

Thank you, Ryan. Appreciate it. Michael. This was awesome. enjoyed it.

Michael:

Everybody that was our episode a big big big thank you to Ryan for hanging out with us and giving us a walkthrough of what the Jackson Mississippi market has to offer and what investors should expect and know when going into that market both with regard to things they might be encountering, and also how they should be making their offers. If you enjoyed the episode, please feel free to leave us a rating or review or subscribe to the YouTube channel. We always look forward and welcome feedback as to additional episodes ideas, just leave us a note in the comment section.

We look forward to seeing on the next one. Happy investing

3 Interesting Ideas On How to Transfer Wealth to the Next Generation Jun 26, 2021

Passing a real estate portfolio to the next generation is not always straightforward, and if not planned well, it can be a painful point of contention for a family. In this episode, we discus come clever ideas on how to equip your children with the skillsets needed to responsibly manage what you leave them.

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Transcript:

Emil:

Hey everyone. Welcome back for another weekend wisdom episode of the remote real estate investor. My name is Emil Shour and I got my co host with me today who are

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today we're going to be talking about generational wealth. We're gonna be talking specifically about our thoughts on it, what our plans for the future what we want our legacies to look like and even how that's changed over time. So let's hop into this week's episode.

Tom sounds like he's at the motor speedway right now he's…

Tom:

…got a little construction going. Like the dentist over this

Emil:

Oh, let's just drilling

Michael:

Are they still jacking up your house?

Tom:

They finish jacking up now they're adding in plywood to strengthen the sides of the walls usually houses have plywood on the side but mine did not so it's kind of scary living in the bay area where it's like a little bit earthquake prone not being as structurally sound but…

Michael:

like around just the perimeter above the ground not like the shear walls that are on the foundation.

Tom:

So you have the two by fours like the framing and then yeah normally outside the framing there it's common to have plywood and mine My House did not so they're adding in like some plywood and stuff so a lot of stuff going on at the old Casa so that's the dentist noise in the background is plywood going in deck being rebuilt all this all this jazz. So kitchen being redone. Fun Fun, fun,

Michael:

Rehab that work.

Tom:

Rehab and live in rehab. I yeah, grind through it. Yeah, it's a first world problem. But it's uh it'd be nice to have a kitchen with running water.

Michael:

So needy Tom, needing running water, electricity. Gosh, Come off it already, man.

Tom:

Yeah, this toughened me up. Sounds good.

Emil:

Alright, guys, so back on track. We're talking generational wealth today. This is personally for me, some I have just gone back and forth on like, what do I want to do? There's like, kind of two schools, right? There's some people, there's a lot of different variations. But I think the two main ones are, I want to leave a lot of the assets that I'm buying and owning to my family. And then there's some people who are like, No, I want my, my kids, my family, well, mainly your kids to build for themselves. And you either I don't know, donate to charity, or do something with it where you know.

So I'm curious, like, have you guys thought about the future? What does it look like, for you in terms of passing, will stick to real estate specifically by passing on your portfolio to your kids?

Tom:

To be honest, I mean, I haven't really thought too much about the mechanics in a way that I want to do it. But what I what I do know is there's a good amount of lead time, hope that I that I live long, that I can, you know, I don't necessarily have to make that decision today, with real estate and I think is relevant to you know, passing on to kids, there's, there's two things you can never change with real estate, that is the location of the property and the price that you pay for it down the line, if they you know, one thing that I like so much about single family rentals that you have multiple kids, it's it's much easier to kind of break up that kind of disbursement of, versus your you know, your family owns a big apartment complex, you know, it's a little bit trickier have a thinking about passing it on to the next generation.

So that's one thing I'm thinking about with single family is it's a lot easier to slice and dice that type of wealth, you know, some questions that I've been having is, you know, how much money should I be putting in this, you could do pre tax money towards like a college fund. And part of me is like, No, just dump it into real estate, like, you know, maybe I'm losing some of that pre tax efficiency, but like, I really love this as an asset class. So I cut in front of the line to give an answer. I didn't really like the answers, just a couple of musings that I have is I don't have a very specific plan. But I do know that I want to get the assets in place and really focus on that side, you know, down the line, I can get more formal about that way of, of transitioning. So not positive. I answered your question that you had asked me, but I had a good time answering it.

Michael:

Well, I've got a follow up. That's more that's more point blank. Do you plan on passing your assets to your kids when you and your wife are no longer around? Or do you have a separate plan?

Tom:

Yeah, I hope so. Um, yeah, that would be the plan to do that. I mean, I think it's a buffer if, for whatever reason, like, you know, we need the money, like, I hope to set myself up in a situation where you know, you have Principle of investments be it in like properties, whatnot, and you never necessarily have to dip into it, you know, you're making money off of the yield, you're making money off of cash flow, perhaps even, you know, dipping into the some of the equity through, you know, another cash out refinance, whatever.

But at the end of the day, the end of my day, I chose source assets are able to be passed on to the next generation, I would like to do that and maybe even step it up a little bit, maybe throw a house or a couple houses in there, too. So, alright, I digress again, Michael or Emil somebody quick!

Michael:

Before the potato hits the floor,

Tom:

I am holding, my hands are burning. Yeah, hot potato.

Michael:

Good. Similar to you, Tom. I've thought about it. In theory, only my wife and I don't have kids yet. So but they're definitely in the foreseeable future. That's part of our plan. So we'd love to be able to leave the whole portfolio to the kids, assuming they're not a couple of knuckleheads. It was something that that I was left when they had future generations passed. And it was a hugely, hugely impactful thing. Now, if my kids have no interest in real estate, no, I'm not just going to give them a portfolio of performing assets and say, well, you're not your setup. I mean, they need to express an interest in wanting to actively manage and be a part of that, from a young age. It's not just a golden ticket, here you go figure it out. So I want them to be active participants.

And if they don't want to be well, there are ways to, you know, liquidate the asset or get equity out of the assets so that they can use that cash for a better purpose or for something that they see more fit or that they are going to get more out of, because so often you hear about these, someone in the future generation passing away, the kids have the asset, whatever it is, and they squander it or squabble over it, or screw it up, and then it just gets really ugly pretty quickly.

So there's a way to avoid that, which I think if I had to play it out, and as best way I could, I'd say that they would be involved in the business during their lifetime, so that they're well equipped and well versed to take over should they choose.

Tom:

I think that's responsible also, Michael, that you're talking about kind of thinking about, like concerns of potential like squabbles, I don't know if this stuff can get ugly.

Michael:

It gets really ugly really fast. And I've seen it happen. I've heard about it happen with family members, that's typically who's being left this stuff. So kids or siblings, cousins, whatever, and then the relationship gets soured, because they are in a better position. Now financially, because they have this thing, which is so silly to do. It's the exact opposite of what should be happening. So if you can plan for that in advance, and there are tons of ways to do that, via trusts and making sure that kids get things at certain ages, and their estate planning is this whole sector unto itself.

But the fact that real estate is such an amazing vehicle to keep until you pass is kind of comforting.

Tom:

If you got a pet, pet turtle, you know, you can you can get really creative with wills and trusts. And if it's gonna outlive you, if you have a pet, there you go.

Emil:

Is that an analogy? Are you serious about pets? I have heard of it. I have heard of it. Yeah. My thoughts on this kind of flip flopped? I think, when you have kids, it puts it a little bit more in perspective, like you just think about it more. I think there's so much value in learning how to build from nothing, right? Like, okay, let my kids kind of work, earn money, help them learn how to do the things I've learned over time, but not just give it to them or give them money or whatever it is.

But I think that has changed a lot over the years. I think now I would rather I would love to help my kid not just like hand my kids over properties, but help them get their first properties, help them do their first deals, even if I'm the person giving them the cash to do the deal. Like I'm their bank, that would be the most amazing thing, because then I think they're learning and they get to kind of make those mistakes. But I'm also you know, it's it's like, you want to help your kids as much as you can give them a leg up in this world. Like, why not do that? Why not help them but still teach them those important lessons.

So like you said, my goal, they don't squander it, hopefully, their kids, you know, when they leave it to them, don't squander it, but like, trying to teach them the value of $1 and like, give them a leg up, but not just hand everything over to them. It's kind of like, how I think about it now.

Tom:

I think in the the process of, you know, grooming them to take it over or whatnot. Man, there's some really practical learning spots in there in like looking at, you know, a pro forma, like breaking it down like looking at lease looking at like math and English and action. So I think in getting to that transition plan, like I can just see a lot of kind of fun ways and getting them excited about these really important concepts. stops with financial literacy, of understanding that so it's kind of a gift that you get like multiple, multiple gifts to give from one that, you know, understanding on the inside of it, and then to it at whatever point you, you know, transitions assets to them, boom, number two.

Michael:

The gift that keeps on giving, it's the golden goose, the golden goose, I think it's interesting that I see. And you hear about these kids squandering it and the squabbling over it. And it's like, they never got any training. And when a kid turns 16, they can go get their driver's license, but we don't just don't give them a keys to the car, because it's their birthright or because it's their right to go get their car, they have to go through training, and they have to learn it and have to earn it and have to pass a test, same thought process should be applied to business or assets, there needs to be training involved. We can't just give the kids the proverbial mineral keys and assume that it's going to all work out. Okay.

Emil:

You, you brought up a good question, Michael, that I wrote down, I want to ask us all, what do you do if your kids are just not interested in real estate? Like you try to bring them in the business, you try to keep them involved? But like, you know, there's only so much like kids, a lot of times they don't have the same interest as you no matter how hard you try. So it's very, very real scenarios. What do you do if your kids are just not interested in real estate?

Michael:

Can you just go get new kids?

Emil:

Trade em in!

Michael:

Trade with someone who doesn't have any, swap till you drop? Isn't that what we were saying before the show for real estate?

Well, that's like Michael Zuber talked about that.

Emil:

Exactly.

Michael:

That his daughter was not interested. I think that you can, again, me personally, without having kids, it's, it's all theoretical. But I would plan to support them in the same ways that I would if they were involved in the business, and whatever their passion was. And that me, I love what you said, that's just not to go give them money and say, or do whatever you want, but to be as supportive and helpful and give gifts in the way that is going to benefit their lives. And further there being a good person in the world, doing things to that effect, and then deciding and having that conversation, hey, you're clearly not into real estate. You know, what's something that you're passionate about?

Maybe we can donate this to when we pass? Or maybe there's something we can do in that department? Yeah, without having a super clear answer, because I don't know yet. That's, that's what I'm thinking in my brain.

Tom:

I think based on if they're not interested in continuing to build upon the portfolio and actively manage, put it in a position where you just be passive. And, you know, if they want to, like have a career that is, I guess, I don't know, net positive. And it's, it's funny, like, Who am I to, like judge that, but if they want to have a career where maybe like, the money that you make is not a lot, and this could help them out, you know, build the portfolio in a in a passive way. And it's a weird thing to say that it's like, you know, who's who's judging? Like, what's a, you know, career worth worth having. But yeah, at the end of the day, just making it like a passive position where it can help them, you know, live their life a little more comfortably. I think that's would definitely be something that I would want to do, even though they're not going to be actively involved in it. Build set up to be passive.

Emil:

Yeah, that's a good one.

Michael;

What about, you know, what if? What if the little one is like, yeah, Dad don't care.

Emil:

I've thought about this a lot. I would, I'd hope that they'd be interested in either business or something like, let's say they have some skill, and they like, they wanted to start their own business,

Michael:

Like bow staff skills?

Emil:

Wxactly. Bow staff skills, nunchuck skills, you know, something where they want to start their own business, maybe we can put some money in there and help them grow their business, right? Maybe they're not interested in real estate, we can use the wealth we've created to help them start a business that they can. That's another type of asset, right?

If they have no interest in that, I don't know man, it would be tough to just be like, Alright, let's just put money in, like Tom mentioned, that was my first thought as well put in something passive, maybe some dividend stock portfolio that just helps supplement some income, I would just be kind of scared if they just have no interest in financial education, personal finance, like they're gonna squander it. So it's, I don't know, at that point, though, I'm going to find out what time is something you can do as a parent that just ensures that they're interested in this stuff that we're all interested in, I don't know.

Tom:

I've got a better take. Now I've got a more established take thinking about and hearing you talk about it. It's so I'm gonna have put it it'll be in a trust, right? And they, if they're not into it, I'm going to make the decision that it's a really great wealth builder. And the trust is not going to let them touch it. It's just going to like, dribble out, you know, money for them to help them. Yeah. And it'll be just this little dribbling out. Money Money machine, that that's what I want to know.

Michael:

A little ATM.

Tom:

A little ATM. Yeah.

Michael:

I feel like if my kid or kids are not into it, and they, they still want access to the benefits. In the fruits of my labor, I'll just like give them treasure maps that they have to go solve. And the trust dictates like, no, sorry.

Tom:

Dude, the trust you can make it like you can make it do whatever you want.

Michael:

Yeah, yeah, you must go to this location, you must solve this riddle.

Tom:

You need your agents license in Hawaii go! Then, you become a notary in the state of Vermont.

Michael:

Your mission should you choose to accept it.

Tom;

Could you imagine like the, like kids faces like this, this 50 point project of like, I have to do what?

Michael:

Are you serious?!

Emil:

Wait, what if? What if you do that same logic, but you make them a achieve? Like they have to buy a rental property and achieve a minimum of 5% cash on cash return, so they basically have to learn real estate investing to unlock the big treasure chest.

Michael:

Yeah, that's good.

Emil;

So I don't know.

Michael:

I mean, you might be on to something Emil.

Emil:

They have to do all these things to get the millions or whatever and in doing so they've learned their financial literacy.

Tom:

You got to go go to a soup kitchen. You got to go build a house!

Michael:

You got to go be a good person. Yeah, totally.

Emil:

With the trust you can do that. Yeah, you can do all that stuff.

Michael:

So all right, I have to go Kelly after this. I gotta go update my trust.

Emil:

Alright, guys, anything else to add here?

Michael:

Yeah just…

Tom:

No we got it!

Michael:

Oh so clearly what I have to add is not essential.

Tom:

Probably not. Go ahead.

Michael:

There's there's something that a lot of people might not know about. And it's called this step up in basis. And that has to do basically with Tom, what you were mentioning earlier, in that the two things you can't change the location of the property and the price you paid. And so the way real estate is tax is it when you make a profit on the sale of a property when you sell from when you bought it for it's called capital gains, and you pay tax on that gain.

So let's say you bought it for 100,000, a couple years goes by it's worth 200,000. If you sold it, you would pay tax on that $100,000 you gain plus depreciation recapture. But let's not even get into that. So what a step up in basis basically says is that the day that you pass, and you give that property to someone else, or to In addition, wherever it's going their basis in the property basically becomes the fair market value at that point in time. So what that all goes to say is, let's say you same example, you bought that property for 100 grand, and you go talk to your tax professional before doing any of this, but this is just high level, how my understanding of it is, is if you bought that same property for 100 grand couple years goes by, it's now worth 200. And then you kick the bucket and you pass it on to your kid, well, your kids basis in that property is now 200 grand, because that's the fair market value.

So if they sold that property, the day after you passed, they could sell it for 200 grand, their capital gains tax would be zero, because the step the basis gets stepped up to the value at your passing. So if you sold the day before you died, you get taxed on 100 grand in capital gains, if the air sells the day after you pass after it's been stepped up, they sell for that same 200 grand their tax basis is zero.

So it's a really, really, really amazing asset to pass on to the next generation. Because what Tom mentioned is true, you can't change what you paid for it in your lifetime. The basis does change in someone else's lifetime. So it's again a really amazing asset to die with. As morbid as that is.

Emil:

A good tip. Michael, I’m glad you mentioned step up and basis very important. As you're thinking about…

Michael:

What do you think, Tom? Is that essential or not?

Tom:

Uh Yeah.

Emil:

I would say that's fair to include in the essential.

Tom:

Oh, yeah. Oh, yeah. Yeah, that's definitely fair.

Michael:

Yes. Awesome.

Tom:

Yes, definitely. The dentist office downstairs agrees, with the pounding.

Emil:

Alright guys wrapping this one up. Thank you, everybody for joining us on another weekend wisdom. We will check you guys out in the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Our Top Tips On What You Should Do When Closing Goes Sideways Jun 19, 2021

Sometimes closing on a deal is not so straightforward. Michael shares a nightmare closing scenario and we discuss how to mitigate struggles like these to stay on schedule, saving time and money.

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Transcript

Emil:

Everyone, welcome back for another weekend wisdom edition of the remote real estate investor. My name is Emil Shour. And today I've got with me,

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And we're going to be talking about what happens when your closing goes sideways. So Michael recently had a refi on a triplex he owns and had some some challenges arise. And we're gonna just put them in the hot seat, learn what happened and learn how he deals with it. So you guys can get some tips and takeaways in case this ever happens to you down the road. So let's hop into this one.

Alright, Michael said, set the stage for us. What what happened on this refi on your triplex.

Michael:

All right. Step back in time with me to December of 2020. So that's what I started this whole process. And my wife actually found this awesome lender out in the Midwest, they could land on this property that I owned inside of an LLC. And I was like, great, this is awesome. So we got the ball rolling. He got a couple different quotes. For me. He was a mortgage broker. That's what he did he so he wasn't the lender specifically. So he found a lender that was going to work. We said, Great, we got the ball rolling, we got the application process started.

And then they said, Oh, you're doing some rehab work. So they went out for the appraisal, that's when they learned learned, quote, unquote, about the rehab work. And I was like, I told you about the rehab work. And they said, Oh, well, we can't we have to go back and do another appraisal once the work is done. So keep us posted. I'm like, oh my god. So that slowed things down to start, then we were supposed to close. And they said, Oh, you filled out some paperwork wrong. Yeah.

Tom:

Did you get charged for like a chip chart trip charge for the appraisal? appraisal.

Michael:

So I got a second charge for the appraisal, which they didn't tell me about until the closing statement showed it. It was only a couple 100 bucks. But I was I was still a bit frustrated, because they didn't like tell me that. And I should have assumed like, of course somebody has to travel to go do these things. But also at the same time, it seems a bit frustrating that they said oh, here's the price for the appraisal when they quoted it to me. And then the final amount being taken out at the closing is different, because they charged more for the appraisal example back second time, which they should have done because they knew about the construction. So that was a bit frustrating.

Tom:

Was the construction like really significant.

Michael:

It was a total remodel of a unit of the biggest unit in the in the triplex so fairly.

Tom:

King unit.

Michael:

Yeah. Yeah. So yeah. So then they tell me Oh, by the way, I know we're pretty close to closing, but you filled out some paperwork wrong. So on my statement of information to the Secretary of State of California, I put that the LLC was member managed. But when I initially filed and made the LLC, I put that it was manager managed. So those two documents didn't align. So they said, Oh, you got it, you got to change this. And I was like, all right. We should we're done about this earlier, but whatever. So I did that and filed an amendment with the Secretary of State, it really wasn't a big deal, like 25 bucks to do to do it all online. Good to go. Great.

So now fast forward, the closing has already been delayed. They finally got through the re inspection of the property, as well. And they say, oh, by the way, this same issue happened in Alaska, where the property is, is physically. So you need to update that as well with the the secretary of state or change the operating agreement. I was like, why didn't you bring this up when you were scanning the documents that you had for California a month ago? Like a So anyway, to file an amendment, the Secretary of State of Alaska was much more difficult. It wasn't able to be that online. It was a whole process. And then I didn't get verification that it was accepted and approved. Until 18 business days later, was there a timeframe?

So I said I can't wait 18 more days to close this thing. What options do we have? And they said, Oh, we can close load in your personal name. So I say Great, let's do that. And they said, Okay, well, now because it's gonna be a person's name, you have to click claim it out of your LLC and into your personal name. I was like, You got to be kidding me. So I quick claiming that out of the LLC into my personal name. And they said, Okay, yeah, now we're clear to close. So they reached out to the title company, and the title company was unresponsive. So then I reached out to the title company, the title, the closer I reached out to their manager, and everybody was giving me the runaround. Oh, we need more documents from the lender, and the lender saying, Oh, we need we gave everything to title. It's in title’s hands. So days and days, days, this Thursday went on for like a week of trying to coordinate this thing with the title company.

The person who the lender had on my case on my file was on the East Coast, but the title company was on the west coast. So there was several hour time difference. I mean, it was just like, the amount of people that got added to the emails each day grew exponentially. And I think Like the final set of emails, there were 12 people CCD on this, like it was a joke. Like they just couldn't get it. Right. So the loan finally funded this Monday, this past Monday, yesterday. And on Thursday, I think I got an email saying, Oh, we hope that this is from title, we hope that the lender wires over the money by Monday. And I wrote back and I was like you hope in a nicer house like you hope I was like, stop hoping and get this done? Who need to take responsibility for this? The lender has told me they've already sent you the money, where is it? When or when should I be expecting it? Please do not respond with you hope. I would like a plan of action going forward and someone to take responsibility, and I was nicer about it. But that was the gist of it. And that was the inner dialogue I was having in my in my head.

So somebody wrote back to me, they said, We're so sorry for this confusion. It will be in your account Monday morning. And I say, Great. Thank you for the confirmation. I look forward to seeing my account Monday morning. So Monday morning rolls around, the lender emails me and says, Hey, confirm with us when you receive the funds. I said, Great. No problem. We'll do 10 o'clock rolls around no funds. 12 o'clock rolls around no funds, but as they're…

Emil:

Keep hitting refresh.

MIchael:

Yeah, refresh. I was like, Hey, you told me is gonna be my account. Monday morning. I know, we're in the same time zone. There's nothing here and there's nothing pending What's going on? And they said, Oh, it should be there. And I said, well, it's not. So there's a lot of money out in cyberspace that you need to figure out where it is, and tell me when I should be expecting it. And they said, Oh, we are our servers have been slow. You know, I did it personally, it should be there.

So then finally, about two o'clock, it shows up. And I say Great. Thanks, everybody. This was ridiculous. So that was a really long winded way of basically going through what was a nightmare close, and a lot of takeaways that I had from this and other closings that have gone semi sideways, as well as that you really have to be your own advocate so much of the time, just because the lender says they're working on it doesn't necessarily mean that they are or just because the title company says they're working on this. I mean, they necessarily are. And so don't assume I feel silly saying this, but like, Don't assume that people are going to do the things they say they do. You really have to follow up with them and really be the driver, and also making sure that everybody's communicating. At no point should I have had to step in to email, both the title company and the lender on an email together and say, hey, why aren't you communicating better? Why am I the intermediary for my own loan? This is ridiculous.

Tom:

Michael, not a not a big hope guy just doesn't really believe in hope, it's just kidding. I'm just kidding. That's pretty funny. I hope it funds. Okay. So yeah. Yeah, question for you here. So did you select the title company, or did the lender select the title company? You obviously selected the lender?

Michael:

Here's the here's the funny part. So I wanted to use Spruce Title, who we use a lot of Roofstock. And I have a personal relationship with we had them on the podcast. They helped me do some things in Southern California to do a quitclaim deed, which was awesome. And so I said, Hey, Spruce, can you do this? And they said, you know, we really don't do a lot of business in Alaska, we would prefer to have your lender, your lenders title company, do it whoever they use, but when in a pinch, let us know we can we can try to be of some assistance. So I thought that we were lined up. I thought we were using spruce. It wasn't until push came to shove at the end of this when they told me Oh, we're using this other our title company that we use a lot. And now I'm sitting here scratching my head, looking at hindsight, being like, Are you freaking kidding me? This is the company that you chose over mine, are you insane, so it was just really frustrating. It was really frustrating.

And then I also asked him, I was like, both the lender and the title company. So you're really going to charge me full price, you're really going to give me all these fees, and everybody keeps giving me the runaround Oh, well, it's the other company that's causing the delays. So you know, our fees are set. I said, Man, this is just unbelievable. So I don't think I'm done fighting that battle yet. More so over principle than anything else. I mean, the fees were not exorbitant. I think they were, you know, reasonable for what I got. But still to make me have to jump through all these hoops at the 11th hour to make me have to do all the communication and I'm like, Am I doing your job for you at the end of the day? Come on. This is This is ridiculous.

So and then not the lack of response, I think is what really gets my go. It really grinds my gears. When people are asking for things that need to happen in a timely manner and just lack of response and I get people are busy, but some acknowledgement of Hey, we're working on it. I mean, Emil, you and I talked about this all the time you sent me an email, it's crickets. If you can't get to it, just acknowledge that hey, won't get to it'll tomorrow. Or hey, we'll get back to you in a day, whatever. Something to let me know that someone on the other end has put eyes on this or is as has a pulse at least.

Tom:

Are there other little tricks you do within your emails when you're responding to them like Hey, are you the right person to contact for this like Basically like having them, like accept ownership of whatever that like specifically. I mean, that's that's brutal Michael, that you had to kind of jump in and quarterback, you know, between these these two companies, but I love it. Do you have any kind of pro tips like on writing these types of emails? I mean, one of them, I would just chime in with, you know, be direct, but don't be a jerk. But is there any other kind of like thoughts you have in being proactive with email, which I think is like the right thing to do? And you can see that it's like, getting a little bit off kilter?

Michael:

I think that's a really great tip that you offered almost in your question of Hey, asking, Are you the right person?

Tom:

Thanks Michael.

Michael:

Yeah, absolutely.

Tom:

So I threw it off the backboard and just dunked it.

Michael:

We read it the Roofstock Academy book club, a book by Chris Voss called never split the difference. And he talks about if you're not getting responses to emails, a way that you can write in the email is, have you given up trying to assist me in resolving this problem, or something to that effect? It's like, a little harsh, but

Tom:

That sounds a little harsh. I like it. I like it.

Michael:

It is it is a little bit harsh, but also how many times you're going to bang your head against the wall with somebody who's not responding to your emails, or phone calls, or any kind of other communication? That's kind of the the question that needs to be answered. Hey, are you are you done talking to me? Are we just giving up here? And so I've only done it a couple of times, and it tends to work pretty well. I've been cc on an email where that was sent. And I was like, hey, that seems pretty harsh. Not sure that was appropriate. So I would definitely make sure it's a last ditch effort. And, you know, there are ways to word that in a more light hearted manner. But I think absolutely, oftentimes, it is justified. I didn't come to that at this. But I think that that's a really great tip of Hey, asking, Are you the right person for me to be talking to, and then also see seeing anybody and everybody that can help?

So managers, managers, managers, because so often, if the chain isn't consistent, things get lost in the email thread. And so adding people and subtracting people mid thread is difficult. So I'd say just make sure everybody is on on the train and communication with one another from the start. And that's helpful.

Tom:

Yeah, I'd say one thing too, when you're adding, you know, more and more people on email, I think sometimes people could see a lot of people in email and like, think like, Oh, this isn't necessarily me. So like, within the body of the email, you know, if there is a lot of people on it, I’ll do an @ Michael album, like or @ whoever you're talking to, just because sometimes if you you're looking at an email, and there's a dozen people on you'd be like, oh, somebody else is gonna pick this up totally. So you know, use that kind of wider spray, but then use the little, you know, direct shot within the within the body of the email.

Michael:

Such a great point, such a great point.

Emil:

So to summarize, the big takeaway, I think, here is that the buck stops with you, you kind of have to, like you have to quarterback the whole thing, right? Is that the big takeaway, that you should own the process? As much as you can?

Michael:

Yeah, well, I think you should be, you should be ready, willing and able to quarterback the process should you need to, I don't think in 90% of the instances, this doesn't happen. And things go smoothly in the title, company and lender work cohesively together. And you sometimes need to nudge people along and make sure everybody is talking and playing nice, get in the sandbox. But I absolutely do think that if you are going to play in this space, you need to be willing to be able to do this kind of stuff. Because this stuff happens clearly.

Emil:

Right? I wonder if this is more of a refi thing, because I had the same thing on my Indy refi, where I had to do a lot of communicating between lender title and even like mobile notary, I had to set it all up and like coordinate with everybody so that docs were getting to the right person at the right time so that I could sign and everything. So I don't know if it's a refi thing, or maybe that's just coincidence that both of us have had this experience with refinances, but yeah, interesting.

Michael:

It's so funny, you mentioned that, I mean, I totally forgot that part of the story. So at the end, at the like, the 11th hour, the title company finally gets back to me says, oh, we're gonna schedule a mobile notary. And what's your address? And we're going to hit the mobile notary and they'll come out and do sign docs. I said, great. That's awesome. This is my address. And I was actually out in Colorado at the time. So this was I don't know, like, noon or two.

And I was like, it's getting late. So if I need to go to the local notary store, let me know they said it and I will schedule mobile notary so great. This is we'll get back to you when we have something that's perfect. So, five o'clock comes and goes six o'clock comes and go seven o'clock comes and goes, I don't hear anything from anybody. So I called her love to message their offices, of course close as an emails, Hey, didn't hear from you or isn't mobile notary. Nothing happens so I was like great. And in the morning, we were headed out to Utah to the National Park making our way back to California. So I get this call at like seven o'clock. And this guy's like, Hey, I'm Have a mobile notary, are you? Are you still okay to sign? I'm like, No, dude, I'm on my way out of town driving to Utah. Like, no, he's like, I got an email last night. I didn't see it. Can I? Can I be there in 20 minutes? I'm like, Yes, fine, come in 20 minutes. So he signed all the paperwork knocked it out. I was like, Oh my god, everybody's dropping the ball.

Emil:

There's a lesson there. And that and this is something I've learned recently, if you're a remote investor, which if you're listening to this show, you most likely are, you're gonna have to deal with mobile notaries all the time, you can't, you can't sign in person typically, right? Because your lenders not local or whatever it is, find a mobile notary near you and add them to your team for anytime you have closing Doc's like, I use the same person now he lives, I think five minutes away from me, I coordinate with him, him and I like know each other now, and it's so much easier to handle that stuff and make sure they're in the loop when you know the person and you use them over and over again. So that's something I recently started doing.

Michael:

I was in Tahoe, Nevada, on vacation, and I had to sign something and they're like, oh, it has to be a California notary. I was like, Oh my god, are you serious? So I had to drive across the state border and then look up like a mobile notary and find them and they were like you coming to me I just broke my back like, Oh my god, what is going on?

So I think there's other takeaways just be flexible, be versatile, you know, be willing to flex a little bit because not everything is going to be the same as it was in prior closings. And especially with the remote aspect, things just are different. So be aware of that and be willing to Yeah, to just be flexible.

Emil:

And things don't go smoothly. We try to hammer that point home right? You got to you got to be ready and accepting of the unexpected because that's kind of just real estate and especially with just lenders and closing and docs and all this stuff. It never goes according to plan smoothly, at least from my experience.

Tom:

Be comfortable being uncomfortable.

Michael:

Yeah, that's it.

Emil:

Alright guys, any any final words before we wrap this one up?

Michael:

Just be in constant communication with everybody who's involved?

Emil:

Yep. Alright everybody. Thanks for joining us on this weekend wisdom. We will catch you all soon. Happy investing,

Tom:

Happy investing.

Michael:

Happy investing.

Showdown Of the Century Round 7: Direct vs Indirect Ownership Jun 15, 2021

Should you invest in real estate directly or indirectly through a REIT? In this episode, we debate just that. Tom and Michael go head to head on this topic and halfway through, switch sides to give you their strongest arguments for both of them.

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Transcript

Pierre:

Hey there, everyone. Welcome to the remote real estate investor. Today we're sharing an episode that we did a couple of weeks back on the pod bean finance week, you can catch all of the episodes that were a part of that at pod bean.com/podcastweek/finance or simply search pod bean finance week on your search engine. And this episode is a showdown debate like we've done in previous episodes.

This debate is between investing in real estate directly or investing in real estate indirectly through a real estate investment trust, also known as a REIT.

Tom and Michael will be debating it out with email mediating and halfway through, they'll switch sides. So I hope you enjoy the episode.

Norma-Jean

And now we'll hand it off to our host of the live stream and the remote real estate investor podcast, Michael Tom and Emil, welcome.

Tom:

Thank you.

Michael:

Thanks so much.

Emil:

We're the we're the last show today, guys. So we got to get everyone hyped up I'm sure people are kind of, you know, like ready to end their day ready to enter the weekends. We got to

Michael:

It’s five o'clock on Friday. Let's bring bring the energy.

Emil:

Alright, so thanks, everyone, for joining us today. My name is Emil shore. And my co host here, as mentioned are Michael album and Tom Schneider. Say hi, guys. Hey, everybody. So we're gonna get into some quick intros on us in a second. But before we do that, wanting to give you all some background on the show, for those who are new listeners. So our podcast is called the remote real estate investor. And as you can imagine, there are tons of real estate investing podcasts out there, why did we decide to create a new one.

So there's this growing segment of investors who are bucking the trend of only investing in their backyard and finding ways to invest outside of their local market, either from hundreds of miles away. So think, living in Los Angeles, investing in Fresno, or investing across the country, so investing in the Midwest or the south east, or even in Michaels case, which we'll get into across the world.

So they're doing this because it's either too expensive to invest close to home. So think LA and New York, San Francisco, Seattle, any high cost of living area, or they're looking to diversify their portfolio across markets. And for anyone who's invested remotely, you know, it's a completely different ballgame with its own set of unique challenges, then if you're just investing locally, so we wanted to create this podcast and raise awareness and give our personal experience as remote investors. And we all invest that estate in different sizes of residential real estate. And we want to start this podcast again, just to educate people on on what that experience is like, and for people who are interested in potentially doing the same.

Besides us hosting a podcast where the three of us will will talk about our experiences. We also invite authors and industry experts to pick their brain as well on the show. So with all that out of the way, we'll we'll kick off some intros.

My name, again is Emil Shour. I'm a self employed marketing consultant living in the greater LA area. I started investing back in 2017. I picked up my first single family rental property in Jacksonville, Florida. I was hooked after I got my first quote unquote mailbox money, and have been growing ever since I've bought in Indianapolis, Memphis, St. Louis. And I'm up to six rental units of both single family rentals and small multifamily. Tom, you want to go next?

Tom Schneider

Yeah, so my name is Tom Schneider. I am the Director of Education here at Roofstock. I've like people who have worked at startups before, I've worn a lot of different hats. I previously worked as the lead product at one of the very first publicly traded single family rental REITs. At Roofstock. I initially was on the product side building out tools to manage transactions and appraisals, all that kind of stuff. Then I led the operations team for a while.

And the last year or so, I found this really interesting kind of gap within within the company, and that there's a lot of people who want to invest in real estate who just maybe don't quite feel comfortable, especially doing it remotely. Or you have people who you know, make the plunge and buy remotely and they're like, okay, what's next. So I left my operations post and started this basically little company within the company called Roofstock Academy and I've been doing it for about a year or so with Michael leading the coaching home and Emil and Pierre as well. So really, really fun. career journey and where we're at right now is the super fun.

I am a also an active real estate investor. I invest primarily in the southeast, as well as the Midwest. I am a California real estate broker as well. And I am in I've got roughly 10 or so, investment properties and all single family rentals. Michael, with that, I'll turn it over to you.

Michael:

Awesome. Thanks so much. So as I mentioned, my name is Michael Albaum. I'm the head coach with the rootstock Academy working with Tom. And so I started investing about 10 years ago, I used to work as a professional fire protection engineer in the commercial property insurance industry. And right about that time realized that that corporate job, the world wasn't going to get me where I wanted to go. So I started investing in real estate and doing all this kind of self education started with remote real estate in Southern California with a market I knew it was about six hours drive away from where I live, so some could call that local, but I call it remote.

And then I was traveling a lot for work throughout the Northwest us. And wherever I was traveling, I was constantly looking at the rental real estate market, because that's what real estate nerds do. And I found myself in a lot of really strong rental markets where the purchase prices were reasonable compared to what you could rent the properties for. So I was picking up properties all over the place and kind of left I felt like a bit of a slug leaving this trail of purchase properties in my wake. And it was a couple years ago that I got some advice that I was so spread out around the country with investments, it was pretty overwhelming.

So a good friend of mine says go get divert, go get laser focus on a particular market and go hammer it, watch what happens it'll blow your mind. And I said, Okay, that's kind of counterintuitive to everything. I thought I knew about investing in diversification. But that's what I've been doing the last couple years in the Midwest with medium sized multifamily value add properties. And so for anyone that might not be familiar with what that is, it's basically buying the junky as dirty as most beat up properties I can find for really cheap, putting a bunch of money into them, getting them repositioned, and either selling them sitting on the cash flow that they then produce or refinancing them and getting some of the equity back out as cash in my pocket. So we'll probably be talking about some of that during the episode today. But yeah, right now, I'm in the process of selling a couple units. But as it stands today, I think about 75 doors currently.

Emil:

Nice. So we started with we gradually went higher in terms of experiences. So that's our thought, well, the intros.

Alright, so on our show, we like to do these things we call showdowns where we take a hotly debated topic, and we argue both sides of the aisle. So things like single family versus multifamily, using a property manager or managing by yourself using or investing in your backyard versus investing remotely, things like that. So one host will take one side, the other hosts will will take the other side and one of us will play moderator to make sure too many haymakers aren't thrown throughout the process.

So in today's showdown, we're going to cover investing in real estate directly. So think about just buying a property holding title in your name, all that fun stuff, or going down the much more passive route of investing in a real estate investment trust, which most people know as a REITs.

So Tom is going to take REITs first and Michael will make the case for investing directly. And I will play moderator. And so after that, after Tom and Michael each make their case, Tom will get the final word so we'll let Tom go first. Michael will get his follow up and then Tom gets the final word. And then we'll switch sides and Michael will go first Tom go second and Michael will wrap it up. And so guys just remember don't throw all your all your haymakers at your punches in the first round because you got to save some pros and cons that we didn't talk about, in round one and round two.

Michael:

I just gotta say I feel a little it's like the underdog here. Tom,

Tom:

You should feel like the underdog Michael.

Michael:

Tom's worked in both the read space and the single family space. me just the single family space and multifamily space direct ownership side of things. So it'll be interesting. Tom, I hope you brought a towel to wipe, wipe yourself up.

Tom:

A good one real original Michael real original.

By the way, love these questions that are coming in, we are definitely looking at this someone had just asked, you know, someone ended up using their first home as an investment property. How do you calculate cash flow? Considering all the mortgage I've been paying along with repairs and upgrades?

You know, one of the things about real estate investing is there are a lot of different metrics that you can follow. And I think for this particular example, in talking about your your first home and calculating the investment, I think thinking about opportunity costs would be important. So you know, of the money that you could take out if you were to sell it like that should you should think of that kind of as the basis as the money that you're returning on it.

So a metric that I liked a lot. And I know Michael likes a lot as well. And I think everybody likes it a lot is this metric called is called a cash on cash return. And what that is, is that's looking at the money that you put into the house using that as the denominator. And the numerator, the top of this division formula would be your net operating income. I don't want to get too far into the weeds because we got an episode going right here. But that's a really great way to think about it is what is your net operating income. So your total money you're collecting minus any expenses minus your mortgage payments for the year and dividing that by the the what you've what you've paid for the property. So I don't want to get too much down into the weeds into this. But it's a really good question. I think that's the way a lot of people get started as turning the first home they purchased into a rental property. So…

Emil:

Nice. And I don't want to plug our show all the time. But there's an episode we did exactly on this it was called ignore the noise. Here's how to actually calculate projected cash flow. We walk through every single expense or line item that you should include as you're estimating cash flow. That's number 72. So if you're interested, we have an episode just on that.

Michael:

And then I would just want to take one more question here as well. Someone's asking how do you get into real estate if you have no experience? Which is a great question. I think it's something that a lot of people run into, without being to promoty it here. I'd say come check out Roofstock Academy. It's a really great place and we designed it for investors who are just starting out all the way up to those investors that are looking to scale their portfolio, or get involved in new asset classes, we've got a YouTube channel as well, which is totally free information. bigger pockets is another great place to check out totally free. If you need some additional help, I think Roofstock Academy is an awesome, awesome place to come get one on one coaching, and over 50 hours of lectures. And I don't even need to get into that right now. Just check out check out the website.

Tom:

I know, the questions are too much fun coming in. All right, I'm gonna just hit it real quick. So someone asked about investing from your Roth. So you can do what's called a self directed IRA. And there's several of these companies that can help facilitate them so you can invest out of your retirement fund be at your Roth or 401k. But it's a self directed IRA. And you know, there's a lot of different companies that facilitate that. I think we have a podcast episode that is specific to that. But if you search for that, like that's, it's it's really awesome, because a lot of people have a lot of money in their retirement account. And it's, it's not like your retirement account is completely limited to only investing in like equities and bonds, you can do alternative stuff, but it needs to be done through one of these Qualified Intermediary. Okay. All right. I'll take a pause on answering questions if we can get back to

Emil:

I want to answer one, two, there's a Okay, jump in jump in. These are great I want to make. So Alright, last one, what's the biggest mistake people make with an out of market versus in market rental? I thought this was a great question. So I want to tackle it, yeah.

This is this is just my opinion, I think the easiest trap to fall into is when you go to another market, you fall into the quote unquote, like spreadsheet trap, where you'll find areas within a market that they the numbers look amazing, but because you maybe don't live there, and you don't know what it actually looks like, you know, maybe a rougher neighborhood, the tenant quality may be low or things like that. So you're you're, you're going in neighborhoods where the yield could be better, but you're potentially getting a lot more headaches with it. You don't, that you don't know about without that local knowledge, which is why we always like to recommend build a team locally, talk to property managers, agents, other investors in those areas to learn that market. Since you're not living there. You're not like driving by all these areas all the time. So that's, that's my one tidbit where I think a lot of people go astray.

Michael:

I think, you know, all these questions are great. Please keep them coming. We will circle back and try to get to as many of them as we can throughout the episode. As we take natural pauses or if we have time at the end. We'll definitely come back. So keep them coming. These are all great.

Emil:

Alright, so it's showdown time, guys, Tom, you're gonna kick off reads, Michael, you're gonna get into direct investing. Guys. I want a nice clean fight. Nothing below the belt, keep it clean. Go to your sockets.

Michael:

He's talking to you, Tom.

Tom:

Oh, God. Yeah. Good. Good one, Michael.

Michael:

All right. All right. Let's, let's get this going.

Tom:

Okay, so I'm going to be advocating for owning indirectly. So this is where you are not taking direct title or you're not setting up an LLC that you own the LLC and buying. This is like investing in a REIT. And there's a couple of different flavors of this. So it's one common way is they call it syndications where you're like investing in a fund, what we're talking about here in this argument is specifically investing in a REIT, which is, you know, a publicly traded company that owns a whole bunch of properties, I'm going to tell you why this is the route to go owning indirectly. So one, you get automatic diversification. When you're buying in a rate, you're not just buying one property, you got ownership all across the southeast, in the Midwest, Florida, Atlanta, Texas, you know, a lot of these REITs have a similar composition of geographies, that professional like Wall Street investors have selected these companies that these do these acquisitions, they have great resources, and they're curating this wonderful portfolio to you for you to buy in, to automatically get diversification across these markets.

The other pro of going this route of owning indirectly is the time requirements. If I'm buying a REIT, Holy smokes, I just have to like click a button I can buy it if you're buying real estate, directly or through an LLC heaven to Betsy, that's, that's a good little time chunk to do that. You know, there's a lot of tailwinds on why people like to do that. But just thinking of it as strictly as a time consideration, you're spending quite a bit of time versus just clicking a button and you automatically own that.

Let's see the last point that I'll make before I let Michael crawl into the ring is the liquidity aspect, right. So one of the biggest challenges with owning real estate is you park your money and it takes a little bit of effort to get it out. And there's also a lot of question marks on like, what that you know, what you're going to be able to get out of it. I mean, I think we've gotten there's a lot of great technology that can help people estimate on what their property is worth, you know, Zillow, and all that kind of stuff. But ultimately, like the market speaks with the market speaks and when you exit there, it's going to take a little bit of time. Usually if someone's buying cash, we're talking like 14 days or 30 days financing. But it's going to take time and there's going to be a lot of unclarity of what that exit price is.

So Michael, I'm gonna let you come on in and do your thing. But that is my side of the showdown for investing indirectly in real estate, remote real estate.

Michael:

Tom, I really appreciate you giving me these gifts. But you know that it's not my birthday. I mean, this was really kind this really thoughtful.

Tom:

Good, good one.

Michael:

This is great. I love t ball. So this is great. I so appreciate these points. So I'm just going to respond to each one individually. And then I'll go on on my own rant. But so first of all talking about diversification, you have these Wall Street hedge fund managers, are they really taking your best interests at heart when they're choosing these properties? Are they looking to line their own pockets, and we get the scraps as the investors I'm not so sure that I'm not the best person to pick out hand pick and hand curate these properties for myself, based on my own personal risk tolerances and investment goals. So that's first and foremost, I would argue that I'm a better person to do that than at some Wall Street hedge fund manager.

The minimal time requirement. Yeah, I think that you're right, it is much easier to click a button. But I'm not sure how responsible that is, in the long run. And if somebody is learning wanting to learn how to invest in real estate, if they're looking at involved real estate as part of their portfolio, maybe they should learn the business inside and out. That way they can learn to feed themselves. Buying a read is like getting a fish. But investing directly is like learning how to fish. So I'm trying to eat for a lifetime man, I don't want just a one a one sushi dinner.

And then lastly, you mentioned the liquidity aspect of it. As we look at what's happening in the market today, I would argue that single family homes are becoming a much more liquid asset that are being bought, sold, valued and traded, almost like a commodity. So the fact that you see REITs buying these up by droves, almost as an indication that hey, this is now a commoditized asset class, which is pretty amazing. So I put my property on the market had to offer same day, and now I'm selling it inside of 30 days. If that's not liquid, I'm not sure what is.

But let me just kind of continue here, I want to make some additional points and give you you a chance to respond. So when I get to control every step of the process via direct ownership, when and how to purchase when to refi when to sell when to do upgrades, that is a massive, massive degree of control versus being in a read, you just get told what they did, you're getting told what the decisions were being made are and you get what you get, versus being able to be in the driver's seat.

Also, also, I think that leverage is a massive, massive piece of the pie here so I can control $100,000 worth of real estate for 20 grand in cash. How much could I get for 20 grand in cash, Tom?

Tom:

Quite a bit, get quite a bit lots of got a lot of shares there Michael.

Michael:

I would also say that the tax benefits of direct ownership far outperformed those of indirect ownership. So like we were saying in the beginning the episode, this is not tax advice. I'm not a tax expert, highly recommend speaking of tax professional before doing any real estate, anything real estate related, so that you understand the tax consequences. But I'm curious to know, can you do a 1031 exchange out of because when you go to sell those shares by guessing you're going to be hit with a pretty hefty tax bill versus me as a direct owner, I can take all of my proceeds and profits and roll those into another deal.

And then the last thing that I want to mention what happens Tom what a bunch of teenybopper short the REITs, like they did with game stock, but now it's called REIT stock. What are you going to do that?

Tom:

Boy, okay, all right. Oh, all right.

Emil:

Guys, remember we have around two So see, yeah, leave some punches for round two.

Tom:

Alright, I'll throw the throw them. Are you ready for rebuttal? Michael?

Michael:

Let's do it. I would love to,

Tom:

You know what you're doing when you add that property, direct ownership, you're buying yourself another job. And I think we're doing this for to become passively wealthy. So in buying a rate, you know, you're getting exposure to the asset class. And at the end of the day, it's a it's passive, you know, I think that remote real estate investing directly like can be passive, but it takes a little bit overhead on the front end, that when you buy it through a reap you don't have that overhead. It's you know, it's how quickly can you like click Buy on the stock exchange. So that will be my final point is the timing aspect.

Michael:

After that, nicely done.

Emil:

Back to your corners back to your corners. Well done. Well done lots of good stuff. There injury caught me cut me. There's definitely a lot left around too. So Michael, you are Now we're going to get the first word.

Tom:

Why don't we? Why don't we break up round two? There's a couple of questions that are kind of fun. So we have some more. Michael I think this is a good one for you.

I became an accidental landlord, twice, would you recommend creating an LLC? You go out and go? You go out and lead the way, Michael? And again, you know, this is not there's people who have had success in both different ways. This is not legal advice. This is just our personal opinions on and on that stuff. So go ahead, Michael lead the way.

Michael:

Yeah, totally. So it's a really good question. So there are really two camps. On the subject pro LLC, and no LLC, the pro LLC camp says it's great to segregate and silo your assets from everything else that no LLC camp says, Oh, just get high liability limit insurance, it'll be just as good. Who's right at the end of the day is only determined after a lawsuit. And by then it's too late. So I'm personally of the pro LLC camp. I like having things in silos and separate buckets so that people can't come after my personal assets, and vice versa.

So being a California resident, it's very expensive to have an LLC, it's $800 a year even if the LLC doesn't do anything, or own anything. So I would say, Look into what's involved with starting an LLC wherever you live, and also what's required in maintaining an LLC, since there's documents that likely have to be filed on some sort of regular frequency, and there might be some dues or taxes that are that are due. And then ultimately, you can decide at the end of the day, what makes the most sense.

I mean, you can go get an umbrella policy to sit on top of your dwelling liability limits for somewhere in the ballpark of $300 per million. So if you go get an umbrella policy for 600 bucks, that's get to 2 million in coverage that'll also sit over your homeowner's personal homeowners and your auto, you know, that might be a good solution if it's really expensive to have an LLC, where you live, it's having an LLC, where you live is practically free, you know, then it could be a good way to go. Just know that the LLC, there's some additional accounting overhead that's involved with owning an LLC. And depending on how you're going to be taxed and might be, it'll likely show up on your personal tax return. Again, depending on the type of the LLC and how you designate the taxation. So it can be a good thing. So definitely look into it, talk to a local attorney about again, what's involved with starting it and maintaining it. And then you have to decide what makes what might make the most sense for you.

Tom:

Yeah, you know, other considerations, if you're out in the process of buying or getting a loan, some lenders, like will not do conventional lendings to an LLC, like they wanted in your in the owner's name. So like some of those related processes could be a little bit more challenging with an LLC. But you know, again, there isn't like a major, like tax savings and like having an LLC, in fact, it's actually going to cost you more. It's not like you're getting extra tax benefits. But again, this is not tax advice, please talk to your tax in having an LLC, so I, you know, I personally have, you know, my, my name, and that's something you know, once you get over 10, you have to start doing private lending, so you might as well like, put it in LLC. So I think in just at two, like I'd say it's pretty common for people who have just two properties to not not have it in an LLC to have it in their name. But again, it's it's a it's a liability, kind of risk tolerance, kind of question.

Emil:

And also that point of lending, even if you already have loans on those properties, right. So even if you're not in the process of buying, but you actually own them, moving them into an LLC can like, have some ramifications. So you need to check with your lender before you do. Some lenders will say Oh, if it changes title, so if it goes from your name into the name of the LLC, you basically the the loan comes due and you have to pay the whole thing. So make sure if you have an existing loan in place on that property, you check with your lender before you make that move as well.

Tom:

Go ahead, Michael.

Michael:

I was gonna move questions, but go ahead, wrap it up.

Tom:

Yeah. I was gonna move questions, but I'll let you use you breathe in as the emotion you hit the buzzer first. So go ahead.

Michael:

About investing in the Roth. So from a kept we keep we keep harping on this, but not tax advice, not legal advice. So as I understand it, because of Roth is what's technically called a tax free growth account versus a tax deferred account. Any of the gains that you make inside a Roth, whether that's direct ownership and stock, bonds, real estate, any of the gains that you make, or profits that you make are tax free, so that when you go to access or make withdrawals from that fund, or from that account, they are not taxed. Same thing with real estate flipping. So I have been told and cautioned not to do this too often, because if the IRS sees you running a business inside of your Roth, I think they are frowning upon that. So plan is to do one to two a year to help boost some of the returns. But basically, I get to control the entire process. Well actually gonna take it back.

There's a lot of things that I can't do. There's a lot of red tape and specifics with regard to how the deal has to be done and what you can and can't do. Do so I physically can't do any work on the property, I can't, I can't, I don't believe I can personally manage the property. But again, it's a flip. So I'm buying a property, all cash, financing the flip all cash and then going to be selling the property hopefully for a significant gain, all of which proceeds will should and should be tax free, so that I can go do it either again, or then put those funds back into the stock market.

So in theory, it's a really, it's a really cool vehicle. I've heard a lot of people have a lot of success with it. And I'm very excited to be on this journey. So again, I'll have to keep everybody posted on how it goes assuming I end up purchasing the property that I have under contract.

Tom:

Nice, nice. Alright, Emil, you ready to start round two?

Emil:

Alright, so let's get start with round two. Michael, you're going to start by taking the side of reeds. Tom will get to go with direct investing. And then Michael, you get the final rebuttal.

Tom:

You're in trouble. Michael, go ahead. Go ahead. Go ahead.

Michael:

It's amazing that my birthday is gonna come twice in the same episode, I just, I'm really excited. So I'm gonna, I'm gonna try to not make the same points that Tom made. Because they weren't good points. Anyhow. So let me let me start by saying that I think that reads have access to capital A deals that I as an individual investor could never imagine, never have access to. And so simply, because of the economies of scale, they're getting more deals for cheaper and can also save on operational costs. So I as an individual investor, I'm likely never going to be even seeing the types of deals that they're doing. And I'm likely not going to be able to generate those kinds of returns for clicking a button for just putting my money into their deal. And sitting back and enjoying the benefits.

So in a REIT, I can also get extremely predictable returns, if you're owning a single home, and the HVAC goes out, which I promise you, if you're in this business long enough, it will, you have to replace it, that could be three to four to five years worth of cash flow on that particular house. So I personally, I really liked the regular distributions, I'll take my monthly quarter quarterly or annual distribution, check whatever the frequency is, and not lift a finger, I don't wanna have to worry about replacing roof shingles replacing the entire roof for the HVAC.

And then the other piece of this is I like the diversification that I can get with a read. If I own one house, and it becomes vacant, I'm 100% vacant. But if I own a read that owns multiple properties, if one goes vacant, I'm never even gonna know about it. So the diversification I get, I'm really able to spread the risk across multiple properties and not have to think about Oh, man, is my tenant not able to pay rent this month? What does that mean for me as the owner.

And then lastly, as an international investor, Reed's provide a much easier path to getting exposure into the real estate into the US real estate markets, I don't have to go through the process of getting a green card or getting approved for a loan or getting a bank account as a foreigner, I can just simply by the REITs and get the exposure to the markets without having to jump through all the hurdles. And being an international investor, I understand all the hurdles that one normally has to go through just to get a bank, a bank loan.

Tom, I know, I see you're kind of bloodied over there already. I'll let you let you kind of come in and just and share your piece.

Tom:

Okay, so this is what I'm talking about why owning direct is, you know, I agree with my first points I made was very relevant, you know, it is a little bit of a time overhead to do it. But once you do that initial overhead of time, there is no greater wealth creator than real estate. And I'm going to talk about a couple of those reasons and why it's so specific to direct ownership.

So Michael kind of sloppily trenched you know, like a, like a, like a pig walking through some beautiful flower bed he didn't really the highlight the the numbers so the tax advantages, so I'm gonna I'm gonna let you guys all know, I got an acronym for you to stay with us. It's the three Ds of real estate direct ownership, there is deductions. So right, all these costs that you you have, so you're paying your property manager, you're fixing the H fac, guess what, that's all a deduction, you can have a paper loss with real estate, even though you're like making money. So the first D deduction.

The second one deferral, right. So in owning the property every year you can you see me depreciation, I jumped ahead depreciation every year that they own the property, you can write, you know, write off this depreciation of the property over, you know, a certain number of years, so you're just taking more paper loss in third is this deferral so I can sell my property, move those proceeds to buy another property and not pay a red cent of taxes on moving out and it's crazy. It's like my wife and my wife's a tax attorney and she like blows your mind whenever she like looks over the advantages of real estate So the three DS is something that you can do with direct ownership that you're not going to be able to do with the REIT is incredible.

The other piece, so having worked at a publicly traded REITs, I remember following the stock price, and thinking to myself, like, This is nuts, like we are performing incredibly, like our vacancy is very low, our overhead is low, all this good stuff. But guess what the price did not reflect that. And I think there's something really frustrating about, you know, a butterfly in Korea, that can chaos theory can like, affect your stock price. I'm kind of like a piglet walking around in a in a rose garden right now. So a, you know, your stock price is there's so many things that are not related to the performance of the asset, with the publicly traded REIT versus your rental property where Guess what, if they pay rent on the first of the month, good news, your value just went up, you don't have to worry about these, you know, externalities that are just out of your control. It's straight direct performance.

You know, kind of related these bigger companies, there's a lot of overhead with them, there's paying that CEO that big salary, there's, you know, all the Sarbanes Oxley public company, yada, yada, yada, there's just a lot of costs that go into that. And by owning it directly, you strip all those costs, and you put them in your back pocket.

The last thing I'll say is in owning individually, in a you know, I can see this argument going either way, you also have the publicly traded REITs, they're basically a very similar composition, they have pretty much the same leverage at like roughly 50% of these other single family REITs, they all have pretty much the same footprint of like the same cities. So in buying individually, it's like using, you know, a shotgun versus a excuse, a sniper versus a shotgun and a violent comparison. But anyways, it's being very direct with what are the markets that you believe in, and you can be way more targeted in that process. And, and honestly, like, you know, like I said, it can be a little bit more time on the upfront, but it's really rewarding down the line in that you set up these systems and the mailbox money is real, and you're paid directly on the performance of the asset versus this, you know, investing indirectly in these in these public REITs. So, all right, go ahead. Go ahead, Michael.

Michael:

Tom, I think it's so comical that you think that you'll have access to better analysis tools than professional advisors.

Tom:

That’s why Roofstock was invented, Michael, that's why Roofstock was invented. So you know, bringing Wall Street to Main Street, go ahead. You know, what, if you said that five years ago, I'd say you're right, that is comical of me to say, but it's different now, Michael, different that.

Michael:

The Times have changed. I know. I know.

Tom:

Seriously?

Michael:

Yeah. But I'm sticking to my guns for round two here and that and then we'll circle back and, and convene. So I think that the analysis tools that these investors have professional investors have far outweigh that of the individual investor with you, and he can Google and have access to there's just no way we can compete. So that's first and foremost. Secondly, you know, I don't want to be worrying about my neighbor not mowing their lawn or keeping trash on their lawn, which is now going to drag the value of my property down, versus the stock market. When the stocks go up, man, we are, sky's the limit, man, we are screaming up there. So you know, the individual ownership, it just you're subject to what your neighbors are doing. And I think that that's too impactful versus the aggregate of being spread across multiple markets and numerous properties, you can spread that risk out, you can peanut butter spread that risk out across multiple properties.

So I just think it's kind of a no brainer, you know, I don't want a second job. You mentioned it so nicely in the first round. I want that mailbox money. And there's no way that going through the process of getting a mortgage finding a property manager checking in on the property manager possibly having to change the property manager like Emil is in the process of doing, getting insurance quotes that you're running through right now. Filing tax returns with the CPA making, checking on his tax returns the CPA. It's just it's craziness. It's madness. You know, what kind of world do we live in? Where if someone thinks they have time for that? I'm REITs all the way man.

Emil:

All right.

Tom:

That’s not true. That's ending with a lie of Michael a great way to end your argument only for the purposes of this show. But for the for the show for the.

Michael:

Absolutely.

Emil:

All right. You're done. You guys are done. I'm cutting both off. You guys can't see anymore. Your ears are swollen. Nice job, guys. There was a couple things I wrote down that I wanted to touch on that. For each side, I'll start with reads. I don't think anyone mentioned that there's less money to get started. So the reeds, you can go invest like 1000 or a couple you know, if you don't have the money to put a down payment on a single family home, or he could be a good way to get some real estate exposure for much, much cheaper.

Michael:

That was gonna be by knockout blow, but you called it too quickly Tom was already down,

Emil:

I want to hop in the ring too

Michael:

The ref is putting on gloves.

Emil:

Right? And then reads, um, I think it was kind of touched on it. But you have professional management like these people manage 1000s 10s of 1000s of homes, they know what they're doing, they have the scale to just have the most efficient, awesome processes to like to know this stuff. So I'd, I'd say they're, they're very professional. versus when you go direct, you're dealing with a property manager who maybe only has 100, or you're self managing and dealing with that nightmare.

Going back to the direct side, doing a cash out refi, you can't. So let's say your property value goes up your interest, interest rates go down, you can actually pull some of the equity out in that home, you still own the property, you're still making a profit each month, but now you just maybe got your original down payment back by doing a cash out refi. And you can go reinvest that elsewhere.

Tom:

Emil, I think you might have won this fight these points you're making are really, really good. So sorry, continue just stepping on the back right now.

Emil:

Thank you, Tom. Yeah. And then the last one is, is building equity. So with direct you, you get equity in a home, right? So yes, you guys mentioned the leverage benefit, right, you can buy $120,000 with a home for 25k, or whatever it may be. But then also you have a tenant. So you're making cash flow each month, hopefully, making profit each month. And then you're you're also having your tenant, pay your mortgage, and you're building equity in this home. Versus with a REIT you don't get that you kind of you, you put your money in and it's paying you a dividend out or whatever it is, each month or quarter, whatever it is. So otherwise, you guys nailed everything else.

Tom:

So we got a fun question that came in. What do you get? What do you guys think about tiny houses, and I love me a tiny house. So a great strategy that some investors use. Now, this isn't a remote strategy. But a great strategy some investors use to get going is the strategy called house hacking. And that is where you buy a property and you live in it. And either in the other room or the other unit or the other little tiny house, you make that a rental.

So it's a way that you are, you know, starting you are owning property, but you're also collecting that rents to either offset your mortgage, or just have a little, you know, extra cash on the side. So the tiny house is a great, you know, way to start generating some income. I think it should be done through the same financial rigor that you would do in evaluating buying like a different property. So looking at what those costs are and what kind of rents you would get. And, you know, establishing Okay, what is that cash on cash? Or what is that cap rate, or IRR? There's there's a ton of different metrics that people use. And I mentioned we we all really like cash on cash as a metric. I think IRR is fantastic to just thinking about total return.

So to final might make my final point on the tiny houses. Yeah, yeah, I think that that that strategy can make sense. Especially if you don't maybe don't feel comfortable and want to be right on top of your investment. I think the downside is you know, if there's whatever broken toilet, whatever that person is right there. One of the things I love about remote investing is I have professional property manager where there's anything wrong going on, I'm not answering phone calls, they're managing it, you know, I pay them a percentage of the rent they collect every month, but I'm okay paying for them that because they're making it like a very passive investment for me.

Michael:

I love this question two. And it's so timely, I'm actually in the midst of looking at a couple of deals to set up Tiny Homes on the property. So Bay Area, California is really expensive. And so my wife and I are looking to move. And so we're looking at property and looking at what the zoning requirements are for placing some of these tiny homes. And it's interesting because you can put them on a foundation and make them permanent, you can put them on a trailer make them non permanent Airbnb, long term rental, there's all kinds of regulations around how you have to do this. But I think that there are absolutely ways to go about doing it and make a significant profit.

There are multiple different styles of Tiny Homes to I've we just came across a company that's up in the Bay Area. That makes them out of containers, their container homes. So those are pretty cool. There's modular homes there stick built at us. So there's all different ways to slice that pie. But Tom, I think hit the nail on the head that you still want to evaluate it and see if it makes sense as a financial investment. And then also I would be looking at what the property value might jump to after the fact a lot of people like having a granny unit or additional 80 or whatever you want to call it. That could add some tremendous value to the property. So then combining a couple of these different strategies you go put in an ADU now you go get a refinance the property is worth more you can take some cash out it's kind of a combination of a burr house hack into

Tom:

There's a ton of tailwinds for Tiny Homes to just I think local areas are getting more friendly, like in wanting it to be a little bit more dense. And then also with the pandemic, like having, like an extra little office or something is, you know, quite a premium of, you know, having having that I feel like it's probably, you know, this is a little bit subjective and be commenting on it. But I feel like that has greatly increased the value I, I just had a no no parallel thing with me her turn just ended in like, wow, that would have been really nice to have a little extra little unit instead of just like, right in right in the grille of the house. But anyways, it was a good experience, though. AuPair but it would have been nice with a little in law or whatever. Granny tiny home.

Michael:

That's, that's a great plug for aupairs too. was great. It was great. Yeah.

Emil:

I just saw so funny. This question came up, I just fell into a YouTube black hole. And it was this guy who, I don't know if he builds them baizen whatever. But he has tiny homes across the country. He manages them all himself remotely. He has 10 across the country, Airbnb ism. So all short term rentals, and he's making like 2k a month on each one, like, just, he has 10 of them, he quit his job like he has he manages himself so he gets like a cleaning crew and a local handyman, a contractor and he just has all these Tiny Homes cross country if that was pretty cool.

Tom:

I just thought of a business idea. So you…

Michael:

own 10 Tiny Homes across country, right?

Tom:

Find like a big enough of a lot, right? And then you you do like a lease on the lot for like 30 years. You do it for free, but then they get the building after that time period. Right You follow me? So you so you you have whatever the 30 years of income you're generating there. There's got to be some clause in there at the property transfers, but I the tiny home Empire, the tiny home leasing, whatever the like, you know, whatever. How many square feet of land? Well, I think there's some, there's some

Michael:

there's definitely some there's definitely something there. Yeah, there's definitely something there. We'll have to do another episode about that. The remote real estate investor Tiny Home Empire,

Tom:

Tiny home Corner lot Empire.

Michael:

So I think we should also touch base Tom on kind of our personal thoughts about the battle, and personal views and opinions. So you know, and ending with a live for me, which is you totally caught me. I am a big, big, big proponent of invest of direct ownership. Everything I do, for the most part is direct ownership. I don't think I own, I might own a couple shares of a couple different reads. But it's a very, very small percentage of my portfolio. I just think that I think you mentioned it really nicely. The tailwinds of direct ownership are so massive when directly compared to indirect ownership and read that for me, it becomes a no brainer.

If you have the time, if you have the will, if you have the desire to learn the real estate investing business, I think that there's no better way to do it than indirect ownership, you might start out in a read and try to understand what's going on. But to be honest, from my experience, and Tom, you'll know better than me, but you're not. The REIT folks that people who are involved in the read are not holding the hands of their investors, showing them financial statements, profit and loss reports, they can see reports understood helping them understand how the business is run. Is that fair to say?

Tom:

Sure. Yeah. I mean, there's, there's good and bad ones, just like any other business, but you know, I guess you kind of continue on to it. It's like, you know, it's kind of like, it's, I think of it as like a little bit of a hobby as well, you know, of doing this type of remote investing. And yeah, there's a good quote out there you know, everyone should have three hobbies, one that makes them happy one makes them health healthy, and one that makes them rich, and like this very much fits in that kind of ladder category of hobbies to have and you know, like, like, like we've talked about, there's a little bit of work that you do upfront. And then sometimes as things come up either you're selling or whatnot. But it's it it's honestly like I it's really enjoyable. I don't know it's it's, it's fun. Yeah.

Emil:

Real Estate Investing kind of covers two of them for me personally like that. The happy in the wealthy, which is nice. Until you know, you have a pipe burst, and you're like, this is why I do this. What am I doing? But then you have enough of those urges, like you know, it's a home. things break, you fix them, you move on, it's all good. Yep, the first couple that hurt, they hurt a lot.

Michael:

Well, it's one of those things that unless you know what to expect it, it sucks even more. So if you go into this eyes wide open. We talked about in the academy all the time. It's so important to go get educated what you know where you do, that doesn't really matter. But just make sure that you go get educated by people that understand what they're talking about. So you go into this investment eyes wide open. Because the last thing that I want to hear and I hate hearing about it is somebody buying a single family home thinking it's like a REIT, thinking that their experience is going to be like that of a read, especially with a lot of these turnkey providers. Oh, it's so easy.

There's still stuff that has to get done. So again, go get educated. Go ask questions, go learn about what's involved with owning and operating single family rentals or rental real estate for that matter, so that you're not surprised or you're less surprised rather because, again, you're going to be surprised if you're in this business long enough. I can promise you that. So you just want to understand what are the risks? What are the pros, what are the cons? Okay, great. Let's Let's do it. I know there's going to be surprises and I was gonna be speed bumps. I'm okay with that. You know, then then direct ownership is probably for you.

Pierre

Alright, everyone, that was episode. Thanks so much for listening. If you liked the podcast, make sure to subscribe and leave us a comment that helps us out a lot. And also go check out the Roofstock channel on YouTube. We post all of our episodes there along with a bunch of other content from the Roofstock team. Thanks so much for listening. Happy investing.

3 Effective Fund Flow Systems For Continual Growth Jun 12, 2021

Managing your money upfront is a smart way to make sure you are hitting your financial targets. In this episode, Tom, Michael, and Emil share their strategies for managing money as it comes in, to efficiently allocate it to their investment projects and work towards financial freedom.

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Transcript

Emil:

Hey everybody. Welcome back for another episode of the remote real estate investor. My name is Emil Shour, and my co hosts today are the lovely,

Tom:

Tom Schneider

Michael:

And Michael Albaum.

Emil:

And on today's episode, we're going to be doing a little bit of personal finance. And particularly, we're going to be talking about how we set up our systems and bank accounts and everything to set us up for investing. So money comes in, where do we put it? How do we make sure somebody gets allocated for investing? All the nuts and bolts and juicy details? So let's hop into this one.

What amazing thing happened to you guys this past weekend?

Michael:

Easy question. With an easy answer. I celebrated my two year wedding anniversary. This weekend. That was a lovely thing to do. My wife took me to a very fun little resort. It was very COVID safe. We had a room to ourselves and enjoy the pool and did like nothing. So we were able to just sit and relax and be and get a little bit sunburned.

Tom:

You're in North North California right now not not overly north, but at least north of San Francisco.

Michael:

Right. We're just north just north of you guys.

Tom:

Congratulations, by the way.

Michael:

Thanks, man. This was over in Glen Ellen which is outside of Santa Rosa. And it was really secluded, really quiet. It was just really a nice weekend to get a little bit of r&r because my wife and I always joke that we don't ever stop. So we will sit down for a day of relaxing be like yeah, I'm bored. Time to do something. So this weekend, we really force ourselves to really just sit and be and read and relax. And it was lovely. So that was definitely my highlight. What about you Tom?

Tom:

I have a one and a half year old and we go on campus tours. So we go tour the local elementary schools and we went on a lovely campus tour over the weekend. So it was really big. I don't remember elementary schools being that big it was it was a particularly big one. It was one called Burn Valley over in Lafayette. But it was really nice. There was a little league practice we scouted out future potential teams. So just a lot of a lot of scouting. I really want to live by an elementary school like for like weekends like play games and stuff. It's like the giant backyard of like, you know, basketball hoops big grass fields. Anyways.

Michael:

That's really great for like Ultimate Frisbee games in college I lived across an elementary across your elementary school we play frisbee there all the time playing the baseball diamond. It's lovely.

Tom:

Totally I think there was some random you know, college kids or whatever bringing what's that game or you like hit the ball into the net and it like bounces up and anyways there was some folks that…

Michael:

Spike ball.

Tom:

Spike ball yeah, it was a big spike ball game going on. So that was my campus tours with with baby. So we're on our way through the of the elementary schools, yourself Emil?

Emil:

So last week was my birthday.

Michael:

Happy belated.

Emil:

Thanks, guys. And so that the family together on Sunday, just immediate family, my wife's parents, my parents, my brother, had a nice lunch, we hung out, they got to hang out with our daughter just a good time, I also got to go surfing that morning. It was like a nice warm day. So even though the water still a little bit cold in Southern California, was warm out. So it's like this nice balance. And just a nice weekend. Anytime I can get out to surf.

Michael;

You don't know a cold water is man.

Emil:

I know. Let's get back to talking about personal finance. How do we set up our money? How do we allocate it? So let's just start with like money comes in right? Money comes in every month. What do you do with it? Do you have an automated system? Are you manually moving money into like different accounts? Are you putting it in? In a Swedish account? What are you guys doing? Tom, you You go first.

Tom:

So money comes in all do some 401 k stuff right off the bat coming in from the employer, then money goes into a personal checking account. There are three checking accounts that I have. One of them is for the rentals. One of them is for a joint account. So money comes in from work funds, all immediately move most of it over into the joint account for mortgage for any all of that like life, expensive stuff, but I'll leave a little bit, I will also move a little bit of money that I will save upfront into an index fund, which is where I basically store like liquid funds for buying more real estate.

So that's that that's that account and then within the other checking account that I have, that's for rentals, I'll have payment going out to pay whatever mortgages there are for those rental properties and then rental income coming in from the rental properties. And then I'll also send a little bit of that dough into that same index fund. So I try to keep that balance as low as possible without any risk of it going to zero. And this is actually a newer strategy for me where I used to just leave it all in cash, but I'm being pretty aggressive about leaving as little amount as money in in a cash position and just pushing it into like a big safe index fund.

And I just started doing this I might have mentioned on an earlier episode is just adding like a little bit of money into just like little slivers of Bitcoin, it's more just kind of peace of mind where I was like, really like, man, I feel like I could have like, been a part of this a little bit earlier. But taking a small amount every month amount that I like, wouldn't be like overly upset if it just, you know, got cut in half or whatever, if Bitcoin imploded, but as a little bit of a hedge against inflation just to take out, you know, a small participation.

So to reiterate, paraphrase, have these three different accounts money coming in from employer, pushing it into joint account, pushing it into this savings account, or just me index fund. And then rental funds coming in and doing kind of a similar maneuver where I'm adding a little bit into that index fund. And then at the point at which I'm ready to acquire, I'll move money out of the index fund back into that cash account, that checking account associated with the rental properties, and then do my acquisition from there. So kind of a longer spiel, I don't think it's overly complicated.

Emil:

Is that automated or are you like manually moving all the money in like choosing the index fund and all that?

Tom:

I've got it 90% automated, so I work, my brokerage account is an online account that I wish that I would automatically, like put the buy in like just for the dollar amount like, but I have to manually push the buy, I can move the money automatically. And I have it totally automated from the bank accounts to move it over to the various bank accounts and into my brokerage account. But to actually buy the index fund, I have to like manually go in and click Buy. And it's kind of annoying. I mean, it's it's like not that much work. But I just love the idea of if I just, you know, disappeared for a year like it just all be running automatically. I love that concept. They have a product where they'll do that, but it's only with like certain mutual funds, and I don't really want to put my money in a mutual fund to, you know, pay that extra overhead of that manager that's managing the mutual fund, it's very close to being fully automated. The only piece that's not is that final buy, also have a fun flow sheet. So we're all see money. This is a tool we have with a category Academy, as well, just so I have all my different accounts. And I could just because I want to keep that cash balance, like obviously not being negative, but keep it relatively low. So you know, all do little shifts in the automatic amount that it's pulling just so it's like keeping pretty close to zero. But it's Yeah, like I said, like 95% automate, it's just that last little purchase of the clicking the buy on the stock. So I'll do manually.

Michael:

So Tom, that's the checking account associated with the rental properties and you try to keep as close to zero as possible.

Tom:

Pretty much all of them except for the joint account is I'm I'm being pretty aggressive about moving any of that loose, loose change loose dollars into this index fund.

Michael:

Okay, so then your reserve for your rentals is in this index fund as well.

Tom:

That's right, yeah. And I'll be extra aggressive about like, if, for whatever reason, the index fund like took a huge hit, like all the extra aggressive and keeping larger reserves. But I think the upside of just continuing to flow with the market is that risk is worth it to me to take on that little extra risk by having it in there. And this is actually from I don't know, I think that I'm not sure the episode have been released yet. But we had a really cool author…

Michael:

$7 millionaire yep.

Tom:

Dude! And honestly, that interview that we did with him, like kind of changed my life way actually, I know that it just came out because my wife was just come out, giving us some feedback on how to how to continue to make the podcast better. Because she she told me about the episode, and she thought it was good as as well. But it honestly kind of changed my life and being way more aggressive about you know, pushing money into into the index fund, especially just at the age you are I mean, so much of is relative to that on how aggressive you want to be is looking at your time horizon. So, yes, I think I answered your question.

Michael:

Totally answered the question. I've got a follow up question. So the checking account that your paycheck comes into, that then gets moved, basically gets zero balanced out every month? What's the purpose of that account?

Tom:

I mean, that's a good question. So like I could just have a joint account with my wife but not have a separate personal account. What we do is you know, we each have our own personal account and then a joint account where we will put a lot of most of the money and I mean, this is like different for probably every couple. I think it's I think we like having a little bit of discretionary fund whatever I save some money out there want to buy a guitar because I can do that or you know, like stuff like that. I think that's healthy to have that balances and if you're able to do that, like great. We have a joint credit card and then we each have individual separate credit cards, but I mean the vast majority All my expenses is going into this, this joint account that we use.

Michael:

Got it. Okay, so it's not totally zeroed out, you still keep some money in there?

Tom:;

Exactly.

Michael:

Got it. Got it got it. Okay.

Tom:

Exactly, I just like to highlight, I mean, I try to keep it above like 1000 bucks in there just or, you know, 500 or something like that.

Emil:

Before we get into mine a little bit later, I'm have the old mindset that you used to have, like, I sit on so much cash and don't invest it because it's short term. I'd love for you to challenge me on that thinking in school me a little later.

Tom:

So for sure.

Emil:

Alright, Michael, you’re up.

Michael:

My wife and I have a joint checking account. That's where all of the income earned income from jobs goes. And then we've sat down and did a pretty extensive overhaul of our finances where money coming in from where is it going out to. And so we put together a pretty firm, fun flow kind of like Tom was talking about. And so every single month, we have automatic withdrawals from our checking account that goes to an external savings account. And from that external savings account is basically where everything happens.

So we have money that goes to a separate savings account, rather, that pays specifically life insurance, we have funds that go from that joint checking account every single month automatically goes to an investment brokerage account. And, Tom, that's really unfortunate that you don't have an automatic investing function with your brokerage account, we do.

So every single month, there's a bi actually is every single week. So I dollar cost average throughout the month, every single week, X amount of dollars gets purchased of a set index fund indefinitely. So we have money that goes to that. And we broke it down basically, for us between our fixed expenses, expenses that never change throughout the month. So that's the mortgage on our personal, you know, pet insurance, life insurance, car insurance, all these things are fixed, homogeneous costs that are the same month in and month out. And then we've broken down, okay, what are our variable costs, so groceries, gas, this type of thing, entertainment eating out, and then everything else we've said is going into savings. And so we have automatically every single month getting with you actually, it's it's like four or five times a month, withdrawals from our joint checking account that go towards this savings account.

And so we've opted to do is keep a small balance in that checking account. And we pay our credit cards from our savings account. And so we really feel it, when we pay it is, hey, we are now taking this money that we've saved from ourselves, and it's now going out the window to our spending, we have all the fixed expenses on automatic payments, so we don't have to do a whole lot of manual stuff. And then at the end of the month, we'll do a reconciliation, if we made more money than we thought we were going to our made less money than we thought we were going to we need to adjust things, we'll do that. But we sit down every week and kind of go over what the expenses are and track how we're doing for the month based on our budget projections for that particular month in all the categories in our variable expenses. And we just do check it and see Hey, how are we doing? How are you benchmarking compared to how we want it to be? How much do we have left in the month to spend. And it's been really, really helpful, it's helped us save quite a lot of money since we started doing it about four or five months ago.

And so I'm you know, I'm kind of like you, we save a lot of cash. So we've got money going to the investment brokerage side of things, but we're also looking at buying a primary here in probably the next six to seven months or so. So we are just stockpiling as much cash as we can to in order to be able to do that, while also still investing, you know, I probably want to automate my Roth IRA contributions. I don't invest to a self directed IRA only to my Roth. And so I've done that in a lump sum the past two years, but I'm thinking that maybe I should change that to a more of a drip, drip style investment, and automate that.

Tom:

Michael, do you use any tools, I mean, besides some of the lovely Roofstock Academy, like fund flow spreadsheet templates to use, like mint, or betterment, or any of those type tools, when you guys do your reconciliation?

Michael:

we do it all manually. Part of the reason we opted to do that we thought about using mint, and I'd signed up for men a couple years ago, but I have some trouble linking all of my accounts. And I'm just kind of like a personal technology. pessimists that I'm worried that if my main account ever got hacked, well, everything is tied to that account. Now those all those passwords are one place. So we often use Capital One credit card, so we just go through every single line item that we spent for that week. And we do everything on the credit card.

So we just talked about, okay, what was this? And then we allocate it to add specific category and see, okay, how are we doing? And I like that better just because it really requires us to have touch points with all of our expenses, as opposed to it being automatically done. We're really to see like, okay, you know, that expense, maybe not necessary it next time, or we can have a really open and honest conversation about it as opposed to being tallied and completions like, Oh, you spent 200 bucks in this category. I personally, we personally want to know what each of those expenses were that That made up to 200 bucks.

Tom:

I dig it. I dig it, Michael, very dialed.

Michael:

Thanks, man I talked about a lot in the coaching sessions to like, a lot of people, when they're looking at their expenses when they're evaluating investment properties, we'll say, Okay, my expenses are 600 bucks, and my mortgage is 1200. So you know, I'm cash flowing, whatever, that $600 figure doesn't tell me anything. It doesn't allow you to do any kind of work on on making improvements, all you know is the result. But if you don't know, like, what's the recipe is like us talking about the sausage, like if all you see is the sausage, well, I don't know how to manipulate the recipe to be more in line with what I want it to be because I don't even know what the ingredients are. So this really allows us to become very pinpointed and precise and surgical about cutting out certain things, because we can see what's eating up the biggest expense. Well, we went to Target it's been $300. Why did we really need to? So it's, it's been really, really, really helpful.

Tom:

What's, what's your biggest leak? What's your biggest leaker? If you had to think about the last six months? Like oh, man, I'm leaking money, Where? Where? Where's that hole? And just curious,

Michael:

it's, it's such a catch 22 it's like, our grocery bill is through the roof. And it's just the two of us, just my wife and I. And so I'm looking at that number

Tom:

Healthy, like fresh foods expensive, man. It's, it's like a, I think, yeah,

Michael:

It's such a good point. Like, I remember when we, when we were first dating, we always joked that we used to eat all of our meals out because it was so fun. And that kind of thing. And then when we got married, we started cooking a lot more, which has been just equally as fun. And then the pandemics we've been eating a ton more at home. And it's like, well, yeah, duh, because now we're eating three to four meals a day at home, of course, our grocery bill is going to go up.

And so you know, that's where I say probably our biggest expenses. Other than that is like, just like miscellaneous stuff that you don't think about, you know, 20 bucks here, 20 bucks there. And you realize they add them up, like, Oh, well, we spent $200. On, you know, junk that we didn't really need.

The counterpoint to that I'll say is that I read this book. And they were talking about, you know, really focus your energy and efforts on the on the big stuff. And the big stuff is you're typically going to be for most people, your housing costs, and your transportation costs. Next, I think is like eating out or food, I think, for most people, so if it's not like one of those three, like, who cares. And I'm so fortunate that I'm at a point in my life, where we can spend $200 a month on stupid stuff, things that kind of make us happy in the moment. And so cutting out those $200 isn't going to radically change our lifestyle, again, I'm so fortunate to be able to be in a position to say that, and that's not the case for everybody. So that's probably our biggest leak, but also during the day, like, it's just not that big a deal. Thankfully.

Emil:

I used to, I got in this mode for a very long time where I'm like, so serious about investing and like cutting our expenses and everything that like, every expense just became a Oh, I could have invested that and earn X percent on my money. And you just start to think like, Okay, if I saved $100 this month, you do that over the year, it's 1200 bucks. That's not nothing, but it's not. It's not a big life changing win you know what I mean? And it's like,

Michael:

But over 50 years is 7%. That's $2 million.

Emil:

Exactly. But like, come on, come on, like, at what price being? Yeah, you're being a robot. And just like, I don't know, I think there's a certain point where it just gets it gets a little crazy.

Tom:

Yeah, I think every year, you got to give yourself a little more grace. It's like, you know, I'm not I'm not 20 years old right now. There, it's reasonable to have some like, pleasantries. I mean, I think it's still good to be, you know, discipline, actually, my biggest piece of advice would be, you know, if you're going to get something, like get something nicer, if that makes sense. Like,

Michael:

It'll last long.

Tom:

Exactly. Yeah. I mean, and my wife had this good point, you know, where she used to buy all these, like, less expensive shoes. And then she got a one pair of nice shoes. And it's like, the old shoes would like kind of cycle through cuz they'd fall apart and they'd be good. But when she got, you know, spent a little bit more got, like a nice pair of shoes. Like it was like really exciting to put them on and, you know, they just last better quality, all that good stuff. So if you're going to go, go, go big. Go big, big.

Michael:

Yeah. And, and the other thing is like, a meal cuz I'm right there with you, man. I am like an investor through and through and thinking about all those expenses, is it It hurts, but also how much time energy and effort and attention Are you giving to those little things, when you could be you know, spending that time energy effort focus on something else, and you can make 400 bucks. And so that's you have negative, you know, doesn't doesn't really mean anything. Personal Finance is personal, right? So you make a decision that maybe is the right one for you, or for Tom or, you know, for anybody out there listening. So don't feel like you have to do or not do any of the things that we're talking about or use any of these strategies. Totally. You just gotta figure what works for you.

Emil:

I was gonna say I'm a big fan of roommates at I will teach you to be rich, and he's really harped on there's only so much you can save which is so true. But your earning potential, starting a business, getting a side hustle, whatever, earning more at your job, like Those things truly have no limit. And so just like you said, What if you put more of your energy into those things and growing your income potential versus just focused on a bunch of smaller expenses.

Tom:

I love that I just that, you know, I love the phrase Pennywise pound foolish, I think a lot of people can kind of get mixed up with that that's such a good point about looking at Excel, there's expensives, and there's revenue, right? It's focusing on the revenue side, way more upside to it,

Emil:

I'm gonna try to get as granular as I can with mine without getting like, into the specific numbers. Also, I had a recent life change where I've become self employed, but I'm going to talk about and like, I'm restarting, like, how I do everything, as I'm like, figuring out my business, how much money is coming in those sorts of things.

I'm gonna, I'm gonna rewind time three months to being w two full time employment, how did we kind of manage our money. So my wife's a part time nurse, she has a 403 B, and her company does like a match, right? And so she, she maximizes that I did a small amount of 401k, there was no match. So I didn't really maximize it. So most of it was just like, taking income.

Money comes in my wife and I had a pretty solid idea of like, our monthly expenses, like how you know, our mortgage, and then credit cards within like, $500 plus or minus a month, kind of like, you know, you were mentioning, Michael, there's just always that little bit of just buying random stuff. So we knew each month, like what is our just baseline cost of living, and so that anything above that as we earn more and more, would just go into these separate savings accounts we have.

So we had an account specifically for investing. And so this is all through Capital One, right? Money comes into my chase checking account. And then I have automatic deductions, every time money came in, we just we did it twice a month, we did it middle of the month, end of the month, just doing these automatic deductions into savings accounts. So one was an investing account. One is a travel fund. My wife and I like to travel. So we like to set aside some money versus like, just to have and be like, this is our travel fund, whatever we want to do and do fun stuff with it, we have money set aside. So it's not like you know, you just have one big pool of money, and how much do you want to pull from it, it's like, dedicated to this thing that we really enjoy doing.

And then it's basically just an emergency fund that we're trying to build up. I'm really glad we did that. Because about a year ago, we had to replace our h back and that was like 6000 bucks. So just pull it straight from the emergency fund didn't have to like stress or sweat about it's like that's what we have this fun for. So a little bit into that each month as well until it gets to a certain level.

And so with those, it was like as we earn more money, it's just like, let's, what are the things we care about, most of it would go into investing, right like, like the travel Fund, the emergency fund, I knew how much we wanted to put into those each month. So it wasn't like I felt like we needed to go faster there. So more money came in, it would just go to investing.

The last thing I also did so even while I was working full time, I did some consulting on the side. And so that's self employment income. And so when that income came in, half of it would go to investing the other half, I would put in a separate, like taxes savings account so that when tax time came, I didn't get hit with like some massive Bill and I wasn't prepared for it. I like to set aside that money rather than going and scrambling to find it later.

The only other thing Oh, so Okay, with the rental properties, all of our cash flow each month goes into a checking account dedicated to our real estate, we don't touch a penny of that there's a certain reserve level I like to keep at the amount of properties we have right now, which is about 10-12k is what we're I'm comfortable kind of just having a reserve account given we have like six units. So anything above that I see is just kind of like going into the investing account as well. I won't always move it unless it gets to like 20k Plus, will I move it straight into that investing savings account I mentioned but yeah, a lot of it.

So this is what I was alluding to earlier Tom, I like that you've gotten aggressive my my hesitation has always just been like, I like to keep it in cash just because if it's short term, I'm always concerned like what if there's a small market correction in the short term and then you know, what if I'm playing against myself and you know, or we just lose some money and that always kind of scares me and so I keep it in cash.

Tom:

I'd say like if you're planning to retire like kind of soon Yeah, that makes sense to keep it in cash but like I think you're gonna have a motor on like wanting like really enjoying work and being good and good at it and like planning to do it for a while. So I think that you know, riding out the bumps. And again, like this is this is not investing or whatever tax advice but but I think you could be more aggressive about just kind of putting it in with the market and like, not some like aggressive strategy where like you're picking specific stocks and, you know, day trading, but just in some safe, safes the wrong word just in some big ETF that, you know, has low fees associated with it. And I could, you know, we could talk about some of those after that are pretty tried and true.

But I think for your reserves account, like, man, I think you can cut that number into a third, because it's not like it's going to like zero out to nothing. And over time, like, I think you're going to ride through all those waves, like even some of these, like massive market corrections that we've had in recent history, like they've rebounded back to higher where they've been before. Now, that's kind of with the cost of debt, like so cheap, like that makes a big impact on the stock market, like helping it out as well. And it seems unrealistically they that that is going to be changed in the near future as they're kind of building back our economy.

So I mean, I feel comfortable. And even if there is some like adjustment, like it's been, you know, fairly unless there's like a total chaotic Cataclysm that is that, like, the economy, like completely, completely fails, like, I would bet against that. And then also, I have my Bitcoin to hedge against that. So if that does happen, the digital currency, but I think you're being too aggressive in your cash position. And this this light bulb clicked for me recently.

Emil:

Too conservative.

Tom:

Yeah, too conservative to your cash position, yeah. I think you can cut it down to tears. But anyways,

Michael:

I think to just to kind of piggyback off Tom's point, and coming from a perspective of someone who's trying to be cash heavy as well. We had our a good buddy of mine on the podcast, Zach Breverman, who's a certified financial planner, and he was talking about, you know, what is the timeline in which you'll need those dollars? If it truly is short term in the investing term, or short term is, you know, in a couple of years, yeah, maybe you do want to keep that in cash, if you see if you have a plan for those dollars, but if you know, it's two years plus maybe, is probably where I'd feel comfortable. Yeah, I think Tom is on the money, you throw it into the stock market and ride ride the ups and the downs.

So I guess, you know, what, when you say the investing account, what is what does that mean? Is that for stock investing? Is that exclusively for real estate investing?

Emil:

Yeah, it's pure? Well, it was purely for real estate. Now. Now, I'm starting to look at it as other investments as well, not. Not in equities or the market, but like, business investments, like, Can I, you know, what I do I help websites generate traffic, like, Can I buy a website or build a website that generates traffic, and then I can monetize it?

So like, something that you know, I do for a living for companies? What if I just started doing that for myself and growing my own businesses? So that's kind of how my mind has shifted on this investing? Can I use a purely be real estate? But now I'm like, Well, what about starting a business? And like investing money there? Again, you know, like businesses, everyone who's read Rich Dad, Poor Dad, businesses are like amazing cash generators, if you do them right. So yeah, that's kind of what I'm looking at the investing account for as well now.

Michael:

So. So you know, how fast or how much you're able to grow that account based on your cash injections on a monthly basis, annual basis, right? Because it's the same amount every single month, roughly.

Emil:

It was, like I was mentioning, now that I'm self employed, I've like stopped all the automatic saving stuff, like just trying to make sure money's coming in consistently. Businesses, it's a little bit like, so I have my LLC, and it set up as an S Corp. And so I'm an employee of the business, the way it works is like, I'm going to be paid as an employee of the business. And then the rest of the money that stays in the business is taxed differently. So it's like, I'm gonna take less of a salary than I would but then I get to like use the money that's leftover in the business is like a deduction or dividend or something like that. But so this first year, as I kind of figure that out, and see how it plays out, you know, like, what is the percentage? I'm kind of just leaving it in the business for now, instead of doing automatic stuff, as I figure everything out.

Michael:

Okay, well, then I don't have anything to say to you. What I was, what I was gonna say is like, you know, at what rate you're funding it, and you know, probably where you want that balance to be, so that you can kind of reverse engineer work backwards into, Yeah, I'll be there in two years, or I'll be there in six months, or I'll be there in five years, and that'll help you determine, okay, do I keep this in cash, or do I invest it in Tom's Bitcoin?

Emil:

Right. Tom coin.

Michael:

Tom coin.

Emil:

Yeah, I used to I would invest in that coin.

Tom:

Schneid coin.

Emil:

Well, what is it, Bitcloud where you can basically invest in people? And like both brands very interesting idea. I used to be like, okay, I knew exactly how much was going in our investing account every single month. So you can extrapolate it to a year and then say, Okay, how many years until I have the funds? I need to go by my next plan investment?

Um, follow up question, what percentage of your income every month right post x, would you say is going towards investing? What is that goal you guys are currently hitting or trying to get to or whatever?

Tom:

So with, you know, your roughly 10% to 12% of dayjob going into going into 401k 401k. Right away. And I'll probably put another 15% or so, going into this index fund, that is going to be, you know, use later for either buying websites with Emil to make money with that, or to buying real estate, it's basically just kind of the general purgatory for alternative investments. And then like a half of a percent for my little digital currency investments, or a quarter of a percent, a very small amount, but enough that I can feel okay. So that's roughly 25. Go ahead, Michael.

Michael:

So I probably got 21st cent going into the equities market. And then we try to save 30 to 40% in cash savings, and then the rest is his spend. So I don't know if that answers your question specifically, but like, we have money going into that brokerage account, I mean, I also have cash flow coming in from the real estate side of things, which stays on the real estate side of things, because everything's owned and LLCs. So that's, I kind of treat that similarly to Tom, where I have everything going into the respective accounts. And that kind of gets left alone. Now, granted, I'm in the middle of some redevelopment projects and some rehab. So a lot of that cash flow is being spent. So it's not really accumulating by any measure of the word, and I'm actually having to dump more money in a construction loan.

So it's tougher to quantify because there's a lot of ins and outs. So that's a bit tougher to quantify. But I'm hopeful that once that's done, those holes will be plugged so to speak. And then we'll be filling those buckets up with water. So there'll be additional cash flow that I will be using, from the rental properties to then purchase additional rental properties, and so on on a percentage income basis, that will likely go up. Because there's there's less money going out the door.

Tom:

Are you feeding more money into the real estate?

Michael:

Yeah, so I was for a while I was self I was funding a bunch of rehabs like with personal funds, because I took on some some massive projects. And then so I have money that's dedicated for my my massive, massive redevelopment project via a construction loan that did need some personal funds injected to especially when I was dealing with the insurance claims there was zero money coming in a lot of money being expended because of the construction. But the construction getting totally set thrown off course, because of the the fires. So the bank wasn't getting the money to then pay the folks that were doing the work. So that was a real stress inducer for a while. But now things have kind of gotten back on track, there's insurance money, there's some Yeah, just basically have more money back on track to pay for those things.

So now, it's at a point where I'm not funding my real estate, from my personal funds. We're just saving those exclusively for cash for the personal primary residence purchase. And then savings and personal investments.

Emil:

Very nice. So about my math is right, like 40 50% or maybe even 50% less going towards investing and cash for investing. You could say?

Michael:

Yeah, 60% or so is either going direct towards personal investments or cash savings.

Emil:

Dang, goals right there.

Michael:

Yeah, it's taken a long time to get to that point.

Emil:

I'm looking at mine, mine is ours was about so if you're including, like, my wife putting in her 403 B, probably somewhere in the 40 to 45% range in terms of actual investing or going cash, going into a savings account that then gets used to buy different investments.

Michael:

Nice, man, that's awesome.

Emil:

Yeah, I was actually surprised when I did them. I did the math on this a couple months ago and I'm pulling up my spreadsheet just to see like where we're at. Oh, yeah. happy with that. Definitely happy with that.

And then like you mentioned real estate that doesn't like real estate just comes into its own account. I'm not even including that But like any cash flow gets reinvested there. So that probably adds to that number a little bit as well.

Emil:

Alright guys, that was fun. Glad we did that. peeling back the onion. Seeing how we are spend our money save it. Tom I'm glad you challenged me I think I learned that I need to go put some reserve money in the market because that just sits there and does nothing and if I really needed I can go pull it out and you know, whatever fix some stuff but at least he gets the ride the market hopefully over a long period of time. Alright, everybody thanks for joining us for another episode. Hope you guys got a lot of value out of it. I learned some stuff. Michael learned some stuff. Tom, you learned some stuff?

Tom:

Oh yeah, definitely.

Emil:

Alright everybody. We will catch you on next week's episode. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

What Gives Better Returns, Cash or Leverage? Well, That Depends... Jun 10, 2021

All-cash or debt? The answer to this depends on what return metrics you are looking for and the specifics of the property being considered.

In this video, Michael shows you exactly how to analyze a property and establish what financing strategy works best for different deals.

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Transcript

Michael:

Hey, everybody, welcome to the remote real estate investor. My name is Michael Albaum and today I'm joined by

Tom:

Tom Schneider.

Emil:

Emil Shour.

Michael:

And on today's episode, we're going to be talking about some of the different ways to evaluate properties and determine whether or not it makes sense to purchase them with debt or with all cash. So let's get into it.

Alright guys, so Pierre and I were chatting last night, and we were doing some evaluation on different types of properties. And what we were noticing is that some properties are better purchased with debt, and others all cash, have you come across the same thing?

Emil:

I have, when you, you actually pointed that out? When we were I think doing some type of video, like how to analyze a property, and we're looking at different properties. And that came up where I didn't even realize that that was a thing, really. But you're right, in that some properties, the cash on cash, debt won't always juice the cash on cash return.

Tom:

Yeah, I mean, just the return profile can can shift quite a bit with leverage leverage. So you know, obviously, increasing your loan to value ratio is going to would be a like, more aggressive thing to do. So if there's like changes in the value of the home, you know, by having a you know, by getting as much debt as possible, there's, you know, risk of the value of the home getting to the other side, which would be like, deemed underwater.

And then on the actual yield side. You know, depending on how much cash flow you want to make in a month, if you're using all cash to buy, you're going to have much more cash flow, but it's, you know, obviously, a higher upfront costs, gosh, I don't like him using the word obviously, all the time. It's a good good feedback from from Pierre because…

Michael:

It's not obvious Tom.

Tom:

It's not obvious. So anyways, it's a different return profile. And it depends on your risk tolerance, and where you are in your kind of time horizon of if you're planning to, you know, need to live off the cash flow, or all that kind of good stuff. So go ahead, Michael.

Michael:

Depending on your strategy for investing is often going to dictate what types of properties you want to be looking at, and then also how you want to be purchasing those properties. So for anybody listening to this podcast, we're actually going to be doing on the doing a screen share here in a minute, and showing some visuals about how I go through the property analysis section, and determine whether or not this property is best fit for an all cash purchase, or a finance purchase.

So for those of you listening at home, or listening on the road, or not watching the YouTube version of this, the list price is 75,000. The current rent on it is $975 a month. And what I'm gonna be doing is walking through just how to evaluate this property, but also how to look at some of the different ways to purchase the property.

And what I mean by that is Tom, Emil, and I could all be looking the exact same property. And depending on how we purchased it, Tom could use all debt, Emil could use 50% financing, and I could use 20, or rather 80% financing with a 20% down payment, the performance of that exact same property with the same income and expenses could look vastly different for the three of us.

And so what I'm gonna do is I'm going to scroll down the page and click on financials. And then I'm going to start playing around with some of the assumptions here. And the first thing I like to do is put the down payment up to 100%, which is significant, or rather indicative of an all cash purchase. And for those of you following just listening to this, what our metrics look like now is we have an a cap rate of 9.6, a cash on cash return of 8.6 and a monthly cash flow of $545 a month. And again, all I did was change the downpayment to be reflective of an all cash purchase again at a $75,000 purchase price with a monthly rent of 975.

So next what I'm going to do is whip the downpayment slider bar all the way down to 20%. And I'm going to kick our loan interest rate up to four and a half percent. Because based on the time of this recording, I think that's fairly reasonable for investment property for somebody with good credit. So now what we see is a cash on cash of 17.3% and a monthly cash flow of $241.

So now what I want to start doing is playing with the downpayment slider bar, as well as the loan interest rate slider bar. And based on my personal experience, what I've seen in the past is that there are loan interest rate breaks at every five percents of additional downpayment that you add, so if we slider down payments slider bar up to 25%. Let's drop our loan interest rate down to 4%.

And what we see is our cash on cash is actually down at 16.2%. But our monthly cash flow went up to 276. So what we just saw is that we lost a little bit in terms of our metric in terms of how hard each dollar is working for us. But we generated additional dollars in terms of cash flow. And that makes sense because we took on less debt because we put a bigger down payment, which means we have a smaller mortgage payment, which means we have more free and clear cash flow coming to us each and every month.

But what might seem counterintuitive, is if you're maximizing or looking to maximize your cash on cash return as a metric, here is an instance we're actually taking a higher interest rate gets us better performance.

So again, what I did is I reduced the downpayment back to its 20%, I kicked our loan interest rate up to four and a half, and our cash on cash was 17.3, monthly cash flow to 41. Then I bring our downpayment back up to 25%, I dropped our loan interest rate to 4%. And our cash on cash is 16.2, monthly cash flow of 276. So we lost a good 1.1% in terms of our cash on cash metric, and we gained about $35 a month in terms of cash flow.

Let's do that again. And kick our downpayment up to 30%. And this time, we'll drop our loan interest rate only a quarter percent down to three and three quarters. And now we're down to 15% cash on cash, but our monthly cash flow is up at $302. So again, here's another instance, where actually lowering the interest rate that we have on this loan, decreases our return metric, in terms of cash on cash.

Now, it's really, really important to understand this because it's not uniform across every single property, we can't say that, hey, if I get a lower interest rate, that'll actually hurt my cash on cash return, often that'll help us. But based on this particular property criteria, again, the purchase price, the income and expenses, which we haven't touched by the way, all we're doing is changing the structuring of the financing. That's what have what's what's having these massive impact on the property's performance.

Now, let's take another example. Let's kick our downpayment back down at 20%. Let's put our loan interest rate back up at four and a half. But let's change the purchase price of the property. And let's make it about $100,000. Now, again, I haven't changed anything else about the property haven't changed the the income haven't changed the expenses, all I've changed is the purchase price. And I want to see if I can't get this property to demonstrate kind of unique phenomenon.

So again, purchase price of 100,600, monthly rent of 975. And by the way, for anybody listening or watching that says there aren't 1% properties out there. Here's a prime example. It's listed for I think 75,000 rent at 975. That's almost like what a 1.2 1.3% property.

So let's get back to business here. So if we increase our purchase price 100 100,600 our downpayment down at 20%, our cash on cash is 9.3%, with a monthly cash flow of 174. Now if I put my downpayment up at 100%, again, signifying an all cash purchase, let's see what happens. Our cash on cash drops to 6.8%. But our monthly cash flow jumps up to 582.

So again, we're seeing a bit of that inverse relationship here, we are sacrificing in terms of the percentage cash on cash return, but we are generating additional dollars in terms of actual cash flow. So what I'm gonna do is same exercises before, I'm gonna drop my down payment all the way down to 20%, which takes us back to 9.3% cash on cash and 174 in terms of cash flow. And I'm going to incrementally ratchet up the downpayment. So now we're at 25%, and I'm going to drop our loan interest rate accordingly to 4%.

Now, our cash on cash jumps to 9.7%, and our monthly cash flow jumps up to 221. So here is actually the opposite example of the prior example, in the prior example, when it was listed at 75,000, and we dropped our interest rate down to 4%. But increase your down payment to 25%. We actually had a reduction in our cash on cash return, but an increase in monthly cash flow. Here we have both an increase in monthly cash flow and an increase in our cash on cash return.

So let's do that again. Let's kick this up to 30% in terms of our down payment, and we'll drop our loan interest rate to three and three quarters. Now our cash on cash is down at 9.5. And our monthly cash flow is up at 255. So again, this example when we increase the downpayment but decrease the loan interest rate, which we would think would help us get a better return. We are actually getting a lesser return in terms of cash on cash, we went down from 9.7 to 9.5%. But our monthly cash flow went up and again that's because we are taking on less debt, which means we have a smaller mortgage payment.

So if you were trying To optimize this property for performance with regards to cash on cash return as your metric, you would actually be better served, putting a lower down payment on the property and paying a higher interest rate, which is very counterintuitive. Oftentimes, we think, oh, lower interest rate, that's the best way to go. Not always. So again, this is to demonstrate that it's important to evaluate the property on its specific merits, and evaluate each and every property as an individual, it's really difficult to make blanket statements to say, Oh, this type of interest rate with this kind of debt is going to be better or worse than this.

So again, based on this property specific income and expenses, and based on the purchase price that we've given it 100,600, we can manipulate the down payment and interest rate in such a way to force the property to behave and to perform in a way that's in line with our buy boxes.

And by the way, if anybody listening to this are familiar with the buy boxes, we talk about it all the time in the Rooftock Academy, but it's basically a parameter or set of parameters or a framework to work within, that helps identify what makes a great investment property for you versus what just noise. And so whether you're part of the Roofstock Academy, I encourage you to make one if you're not part of the Academy, definitely encourage us to make a buy box as well, it's really important to get very clear on what your goals are.

Because, again, Tom, Emil, and I could all be looking the exact same property. And if Tom buys it with cash, Emil with 50% financing, and I use 20% down, we're gonna have vastly different performances. And thus, it could meet Tom's by box, and it could be outside of Emil, and mine, or vice versa. So again, the debt structuring is hyper critical. And this is a really great way to play around with some different scenarios and determine what's possible, what's feasible, and what might work well, for you.

Tom:

Awesome. Love it.

Emil:

Yeah, great. I remember you show this to me months ago, it was like a year, year and a half ago, I had no idea that like certain certain property prices and stuff like you, you can actually go negative or in the wrong direction with your cash on cash or yield by putting more debt on the property, which I always thought, you know, more debt, better yield, but not always true.

Tom:

What I liked about this exercise is sometimes you have a certain amount of capital that you want to deploy, right, it seems like a lot of you are probably looking for more capital, you need more capital, but sometimes, like I have, you know, I'm just gonna make up a number I have $50,000 that I want to spend that I want to get to work. And, you know, if you if you don't need to use that extra debt, and you're still getting that same cash on cash return whatnot, this is a great exercise to you know, model out, you know, deploying exactly how much money you want to you know, at these pro forma returns.

So, I got a good one. So, complex is used to to refer to the level of components in a system. If a problem is complex, it means it has many components. Complexity does not evoke difficulty, on the other hand, complicated refers to a higher level of difficulty. So, this kind of exercise is complex, right? There's various components into it, that we're moving these variables to get the kind of return that we want. But it's not complicated. It's not, you know, brain surgery. It's not flying to the moon or something, you know. Anyways, love it. Great exercise, Michael.

Michael:

Yeah. Well, the other thing to remember, too, is the complicated part. There's only two variables, it's it's down payment and interest rate. The end once you once you get to that point, you've already done the hard stuff, you've already figured out what the income and expenses look like, on that property. So now you're just figuring out well, how much money do I put down? And what kind of interest rate can I get on it?

So I love that complex versus complicated. That's, that's great. But I encourage everybody to do this exercise on any property, you're interested in investing, and even on those that you're not because what you're gonna see is the different levers that you pull and how they affect one another. So play around with different properties, different downpayment, different interest rates, see what kind of returns you're able to create. Because I think that's the big the big thing that separates Great Investors from good investors is those Great Investors are able to create and generate their own returns, independent of what others say they can or cannot do.

Alright guys, shall we'll get out of here?

Tom:

Yeah this is a good one.

Emil:

Yeah.

Tom:

Great One.

Michael:

Awesome. Well, thanks, everybody for tuning in. Whether y ou watch it or listen to it, hopefully this was helpful. If you liked the episode, feel free to give us a rating and review wherever you listen to your podcasts. Those are really, really helpful for us. And, as always, if you want to hear about something on an episode, or have a topic idea, feel free to leave us a comment and we look forward to seeing the next one. Happy investing.

Tom:

Happy Investing

Emil:

Happy Investing

2 Tips On Intelligently Navigating the Current Real Estate Market Jun 05, 2021

As you may have noticed, the market is crazy right now, and knowing what to do can be a challenge. Today we give a couple of quick tips on how you can make the most out of the current state of the real estate environment.

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Transcription

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider,

Emil:

And Emil Shour

Michael:

And today we're gonna be tackling what should you be doing right now given the current state of the market with interest rates, where they are and values doing what they're doing.

Alright guys, before we get into it, I just want to give a call out to all of our listeners, all of our watchers, we just launched our YouTube channel, we would love, love, love. If you came over and liked and subscribed to the channel, we've got tons of new content coming out regularly, I want to make sure everyone stays up to date. So that's a big help for us.

And as always, if there are content ideas that you want to hear an episode about, let us know drop us a line in the comment section. Wherever it is listen to your podcast. Alright guys, before we jump in today's episode, where are we at? How are things coming? Tom, you got your insurance all squared away, right?

Tom:

Yes, yeah. So what I did recently was a long story short, I guess short story long. My insurance is a bit of a mess on my rental properties. I was using this third party company and they kind of dropped the ball where I paid to renew but they like sent me a refund. I mean, this I'm probably it's probably my fault. But anyways, short story long, I ended up getting lender placed insurance for like a few months. And wouldn't lender place insurance. It's not necessarily what you want, you're maybe not getting the coverage you want, you're probably paying way more than you should. So what I did through the the prodding and poking of a meal and Michael to keep me going is I did some bundling, I went to my home insurance, the company that does my house and my cars. And I added my rental properties all on on one gigantic policy, I would say you know, when it's all said and done, my costs on my insurance are probably pretty comparable to what they were but the coverages was way more expansive, with a little bit lower deductibles and just a little more, those blankets at night are a little bit warmer, the pillows a little bit softer of comfortable.

So did that finishing up refining, seeing a couple of rentals, getting them all refinance, actually under the same lender that ended up buying a bunch of my other loans. So it's there's some convenience there of having it all through the same lender first a bunch of the rentals that I have. So that's my…

Michael:

Nice, Emil, what's good in your world?

Emil:

Tom, I just want to first say how proud I am of you that you did it, man. like six months, but you did it to there.

Tom:

Yeah. There are things in this world that you know, like wouldn't take a lot of effort. But for whatever reason, it was in this like rebellious little part of you, like just doesn't want to do it. And like the moment you do it, it's like, gosh, why did I do that like a long time ago. And that kind of stuff like pops up all over the place? You just need to get through the fog and just, you know, just do I don't know. But thank you. No, thank you that positive reinforcement has me geared up to continue to do things that I for whatever reason, like the rebelliously like have a hard time finishing through on so thanks, man.

Michael:

Yeah, Tom. I'm also proud of you. Nice work, man.

Tom:

Michael, that sounds fake. Thanks, Emil.

Michael:

Just kidding.

Emil:

I'm actually proud of you. Michael is patronizing you.

Michael:

I'm just frustrated how long it took. But I'm one of those people, you know, you can only take the horse to water not calling you a horse by any means.

Tom:

It's about the journey, Michael. It's not about the station. Enjoy. That's true. It's very true. Yeah, that's true. Alright, Emil, what's what's going on with you?

Emil:

For me? I told Mike about this earlier. So I bought a triplex last November. And when I got all the seller documents when we're doing due diligence, I noticed that the property tax was super low on the property. And I actually knew the seller of the property. And I contacted and I was like, hey, how come your tax property taxes were so low on this property? He said he had no idea why but obviously he wasn't going to complain or anything. And I figured, okay, property is going to be sold, changing hands, the city is going to reassess and it's going to bring my my property tax level much higher.

So when I when I underwrote the property did all the performance stuff. I wrote it at a much higher tax level. And so about a month ago, I got this statement from the city of St. Louis, saying, hey, it's a reassessment year, I think St. Louis reassessed his property values every other year and changes property tax accordingly. He said, it's a reassessment year, we're reassessing your property and we'll let you know of any property tax changes soon. And so I'm like, okay, here it comes. And I get I get the reassessment letter about a week ago expecting the bill to come in higher, it ended up going Up by $10. And I had underwrote it for it going up like price. 16 1700 bucks. So that was a huge win. And I'm so stoked. And I don't know why they're doing this, but I'm obviously not gonna complain. And thank you city of St. Louis. I hope you're not listening and know my property address. But thank you.

Michael:

Massive win.

Emil:

Yeah, yeah, I'll take it. I'll take anyone I can get right now.

Michael:

Yeah, it's it's you being lucky. But also, like, the cool thing is that you underwrote and assume that it was gonna be worse, and the property still worked. So now the fact that you got this is just a total cherry on top. And granted, it's a pretty massive cherry. But it's, it's something extra, it's I mean, you weren't expecting. And so you know, good for you, man. That's awesome.

Emil:

Here's the other thing, though, I find it's rebalancing everything else because I have properties and in other places where they also reassess, and they're doing it correctly. So my property tax bill has been missing all year. So I needed a break elsewhere. So happy about that.

Michael:

Good. That the universe giveth and the universe taketh.

Emil:

Michael, what's, what's going on? I'm sure nothing for you.

Michael:

My backgrounds a little bit different today, I'm actually in my van that we had converted. So it's my wife, my dog, and I. So we're up in Lassen National Forest for a couple days hanging out up here and driving around, we're going up to Idaho, Montana, Wyoming. So doing the whole remote real estate investing from from a van is is interesting, for sure. So I've got 16 under contract to sell, which is exciting. It's getting inspected today. So I'll be curious to see what the buyer has, in terms of feedback. I have the the IRA flip is currently underway, which is exciting.

So construction started last week, hopefully three to four week time for construction, and then getting at least up and then sold as an investment property. And then looking to get a another flip as well under contract out in the Midwest, but just on the personal side of things, my wife and I want to kind of team up and do something there. So that'll be kind of an experiment for us to see what that process looks like and how, how well she can, she can tackle that. So we're really excited.

Tom:

Have you guys done deals together before or you know, it, or she kind of over into the space or

Michael:

She's newer into the space. But she's been involved from, from pretty early on since we started dating. And I told her kind of what my portfolio look like as we're getting closer to marriage. And I was a little ambivalent on how I wanted to have that conversation and broach the subject. So for anybody listening out there that's in a similar situation, you know, take my advice, or don't I think, you know, I easier into it and explain kind of what my situation look like. And she was very excited about that. And has always been a big proponent, and a great ideas person throughout the whole process.

Because for me, I get so in my head and I get so tunnel visioned, especially with regard to problems. And so I remember she asked me one time like, Oh, well, I was in a money crunch. I'm like, I don't know, where I'm gonna find the funds to do this. She's like, what about the HELOC you have over here, I was like, holy crap, you're a genius. So when you give people the full picture, they can better they can better assist. So it's been really great. But so this will be kind of her first deal that she's going to be partnering on and really looking to drive the ship, so to speak, because she's talking about leaving her job to do this full time. So we're gonna make sure get a proof of concept going and then see if we can make that happen.

Tom:

That's awesome. I think in a future episode, that's it, I think it'd be a good thing to kind of drill in because with a lot of people in doing this type of investment, like it's, you know, you have a you have a life partner you have, you know, whatever, a wife, girlfriend, husband, you know, boyfriend, whatever, who, you know, those kind of you need to get a little bit of mindshare before moving forward. And it'd be interesting to talk to you guys about your experiences with that and Michael, you're you've fully crossed the cause the chasm and in bringing her in, you know, full, full hug. That's, that's very cool.

Michael:

So we're excited to start that and see what that looks like. But we didn't come here to talk about ourselves. We came here to talk about what people should be doing right now given the market conditions with values and interest rates. And Tom you kind of touched on it nicely, I think ever so innocently in that you are finishing up your refinances. So talk to us about why you're doing that right now.

Tom:

Yeah. So for you know, fortunate enough to have properties in areas that is appreciated quite a bit. And right now the rent is appreciated along with the value so what I'm doing right now with three different properties is doing a cash out refi they've you know, from the time that I bought them to where they're at now it's they're up roughly, probably close to 50% five zero.

So you know, getting my original downpayment back into my pocket to redeploy how however I see fit, and right now working on the side with Michael On on talking about, you know, the right ways to think about that either continuing to build into SF SFR, or possibly some multifamily.

So yeah, really excited about that hopefully I can close within this month and have the funds there. And man with just interest rates where they're at, it's, you know, if you have the built in equity, there's there is not a reason not to take advantage of it, it's probably cumulatively maybe five to 10 hours worth of time of getting your documents sending them over, if you don't have a lender vetting the different lenders. But I think of it this way, either the rates are either going to go up, or they're going to go down and by refinancing. Now, if they go down, I could always just refinance later, but by refinancing now, if they go up, great, I've taken advantage of that, you know, where I see right now, the bottom of the trough of where interest rates are at so highly recommended, you know, you have that the ability to do that, to take advantage of that for the refinance. So that's what I'm doing right now.

Michael:

Love it. Love it. You said something that I want to dig a little bit deeper on, you said that both the actually said a couple things I want to dig deeper on. But first, you said that the properties have appreciated, and that also that the rent has gone up over time. But throughout that whole conversation, you didn't say anything about the rent. So why is that important to you?

Tom:

That's important for me, because, you know, another another way to say like, I want to dig deeper that I don't know, I just thought of it. Let's double click on that. Okay, so

Michael:

I like that a lot.

Tom:

What's it like office speak? You know, like synergy? Yes.

Michael:

Tech tech office speak. That's good, man. Yeah, let's, let's double click on this. Let's expand the window.

Tom:

Let's expand the window. Yeah. So with rent increasing, so this is important. So within a rental property, when you refinance, you're getting a bigger loan, so you're having bigger monthly debt obligation to pay that loan. So what you could do, and this is something our friend Michael Zuber would would highly advise against, you could create an alligator, an alligator is when the rent, the value of the rent that you're collecting is less than your monthly costs. So it's cash flowing negative. And alligator is just a term that Michael Zuber came up with, like it's it's eating up cash flow, the importance of the rent staying up is if I go and refinance this property, I want to make sure that it's cash flowing, that it's not like going negative.

Michael Zuber admitted, you know, early in his career, he created a couple of alligators, just to get the capital to move faster. And that's something that I think you just need to be really cautious about. But my point is that Michael double clicked on is, since the rent was able to kind of pace up a little bit, I could comfortably refinance a larger loan, take that cash out, and still with the rent that's coming in, be able to pay off that larger loan.

Michael:

Awesome. Awesome. And so did you take a hit in terms of your cash flow on that property, barring the cash on cash return metric, but let's say you were bringing home 200 bucks a month, or whatever the number was, are you did you take a hit there?

Tom:

Yeah, I expect to take home, you know, pro forma. And it should be pretty accurate. Just because it's been operating for a while, is my monthly cash flow is going to go from roughly 300 bucks down to 200 bucks. But I'm, I'm okay, I'm okay with that drop, just with the capital that I'm taking off. Now, I think the right way to think about this, Michael is, you know, think about it cumulatively as a portfolio. So, you know, with this capital that I'm taking out, it's going to create new cash flows, it will probably also create new new debt, because I'll get a loan with this new property, but the net cumulative cash flow, should I expect it to be a little bit higher, if not equal? more cash flow?

Michael:

So would you then disagree with Michael's Zuber’s alligator warning?

Tom:

If we were in like a like a coaching session right now with rich Academy, I would say it's pretty dependent on where you are, and when you're trying to like access those funds. So a common investing philosophy is the later the closer you are to retirement, the more conservative you should be with those returns.

So I plan to work for a while I enjoy working, you know, so I'll have you know, cash flow coming in from, you know, a day to day job, so I'm okay being a little bit riskier, on leverage, you know, I still want to be really cognizant that I can cover my bills for whatever. But if you are in a position where you were looking to retire really soon, I would say you know, that alligator is pretty is risky. Just because over time, sure, there's, there's there there might be ups and downs with the economy but generally speaking, it's it tends to go up into the right, Especially over longer periods of time. So with that said, creating a property that is looking a little bit alligator ish, maybe like a capybara or like a crocodile. Cadbury's like a big guinea pig.

Michael:

I think it's like a big guinea pig.

Tom:

If we're younger, you should be okay taking a little bit more risk. But that doesn't mean like go nuts. You should still be really intentional about your about the risk profile and your ability to manage it. But we can work closer to crocodile. Well, I really just expanded that longer than it needs to be my today's

Michael:

You double click the crap out of that.

Yom:

I right clicked, clicked on Get Info. And then I like looked at how many bits it was so. Yeah.

Michael:

That's great. All right. That's awesome. Tom, thanks. Thanks for sharing that man. A meal. Anything to add on to what Tom said in terms of what people should be doing right now. I know you just went through a cash out refi as well. Can you talk to us about why that made sense for you. Given the current conditions.

Emil:

I am trying to save up a little bit more money right now I'm I'm in cash conservation mode to God and buy something a little bit bigger. But I don't want to hold all my activity, right, right now, some awesome things are happening. If you own real estate, right? It sucks. If you don't, because prices are going up. It's a very competitive market. But if you own real estate, it's awesome. Right now, values are going up rates are super low.

And so I think we did it on a past episode. But I'll go through the numbers, I have a situation very similar to Tom. So I bought a single family home back in 2017. The purchase price is 115k. My down payment and closing costs were just shy of 25k. And the rate back then was 4.625. And so I noticed that, you know, like everywhere in the country prices were going up homes in the area, were selling for about 140 to 160k. So I did the math, and I reached out to a lender and rates were 3.125. So drop a point and a half.

So I had two options. I was like okay, I can just refi and lower my monthly payment. Or I can do a cash out refi pull out all my equity. And because the rate is dropping by a point and a half, my monthly cash flow shouldn't be affected too bad. And so all said and done went through the process. We refied out that 3.125%, the home appraised at 157. So 40k more than we bought it. So I was able to pull out 26k, which is actually 1000 bucks more than what we put into it. So pull all the cash out a little bit on top as well. And my monthly payment only went up $29 a month. And this property cash flows decently. So I knew that $29 wasn't going to affect it wasn't going to turn into an alligator.

I am on the Michael Zuber side of that one I will I rather be more conservative, even if you say oh, I can go negative on this one house by $100. But I can increase my cash flow $200 by buying another property. I am very reluctant to to have a property where I'm just shelling out money every month that just pains me and I I'd rather not have that. I'm a little more conservative on that end.

But yeah, this one was like a no brainer. It's like okay, I'm still gonna be cashflow positive. rents have been going up in that area. Why not pull all the cash out and refight a low rate. So yeah, pretty awesome environment. If you own property, like Don't, don't let this amazing time, go to waste, go refi some properties, if even if you're buying, whether you're not buying whatever, just like it's such an amazing time to go make some moves right now on your existing portfolio.

Tom:

We'll also add in it's like it's it's not impossible to buy right now. Like, you know, we had this in another episode, I think it might take a little bit more offers and a little bit more time and a little more diligence, but it's not impossible to buy right now. Just

Emil:

Yeah, I hope I wasn't making it sound like impossible. I just mean, you know, it's it's a tougher environment, you could be a little frustrated. But for me personally, I'm just trying to save up some money to go. If I had the cash that I need to go buy something I'd be going out and making offers right now I'm just trying to save up a little more. Just saying you know, there's there's other things you can be doing, even if you're not buying right now, like you talked about, like with your insurance and your refiling properties pulling cash out. So just keep it moving, you know,

Tom:

Awesome Emil. Great, great points. And man, what a good run of luck with your property taxes and for rates doing that refi and only just having that marginal increase. Awesome.

Alright, this is a good spot to end it. Thank you guys for listening. We encourage you again to check out our YouTube channel. Lots of good stuff going in there. encourage you to check out, subscribe to the podcast, give us a rating wherever you listen to podcast and also check out RoofstockAcademy.com that's where you can sync with us talk about your profile or show me your strategy, all that good stuff. So, as always happy investing.

Emil:

Happy investing.

3 Reasons Why You Should Walk Away From A Deal Jun 01, 2021

As an investor, it's important to remove emotions from the deal-making process. Knowing when to walk away from a deal is an important skill to have to be able to scale your portfolio effectively. In this episode, we give you 3 reasons to stop negotiations to save yourself from future headaches - even if it means absorbing sunk costs.

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Transcripts

Emil:

Hey everybody, welcome back to another episode of The Remote Real Estate Investor. My name is Emil Shour and my co hosts today are,

Tom:

Tom Schneider

Michael:

and Michael Albaum.

Emil:

And in today's episode we're going to be talking about deals that we've walked away from. So we've gotten into contract on a property but something came up during inspections or during escrow and we decided to walk away from the deal so we're gonna review what happened, the lessons learned and some insights that you can take away and use in your deals. So let's get into this episode.

Alright guys what's going on anything new in your personal real estate investing careers?

Tom:

Yeah, I'll go first. So not a lot on the investing front just quite a bit of home renovation stuff so working on the homestead but you know, still using some of the fun mechanics or fun tools of the real estate investing trade like pulling money with a HELOC, but right now more just investing in myself investing in my personal house working on a kitchen remodel and some structural foundation stuff and busy on that front not a lot of the remote investing side right now.

Michael:

What are you doing on the structural foundation stuff that sounds heavy?

Tom;

Yeah, right. This is like one of my like, pieces of advice I give to people in the academy is like you know, stay away from foundation stuff, you know, it's a big red flag. Well fortunately, I am family friends with a concrete contractor, really reputable guy in the local area that I live in. So I just one of the corners of the houses started sinking a little bit I live in the hills, suburbs around San Francisco and one of the corner of the house dropped like two inches down. So when I'm like kicking a soccer ball with my son, you know, the ball just starts running down to the corner of the house and it's kind of thinking this is kind of an issue and we're planning to stay here for a little bit longer. So let's address that stuff.

So it's crazy they did these like 1415 foot holes in the ground to get to the bedrock and they fill it with concrete jack the house up a little bit left the house up a little bit and they are in the process of pouring the concrete into these gigantic holes that are the new piers that will be supporting the house.

Emil:

I've never seen this process and this videos

Tom:

Yeah, I mean just like you think of like piers you know, we're like going over a lake like these long metal you know, whatever piers it's like the same thing with the house they did they just jacket right into the bedrock like I was thinking they were gonna have to do all these like retaining walls and stuff like that along the side of the hill, but nope, just piers, giant holes in the ground, filling them up and jacking the house up. Yeah, I'll share some some videos in the show notes.

Michael:

You should put a time capsule into the concrete so that way, when in 150 years, when it's to race, someone will find it.

Tom:

That's a great idea. There's probably some time right now.

Michael:

Yeah. So my friends were remodeling their bathroom and they took out down to the studs, and they found a beer can from 19 like 52. With that someone had put in the stud in the wall. I was like, Oh, you guys gotta leave something from 2020 now.

Tom:

Yeah. I love it. Love it. Love it. Love it. So that's what I'm doing not real estate related, or investment related. I'm going to pass the hot potato off Emil. Go ahead. What's going on?

Emil:

What is going on with me, I think I've been talking about property management changes. Luckily, those are both done. So in the property, new property manager as of last week, same with St. Louis. So very happy to have those behind us now. And in terms of acquisition, as you guys know, I recently started a business. So I'm on hiatus for buying right now just trying to save money and get on stable footing with the business before I go out and buy new stuff. So right now I'm on pause, just trying to get the business going.

Tom:

Keeping me on the hot seat. So in starting a new business as a sole proprietor, very cool. Your ability to get traditional loans has probably changed a little bit or the requirements and what they're asking for Why don't you talk us through a little bit about that you're kind of plan coming, coming out of a W two job into this sole proprietorship and getting to the other side. So I'd love to hear your your thoughts on going through the process.

Emil:

Yeah, it was actually the timing was good, because I had a cash out refi that I needed to finish before. Like, if anything happens, like changes in your employment during a refi, it can basically cancel the refi. So for anyone listening, if you're thinking about making a major, either switching jobs, going self employed, whatever it is, like, Wait till you do your refi or whatever to make that move. Just quick note.

So for me, I knew that yes, going out on my own, basically, conventional lending, they want two years of employment or two years of business history, so or business income. So right now, if I go out and try to get a conventional loan, they're basically not going to give me one because I just started a business, I have one month of income, not enough to show they want to see two years of, of tax returns under whatever you're doing either employment or self employment. So conventional financing has gone out the door, my wife might be able to do it instead of me.

So I've been getting all my loans in my name, maybe we can transfer it to my wife. But it actually segues fine, because I've been wanting to move into buying commercial multifamily. So five plus units where you don't get conventional lending anyway. So I don't think it should be too big of an issue, since they're looking at the property more than myself.

Tom:

Yeah, makes sense.

Michael:

It just makes it tough to buy non performing properties with commercial lending, right? Because if it's not performing, they're not gonna want a loan on it. So doing any kind of value add is is tough from that position

Emil:

Really?

Michael:

Well. Yeah. Because they're gonna underwrite the property's value based on its performance. And so if you want to add value to it, you know, it might be tough to do, you can buy it for whatever, the bank will lend on it. But then you've got to have the cash in reserve to go do that value add,

Emil:

Right. That is a good point. I mean, when you say like non performing, it could be you have a let's call an eight unit building, and it's under market rent, but it's still cash flows, but you just know that you can improve and make a cash flow better, which is probably what I'd be going after anyway. Not like a vacant eight unit building.

Michael:

Exactly. Yep. Yep. Yeah.

Emil:

Okay, cool.

Tom:

Completely unrelated. We've been playing around with different recording software for this episode. And I just had this pop up that just said, the recording looks and sounds so much better than what you see live. What? Do you think we look and sound bad?!

Random pop up that goldfish distracted.

Michael:

That's a great.

Tom:

Cool Emil. Very exciting stuff. And, yeah, dovetails Well, with that strategy change and the type of financing requirements.

Emil:

Michael, you're sharing what's going on?

Michael:

I still got that six unit under contract, they got to inspect it and found a couple issues that they want to correct it, they went and got bids for them. And they came out, like astronomically high. So I said, let me go get bids for this. And maybe I'll repair it myself. And they came in way cheaper, like many, many, many times cheaper than what they got bids for. So I'm going to take care of that work myself. And then we're going to get this seller, excuse me, the insurance company and lender to sign off it says, Hey, once this work is done, that will you'll basically lend on this thing and insure the building at that point in time. So once we get that we're gonna have the work done, and then we should be off to the races. That's super exciting. I'm going to get a Southern California condo that I own listed live on the market here this weekend, which would be very exciting. And then I'm also looking at doing some flipping inside of my Roth IRA. So I transferred some money over to a custodian couple weeks ago, and now I'm making offers on properties out in the Midwest to do some flipping. So keep Your fingers crossed for me Oh, see how it goes.

Emil:

Alright, guys. So today's topic, shout out jack Crone in front of the podcast for this idea, which was a deal that you've walked away from. So I'm sure all of us have walked away from a deal. In fact, we've talked about it and we have what else this episode wouldn't be very good. So we've all walked away from a deal. And I'm sure for different reasons. And I think it'd be fun to just go over some stories. So who wants to kick us off?

Tom:

Michael lead the way.

Emil:

Michael?

Michael:

Yeah, sure. I've walked away from numerous deals, I think everybody, if you're in this business long enough, and you haven't walked away from a deal, you likely have bought some bad deals. Because a lot of times you need to fire Ready, aim kind of approach and make an offer and then go do all your due diligence. On the back end, once you have something in contract, especially in hot markets, which I'm hearing a lot of people talk about, kind of we find ourselves in today is that, hey, by the time I get all my questions answered, the deal is gone. And so sometimes you got to offer first and then figure out all the stuff.

So for me, I offered on a property, it was actually going to be my primary residence, as I was looking to moving down to the central coast, I offered on it, and again, went and got our inspections done after the fact. And we were looking for something that we could rent out an additional space. So it was going to be kind of a house hack. And so it had kind of a separate on suite wing, if you will, that could have been closed off. And we said awesome, this looks great. Because it was more than we wanted to spend just for our living expenses. So better under contract, got an inspection done, and it had multiple offers on it. So we had to come in fairly strong. And the agent I was working with became friendly with the other agent. So they said, Okay, let's make this happen.

So got the inspection done. And there was a foundation issue, the floor was a little bit uneven. And we knew that going into it, but we didn't know how bad it was. So we paid for the inspection. And we paid for a foundation inspection and got the foundation contractor out as well to give us a bid and the bid to fix it was like $115,000. And keep in mind that that can't be financed, or we were not able to finance that. So if we were to pursue the deal, we would have had to bring that out of pocket in cash on to the deal itself.

And we just said you know, that doesn't make any sense based on the all in cost at that point in time. And based on the value of the property we didn't think it was it was worthwhile. So we cancelled the contract walked away. But it was funny because we actually ended up assigning the contract to my agents. He and I are really good friends. His name is also Mike.

He ended up wanting to buy the deal the property for his daughter who's in college to live in and with some of our roommates. So he bought it as a rental for his daughter and has been really enjoying it is slowly doing work. So it was something that needed to be addressed immediately. And that made sense for him. So I basically assigned the deal to him almost like a wholesale I didn't charge him anything cuz we're good friends, but he was super excited to get his hands on that deal. Because he was really excited about the property.

So walked away from it. He ended up paying me for the inspection because he's like, Yeah, I would have had what to go on anyhow, so ended up walking away for really no money out of pocket. But if I had to have walked away from the inspection cost 800 bucks, 1000 bucks, whatever it was, it's not a big deal to avoid $115,000 mistake or repair cost. So I think a lot of times people get concerned with how much money they've already put into the deal whether that's an appraisal or title and escrow fees or a loan application fee, and then they'd have throwing good money after bad and if the deal is bad. Don't be afraid to walk away. I'm not going to say in in totality, but in many instances, you will not have spent enough money to commit you to that deal.

I mean, even losing your earnest money deposit, I would like to talk about that another deal, but I walked away from my earnest money, a couple $1,000 because of an unforeseen issue that came up and we had to walk away from the deal. We just weren't comfortable proceeding. So just keep that in mind as you're looking at deals. And as you're thinking about the results of the inspections, and the results of your due diligence, think about if it's worth it to throw in the extra purchase costs of the property above and beyond what you've already spent.

Emil:

Nice. So what was the big takeaway for you from that? One

Michael:

Big takeaway is, I think, just do as many inspections as you need to feel comfortable with a lot of people I feel like it myself included, we don't want to uncover the scary stuff. Like if I don't see it, and no one can see me right now. But I'm holding on my hands or my eyes like a like an ostrich. If I stick my head in the ground, and I don't see it, it's not a problem.

That's not true. It absolutely you know, you need to face facts and face reality and uncover as much of the gross stuff as you can and don't fall in love with the deal. Because the more hair a deal has, as I say, in the industry, the harder it becomes to do. And the easier it should be to walk away because there's more hair on it. But oftentimes, we fall in love with deals and think, Oh, well, it'll be okay because and we make excuses for ourselves or for the property. When really we need to think more objectively.

And that's really hard to do, especially when it's your primary residence when you're going to be living there there's a little bit more emotion tied to it. And so for this primary residence we ultimately did buy I tried to remove emotion from the equation a bit more. And that has worked out for us much better.

Emil:

It’s so hard when you're buying for yourself though cuz like, you know, as an investment, it's just it's numbers in Excel totally. versus when you're living there. You're like, oh, man, but we're so close to this I gotta be happy here, the yard it's impossible even like us as you know, investors who are supposed to be so objective, like when we walked into our home, I immediately just think about kid running around and our dog running around the backyard and stuff. It's It's so hard with a personal residence.

Michael:

Yeah, it really really is.

Tom:

Yeah, psychology, like they give you like, you could run to a situation where you just don't ever pull the trigger on your own occupied one. And if you don't give yourself a little bit more leeway than you would normally have the discipline on investing. So yeah, so true that psychology of the different owner occupied versus investment.

Emil:

Totally.

Tom:

Emil, do you want to go ahead on a deal that you walked away from?

Emil:

Yeah, so I think the most recent one was September - October of last year before we ended up buying that triplex It was another triplex and this one had been listed on market for a while I think it was like two to three months I even think it was went under contract and then back on the market. And it had like two pictures It was like a picture of the front picture of the site and the owner refused to allow anyone to go in until they had a signed offer.

I think the property was 120k I think we offered 110 they accepted and then my agent went through walk the property sent me a bunch of videos of the walkthrough and you know I knew that this person is not posting pictures there's probably a reason like it's probably not going to be beautiful on the inside but man there were like so many issues. Like when issues come up my first thought isn't I need to run away it's like how can I now make this work if I like the area of I think you know there's still potential and I don't think it's like a massive massive headache right like yeah, those plaster coming off the off the brick which is not awesome, but it's very fixable. And just a couple other I think it was like a plate like taped to this a hole in the plaster it was you know, it was ugly in there.

Michael:

Like a dinner plate?

Emil:

like a paper plate over a hole in the plaster.

Tom:

Was it a commemorative plate? It wasn't like a racecar driver or something.

Emil:

It was a straight of white plate that you see at every picnic you go to so one of those.

Michael:

Well at least they were using paper not plastic they're trying to be eco friendly.

Emil:

That's right and at least you know it matched the white plaster wasn't like a red plate. So you know I ran the numbers again and I was like really conservative and we made a count like said look we can't do this deal unless I think I dropped it like 30 40k in price I was like look there's just tons of stuff we have to do here you know I have to account for whatever things we're gonna find in inspections and the seller refused which was funny because this property has been sitting on the market for a long time for very obvious reasons and so we decided to walk away it was just too many unknowns property just terrible in the on the inside and the seller was not willing to go lower to like make concessions for how much work was going to need to be done so walked away.

Michael:

Isn't it funny when sellers like won't let you inside it and post pictures like dude do like not think we're gonna get inside the building and see this like it's just such a waste of everybody's time.

Emil:

It's such a waste I made sure my agent could go in there and take video and send it to me before we paid for inspections and stuff. This is like you know you have to as remote investors obviously you want to go love to go check out every property but sometimes it's like alright, you know you have your person you boots on the ground who go look at for you send you videos, all that stuff. So

Tom:

Do you guys stock the properties after after you watch away, like, you know, follow it and see what it does sell like most like stocking on whatever Facebook, someone that you?

Emil:

I watched that one and it the listing just ended up expiring. Like I think I was probably the second or third person where it had fallen out of contract. So

Michael:

I don't put a whole lot of attention on it. But if it drops significantly, you know, maybe there's still an opportunity there, like in Emil's case, and the seller said, Oh, they dropped the price 20 grand on the listing, you could circle back and say, Hey, you know, offer you taking us to 10,000 off and we can talk about this deal by feels much less of a sting for the seller, oh, they only got to drop their price 10 grand from where they are currently versus 40 or 50. From where they were previously.

Emil:

Yep, I knew when I made the counteroffer, they were gonna say no, but I think is like the flip side. And I think we should talk about it later. But like, issues come up in most deals, and you shouldn't look to immediately walk like a lot of especially newbie investors, something will come up in the inspection or something will come up during escrow. And your first thought is like, Oh, we gotta walk away can't do this. And I think that's that's the wrong attitude to have, especially if you've done a couple it's, you know, that can work in your favor. Now you may get a better price, you may get concessions from the seller, and you find something busted, you ask the seller to fix it. And now you're discussing brand new, so it's not like you should walk away from every issue that comes up in escrow. So anyway, some for us.

Michael;

I love it. Like you said, Emil, is you said how can I make this work? Right? And if you approach it with that lens, you can't lose? And you offer based on what makes sense for you and your investment goals. Yeah, and if the number doesn't work, okay, well, then on to the next one, and no harm no foul.

Emil:

Right. It's not you should just be locked in on the deal and take no matter what and find ways to make it. But like something comes out, find another number that works and then negotiate like, don't just look to immediately walk away if something comes up. Yeah, especially the better the deal, the more problems there's probably going to be. So you have to you have to consider that. Tom, what about you, man?

Tom:

I've gotten pretty deep into the negotiations, but I haven't crossed into earnest money paid walked away territory, you know, just within the upfront negotiation. So like, I've done some acquisitions earlier on on the MLS, and they were fairly smooth. And then in doing acquisitions, as well as dispositions on roofstock, it's been extra smooth, just because a lot of the diligence is already completed upfront with the listing price.

So when you listed there's already an inspection report in there, both on the sell side and the buy side, it's just been way pretty smooth. And I don't know, not a lot of risk in here. And I'd say with my strategy, I am not looking for these properties that have, you know, a lot of construction risk, that's just like not within my profile as an investor of doing a lot of value added stuff, I haven't I don't have a lot of experience of walking the way mid deal. And like I said, you know, there's some properties were going back and negotiation before we have, you know, ink on paper, and then you know, setting my hard number and then not getting to it are within a reasonable amount to budge up or down.

So I'd say I've been, you know, the closest I've been is it was a property where the roof was a little bit older, I knew that going in, there was a little bit of a discount on what the value was. And then when the appraisal came back, it ended up being like a much bigger discount relative to what it appraised that to what the purchase price was. So I was okay, you know, moving forward with that, and I did end up needing to replace the roof A year later, but it was, you know, within budget and expectation so I'd say you know, kind of based on the strategy that I have there's been less risk of stuff coming up you know, within the the diligence period as it relates to to the house.

Michael:

You could just say Tom you don't put crappy deals under contract, we get it message received.

Tom:

I don't deal with trash guys. I'm totally jinxing myself really badly for the next several transactions that I go through.

Michael;

One person's trash is another person's treasure me and Emil are trash pandas over here.

Emil:

Yeah that’s right, we're looking for the garbage.

Tom:

I liked it guys, I like it. Lots of good stuff in there.

You know, the fun to talk about a little bit is being on the other side with with buyers trying to walk when you're selling now I had a friend who bought a property, and then he was selling it for whatever reason just to kind of reallocate, and a buyer was negotiating with him, you know, based on the inspection report saying, Oh, this roof, you know, has, you know, less than two years I want, you know, a $20,000 discount or something like that was kind of outrageous. And he just like accepted it. And I like Wish I could have like talked to him and like coached up a little bit before because he caved so quickly on these buyer demands.

So for those of you in the sell position, like know, the value of your house, and like the one who wins and these types of negotiations is the one who has the most information. So like, if you have a good idea on how much something costs to fix, like you should really anchor to that when you're on the buy side or on the sell side and making these type of negotiations because I saw my friend probably just like light $10,000 on fire because he wasn't like disciplined in seeing this request from the buyer, you know, to change the price and he just went with it right away and it like makes me sad to think about it's like man, why did you do that? Like we work so hard in this game and it's like on the sell. It's like he just kind of gave Get away. It was a bummer.

Michael;

It reminds me so much of a guy I know that paid way too much and continually pays way too much for insurance and it's just constantly on fire and talk you through it.

Emil:

And the episode comes full circle. I like it. I like it. I like it, your emails gonna ping you because there's a calendar up to date.

Michael:

It is. Okay, good. It's funny, too, I think to just piggyback on that Tom, the person who wins the negotiation has the most information, but also coupled with the person who cares least Yeah. And so if your friend really didn't have to sell their property could be like, No, I'll just keep waiting. And so being in a position both on the buy side and the sales side to be able to come at it from a position of strength and not needing that deal. Either to sell it or to buy it gives you a lot more negotiation power in that you can just sit and wait for the next one. Both on again on the buy and the sell side.

Tom:

Totally. I'm literally pulling up my calendar right now. Awesome. And Okay. All right. invites sent.

Michael:

Perfect. And don't worry, I'm gonna accept.

Tom:

I can't take this abuse anymore.

Emil:

How many episodes we got to grill you on Tom? Come on.

Michael:

I think it's three or four.

Tom:

At least you guys are my accountability buddies. Accountability buddies. Michael, I love your strategy of the IRA flip fund.

Michael:

Yeah, I think it's gonna be cool. So we'll have to see how it goes. I mean, everything sounds great on paper and in theory until you get punched in the face. So I'll have to Oh, yeah. I'll keep you guys posted the whole time.

Emil:

Cool, guys. I think there's a good spot for us and this episode. Thank you guys for sharing your stories. Anyone who has questions by the way, we love answering you know, whatever topics you guys have on your mind. So reach out to Michael Tom and myself. Let us know what you want to hear. We're always happy to dive into our personal stories. With that we will catch you all on the next episode. Happy investing. Happy investing. Happy investing.

How Long Does It Really Take to Get To $100K Passive With Real Estate? May 29, 2021

There are tons of videos floating around about getting rich quickly with real estate. But let's be real, real estate is a long game.

In this episode, we use a model from the Roofstock Academy Playbook to project exactly how long it would take you to get to $100K per year in passive income based on 3 different sets of assumptions. This episode shows how you can set realistic, time-bound goals for your financial freedom.

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Transcript

Tom:

Greetings, and welcome to the Remote Real Estate Investor. My name is Tom Schneider. And I'm joined today by

Emil:

Emil Shour

Michael:

and Michael Albaum.

Tom:

And today we've got a fun episode. So there's lots of content out there that talks about how to become a millionaire and you know how to become rich with real estate and in today's episode, we're going to go through some specifics year by year to meeting some specific goals. So both Emil, Michael and myself, I guess all three of us are going to come up with some scenarios. And we're going to use this tool from Roofstock Academy to see how long it takes to meet our goals. All right, let's do it.

Emil and Michael, what is going on?

Emil:

Hey guys,

Michael:

Not too much. I'm just getting ready to take off in my van again, we had some solar issues around the road for a week so we came back to home base to get those squared away. So got brand new solar installed brand new batteries, did some plumbing customisations and ready to rip and roar in the next couple days. So we're stoked.

Tom:

Very cool, Emil What's going on?

Emil:

You know following Michael really sucks because I'm just a guy living in his home just doing normal boring stuff every week. So Michael I'm just gonna vicariously live through you in your van now everything's good. Nothing crazy going on. Yeah, just happy. It's it's summer the waters warming up. So it's been it's been more fun to go surfing in the morning. Don't have to wear booties, feet don't get cold. So that's been nice.

Tom:

Nice. Nice. Nice.

Michael:

What about you Tom, how comes the construction on the house and the refinances?

Tom:

It's coming. Oh, closing on the refi is on Thursday, which is exciting.

Michael:

Awesome.

Emil:

Nooice!

Tom:

Some ammunition for some acquisitions. But yeah, yeah. And the construction is cruising along, almost done. It's like stop and go, you know, like there's like certain dependencies on certain parts of the project and takes a while to get done. And then a bunch of stuff gets done. And then it kind of goes back to a little bit of a halt. But Fingers crossed, we're moving some things back into the kitchen. over the holiday weekend that is coming up. So fingers crossed.

Awesome, guys. So we got a fun episode. This is also going to be on YouTube,I encourage you to check our YouTube station out, just search Roofstock.

What we have here is we have this tool that was built within Roofstock Academy, it's not an over complicated model that just goes year by year. And what it does is, you take some baseline assumptions of your investment, kind of by box right on what type of returns you're getting, what is the cost, and then you extrapolate that over years. And what the model does is it assumes that you're reinvesting all of the cash flow that you're collecting into your acquisitions into the following year. So that way, you know, when you're buying into year two, you're using the income from year one, when you're into year three, using the income from year 2. The model accounts for a little bit of rental appreciation. What the model does not account for which is a benefit in real life, and perhaps we'll work this into the model at some point is doing 1031 exchanges or cash out refi. So, you know, there is ability to move a little bit faster when you're having some appreciation. Emil, Michael, before we get into the specific examples, go ahead.

Michael:

I was gonna say I just wanted to take a moment to pause here and highlight and talk about one of the benefits of real estate that totally took me, I had an aha moment when I realized it. So you just said that the income from year one is going to go into acquisitions from year two. So what that actually means is that you're getting paid every single year for the work that you did previously. So if you have a W two job or self employed, are you going to get paid next year for the work you do this year? Probably not. Real Estate totally doesn't work that way.

So all the work and hard, you know, grit that you're putting in right now is going to pay you year after year after year. And you should actually increase over time. So you get to give yourself raises, hopefully every single year for work that you did today or yesterday, or you're going to do this year. So stop and let that sink in for a minute. It totally blew my mind when it it kind of slapped me upside the head.

Tom:

Yeah. And your cost basis is like pretty much effectively flat. I mean, there might be some increases in property taxes.

Alright guys. So before we jump into our specific examples that we're going to come up with, to determine how long it takes to reach our goals. I'd love to hear both you guys just a little bit of input on the model and thoughts, all that good stuff. So Michael, why don't you go ahead and go first?

Michael:

Yeah, so I think it's really important to model out and forecast what your portfolio might look like going down the road based on your current day assumptions and goals. And working backwards is so important, I think in real estate because it dictates and helps us to find what makes an ideal investment for you or for me or for for yourself as an individual investor, so the three of us might have very different investing end goals. And so that is then going to determine that we are likely going to be purchasing different types of properties along the way to our end goal.

So this is a tool that allows you to do that. And really reverse engineer Okay, what types of returns should I be targeting? Where should my cash flow assumptions and targets be such so that I can get to my goal at a desired timeframe. And again, putting a goal that's timed bound I think is really important. We talk a lot about in the academy, using the acronym smart, and the T and smart stands for timely or time bound. And so being able to measure that and see how you're doing against your goal, and from a time perspective, I think is really, really critical.

Tom:

Love it. Emil?

Emil:

Totally agree with what Michael said, I will be blatantly honest, I have actually never gone through this exercise. But I love it. I think it's a good way to kind of just see like, what are you in for right is your goal, let's say I know so many real estate investors who are looking for cash flow, a lot of the goalpost is how do we get to 100k per year basically, like, how does your your passive income, replace your job, take care of all your expenses, things like that.

So it's, it's, I think it's cool to at least have a goalpost and be like, Alright, if I invest this amount per year, it'll take me 12 years. Well, what if I accelerate that? What if I go earn more? What if I am able to save more generate more cash flow? What if instead of a 7% return, what if I can generate a 10% return on all the properties I buy? How does that change all these assumptions? So I've never done this, but I think it is such an insanely valuable exercise to do. I'm hoping that us just doing a right here is gonna give me a much better picture of what my goalpost will look like.

Tom:

Awesome.

Michael:

Goal posts!

Tom:

Alright, so let's jump into it. So I'm going to go ahead and go first. And since I'm going first, I'll define the rules for myself. So my goal in this little game, this little model is to get to $100,000 of passive income, the rules are, in the first five years, I cannot exceed adding an additional $25,000 a year. And practically speaking, that means basically, throughout the year, I can save roughly 25,000 bucks a year to go to, to buying real estate. And in this model, I'm also going to use the cash from my rental from previous year to do and add new acquisitions. What I'm going to do to increase my buying power is in year five, I'm going to increase that to not exceed $50,000 a year. It's it's a bigger jump. But I am just kind of curious to model that out.

So okay, so I'm looking at the sheet right now, which on YouTube, you can see it here. I have my acquisitions that I cannot exceed 25, the first year. So I'm starting with 15 was, you know, let's Yeah, well, let's make it 25. We'll start with 25, just to be consistent with this exercise in year five. So that's five single acquisitions at with a down five of them 25% down of $100,000 for the first five years, first five years. That's one house each year for five years. And that gets me to a cash flow of $15,000. So still quite a bit of way to get there.

Starting in year five, I'm going to increase my cash that I can put in, which is this red number here, up to $50,000. So this example, I'm going to move this up to two, two, by year six. I'm up to 31,000 exceeded it.

Emil:

Tom, can you highlight where you're looking at your cash flow yearly number?

Tom:

Yep. So my cash flow year not yearly number is down here, which is portfolio levered income. And my new acquisitions for that year is this row, row 22. That's going across. And my acquisition cost is this row 23. But the down payment is this row 24 is this red number and this red numbers is taking off taking out your cash flow from the previous year to be applied to your new acquisitions.

So year five I'm bought now buying two houses a year with a cash flow of 18,000. Let's see in by year seven. But not quite yet. A year seven I thought I could move up to three houses a year or three units. This also could be used for multifamily. But it actually be year eight I can move up to three houses per year and by year 10. I'm at 60,000, just just below 60,000 of passive income at three houses, three houses or three units, and then year 11. That takes me to four.

Emil:

So the red Tom, just to clarify, that is the amount out of pocket you're putting. So you're using some cash flow, and then the red amount is how much am I coming out of additional savings from work or whatever to be able to buy the number of additional homes you have there?

Tom:

Exactly. And so here we are, based on these constraints in year 14, is where I hit that my magic number of $100,000 of passive income a year based on these assumptions up here. So that's 37 total units. That is a total sum of assets owned a little bit under $4 million. And that would make for $113,000 a year. So those are my assumptions. My I ended up in year 14. So who wants to go next.

Michael:

I'll go next.

Emil:

Tom, a couple more questions. For you For you take over Michael, couple questions here. What, uh, what is your assumption for a cash flow? Can you fill in our viewers on that one?

Tom:

Yep, you got it. So cash flow, you know, there's a lot of cash flow is, is basically you know, what you're walking away of profit at the end of the day after you collect rent and pay all your expenses. And we use just a blanket number for cash flow, a $250 per month, at the end of the day, so you know, there's a lot of variables that are not implicit within the model, like, what the rent is, what the repairs and maintenance are, what the property management costs.

But within this model, what it does is it just, it just comes out on the other side of what that number that a heart that actual number is, it's sort of peanut, peanut butter spreads your portfolio. So if I wanted to be, you know, more conservative, I could take this down to $200 a year. And you know, and that takes for just below a 10% yield of cash on cash, which I feel comfortable in being able to achieve. So yeah, it's just a straight number that you're plugging in at a monthly basis on what that cash flow is going to be.

Emil;

Can you go back to 200? I'm curious how the how your model changes, if you do a 10%, just under 10% cash on cash return assumption versus the 12. So it only takes pushes it out a year, an additional year?

Tom:

Yeah. Yeah.

Emil:

Yep. So I'm just good to see.

Tom:

Well, actually, no, I think it pushes it out and might push it up two years. So you're 16. Now is, is that year, so pushes it out two years, by changing that assumption, I think it's better and generally speaking to be more conservative with those assumptions. But what I did there is, since I changed the, these, you know, key assumptions at the top, it changed all the cash flow that runs through each year. So each year, there's less, you know, income. And what when I moved it down, there wasn't enough income from the previous year, or one of the years I had to, I missed an acquisition. And that kind of cascaded down year, year year, which pushed me out, I think, to two additional years to get that $100,000 goal to year 16 here.

Emil:

Nice. It's, it's at least interesting to see, like a two and a half percent swing in cash on cash. Like it doesn't have an insanely dramatic change on getting to your 100k mark.

Tom:

Yeah. Yeah. And, you know, as we said, like this model, like, you know, it doesn't include cash out refinance, it doesn't include, like 1031 exchanges, it also doesn't include the the tax benefits that you're having here. So there's anything it's really helpful and kind of directionally and thinking about acquisitions that you need to make based on some return assumptions on where you want to go. But it is, there are some benefits that this doesn't even necessarily account for.

Michael:

Yeah, great point. So Tom, why don't we walk through a scenario where maybe somebody is starting from a stronger position with a bit more capital, and they're actually able to make all cash purchases. So let's just assume that somebody's got a, you know, a very high paying job or is able to start from a really strong capital position, and they're gonna make one purchase a year.

Let's just say one purchase a year, how many years does it take to hit your cash flow goal of $100,000. So if we change this model, we wonder out the first couple of years, and let's just see for $100,000 purchases at a 7.8% return from a cash on cash perspective. How many Here's his take the hit $100,000.

So it looks like in your five, we're almost at 40,000. No, let's actually let's one it out, let's just say if you made one purchase every single year independent of cash flow from the years prior, yeah. How long does it take you…

Tom:

On it.

Michael:

And so it looks like we crossed the $100,000 threshold that year 13 with 13 properties, which is?

Tom:

Yeah, I mean, that makes sense. And then the following year, that single purchase is, is being made on its own by the $100,000. That is in place. Yeah. So 13 years,

Michael:

13 years, 13 houses to $100,000 at an average purchase price of 100 grand at an average return of 7.8%. So another way to piece this together.

Tom:

That's cool. I yeah, I've never done them this model this this way. And I'm 13 years kind of goes back on a quick I mean that that's that's a tremendous amount to pay each year, you know, in buying an all cash. But..

Emil:

Let's do one more scenario then here. Let's do I like Michael’s, you have a little bit more cash to work with, right? You have a high paying job, maybe you have a side business, or you have a full time business, whatever you're able to just generate, basically 100k out of pocket every year. But what if instead of you're doing all cash, what if we go back to the 25% down model, but you have more money here? Let's see how quickly we can get there.

Tom:

Alright, so I'm going to change this to 250. And the cash down 25, Cash on cash of 12%.

Emil:

Let's, let's go 200. Let's go a little more conservative than 12% cash on cash.

Tom:

I like it Emil just under 10%. Okay, so how much money do we have each year to spend?

Emil:

We have 100k to spend out of pocket.

Tom:

Love it.

Michael:

Cuz maybe someone right is thinking about selling off some equities because they've done really well in this in this run up market. And now they're wanting to transition it over to real estate.

Tom:

Yep. So by year five, you're already at 53,000 in your first three years, or at four houses or units and an extra five, and then it gets to a point where every year you're adding Yeah, we hit it. Or a year six, you can just start adding. Yeah, it's just 7,8,9.

Emil:

Yes, you hit it by basically by year 8 you're at 99,914.

Okay, what about what Let's do this again, but you only have 50k. Right? So you're you're in the middle of our first example, and the most recent example, you can put 50k out of pocket. How long will that take?

Tom:

So we're in year five we're at? We're still doing two acquisitions per year. I'm gonna give us a little bit of your six an extra 700 bucks. Yeah, there you go. Yeah. Yeah. So you're eight, you're still at? Let's see, by year 10, you're up to four acquisitions per year. And then your 13. Five.

Emil:

At year 12. You could squeeze in another?

Tom:

Yeah. Oh, year 12?

Emil:

We'll try your 12. Yeah, year 13 year 14?

Tom:

That's kind of a magic number and doing this exercise, it's hit your 13 twice now.

Emil:

Interesting, Why would it be the same amount of time is your first? Is it because I took a lower cash flow per House of 200 verse 250.

Tom:

Possibly, I mean, you're putting a lot less money forward. Right. So like, you're no, it's like in this example. You know, they're both are your 13. But this one, you're only spending $50,000 a year?

Michael:

Yeah, I think your total your total

Emil:

In yourexample you were doing 25k or less?

Michael:

Yeah. So like in the in the all cash model. At this point in time, we had spent 1.3 million in cash to generate $100,000 in income and a meal in this example, you spent 533 533,000. And you're generating $100,000 until I don't remember Tom, what was what was your years must have been less because you're getting a better return.

Tom:

Right? Yeah.

Michael:

So I mean…

Emil:

I think it's what I was wondering, why was Tom able to hit the same amount in year 13? I guess it was because that extra 50 bucks, 12% cash on cash versus a 9.6. Right, exactly.

Michael:

And so this is like a perfect example of how this model works based on all the different assumptions and inputs. And I think it's so cool that we are finding, you know, fairly similar conclusions based on the different ways to get there.

And so building this out for yourself or, you know, checking out the Roofstock Academy and using this model, exactly. We'll give you an idea of, Okay, how do I get there, what's the most efficient way to get there, and what's going to work for me, because again, depending on where you're starting from and where you're trying to go, You're gonna have a very different path. And then somebody else who's maybe has the same end goal, but starting from a different point.

Tom:

Definitely. Yeah, it's, it's, it's flexible. I mean, everyone's path is unique. And it could be a bumper year for whatever reason, you have some extra money. And instead of having that limitation of 20,000, or 10,000, or whatever that number of how much extra cash you put in, perhaps that year, you could have 100,000. And like, if you do that, it plays a major difference of being able to hit that goal, your earlier.

Emil:

Plus every year that you're gaining, you're acquiring more properties, you have more deductions, you have more depreciation, you can take meaning more money in your pocket at the end of the year, a couple years ago, the switch finally happened where instead of paying taxes in the year, I started getting refunds because of all the awesome depreciation we were taking. So that also puts more money in your pocket that you can keep steamroll and into acquisitions.

Michael:

Yeah, that's a great point. I mean, this model only takes into account the appreciation side of things in terms of value. And then also the cash flow side of things. When in reality, real estate generates wealth in four different capacities. One is the cash flow. One is the appreciation. The other is via loan pay down or leverage because you're actually buying equity every single month in the property, or rather, your tenants are buying equity in the property every single month.

And the last is tax benefits. And tax benefits are just really squirrely to nail down because based on what tax bracket you're in, and where you live, and how much income you earned versus Active Passive mean, all these things can change how the tax benefits are going to likely help your tax situation.

So definitely check with a tax professional about looking to nail that number down to get an idea of how they might help you as an individual. But also keep in mind that Hey there, the return goes beyond the cash flow and the expected appreciation. There are all these other things that to add on and incorporate into that return as you're calculating it. So you're in you know, 9.6% cash on cash is likely going to be a whole lot better when you factor in those other those other factors. Factor those other factors. Don't use the word in the definition. But then also, I think this is a great depiction of real estate is not a get rich quick scheme.

Tom:

Sorry, guys, I need to step out for a minute.

Michael;

Yeah. Real estate is not a get rich quick scheme. It's not an overnight success scheme. This is a 13 year plan to generating $100,000 in passive income. And so a lot of people might be hearing that or seeing this and thinking all 13 years, that's way too long. But do you have a 13 year plan? Do you have a plan that'll make you $100,000 passively in sooner than that? If so awesome, like run with that. But also make sure that it's a legitimate plan.

I think real estate is one of those things, it's a slow burn. And then as you go further and further down in time, you see those returns start to take off semi exponentially. And so just be thinking about that and be long term greedy like Tom always says,

Emil:

That's right. Get Rich, slow!

Michael:

Get Rich, slow!

Thanks, everybody for listening for watching. If you're on YouTube, hope this was helpful. Again, this is available at the RooFstock Academy. For those members that are enrolling, come check us out at Roofstock Academy comm if that's not a good fit for you, definitely I'd recommend either looking up a model that exists or making your own model because again, these are really really powerful tools to help you forecast and reverse engineer what type of properties you need to be purchasing or looking to purchase. So with that, let's get out of here. And we look forward to seeing you on the next one. Happy investing.

Emil:

Happy investing

Is Columbia, South Carolina One of the Hottest New Markets? May 25, 2021

Today we talk with Matt Crawford with the Montgomery Company in South Carolina about what is happening in the Columbia Market. We cover everything from the economic and employment trends, taxes, the current level of competition, and other things that make Columbia an investor's market.

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co hosts, Tom Schneider and Mark Woodling. And we have a very special guest with us today, Matt Crawford is an agent out of Columbia, South Carolina. And today Matt's gonna be giving us a market overview and talk about some of the things that he and his team are able to assist buyers and sellers in doing in that market. So let's get into it.

Awesome. So Matt Crawford, thank you so much for taking the time to join us today. Really appreciate you being on the show.

Matt:

Excellent. Thank you, Mike. Glad to be here.

Michael:

And so you're out in Columbia, South Carolina. Is that right?

Matt:

Yeah, Sunny Columbia mass about 85 degrees, you know, beautiful state born and raised about an hour north of here. So fantastic market, man, it's a good place to be.

Michael:

Awesome. And I'm curious, Matt, who are you an agent with.

Matt:

So right now, my agency is hung under the Montgomery company, which is a pretty interesting story. And just to quickly unpack that, Matt Montgomery, he's a great friend of mine. He runs a massive construction business here in the southeast. And just for the conveniency of our partnership, I ended up creating a brokerage with him. And I'm really sort of the head of the firm, sole proprietor of that brokerage, which I moved my company under, which is technically not a capital in southern capital brothers, which is our investment brokerage underneath this umbrella.

Tom:

That’s a perfect segue, Matt, and, you know, before jumping into Columbia, South Carolina, I'd love to learn a little bit more about yourself and your background and how you got to where you're at today.

Matt:

Yeah, 100% time, you know, it's a, it's been a journey, you know, as we all are inclined to take. And so, you know, I'm going to probably take this back five years, you know, I'm in Denver, Colorado, man, loving life, sort of so in the proverbial oats of a new broker. And I started really getting into cahoots with a lot of the investors out in Colorado, a lot of these guys were doing huge land acquisitions, building massive multifamily complexes, as well as doing something that I'd never heard of, which was institutional capital investing.

So they were piecing together these massive SFR, BTR portfolios, renting them out, stabilize them, and then doing the disposition strategy. And I was like, what a awesome niche within the real estate arena to start cutting my teeth on. And so we got licensed in Colorado started working with these guys, the barrier to entry there for a new young agent in his 20s was so massive, and like, man, it'd be great if I had $600,000 for my first rental, not the case.

So I look back to my roots back here in Columbia, South Carolina, where I can get that first rental for about 50,000. And so jumped over here about four years ago, and started building some institutional funds with a previous venture, we built that went to about 2200 homes deployed around 220 million over 24 months. I don't think I slept much. I probably lost a little bit of weight. But I learned a lot, you know, and, and from there, you know, there was a talk about destiny, talk about fate, you know, the pandemic arose, a created a little bit of space, to sort of see where I wanted to navigate. And, you know, I decided with a few of my other founders, Jordan, and Alex Fisher, to start our own company. And that's sort of how we got here today,

Tom:

I had a boss who had a pretty funny joke. I was like, working a lot of hours. And he's like, Hey, good news. Tom, you're getting credit for two years of work, which is one year by working, you know, every day, 100 hour weeks, you know, yes.

Matt:

It is a journey man is like, you know, you know, first and last out, but we had the, the gusto of, you know, being passionate and, and finding, you know, a purpose within the the jumble of real estate, not at one point, I thought it was so binary, you know, it's just traditional transactions between buyers and sellers, and then start unpacking that man, I'm like, oh, man, if you can sell one home, you could sell a portfolio of 1000 homes. And so that's what brought us here.

Tom:

Let's, let's learn a little bit more about the practice today. Your guyses brokerage today.

Matt:

Yep, yep. So, you know, we really have pivoted to fly a new banner. That banner is called Southern capital. It's a company that we've had for many years. And what that really does is it pieces together investment clients, like you guys have it Roofstock with really high profile properties here in the southeast. And if we can drill down even more granular, you know, Colombia has been our top market. And it's just so funny how it happened. You know, when I, when I ended here, I wasn't thinking, Oh, Colombia is going to be the most fantastic rental market ever. But it is just really happen that way, the average property value in ratio to the average rent rate is just so incredibly strong, that it's created a lot of attraction.

So at Southern capital, I have Jordan shots, he's just like our tech, no, not man, this guy is building these fantastic databases. He's bifurcating all these beautiful codes on the back end, that parallels the software that you guys have, you know, shout out to Andy, and Danielle, for Roofstock. And it's just played so well in our court. And then Alex Fisher, the guys basically like a pseudo General of the military. And he's just running fantastic operations, and allowing me to sort of be on the forefront, gaining knowledge, making really strategic connections, and providing the utmost service to the clientele.

And so Southern capital sort of walks that fine line of servicing large institutional clients. But I've really, really enjoyed the opportunity that mark and Matt and you all at rusak have provided us, which is working really intimately with people from all around the world. I mean, we've had, we've closed deals in India now, like doing five day meltaways. And I'm like, this is awesome, man. Because with the with the large institutional space, you know, with any kind of maybe corporate structure, you almost become a data point. You know, they're they're really looking hard at performance underwriting sheets, which I'm fine with. And I love the scalability of numbers. But there's something beautiful about that connection of getting on the phone with someone who's buying their first rental or their 10th rental, looking at looking at their projected rent rates. And that's sort of what we're doing in a nutshell, on the day to day here.

Mark:

Let me kind of unpack it, as Matt Crawford would say, in a sense of connecting why Matt's here with us today, because, you know, Matt's one of our prized certified agents that Roofstock has partnered with, he's the one that's actually handpicking properties to bring over to Roofstock select. So we don't just treat Matt like he's a partner, but he is sitting in the same arena with us, he is there rolling up his sleeves every single day, and really bringing properties a Roofstock. So we want to give Matt a shout out bring him on the podcast because a he's an expert in Columbia, South Carolina, we want people to understand it, but he's the guy that's handpicking the properties for the Select program.

So if anybody likes what you're doing, they're going to see your work. It's almost like artwork that's going up on Roofstock. So great job, thanks for all your participation. And again, I would love to love to get into the market when when we do really unpack it for for the crowd, because there's a lot of things happening in South Carolina, but specifically your market.

Matt:

I love it. I love it. Mark within let's uh, let me let me switch some gears real quick. Now you guys have started getting the creative juices flowing. So let's talk about the masterpiece, the artwork, and that breaks down to the underwriting that goes into these problems. So all that history that we just covered, taught us one thing, and that's how to underwrite really well to be the best underwriters, right? In South Carolina, you know, putting that out there into the universe. And so it is an art form. You know, we're looking at a ton of different data points. We're looking at so many different comps, whether it's purchase comps, rent comps, we're looking at outlier data that we're pulling off Airbnb, err, DNA that we're trying to figure out how many data points can I put on this one property to make it a sure bet for an investor.

And that really is what's given us the success with the Roofstock program, you know, as Mark mentioned, you know, we're looking at these properties every single day, manually underwriting them, you know, which is a huge, huge help from Jordan, my partner, you know, really appreciate you, Jordan when you see this, but we're getting on there, and everything is converting, because we've already done that heavy lifting upfront, you know, and I think that's sort of the secret sauce here, as well as being so intimate with the market here. And that's just the beauty of painting this piece for you guys.

Michael:

Matt. So if we can peel back another layer of this proverbial onion here, what are you seeing? Are you able to get a finger on what makes great investment properties in Colombia?

Matt:

100%, like, you know, it's, it's gonna come down like the easiest way is my hot zones. You know, there's a, there's zip codes, no 29209, 29206, you know, 29203 I want to stay away from except if I'm on this one side of the street. And so just being able to speak on the micro locality. I think that's such an important word here is a huge service to these investors. And then, you know, like any, you know, skilled tradesmen of his craft, you get to a point where you can Almost looking at property, as long as sort of meets the actual locale checkbox, in my mind, I can tell you, this is going to be a great rental. And I can also tell you if the area is going to have a specific tenant demographic that's going to play in to the longevity of your asset. And that simply just comes from experience from data, you know, those probably now 25 different homes that we've managed to underwrite, put in a pipeline, put a tenant in there and have it stabilized. And so that really has allowed us to speak really clearly to the Rootstock clientele.

Michael:

that's such a good point. Because like we've sent out other episodes, you know, the, the what the one thing you can never change about a property's location. So getting that right off the bat is so critical.

Matt:

Oh, man. And and and, you know, I'm not gonna lie. It's sort of fun. Because you go across the bridge here in Colombia, you have you have greater Colombia, then you have West Columbia, which is a whole different municipality, and it's split by a huge river called the Congo. Five years ago, there was no one saying, hey, let's head across the river, it was almost like that was a less developed obtuse area. Well, now, these veterans just came in, they put $4 million dollars into a brand new brewery right on the river. And so I'm doing reconnaissance, hitting up the brewery, checking out all the properties around there and then actually sourcing data, you know, so it's, it's a lot of give and take, but you know, it's how creative can you get with your market? Know, your market in my eyes is a product, you know, how can you literally turn these widgets polish this product to make it presentable and digestible from somebody who's investing all the way from California? And that's what we do.

Tom:

Would love to hear about some of the broader kind of like macro tailwind. So Colombia is the capital of the state. What other you know, how else would you describe this sort of, you know, general kind of tailwinds. Beyond, behind the Columbia, South Carolina market, like what are the major employers all that good stuff?

Matt:

Yeah. Awesome, awesome question time. And it's, it's so just, to me, it's a beautiful thing, what's happening here, so an hour north of here you have Charlotte, North Carolina 2018, ranked the number one city for millennial retention in the US. You know, two and a half, two and a half hours east of here yet Charleston, South Carolina, ranked the number one best small town in the US of this several years in a row. If you go an hour and a half Northwest, you're in Greenville, South Carolina, which is also have gone through this huge development curve.

And then you have Little Columbia right in the smack middle of the state that has been like overseen for the last seven years as each one of these towns develops. And we're now starting to see this huge shift of people being priced out of assets and Charlotte green go in Charleston. And so all that wealth is coming right to the center of the state now, and this is super evident. And probably the last three to four years, like you know, call it serendipity or what may have you but right when I moved here, it was the first time institutional capital really got into this market.

And now it is just turning in two parallel that the big players are now coming to town, these huge multinational conglomerates, just to rattle a few law, we have Prisma health Prisma health basically aggregates massive hospital systems, puts them under the Prisma banner sort of puts a new culture and spin on the health care that has exploded here. They bone up everything and Columbia and Lexington and irmo. With that medical Lance now on Columbia, Nephron pharmaceuticals, one of the largest pharmaceutical manufacturers in the country, actually opened up their HQ here in Lexington. I think it brought around like 12,000 jobs to town. I mean, you cannot go out and meet somebody Now, that doesn't have a gig at nephron.

So those two players really showed that Columbia can get out of sort of the Capitol education scene, and now we're having huge entities pick up. So outside of the medical field, of course, you're gonna have education, you have the University of South Carolina, for all you awesome investors out there. This is a cash grab of amazing students as fantastic business program and a law program that sort of as you can sort of insinuate is going to feed into the rentals, especially if we're going to be plotting these five to 10 miles outside of downtown Columbia.

And I would say probably the third is going to be your, your political and your military industry. We have Fort Jackson right here. It's the largest trainee base in all of the US, I believe, for new recruits. So what we've done as well is we pivoted to the industry. So on my personal portfolios, we're actually doing a majority of short term rentals Airbnb models, which is something that you know if you guys are ever interested in I'd love to also unpack that to sort of look at the underwriting scales between a 12 month long term lease versus if we put this into a another tier of short term leases. But all those things just play perfectly together with the assets that are available in Colombia.

Mark:

So Matt, I always like to play around with the Economic Development Council websites and like, really dig into what's happening, like, how are these? How is the local city trying to draw in outside business? Right. And so they're always putting a ton of numbers up there. So I see that there's a ton of renters, there's a young population. But tell me, one thing I didn't see on there is tech, what's happening in the tech scene out there? What kind of jobs do you think are being developed? And maybe are there a ton of startups moving in or Yeah, go into a little detail about that.

Matt:

100%. And I think that's also the beauty of a lot of people, especially in the startup world, you know, being a entrepreneur myself, you know, might not have that $50,000 liquid to plop down on a $220,000 starter home. Or, in fact, they might have used that liquid to actually inject into their business or building. And we're seeing an explosion of that community here. Maybe it's because FCRA is a huge grantee here in Columbia, South Carolina, they're getting everything from 20,000, up to $200,000 startup grants.

So people are just flooding this town, seeking those grants, you know, there's low, low barrier to entry. This is not Charlotte, this is not Atlanta. So you really can get great visibility into the market without having all the noise of similar competitors. Everything from five bubble five bubble was a fantastic tech startup here. Shout out to those guys. We meet with them all the time. And then even more so mark, to your point, because of that community, because of that influx that's now happening and putting this polish on this town, there's a massive tech, what would you call this, like a, like, tech village, man, it's probably like, I don't know, a million square feet total. But it's going to be housing. Tons and tons of startups that come in and basically have office space for

Mark:

Basically like an incubator where everybody can come together, exchange ideas, and magic happens in those kinds of environments.

Matt:

It's massive. And I think I can add one more layer to that as well is that at the key here, you know, Tom and Mike to fill you guys in this is a true tertiary market, right? You know, this is tertiary being that we have moderately low purchase prices, and comparative to the historical rent rates. And so in any kind of investors mind, you really want to be searching for that true tertiary market, but not only got a tertiary market, but a evolving tertiary market that's about to flip over into the secondary category, secondary, secondary, meaning you have a little bit more modernize commercial entities, we have a lot more retention of your population that is grown there, then you have just a average household income starting to rise and a gradual slope.

That literally is happening right now. And that's what's helping retain startups retain the young millennials that are getting out of their MBAs or college. And we're bout to flip into a true secondary market, whereas Charlotte, Charleston, Atlanta, I would say a primary, you know, they have massive, massive inventory, but also high purchase prices, we're bouncing the ball, which that secondary market, which I think is the perfect time to start planting some seeds and dollars here, because in three to five years, this, this city is going to have a total different culture, a different field. And as you guys would, you know, understand a totally different marketplace. And that's what makes it so healthy right now to invest in.

Michael:

So Matt, let's let's unpack that a little bit further and talk about some specifics. So if somebody is just a first time investor looking at different markets, which is a question we get all the time, and the Roofstock Academy is, hey, what market should I be looking at? Can you give us an idea of what that entry purchase price looks like? And what someone could expect for rent, and maybe give us an idea of some different neighborhoods to look at at a different price point and rental amounts.

Matt:

Oh, let's rock and roll. Michael, you know, for everyone out there watching, you know, my two senses. Let's get started. Right? Come on. Like, we will literally show you the ins and outs of this marketplace. But it's easy to have analysis paralysis, you know, especially or building a portfolio or investing, you know, hard earned capital or anything. I understand that there's this level of nervousness. How do I choose between San Antonio or do I look in California? I've never even heard of Columbia, South Carolina.

But I can tell you if you guys just give us the opportunity to show you the ins and outs. You'll see exactly why this is the number one market The Roofstock buyer program right now. And that's because you can come in, you can buy a house for $80,000. For 80k, if we have it in the bank account, collectively, I'm going to put this over in West Columbia, I'm going to literally draw you a circle that is probably around five minutes from the actual river front. And so the fact that we can get that close to a beautiful amenity, you're about to be 10 minutes from downtown for $80,000, it's going to run out conservatively probably 1200 to 1250. Now if we come in there, we slap granite, stainless steel appliances, maybe put some LVT on the flooring, that $80,000 property, literally now could probably fetch $1500 for a modest three bed two bath, and I am hard pressed to find a another market that can support such high rent rates with such low barrier to entry and the purchase price without maybe going to specific places in Birmingham, Alabama, or what have you. But that's the beauty of Columbia right now.

Tom:

As we're talking I'm like looking over Zillow in the area. And man, I love how I love how self serving this podcast is. It was will definitely be talking after math like, I don't know, I'm gonna love the thesis on like this.

Matt:

It’s a beautiful thing.

Mark

Well, what I love about it's a state capitol, right, and you have a major college there. I live in Dallas, near Austin, Texas. And it's like the two things I see with Austin are the same exact thing that you would see in Columbia, it's just it may be years behind. So people move to affordable areas and where they can stay young, right? You get out of college, you find a good job, you can stay hanging around your friends if you really wanted to. So there could be some really cool things I see in Colombia happening.

Matt:

Massive and Mark, I can even add some two cents there. And that can parallel it to with your point, Mike about, you know, what are some micro neighborhoods to start really searching in and so if anybody's taking notes, Rosewood, you know, rosewood is where you want to be it's literally maybe what happened to Austin five years ago before Austin became keep Austin weird. Like, that's what's happening in Rosewood right now. We have world renowned graffiti artists, you know, tagging massive walls, like the coolest stuff that you know, really did not reflect in Colombia, even two years ago, even like pre pandemic like there was no, no justified culture.

There certainly wasn't an art area. You know, I think back to Denver, Colorado when the river North District, which is now this huge art conglomerate, that literally is happening here. So if you're ever searching for properties, massive, massive student population, it's going to be in the Rosewood neighborhood area. And it really is following that path like Austin is of creating its own personality, its own culture, and its own distinctive.

Tom:

Where is rosewood? I'm looking at my map right now. And this is probably for helpful people pulling up their map where is rosewood relative to the center of Colombia, maybe like near a freeway or where is Yeah.

Matt:

But I'm looking at the center of Columbia, like, literally pinpoint the very center actually is the state capitol. It is three miles to the right. So literally, if you just look to the right, I'm pretty sure the zip code is 29204. Nope, internet 206. But there is a main bang, there it is. It's literally called…

Tom:

Inside of 77, just south of 378. Is that right? Cool.

Matt:

Yep, that is 100%. Right. And it's just like, it's the coolest spot man. There's like a 19 hundred's airstrip that's been this like massive hangout spot on they actually converted the hangar into a state of the art brewery. And so using those like outlier data points, like, especially with something as commodity commoditized, as a brewery, I've been seeing values on these properties jumped up 10 to 13%, year after year, just because it was getting to attain more and more populations. And it's becoming hit, you know, for whatever arbitrary.

Tom:

Looking at the great school ratings, I'm seeing an elementary school and an eight, which is incredibly high and middle school to five in Dre, her high school at a seven those are those are fantastic school scores. And that's one of my big criteria that I look at. So we might need to you know, hide this part of the podcast because

Mark:

Or let's do the opposite. So after this, you have you have full control, go ahead and post some properties on a roof stock in the rosewood neighborhood. And let's let's see it through the roof stock lens. So I think we're onto something here.

Matt:

Absolutely. And then, you know, Tom, now that you're sort of looking into the map, you know, I'm going to sort of drive us down. I 26. This head west probably about 13 minutes. I'm getting off at exit 103 B and I'm in Lexington, South Carolina. You know, so a lot of people, a lot of people will come in and say that tell me about Colombia. So the big four that you want to really start investing in, that's going to be Colombia proper. West Colombia, KC, which is right parallel to West Colombia, and Lexington man, Lexington is like Hotlanta, baby, but a lot smaller. And it's just fantastic. It's created its own culture. It's right beside Lake Murray, which for this area, you know, is literally as I'm sweating in my back, I'm glad you can always see my front right now is a beautiful thing to have. And these, you know, you're gonna have a little bit more competition, but anywhere in Lexington, especially centralized and looking East fantastic inventory.

Michael:

So Matt, this is this is really great. And I love that delta between the purchase price and the rental amount. I mean, that sounds like it's really, really strong. Something that our investors see is either able to make or break these deals as an investment is often Pentagon property taxes. Can you talk to us a little bit about how property taxes work in the Columbia market?

Matt:

Yes, 100%. And it may or Benjamin, you're watching this, please answer my emails, because the taxes are tough man, you know, it really is, it's the double edged sword. You know, with such a fantastic market such beautiful rent rates and purchase prices, of course, there has to be some catch. And that is going to be the non owner occupied property taxes, you know, and these are going to really come in roughly around 3% of your gross purchase price.

So, you know, on a four bed two and a half bath, beautiful new bill, that's, you know, 210,000, man, you're gonna get slapped with, like $5700 tax bill. So I mean, if your cash flowing, you know, a couple 100 bucks a month, that means you're probably only gonna net maybe four to five to 6k annually. It eats up a lot of the margin. So Mayor Benjamin, please, can we change that law and attract more beautiful investors in estate. But what we're doing to offset that is looking for those lower purchase price assets. Right.

So a lot of people they want the new builds, you know, they sound sexy on paper. But, you know, to win to win in this market, need to combat, that 3%, non owner occupied property tax, you know, let's play in the 120 to $150,000 range. So now your taxes are three grand, and we're going to get that thing rented at 1500 to 1800. That's how we can combat such a tax problem.

Michael:

And just as a kind of a point of reference. So folks understand why people might be continuing to move to Colombia. What is the tax rate for an owner occupant?

Matt:

Oh, man, it's less than half man. It's like, you're not really paying much. You know, and there's a ton of grants out here as well, to incentivize people to move to Colombia. You know, and I can even go into a little bit of deeper history of why that is. So, you know, the 1980s, the sort of the war on drugs really hit Columbia hard, because this is this is historically a new labor force town, you know, we have a massive flour mill in the heart of downtown that now it's become sort of a legacy item, no, people have weddings on top of it now.

So that demographic really was affected by the 1980s pandemic itself. And a lot of the assets in the single family units sort of were deteriorated, especially in some zip codes, nobody would move there and develop them. And so now the state is giving tons of grants for people to come in and give more life to this city, as we're sort of pulling out of that prior, that prior culture that really stuck around really, until today, there's still pockets and 29203 that are, you know, less than desirable, because the demographic there has sort of been inundated with the ancestral baggage that came from a few years ago.

Tom:

This is awesome. Michael, do you have any more questions or mark, anything else you want to touch on? I'm, this has been? Yeah, I'm, I'm a fan. I don't know. I've been looking at market for a while. And this kind of conversation really is drawing me in a little bit. A little bit closer for sure.

Michael:

Yeah, I guess my only other question that would be kind of on that on the example you gave previously. Were you getting in for 80k? Putting in that granite countertops and stainless steel now that thing could rent is renting at 1500? Is there any type of reassessment that the county is going to do in any kind of regular frequency? Or is your property tax truly tied to the purchase price at acquisition?

Matt:

Boom! So everybody, Let's get some house hacking skills ready? Because it's tied to that gross acquisition price. And so that's how you get to beat the market here is you can get by a distressed property for 60k You know, that's so 20 $25,000 into it, you know, Sue Paint windows flooring kitchen. And that thing's now gonna appreciate and appraise probably at 120 125k ran out for 1500. But now we're only tied to that $60,000 original purchase price, we're going to let it season we're going to refi our money, and we're going to keep it rolling.

And that's exactly what we did in tranches of 100 properties, every 100, we do that exact strategy, pull that cash out, recycle that it's your, your, your gilded, BRRRR strategy, and it works perfectly for this market. And so, actually, Mark is very well aware of this, that there are a few individuals that have come to this, this market space through you guys. And we're actually doing that right now. So, you know, Southern capital, we are a acquisition renovation management company. And so we have what I literally would crowned the best crew, because we have cycled through the last years of who guys can keep up with the scalability, that consistency and the sourcing of these renovations.

And that's where Matt Montgomery, who we mentioned at the very start of this cast, that company now supports all of our innovations. And so, guys, if you're interested in the Columbia market, you want to find a way to get around the property taxes, you know, my resources are your resources, I'm more than happy to have a scope built for you completely itemized with timelines. General rule of thumb is for every $1,000 renovation, it's about one day. So a $30,000 job should take us about a solid month to do. But that is one really great way to start cash flow and quickly here in Colombia.

Michael:

That's great. And let's just kind of highlight that again, Matt. So if I'm an investor, I'm interested in doing some kind of value, add renovation, and then putting a long term tenant in place, I can do that all with you and southern capital, you'll take care of the acquisitions, you'll assist in the renovations, and then you'll manage the property once I've got it completed.

Matt:

100%. So that was the whole idea of creating a holistic turnkey investment centric brokerage. That is a mouthful, but basically, we're here to be your best friend. And not only that, but we have the opportunity and the blessings of working with people like Mark, yourself, Michael, yourself, Tom, the whole team at Rootstock. So their back office, our front office and operations literally have made such matrimony moving forward that we're here to help.

Michael:

I love it. Tom, like you said, I got to make a couple phone calls over the over to Matt's office here after we hop off. Yeah.

Matt:

Come on the ship is sailing, baby.

Mark:

Got one last question. Now that I think about one last question for you, Matt. So buyers can really understand what you know, what the competition level is there? Are you seeing multiple offer situations on every property? Or is it less frequent, like we see in like Birmingham right now where almost every property has multiple offers?

Matt:

Awesome, awesome. Question mark. And so Phil, you know, everybody tuning in, you know, it's, you know, we're almost 50% maybe the last that I checked, 48% less inventory, then last April of 2020. So every offer is almost I would say 95% a multiple offer situation. But this is what we're going to do. You know, we're going to get your offer, we're going to expedite it being built out signed by you. I literally pick up my call and just being a player here in Colombia. I know a lot of the brokers say Hey, man, this is one of my investment clients, you know, you know, I know you love your your buyers and sellers, but I really value these people and their trust, can you please put me at the top of the pile.

And so that's, that's me. I'm kissing babies and shaking hands. And so I really push it as far as I can. But if you guys are coming in, we really have, I would say one shot to get it right. But that's not the case. Because if I know that we're not the highest and best, I'm gonna allow us that window, you know, and a lot of times they say, hey, Matt, we're sorry, the sellers didn't even you know, want a call for highest and best but I'm pressing these people I'm following up. I'm texting them say Hey, man, before you accept, you got to give me some feedback.

So that's number one. So guys, if you come in know that we're going to be right at ask, you know, if not five to 7% over ask. But that's not the end of the story. There's a beautiful part. And this is really what I think makes us dangerous is our off market channel. So for the last several years, I've amassed this massive contacts through asset managers to different real estate lawyers from local investors portfolios, trust funds, and say, Hey, guys, like funnel your inventory through me and I can bring a really, really healthy productive investment base to buy these acquisitions. And so I think that's what makes Columbia stand out from the rest is that we're uploading exclusive off market properties every single day that are not publicly facing and not on Zillow. They're not on the MLS stay get the sort of forsee that wave of multiple offer situations and avoid it completely. And that's something that we've done tons of transactions With the Roofstock clientele as well.

Mark:

And just to fill in on that, so you're doing that through our BYOB program, right the bring your own property, so you can send our private link, because otherwise we can't post those because they're not on the MLS. And we don't have the listing, which would be the ones that go on our exclusive marketplace. But there's still a way for buyers to get access to that inventory through you. So if they want to reach out, you can show them some of those properties, but still use the roof stock lens, so they can get the roof stock guarantees if if the properties are in the right condition.

Matt:

100% Mark, and you know, you know, Fred Haines, I hope you're watching this podcast, he just picked up four off markets from us here in Colombia. The guy is a champion, Fred, thank you so much pleasure to work with you. And we're going to get those things closed here in the month of May.

Michael:

Oh, that's so exciting. So Matt, if folks do want to reach out to you or southern capital or have questions about you know, reaching out, purchasing properties, getting rehab or management services, what's the best way for folks to get in touch with you?

Matt:

Man, I love the email. So MCrawford@roofstock.com shoot me an email, I'll shoot you a calendly link we'll get a phone call. I absolutely love that discovery phase, to sort of hear what your investment footprint is. What you are looking from this market that's gonna help me perform for you guys.

Michael:

Alrighty, everybody that was our episode a big big big thank you to Matt for coming on the show a lot of fun. Kudos to you for crushing it out there with the roofstock select program as a certified agent. We definitely look forward to having you on again. If you'd like the episode, feel free to leave us a rating or review wherever it is your podcasts. And as always, we'd love to hear new episode ideas, topics feedback in the comment section. If you want to hear about a particular episode. Again, thank you all for watching. We look forward to seeing on the next one. Happy investing

Here's Why Warren Buffett is Wrong About Real Estate May 22, 2021

We often see titles online that are misleading. Today we take a little time to push back on a video we found on Youtube titled, "Warren Buffet: Why Real Estate Is A Lousy Investment". Taking into account investment strategy, the size of your organization, your entity structure, and your expertise, we show how these blanket statements might not be applicable for you as an investor.

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Transcript

Hey everybody, welcome back to The Remote Real Estate Investor. My name is Emil Shour. Today, I've got my co host with me,

Tom:

Tom Schneider,

Michael:

Michael Albaum.

Emil:

And we're gonna be talking about and breaking apart a video that we've seen floating around on YouTube, titled Why real estate is a lousy investment. And this was from a speech from Warren Buffett and Charlie Munger during one of their annual conferences. So we're going to break it down and tell you what the video says and give you our thoughts as to why we believe this title is absolutely wrong, and why real estate is actually a great investment. So let's hop into this one.

Alright, guys, so we all just watch this video. And the title is very click Beatty, right? Why real estate is a lousy investment. And I'm sure that was created for a very specific reason to get a lot of YouTube clicks. But when we when we all watched the video, there were some very clear takeaways. First, first one, which is like the first minute or two, Warren Buffett actually talks about how Charlie Munger, his business partner actually made most of his early money in real estate. And that, why they believe real estate is a lousy investment is actually why it's a lousy investment for Berkshire. And so he lists lists a couple different reasons. You guys want to talk about those reasons real quick.

Tom:

I’ll start with it's a double clickbait article. It's not just why real estate is a lousy investment, it's Warren Buffett; Why real estate is a lousy investment. And I think I'll let Michael speak a little bit more to one of the arguments, which is the tax implications. Mike, I'll let you lead through,

Michael:

Oh of course you give me the tax.

Tom:

You know, there you go.

Michael:

Smooth!

Tom:

Smooth transition, but all, you know, all speak to one of their arguments is one of them is they didn't feel that they had a competitive advantage in and they were mainly speaking to commercial buildings, like talking about like Chicago class, a office, their argument is that is priced pretty effectively. So they didn't feel they had much of an advantage in in any type of price discovery. And I think, you know, there's such a, like an industry, institutional capital in that like larger, you know, Class A commercial space, it makes sense that, you know, as, as them and as an investor, you know, they're they're looking for value in other spaces. It's not necessarily that it's a lousy investment, it's just like, that's not where they're kind of bread and butter is, even though it was in the very beginning of their career. So, Michael, let you I'll let you transition you over to the more technical response on…

Michael:

Yeah, tax, vitiated. Yeah, I think just kind of, to paraphrase what you're saying, Tom, for our listeners is they just can't seem to find deals or they don't think that there are deals out there to be had where the there's a disconnect between what the investor can buy it for versus what it's worth. And so in that market, that they talked about that class a commercial stuff, they're just not seeing deals to be swept up. So I think that's, that's kind of the point they're making.

So regarding the tax structure, I'm gonna do my best here. Full disclosure, not a tax professional, not a tax expert, but there are different types of entity structures in which you can have as a business, you can have a sole proprietor, you can have an LLC, an LLC, you can have a C Corp, you can have an S Corp. Just real quick side note, have you guys ever seen Arrested Development?

Emil:

Yes,

Tom:

Yeah.

Michael:

So they talk they talk about instead of, instead of a limited liability company, they want to start a no liability company.

Tom:

It's so good.

Michael:

So good.

Emil:

The money is in the banana stand.

Michael:

Money’s in the banana stand.

So So you have your LLC, you have your S corp, C Corp, so they are taxed differently, and they are treated differently as entity structures. It's not all the same. And so determining what is the best entity structure for you as an investor is a really personal decision. And it's a bit of an in depth decision. There's not a one size fits all approach. And we talked about this a lot that you don't necessarily need an LLC to start investing. And there are tons of investors out there that say LLC is our are kind of ridiculous, and maybe a little bit over, over done. And so you can do it in another way.

So Berkshire was talking about, they were talking about Berkshire Hathaway, about how it's currently set up as a C Corp. And so there really is not much of a tax advantage to be investing in real estate because of the current structure that they have. So that's why they said okay for us, it's allows the investment and that's like Tom, to your point, they aren't looking at the types of deals that the three of us are looking at, and that a lot of roofstock investors are looking at in the single family space with a small multifamily space, or even the commercial family value add space. They're just not playing in that same water.

And then also, most of our I would argue that most of us, as individual investors, or partnerships aren't using C corpse, we're probably using s corpse or LLC s. And so that also changes the narrative around what makes an ideal investment. So just like we talked about, in the academy, the way in which you purchase real estate, how you structure your debt, the type of mortgages you're using, how much down payment you're using, can drastically affect the outcome and performance of the property. Same thing can be said for the ownership side of things.

If you are buying this in a C Corp. Yeah, maybe it's not going to perform as well. And you know, maybe Tom, you buy that class, a office building and a C Corp an Emil, you buy it in an LLC, and Emil’s like yeah, this is a killer investment, it makes total sense. Because of all the tax benefits that you're getting as a result of that. Tom, you might think the opposite. So you really have to look at the whole picture. And you really have to understand who's saying it, how are they saying it? And what are they actually talking about? In order to then make a determination for yourself, hey, this is advice I should listen to. Or maybe this isn't applicable to me.

And so for that video, I the my takeaway was that really none of what they were talking about is applicable to me as an individual investor, that invest in smaller and commercial small multifamily deals with the value Add Component inside of an LLC. It couldn't be like more opposite end of the spectrum than from what they were talking about. And so for me, it's like, no, that's real estate's a great investment. It's it, it couldn't be further from a lousy investment.

Tom:

Yeah, I guess to belabor the point a little bit, I love analogies. So, you know, Berkshire Hathaway is this huge conglomerate that's structured, most efficiently for the type of business that it does. So that's like saying someone who's like training to be an Olympic weightlifter, you know, what do they think about sprinting, you know, or like, you know, not that one is better than the other. But the way that you structure your business, both from a tax and a liability perspective, there's optimal ways in the many different ways that you can do it. And, you know, Berkshire Hathaway isn't structured for that type of business. Right? And, you know, they speak to it that, like, the way that they're structured, you know, there's there's not other companies that do it and that. Yeah, based on their, their, their business doesn't make sense. With their structure.

Michael:

Yeah. And that's like, yeah, in thinking about turning a, like Berkshire Hathaway's, this massive, massive company, we can think of it almost like a cruise ship. And to reorient a cruise ship takes a long time and is really difficult. And it uses a lot of fuel. And you need a very specific person to do it. And so to pick up these onesie twosies and threesies, that a lot of the kind of mom and pop or individual investors are targeting, there would just be no way to do it effectively or efficiently. And so they're going to continue down the path that they're on doing what they do, because they do it really, really well. So it wouldn't make sense for them to try to go buy a single family home in Birmingham, Alabama, for a couple 100 bucks a month cash flow for a stellar return, because they're talking about billions upon billions upon billions of dollars in doing what they're doing.

So there's they're smart enough, they're staying in their lane. They know what they're good at. And they know what they're not good at.

Emil:

Yep, exactly. And Warren says that at the end, right, he's like, it's just we're not going to be able to generate a significant return for the level level of capital that we have. Right? And so the big takeaway for me is, it's everyone looks up to Warren Buffett, like, obviously, you want to invest like in one of the best investors of all time, but you also got to know he's playing a completely different game from you, like, you got, you're playing. All of us, we're playing a completely different game than Warren Buffett.

And so when you see headlines like this, you know, it's good to remember that it's, he's saying it for the level he's at. He doesn't mean that for every single investor everywhere, we obviously know we talk about it, we have people who come on the podcast, who investing in real estate has absolutely changed their lives, help them achieve financial freedom. Like if you ask them, it's the best investment they could have ever made. Right. So yeah, just important to put context to all these, these things you see out there.

Michael:

And another really quick side, tangent, another one of those Have you seen Have you guys seen Kevin Hart's stand up where he talks about staying in your financial Lane?

Emil:

Tom:

No.

Michael:

Oh, man, you gotta go check it out. He goes, man, it's so difficult to go out with like, all these big professional athletes who they'll have so much money to spend. So when the bill comes, you know, when they're out, it's $5,000. And they're all like, Oh, yeah, we'll split it. And Kevin's like, Oh, I gotta move money for my checking account, my savings account so I can keep a debit card. Yeah, it's hysterical. He's like, just stayed. You're financially know where you're at play. There. You're Gonna have way more fun. If you haven't seen it, I highly recommend you checking it out.

Emil:

Do we have anything else to add here? Guys?

Tom:

I'd say just a click baity article. Yeah, click baity article.

Emil:

And you know, they talked about one last thing. They talked about not being operators or having an experience there. It's also they don't want like, I guarantee if Oren and Charlie wanted to become good operators, they would absolutely do it and crush it in real estate. They're just so far along and know what they're good at that they've stayed there. So, you know, if you're early, like there's only one way to become a good operator, right? You have to invest that takes time you get better at these things. And yeah,

Michael:

I just, I think that's a really great point. And Neil, and to piggyback off that, I think that to generate the types of returns that they are generally consistently generating, they would need to go cut their teeth, so to speak on a massive, massive real estate portfolio, or a massive real estate project, versus everybody who's just starting out, or who's got a couple deals under their belt, I mean, you get to determine what kind of business you want to run and build that from the ground up.

And so if you can go get your experience and cut your teeth on the single family home space, or a small multifamily space, or even the small commercial multifamily space, wherever it makes sense for you to begin, you can do that. And you can go learn those lessons, the hard way and go to the school of hard knocks, and really come away with, you know, being a better operator, a more efficient operator, and then go look to scale up, once you already have this huge business, to try to go learn something on the smaller scale doesn't make sense. And so you've got to go play in the upper echelon and go learn on the big scale. Well, that's really scary. And so we talk a lot about on the podcast, and I've said from my past career that we always have to ask ourselves, what's the bet, whenever making a decision? What's the bet, and if you're betting a really big amount on your decision, then you better pay a lot of attention to it and give a lot of time and energy and focus to it.

If the bet is smaller than Okay, roll the dice, see what happens. And so for Berkshire, their bets are big. And so they want to go learn it right? And it just doesn't sound like there's an effective way or an efficient way for them to do that.

Tom:

Exactly. I mean, the amount of capital that's being deployed is just so key in here and looking at the market cap of Berkshire Hathaway, their class A, it's, you know, over half a trillion dollars, like 660 billion so like, you know, if they wanted to, like, deploy money related to real estate, that's of any significance, you know, there, it would just be, you know, you're buying these huge, you know, Class A, whatever multifamily or huge, you know, commercial and that's, that's not their sweet spot. So, I mean, it's not even relevant talking about single family or smaller stuff.

Michael:

But the new investment and Tom just for everybody who's listening who might not be familiar, what is a market cap mean?

Tom:

It is the the total value based on the shares outstanding. Well, basically what it is it multiplies the number of shares outstanding by the price per share. So it kind of gives you a rough valuation.

Michael:

Perfect. And so bigger valuations means bigger dollars are at play, right?

Tom:

That's right.

Emil:

Awesome, cool, guys. So I think the big takeaway here is that we're all smarter than Warren Buffett and Charlie Munger and those guys should retire now. Just kidding. We're just we're just debunking the the clickbait out there. That's what we're trying to do. Alright.

Michael:

Just a couple of guys, You know?

Emil:

Yeah, exactly. Just a couple guys. Alright guys, that we had this conversation. If you're listening, go ahead on YouTube. Leave us a comment. We're going to be doing a little bit of a swag giveaway. So leave us a comment, subscribe. Let us know what you think of this episode. And make sure you check out our podcast playlist that has a bunch of previous episodes, and we will catch you on the next episode.

Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

How to Make Competitive Offers Without Paying Too Much May 15, 2021

With home prices soaring and competition through the roof, it's important as an investor to know how to be competitive without compromising your returns. In this episode, we discuss different strategies to consider to make sure you're not left high and dry from an emotionally driven deal.

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Transcript

Emil:

Hey everyone, welcome back for another episode of the remote real estate investor. My name is Emil Shour and my co host today are,

Tom:

Tom Schneider

Michael:

and Michael album. And today's episode, we're gonna be tackling something that's a little relevant to the time. So as everyone knows, very hot real estate market, not a lot of supply a lot of demand. So we're gonna tackle the question, how do you make competitive offer in today's environment without overpaying? So let's hop into this episode.

Alright, guys, this is a very timely topic. As I mentioned earlier, very hot market out there not a lot of supply. A lot of demand a lot of owner occupant demand, right people very interested in home. So if you're an investor looking to buy a single family home, probably pretty tough out there right now. So Michael, I wanted to kick this one off to you first, just because I'm sure in in Roofstock Academy you get this question a lot from new investors, seasoned investors. So I'm curious what your you're telling people what the message your your relay is?

Michael:

Yeah, absolutely. Is I First off, I just have to say I love the wording you use. It sounds very coach, like at a sports event? So my answer is like, you got to have high and low and you go out there. It's tough out there. But you got it. Yeah, score barkos. So I think it's really apt. It's really apt question and definitely really timely. So what I always tell people is, look, the numbers need to drive the decision making above anything else. So if you can afford to pay 5000 over ask 10,000 over ask or ask or 10,000 under ask. I mean, that's just the numbers. That's the math.

So you need to do your analysis really thoroughly and be very confident in your numbers both on the income and the expense side, which is then going to dictate Okay, what kind of returns should you be anticipating based on these different purchase prices. And so we've actually got a really great tool in the academy, the property analysis tool, and you can do a goal seek in Excel, which will basically tell you, Hey, this is the maximum offer price you can have, or that you can offer in order to hit your goals, whether that be cash flow, or cash on cash or cap rate. And so like Pinocchio says, always let your conscious be your guide.

Tom:

But that's not a good mentor He’s got a, you know, a checkered history. So think of someone else Michael

Michael:

Depending on his nose length is gonna determine how how good of a mentor he should be, always let your numbers be your guide. And the other thing too is if you're buying with a loan, there's going to be an appraisal done. And so the lender is also kind of going to be your backstop in that sense. And they're going to look to other properties and say, Well, this isn't worth that much. So we're not going to lend on this much. So you've got a little bit of leverage. But the thing to keep in mind is that a lot of people are overpaying for properties they're paying over ask they're paying above and beyond what the appraisal comes in at. So it is just very competitive. So I'd say first and foremost, let your numbers be your decision making beat up pointed out spear. Tom, what are your thoughts there?

Tom:

I think that's great. You know, it's funny, we have the outline of this episode. And sometimes I'll I'll sort of quickly run the episode and how I expected to go out like our talking points, just kind of knowing each other and I think you stole mine in this episode.

Michael:

You were going to use my reference to Pinocchio?

Tom:

Well, no, I didn't know we're just talking about this is the magic bullet for like making competitive offers it is knowing what your maximum bid is. And in a really tight environment, like volume could be could be part of it is just evaluating more properties. If you're in a less competitive environment, it's going to take less offers, I think to get stuff into contract, but you know, being data driven and knowing what that maximum amount you want to pay, having that in going forward in making your offers.

And like I said, in this type of environment, I think it's it could be a little bit more of a volume play of just evaluating more properties to get there. Now in the episode of my head, Michael, you have this really beautiful narrative around do what you got to do to make your competitive your offer like a little bit more unique, you know, if you can do things around, I don't know, like contingencies or get to know the seller, you know, and see what makes it worth it. That's what I heard in my head of the Michael version of Michael in my head going on,

Michael:

You must be looking at my screen then cuz I've got notes on on that that was gonna be the spirit handle.

Tom:

Okay, Okay, got it. Alright, so it sounds like we're getting back on track. The feedback is, you know, within this environment, it could be easy to get caught up and wanting to win win win when you need to win at getting the returns that you want. So you know, making sure you know exactly what that maximum bid is to get and using that and not going beyond it and then oftentimes doing a little bit more volume.

Excellent. So within the article that peer mentioned, he talked about, you know, waiving all your contingencies going over Emil, why don't you speak a little bit to some of those strategies from that from that article?

Emil:

Yeah, so like Pierre mentioned, if you've read anything about this crazy market, people are going way over ask, they are removing all contingencies, because, you know, they really want to get a house. And I'd say the warning there is remember, these are probably owner occupants, these are people who want to live at that property, they are driven by emotion. And you as an investor should be driven by numbers and returns and things like that. And so just like Michael and Tom mentioned, let the numbers dictate what you do.

I would never personally drop all my contingencies for an investment property, especially if I'm buying remotely like there's, there's no way I'm going to do that. And again, just remember, these are owner occupants, these are people who are driven by emotion, who want to live there and doing all these things. So don't assume because you're not willing to do that, that there's something wrong with what you're doing. It's just a different type of person and buyer that's, that's doing those things. You guys agree, disagree?

Michael:

I have to say, before we move on, I just want to ask you, for all of our listeners that might not be familiar with what contingencies are, can you just give us a high level overview of what a contingency is, and what the typical ones you might see in an offer or a deal are?

Emil:

Yeah, contingencies are things that and you guys, correct me if I'm saying this incorrectly, it's things that protect you as the buyer. And so typically, you have an inspection contingency, a financing contingency, if you're getting a bank loan, that allow you to back out of the offer, if certain things aren't met. So your inspection contingency says, you know, it's, let's call it 15 days out from when you enter escrow, that allows you to do your inspections, and address those things with the seller. And you can back out of the deal if you're unsatisfied with certain conditional things, or things that the seller isn't willing to agree to. So protects you as the buyer. Same thing with financing, let's say you go out bank won't give you financing. It allows that's your financing contingency, it's in place allows you to back out of the deal as well, that right guys?

Michael:

That's perfect.

Tom:

Yeah. Instead, by backing out of the deal that allows you to get your earnest money deposit back.

Michael:

Yep,

Emil:

Yeah, you can still back out of your deal. Even if your inspection, contingency and financing contingencies have been removed, you're just not going to get your deposit back.

Michael:

And with those contingencies, too, I mean, there are other things that you can put in place, and you can put into a deal into a contract or an offer whatever kind of contingency you want. So it tends to weaken the offer, the more contingencies, the less strong the offer is compared to other offers, which is why people are removing their contingencies to make their offer stand out.

So I was in contract on a commercial property up in Alaska, actually, way back when, and we did not remove all of our contingencies, we still had them in place. But we were not able to get insurance on the property. We wanted earthquake insurance, and there was nobody that would write that for us. And so we had to walk away from the deal, because we couldn't insure it, and we couldn't get our earnest money deposit back, because that wasn't one of the contingencies. That's not part of those two. So I said, well, that's interesting one, so keep that in your back pocket, if you're going to be purchasing any kind of unique property, maybe think about putting an insurability contingency as part of your offer.

Tom:

Yeah, I think that article is totally about owner more relevant to owner occupied, like, I get it, like, you know, you have a pregnant wife and a dog and you're living in a studio apartment. And yeah, sometimes it makes sense to pay a little bit over to make that work.

Michael:

So something to think about, too. For all of our listeners. I'm curious to get your guys's thoughts on this. But if somebody as an investor is targeting tentative occupied properties that already have a lease in place, do you think there's going to be this same kind of hunger feeding frenzy to buy those properties by owner occupants? Because if there's a lease in place, they can't just kick the tenants out? And so I would imagine that the vacant properties are the ones that are seeing more of this feeding frenzy type of thing. What are your guys's thoughts on that about potentially targeting occupied properties, tenant occupied properties for investors?

Emil:

I think it's probably not as crazy but still feels crazy right now. I think just interest rates are so low and prices are appreciating everywhere that there is a lot of single family rental demand. So people who are investors looking to make a single family home a rental property. So you know, I think we see it on the roof stock marketplace, a lot of healthy demand out there still, but I don't think you see the craziness of multiple cash offers going over asking and you know, like dozens of offers. I don't think it's that crazy.

Michael:

Tom, I'm curious, would you ever buy a property and waive all of your contingencies?

Tom:

So with some properties, there is recent inspections completed by third party inspectors so like with roof stock certified properties, you know, there are not a lot of contingencies on those, there isn't an appraisal contingency. But you know, if they recently did an inspection, it wouldn't include that. I guess that to answer the question directly, I probably wouldn't like there is at least an appraisal contingency where I couldn't get that end back. So no, I would, I wouldn't waive all contingencies. But never say never.

Michael:

Never say never. But so let's dig deeper into this. So you have a recent inspection. And let's say you're going to pay all cash for the deal, because it's at a price point where you can afford to do that and you want to be competitive. Would you keep your appraisal contingency in place? Even with an all cash offer?

Tom:

Oh, probably not. I feel pretty confident in coming up with comps on my own. Like, I would say I've never really outside of like 15% of what an appraiser thinks it is. And I'm often like a much more stringent, more very conservative on like, when I'm evaluating properties on the like, what the value is, I'm not putting on the pink glasses, the rosy sunglasses pink, something like that. Anyways, so I would be fine. I wouldn't be totally fine giving away the the appraisal contingency if that would make my offer more competitive of giving away that type of a contingency. But I mean, if there was any, like, you know, structural smoke any of that kind of stuff. Like I want to hang on to that. Yeah, but the appraisal one would be a reasonable one that would feel comfortable punting on just in my ability to do that. Get the appraisal my own.

Michael:

Awesome.

Tom:

Yeah.

Michael:

So now I'm curious, if let's say let's walk through a scenario, the inspection looks good. But you have an appraisal contingency in place, and the appraisal comes back. And it's 10,000 less than the price that you have the property under contract for, let's say, the $100,000 property, you got an contract for 100 appraiser comes back says it's only worth 90. So the bank's only gonna lend on 80% of 90 grand and it's a hot market. So if you don't pay that $100,000 price, the deal is going to go away because somebody else is going to come swoop in and pay all cash behind you for 100 grand, what are you going to do?

Tom:

There is some wiggle room on the value even if it does like appraise poorly like i would i would be okay coming out of pocket. Like if I feel comfortable on like what I think the value should be even though like the process, the appraiser may come up with something a little bit different. It's just such a subjective game sometimes like on the appraisal art. So like I would still move forward as long as I had, you know, the right kind of reserves to make up the difference on like, what appraisal came out.

I got a different angle on making your offers more competitive to the heart of this conversation. This isn't relevant, you know, within Roofstock, because there's a set end amount, but what do you guys think of putting down like massive earnest money deposit amounts, I'd love to hear you guys riff on that.

Michael:

I love it. I think it's a really good play, especially because it is 95% of the time protected and refundable. So if you can structure your deal properly, I think it just shows that you're super serious about the deal, and willing to put your money where your mouth is. So I'm a big fan, I get turned off when I get offers on properties that I'm selling with really small emds because I'm asking myself, Well, what are they concerned about? What do they know something that I don't? are they planning on this deal? Not happening?

Tom:
You scared?

Michael:

Yeah, you scared, bro? Scared, your end goes towards the purchase price. So it's not again, it's fully refundable, if all the contingencies are not met. So I'm a big fan. Emil?

Emil:

Yeah, like it, I've never done it. But I think in a market like this, where you're trying to do anything you can to make your offer more competitive, why not? Especially if you're not waiving your contingencies. Now those contingencies in place for a reason, why not make your offer a little bit stronger with, you know, doubling or potentially even tripling your earnest money to make it stand out.

Tom:

Random, emd related, quick story. So I, I have my broker's license in California, but I've like rarely ever used it, I only use it to buy the house that I'm living in today. And I've like I've made some offers on other houses. And it like show that I didn't you know, wasn't like a super active agent, because that's when I was putting my emd offer down. Like it was like not best practice at all it like stood out.

Like I'm used to the standard, whatever, either like 15 $100 or whatever. And when I'm putting an offer like on this more expensive house for like an owner occupied house, my end was such a small percentage of the purchase price where they're like usually expecting it and I found this out talking to the agent after is like, yeah, you look like a moron with your EDM out there. So like there's some best practices with EMD. And, you know, showing you mean business is like could mean perhaps even putting up to like 50%, you know, or some very large amount but me being a moron, not at being an active agent all the time when I was like submitting offers on behalf of myself buying houses, I put like, you know, it was like half a percent where it should have been like three or 5% something's in there like so, you know, in thinking about your offer, that that end amount is a really important lever to show intent and putting it on the table.

Michael:

That's such a great point. It's something it's a question I asked all the agents I work with when we're writing offers is you know, they say, hey, how much do you want to put for end I'll say what's customary for this market? Because it really does range and varied, you could have a set dollar amount that's customary, you could have a percentage of the purchase price that's customary. So, Tom, that's a really great point to bring up and just have that open conversation with your agent so that you don't look like a moron. Yeah,

Emil:

Tom, you just brought up an excellent point that I'd never really thought of, if you're buying your personal residence in California, maybe it makes a lot of sense to go get your your license, because I feel like you can make your offer so much more competitive. If you're like, Hey, I'm representing myself, you as a seller, you're saving 3% you know, get a little bit more of a deal when you go by your by your home, or not just random aside.

Michael:

It's like a 6%, swing, right, you'll, you'll save the seller 3%. And then you'll make 3% as the buyer, so you can put that towards your down payment. Depending on the purchase price of the home, it could be this could be big dollars, for sure.

Emil:

Interesting.

Tom:

EMD. The other lever in the offer, you know, competitive offers his timing, right? Like how quickly you're you're going to close, I'd love to hear you guys riff on, you know, ways that you've used that part of the offer letter to your advantage.

Michael:

I've in the past just offered a quick close three week close with a short, you know, shorter inspection contingency period, I'm never willing to waive the inspection contingency if there's not one existing. So I'm not comfortable with someone just walking through the house and saying, Oh, yeah, this is that I mean, I want a professional walking through it. Because nine times out of 10. For that cost of the inspection, I'm able to negotiate the purchase price down more so than that, so that's money well spent.

So I can offer a quick close, I can offer cash clothes a lot of the time. And so that's very attractive to sellers. I know being a seller that's very attractive. I'm in contract right now, to sell a property where someone today we can close in 30 days all cash 15 day inspection contingency period. So it's attractive to sellers, because they want to get the deal sold, they're not in the business of holding on to properties if they're trying to sell them, otherwise, they wouldn't be selling them.

So yeah, I'm just thinking about this too. Like sometimes if you don't have a motivated seller, like myself, for instance, I'm not a highly motivated seller, because the property cash flows, so I just have a better use for the cash elsewhere. So if I can't get the purchase price I'm looking for I'm just gonna hold on to the property. When you find sellers like that, it's tough to really drive your numbers and your price. So just kind of look to understand why the seller is selling, if you can, if you can get some insights into what's driving them to sell what their motivation is, you can then structure your offer to play to their strengths, so to speak.

Emil:

Yeah, I've never done cash. But on financing, I'll always ask the bank, what's the quickest we can close so that it helps us write that into the offer, right? You know, instead of having to write 45 day, we can say 30 day, if the bank can close in 30 days, so definitely something to add in there. Just talk to your bank, ask them what the quickest close time is and write down your offer.

Tom:

Another lever that I learned about during a recent episode that we recorded was about creating like a resume, like an investor resume. And you know, it sounds kind of silly in like, oh, creating a document about yourself as an investor or your LLC, or whatever, in the deals that you've done. And like performance of like closing quick. And basically like a, it's almost like, you know, when you're owner occupied, submitting a letter, you know, say, Oh, I want to move in with my dog and my baby. And all that kind of stuff. Like this is basically the version of saying, you know, I've closed, you know, 20 transactions, I close on time, blah, blah, blah, here are some references. It sounds kind of cheese ball. But like in a competitive market like this, like I think there's some value to be had in putting together organizing that type of a document.

Michael:

I think that's hugely impactful, Tom, and something I didn't realize was going on was the agent that I used to work with out in the Midwest, he was kind of doing this on my behalf anyhow, without my knowledge. So he would approach other agents when we make our offers and say, Look, this is my buyer. He's done, you know, six deals in this market. This is the purchase price, this is the closing this, you know, this were the details of the transaction.

And so I was taken much more seriously than someone who is brand new to the market or someone who is a brand new investor. And so I've actually had and this is not me, tooting my own horn. This is not meant to be a humble brag, but I've had agents reach out to me, because they know of the deals that I've done in the area and have brought me deals. So these are selling agents coming to me saying, Hey, I know that you're serious buyer, you can close. This is a property that my client wants to sell Would you be interested in.

And this is usually off market type of stuff. So I'm like, holy crap, like your reputation precedes you both good and bad. So you know, and people talk in the industry. So make sure you've got a good reputation and absolutely highlight your wins, highlight your successes, show people that you are serious and that you are capable as an investor. It's massively impactful.

Emil:

You know, does?

Michael:

Who?

Emil:

My good friend Michael Zuber baby. He invests in Fresno, he has a fantastic resume, write anything he would enter in contract. I think he closed like 99.9 like some insane number. And so he wrote this resume, number of deals he's done, what percentage he's close all these like awesome facts about himself references like you guys mentioned, and he says he believes that that has helped him a lot. And so I got bought a lot of property, and he does it. So I would imagine pretty solid tip.

Michael:

And for anybody that thinks it's cheesy or kind of silly, just put yourself in the cellar seat and flip the roles a little bit. If you're selling a property and you're getting you have 10 offers, nine of them are a name and a number that they want to buy the property for an attempt one is a name, a number and a list of other deals that they've done in the area of purchase prices close on time transaction percentages are probably gone with that person, you know, 95% of the time, as long as there's not a huge Delta in price point.

Because to be honest, everybody else has kind of taken a gamble with a lot of deals fall out of contract. And when they do, you've got to start back from square one. And if you come crawling back to a buyer, the second or third or fourth down the list, they might get wind of that and say you know what, you're coming to me now. Now the balls in my court, the price isn't the same. Now we're I'm gonna make you pay for that. So look to do the deal when you're selling property and get it done with the most likely candidate who's going to close, which is why sellers like all cash, because there is no bank to muddle up the deal.

Emil:

It is a little cheesy, but you stand out as a professional in a sea of anonymous, you know, contracts being submitted. So it's probably not as relevant if this is your first or second property. You don't have that resume or track record. But I'm sure there's something you can think of that. I think it just it makes you look like a more professional real estate investor. So I think anything you can do to create some type of resume, I think it's solid.

Tom:

I like it guys. So we got a couple of things here we got knowing exactly what that max bid is and coming against your offer, you know, put it crafting your offer with that in mind. Probably volumes going to get to be an aspect of evaluating more properties when it's really competitive, raising the EMD tightening the offer, the closing timing, and then also some collateral about yourself as being a performer, right and sharing that seller agent and whoever will listen to you talk about that.

Michael:

Yeah, love it. All really great, actionable takeaways.

Tom:

Awesome, guys.Any other final thoughts on the episode submitting competitive offers?

Michael:

The last thing I would say is your ego is not your amigo. And so oftentimes we'll see a property, let's say is listed at 70,000. And you've got to go pay 80 grand to get it done. Well, you're thinking yourself, man, I'm paying 10,000 over ask, this might be a crap deal. But if we just raised the list price to 90k, and you got it for 80 you'd be thinking oh my god, this is an amazing deal. Everything else being the same. So don't let purchase price influenced your decision making or opinion of the deal. Again, look to the numbers.

Emil:

And along those lines. Don't let your emotions get the best of you. I say this you know if you're if you're watching on YouTube, I'm saying this with a smile because I have let my emotions get the best of me. You know, it's hard. It's hard when you've lost five to 10 consecutive offers to not let your emotions get the best of you. But please learn from my mistake. Don't let your emotions get the best of you stick to the numbers. Be patient. It's more about getting the right deal than just getting a deal under your belt. So that's my final tip.

Tom:

How about this Emil, Don't get lost in the ocean of emotion.

Emil:

You guys with your Amiga when I go and ocean emotion you guys are rhyming bars today.

Michael:

Yeah, yeah, keep up. We're rhyming, we're right on.

Tom:

And I'll close this out with sometimes your best deal is the one that you didn't do. You know, the by not needing to win, being patient. being strategic. I think, you know, I definitely believe in a bias for action. But it's super important to be disciplined in setting that number and not going beyond it. So that will be my final, final input.

Michael:

My final final final…

Emil:

No, no, you're done, Dude.

Michael:

Crap. We were chatting about it the other day, the person who wins the negotiation is the one who cares the least. So if you're able to walk away like Tom mentioned, you stand to gain the most.

Emil:

Solid. Alright, and any other cheesy one liners or

Michael:

There's no crying in baseball.

Emil:

It takes two to tango.

Tom:

Yeah.

Emil:

Thanks, everybody. Hope you enjoyed this episode. hope you got some great valuable tips and we hope you you win that next offer and get an awesome deal. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

So You Won a Judgement? But How Will You Collect? May 08, 2021

Winning a judgment on a tenant that has trashed your property is one thing, collecting on that judgement is entirely another story. Did you know that only about 10% of judgments are actually collected?

In this episode, Steve White from RentPrep drops some serious wisdom on what you can do on the front end to increase your chances of being in that 10% of landlords that actually collect!

Website: https://rentprep.com/?utm_source=roofstock&utm_medium=podcast&utm_campaign=steve-media-outreach-2021
The "RentPrep for Landlords" Podcast: https://podcasts.apple.com/us/podcast/rentprep-for-landlords/id851540886
The "RentPrep for Landlords" Facebook Group: https://www.facebook.com/groups/RentPrep

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Transcript

Michael:

Hey everybody. Welcome to another episode of remote real estate investor. I'm Michael album, and today I'm joined by Steve White, who is the founder and CEO of rent prep. And on this weekend wisdom, Steve's going to be giving us some insider tips as to better ways to collect judgments that we have against former tenants. So let's get into it.

Hey, Steve, thanks so much for joining us on today's weekend, wisdom. Really appreciate you taking the time.

Steve

Yeah, thanks for having me on.

Michael:

Steve, we had you on another episode of the real estate investor, where we're talking about rent prep your company and some things that landlords can do to screen tenants. So stay tuned for that one, but wanted to give everybody a little nugget. And you've got some experience in collecting judgments, or winning judgment awards that landlords have put on tenant. So can you talk to us a little bit about some things, tips tricks landlords can do?

Steve

Yeah. So winning judgments is a lot easier than executing and collecting judgments, as you know,

Michael:

Yes, I know. I am all too familiar with that.

Steve:

Yeah, I hear landlords get excited all the time and say like, Yeah, we got to judgment. Oh, my God.

Michael:

Good luck.

Steve:

Yeah, the struggle has just begun,

Michael:

Right, really the best way to handle it. And I'm gonna say that your strategy needs to start way earlier than you would imagine the strategy needs to start at the rental application process. I know, a lot of landlords are okay with applicants skipping information on their application. And there's a lot of information that you wouldn't think is super useful in the application process, like for example, their references, like who's going to call a reference and expect that they're going to give you a truthful, objective perspective of if this person's a good tenant or not, you know, their mom is gonna say they're lovely, and they're great. They want them out of the basement anyway. So they're just gonna be like, yeah, they're awesome. But, you know, that rental application has a future life well beyond that screening process.

So when you think about obtaining a judgment, or even executing judgment, some of the pieces of information that you might need are going to be hidden in that rental application. So for example, they were just evicted or abandoned, or whatever your property, where are they living now? Well, if they're short on money, they may not have a new apartment, they're probably living with whoever they listed as their next of kin or personal reference. So now, you know, now you know where to serve. And now you know where to you know where to find them at least.

So those personal references are absolutely worthless. When it comes to the application process. Don't waste your time calling them and asking if they're going to be a good renter, call the previous landlords, that's worthwhile, but not the references, the references are worthwhile after you've screened them, and you're trying to track them down.

Michael:

Interesting.

Steve:

Yeah, employment information, right. So you cannot garnish somebody's wages, if you don't know where they work, the court will not do that dirty work for you. So you got to know that going into it, you know, and again, that's something that you'd find on the rental application, right, daycare 30 to list where they work, who their supervisor is, how to get ahold of them. So the best piece of advice I can give you on the rental application side of things, is every single landlord needs to adopt a no Blank Space Policy.

If an applicant fills out the rental application and says, I just don't have some of this information. But here you go, it's 70% complete, you need to kindly push it back across the table and say, I'll wait, I need the rental application to be fully completed. And again, a lot of that information may be useful to you into the future.

Wage garnishments again, you need the employers information, if you're going to do any kind of garnishment you know, beyond the wages or freeze their bank accounts or anything like that, you're going to need their bank information if they're not paying you with rent checks. And they're, you know, they're paying you through some online system, you're not going to have access to their bank information as easily as you would if you had a check in front of you. So if your application or your leases including information on you know, bank information as a reference and things like that, that's going to be useful for you as well during the the judgment collection process.

Okay, so a couple of easy tips on the front end, no Blank Space Policy collected information, it could be hugely valuable to you in the future and on collecting on a judgment. Now, let's assume that you have the judgment I'm already I'm going to give you the really ugly truth, the rental industry as the lowest collection rate of any other industry below if you can imagine below dentists, these poor dentist can't seem to get paid on stuff. And the reason is because there's no blacklist for dentists. If I go to a dentist and I leave owing a balance, I can go to the dentist on the street and have him continue or fix whatever my problem is. Mm hmm. And he's going to take me as a new patient. There is no dentist blacklists that says hey, this guy owes me money, so don't do business with him. So Dentists have a notoriously low collection rate when it comes to their receivables or past due bills. And if you can imagine the rent All industry is even lower than dentists.

Michael:

And we have a blacklist what a bunch of baloney.

Steve:

I know. I know we Yeah. Right. So first and foremost, don't get your hopes up that because you got a judgment that it's money in the bank. And don't spend it before you have it, the chances of you getting it are slim. And when I say slim, I mean, at best 10%. So our recovery rates that we were normally seeing were about eight to 10%. In the rental industry.

And the reasons are obvious. If somebody falls behind on things, and they can't make their payments, it's really hard to catch up on big chunks, like rent payments, and still keep up with other things. Right? really tough.

So, you know, they're really, really difficult to collect on the best advice I can give in terms of what do you do after you have a judgment in your hands, don't spend another Penny trying to collect on it. A lot of landlords make that mistake, I would use a third party collection agency that operates on a contingency basis, do not pay them anything upfront to place the debt with them, if they're insisting that that's how it works, find a different agency, there are a ton of them out there, including a lot of attorneys that may not even advertise that they do debt collections, but a lot of attorneys do. So it may even be worthwhile asking your own attorney. And if they're working on contingency, they've got a little skin in the game, they're not going to get paid unless they get paid. So that's one, you know, potentially useful way to do it and take it off of your plate and not have to think about it and let a third party agency or a third party, you know, Attorney try to collect on it

Michael:

Like Dog the Bounty Hunter.

Steve:

Exactly right. Don't you wish like that would happen? Like dog showed up and says like, Hey,

Michael:

you owe me money.

Steve:

Right, right. Like every landlord wants that. So, of course, like I said, you know, you could try some of the traditional ways which are not very effective, like wage garnishments, if they're job hoppers, and they don't have a job or don't keep a job for a long stretch of time, you're not going to be able to garnish wages. And even if you do what garnish your wages, it's regulated by the state that you're in how much of a percentage of that wage you can actually take at a time. And I think the highest percentage is Ohio, which is about 10%.

So it's not much going to take you a long time. I think you mentioned you had a $10,000 judgment and take you a long time to collect a $10,000 judgment small bites at a time.

Michael:

Yep.

Steve:

Freezing bank accounts. That's another one varies by state. But in most states, they require a minimum balance before you can freeze it. In New York, it's 20 $500. I don't know about your confidence level that your previous tenant has just an extra 2500 cash laying in their bank account, right? They did, they probably wouldn't be in bad financial shape.

Michael:

Right.

Steve:

So that's not super effective. What I've seen the most effective is tax refund, garnishments Hmm. And these need to be filed every year, you can get lucky if they have a huge refund coming, you might be able to grab your past two in one clean swoop. But there's a more likely that you're going to have to do this in over a period of several years, you got to check with your county that you filed your judgment and when that deadline is for filing refund garnishments, because it's usually December, each county is a little different. So you want to be prepared, make sure you get it within the filing deadline. And there may be a filing fee. And we're talking most places, it's 10 or 15 bucks, it's like the same fee, you pay for a marriage license or you know, to get a permit to build a fence in your yard or something like that. So it shouldn't be a super expensive fee. But you file these at the courts.

And you're basically standing in line waiting for that refund that tax refund. And it's based on order filing priority meaning first come first serve. So if you're doing this and five other people are doing it, you got to get there first. And the only person that can supersede you is the government. So if the government is going to garnish their tax refund for whatever purposes, maybe they would pass due taxes. The government's first no matter what, okay, they're going to get through money before you do.

Michael:

Big shock there.

Steve:

Yeah, right. But anything that's left or if they don't have any other garnishments, that is a really useful way to take large chunks at a time and get your money back. So in my opinion, that's probably the most effective strategy. If you have an old judgment laying around, and you want to blow the dust off and try to go after it again, that might be your best bet.

Keep in mind that judgments are only good for seven years, they expire. They're like milk, and the differences they get chunky, but here's the difference. You can file extensions, ah landlord should do. Again, it's a filing fee. So it's well worth 10 or 15 bucks to file an extension and have that thing live on for an additional seven years then to just let it die because it will just die after seven years and then blow away like dust and it says if it never happened. So if you're getting close to that timeline, you want to refile. Also if you can get them to pay anything, it restarts the time

Michael:

That's seven years of no payment,

Steve:

Seven years no payment, no activity. It's it's dead after that time. So if you can grab something on a garnishment or something like that, or get them to make a payment on it, then it starts that time clock back over again.

Michael:

Okay. And can landlords double dip or use multiple of these tactics? Get a wage garnishment and a tax refiling garnishment? Or is it one or the other?

Steve:

It's one or the other? I've never heard of anyone double dipping, although I'm sure plenty I'm sure it's been tried. I think it's one or the other. And I think the issue that you would potentially run into, which would end up being more of a headache for you as landlord would be. Let's say you got two things operating at the same time, and you get lucky and you collect all the money on the tax refund. And now you're in some sort of situation where you're collecting,

Michael:

Wage garnishments.

Steve:

Yeah, so I would say I would do one at a time,

Michael:

Pick one and stick to it,

Steve:

Pick one stick to it. If you already have an existing judgment, check out the tax refund, if it's really early in the process, and you just got that judgment filed or you're about to I would look into, again, a collection agency or an attorney that's willing to work on contingency to try and collect that so you don't have to worry about it. Think about it. stress about it if they collect something great. If not,

Michael:

Didn't cost you anything.

Steve:

In it wasn't probably a good collected either way. So yeah, yeah.

Michael:

Oh, man. See, these were great. These are super, super cheap. I wish we had had this conversation seven, eight years ago when I needed this more.

Steve:

Yeah, I know. I know. I

Michael:

That's okay.

Steve:

Well, I talked to landlords all the time that are in that same situation and a lot of landlords that have that mindset of like, cool. I got the judgment and it was a couple of hoops to jump through. But it was worth it. And now when I get it collected, and that was

Michael:

Easy sailing.

Steve:

Yeah, that day never comes.

Michael:

No, it doesn’t. It has it. But you know, I've gotten a lot of mileage out of this story. So you know, it's all good. It's all good.

Steve:

Well, that's that's what it counts for, right? Like life lessons. And usually don't make those kind of mistakes twice or, you know, high aspirations that something's going to happen if you learn like, no, that'll never happen, and I'm probably not going to get that money. So, Yeah, I hate to tell you that to let it go. But that's the best. You're gonna sleep better at night.

Michael:

It's the best thing you can do.

Steve:

Yeah, yeah.

Michael:

Yeah. Awesome. Thanks Steve. Again. really a pleasure having you on and we'll have to do this again sometime soon. Take care. Yeah. Great. Thanks. Alrighty, everybody. That was our episode. Wow. A huge thank you to Steve really, really great stuff. I wish I had known years ago when I was trying to collect a $10,000 judgment from a tenant that trashed a property on the way out of my house. So again, if you liked this episode, please feel free to leave us a rating or review. They are really helpful for us. And as always, if you have a specific episode, topic or idea or something you'd like to hear more about on episode, leave us a note in the comment section. We'll make an episode about it. Thanks again for listening. Happy investing.

Why Cost Segregation Studies Are Powerful For Saving On Taxes May 04, 2021

One of the major upsides of investing in real estate is the tax benefits you can take advantage of as an owner. This episode covers a powerful tax strategy, the cost segregation study. Scott Roelofs from RCG Valuations, explains how they work, who they are good for and why you might want to start employing this strategy now to save big on taxes.

Visit RCG at https://rcgvaluation.com/

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Transcript

Michael:

Hey everybody, welcome to another episode of the real estate investor. I'm Michael album, and today I'm joined by a very special guest, Scott Roelofs. With RCG valuations, and Scott's gonna be talking to us today about all things cost segregation study. Some of you may or may not have heard about, but let's jump into it. Well, Scott, thanks so much for joining me today. Really appreciate you taking the time, man.

Scott:

Yeah, man. It's exciting.

Michael:

So I just have to ask, I mean, you've got a ton of letters after your last name. I'm just curious. What do they all mean? What do they represent? Let us know give us some insight.

Scott:

The big ones, CFA, Chartered Financial Analysts, you know, three years of study, average pass rate is 45%. So basically 8% of the people who try to get it actually do get those three letters. So that's kind of the big one ABV, that's

Michael:

Your alcohol by volume.

Scott:

Yeah, alcohol by volume. Yeah. It's an auditing. It's a construction, auditing. accreditation, then you have a IMS, which is asset management, AWS, which is a wealth management. I also have 679 1063 life health. It's actually funny, my cousin who is smart as I am, she comes up to me, and she's like, so are you done educating yourself? And I'm like, Yeah, I guess so. I guess,

Michael:

I guess I shouldn't be.

Scott:

So yeah, so I guess I'm, that's an…

Michael:

Awesome,

Scott:

You know, you may not know what they all look like, but you're like, there's a lot of them. So, yeah,

Michael:

Totally. So there's not a whole lot that you don't do in the financial world. That sounds like?

Scott:

I feel like I can walk into any room and hold down in any kind of conversation, whether it's, you know, in business or, you know, venture capital or anything like that.

Michael:

Awesome. And so did you are you the founder of our CG Valuation & Monetization?

Scott:

I am, yeah, I started doing cost segregation, kind of like in a selfish ways I had owned my own office and didn't want to pay as much taxes. So I started looking around and got introduced to it. And then I found a company that actually allowed me to do them, and like, actually kind of do the work. And they would help with some of the engineering and that worked out great for a while, but what happened is, is I started to look at things and go, okay, you know, you send me out with a measuring wheel and a measuring tape. And some of these places are huge. I mean, just my first one, which was our office, I own a portion of, like, the land of a whole bunch of offices, it was eight acres. And we had to, you know, count and measure, you know, is something like 2500 shrubs, you know, it was bananas.

And I'm like, this is an awful way of doing this. And so I started searching around, I first found, I got into, like, the drones, which is kind of a hallmark of what we do. And then we added the interior, I saw commercial for matterport cameras. Yeah, that's kind of like used for real estate. And I saw that commercial, I don't, man, if that can measure, like, I really got something and turns out again, so well, voila. So now we have the, you know, interior exterior, you know, kind of all this stuff. So but what happened, and I think this is, you know, just an a general business since this is interesting. But I started to try to implement the technology with the other company. And we kept running into roadblock after roadblock after roadblock. And finally, like, had a conversation with the founder of the company. And he's like, Listen, we just don't do it that way. You know, like, we've made exceptions, but you know, it's just, it's just not gonna work. And I go, all right,

Michael:

Well, neither am I.

Scott:

Then neither am I right. And so I'm like, well, then I'm going to start my own company. And that's kind of how RCG valuation came to be.

Michael:

Awesome. Yeah. And so we're going to be diving deep into cost segregation studies, all things cost segues. So yeah, I would love if you could give us just a high level overview for those who are not familiar. What is a cost segregation study?

Scott:

Yeah. So the government allows people who buy investment property to depreciate that property. depreciation is really just an understanding that stuff, there's wear and tear. And because real estate is, you know, heterogeneous, or, you know, in other words is every house is different, or every building is different. They don't have a good way to understand how you depreciate it. So they set a general rule 39 years for commercial 27 and a half for residential and multifamily. And that's really just kind of like an admission that they're just going to listen, we don't know how this is.

Michael:

So you figure it out.

Scott:

Yeah, yeah. So you figure it out? Well, that is, you know, what they would call the composite method, but they did through different case laws and everything. They decided that you could break up a piece of real estate into its individual components because they do run out at different times. However, you have to have a professional who knows what they're doing right. So as a property owner, you don't have an inherent skill to you know, Identify, quantify and cost every piece of like commercial construction that's in your building.

Michael:

Right. Right.

Scott:

What we do is we come in and we scan the property, we identify all the different components from carpet to plumbing to electrical roof, you know, site and permit. And then we use the different case law that allows us to break those out into different depreciation schedules. So five 715, and then the remaining like structure remains at 27, half or 39, that allows the, you know, kind of push that forward. So if you would understand it this way is in year one, you would have all of the 27, all of this 15, all of the seven and all the five, in year two, you have the same, but in year six, you've used all the five, so you have only 715 27. And then in year 16, you only have 27 left, so that pushes it accelerates the depreciation towards the front end. And then with the new tax laws, anything under 20 years, you can bonus depreciate, so you can take all in one year. So anything that is 15, seven, five and below, you know, can be depreciated all in the first year, and then you just appreciate the remaining 27 years for the rest.

Michael:

Got it. So just in full disclosure and transparency, Scott, you've done several cost segregation studies for me. And that explains why that number was so big on the front end of your one depreciation was because this bonus depreciation you're just mentioned, right?

Scott:

Yeah, that's right. It depends on what your goals are. We've always said Our goal is never to give you the largest depreciation, our goal takes a step back. And we want to give you the largest tax deduction for the longest number of years, right. And that's important because sometimes bonus is good for you. And sometimes it's not, if you had $180,000, you want to write off, but you have a bonus of 1.2 million, you don't lose that bonus, but you have to carry it forward. And the problem with having to carry it forward is if your next year of income happens to be 20,000, you use that 20,000, you'll carry forward your deduction, but you're not writing off, those are low tax dollars, I would much rather see you instead of having 1.2 million go so your incomes 180. We want to write off 170, but then have that 170 every year for a number of years. So the number of years you have you're all knocking off that top and 40% tax rate. And then instead of using it on the 10%.

Michael:

Got it. Got it. And so if I heard you, right, there's the year breakdown is five 715 and 27 and a half. But did you say that there's something that are depreciable for a shorter lifespan did I miss here?

Scott:

There are there's an IRS documents, that's how to depreciate property. And there are some individual items that they put out there that are different. We actually just did one on on Native American land, which was interesting. All of the fives go to three, the fifth teams go to nine and and then the 39 goes to 22. It's strange. But yeah, so there's just different ways to depreciate different property. A lot of that doesn't apply to actual real estate.

Michael:

Got it? Okay, so the big categories we need to be aware of are five 715 and 27 and a half.

Scott:

Yeah, that's pretty much where it falls.

Michael:

Okay. And so how does it work? Like, if I've got this house, right, let's say I bought it for 200,000? Is the cost segregation based on the purchase price is based on the taxable value? And then how do you know how much electrical is in that house? versus how much plumbing versus how much drywall?

Scott:

Sure, the nice thing with us is that we actually don't go off of valuation, we go off of cost basis, so we go off of what you actually paid, or what you actually put in the property.

Michael:

Okay.

Scott:

So for us, that's maybe not be a benefit for some people, because like, they go, Hey, my values way up. But for us, it makes it a lot easier, because then we're not making having to make a judgment or, you know, say, Hey, you know, I think my property's worth a million bucks. Here we go, Well, that doesn't really have anything to do with it, you bought it for a half a million, right? So that's what we're working with. So it's very simple in that way is that, you know, I bought it for half a million I put 100,000 in, and those are the numbers that we work with.

Michael:

Okay.

Scott:

And then how we do it is, you know, this kind of gets into why, you know, some of the people never heard of it, because there are why they're CBA never brought it up, is because we work with construction, right? We work in construction engineers. And so part of our process is, you know, scanning, identifying and measuring, you know, all the different components. So start with the easy stuff, right? The stuff that you can physically see, right, so we actually create a floor plans and we have something that's really cool and very helpful called a ceiling plan. So imagine you have an office that is 20,000 square feet with 200 offices, right? Okay, try counting the fluorescent lights in that.

Michael:

I'd rather not

Scott:

And here's where the trouble kind of comes in is you go Okay, so I'm standing in this office now trying to picture I'm standing on an office with 200 rooms and 40,000 square feet amount that's accurate. But whatever, yeah, and you have to count anywhere between 120 and 130 different items. So do you count, just like the fluorescent lights and circle the entire building once? Or do you count all of those items that's in the room, and then go room by room counting, you know, 50, to 100, items, all those things, so becomes very, very difficult. And so that's where our scanning comes in, it actually looks upwards at the ceiling, because we scan the whole thing. And so on one sheet of paper, I can actually just see every single light in the entire thing, it also helps us see, one of the kind of one of the tricks that we have is if you can see like a floor plan, but that looks at the ceiling, you can see where all the vents are. And HVC will run the length of the building, and will branch off of a main pipe.

And so we can actually draw the hvac from that plan. So that's, you know, kind of one of the ways that, you know, we were able to kind of fix things and identify them, there's other little tricks of the trade that we don't want to give everything away. But for the most part, we can see everything, you know, I know you do multifamily, there are large multi families here in you know, in Arizona, that you know, there, but 200 doors or something like that, one of the difficult things is there's usually about 5200 square foot squares of gravel that are throughout the entire property. And when you're not looking down like a satellite, that's almost impossible to count, I think about this all the time, and how we can, you know, work with other competitors, I'm going there's no way. Standing on the ground and actually counting and measuring because, you know, frankly, a lot of these shapes are not squares, you know, they're, you know, different shapes. So, you know, without a computer, how would you get the square footage of these little tiny bits of gravel all over a place?

And I think the answer is I don't, right. So what happens is that with a lot of cost segregation companies, you'll get a cost allocation. So they'll say there's, you know, $100,000 of gravel on this whole big lot. But there won't be a quantity allocation, you know, they're not actually measuring it and then multiplying it by four footage, they're just going to the end and getting an estimate,

Michael:

Why is that a bad thing, if they just give the number of seemingly that's what's the important thing anyhow, at the end of the day?

Scott:

Everything has to do with accuracy. And so the IRS puts out guidance, and they actually named several levels of cost segregation, the highest level being actual cost and engineer base. So you go out and measure everything you measure, count everything with the actual costs. And then the next best is, you know, engineer base with estimated cost, which is we do a combination of those two items, mostly. So a lot of times, you know, if you just build or you've remodeled, you actually have the actual cost, right. But if you bought a property, you know, you paid a price, you know, many times you don't have any idea what your actual costs are going to be. And so estimate is the net, but then, and then it kind of goes down from there. And so then, you know, you kind of fall into rule of thumb, which is essentially what that is, is, you know, based on a property that's this expensive, a rule of thumb would be, you know, 30%.

I'll explain it this way. This is kind of like a, you know, a financial evaluation. But there's a rule of thumb in like companies that if you ran a company, you would pay two to three times revenue, right?

Michael:

to purchase that company.

Scott:

Yeah, to purchase that company is, you know, if they made a million dollars in revenue, you would buy for about 3 million to these companies that each do three, you know, do a million dollars in revenue, but one has 85% profit margin, the other one has a 15% profit margin, right? Are those two companies valued at the same?

Michael:

No they shouldn't be?

Scott:

They should not be? Right. So your rule of thumb is helpful, right? It is a good starting point, you know that you would pay 3 million, but if you paid $3 million, and your profit margin was 15, versus paying 3 million for a profit margin of 85. You one person got ripped off?

Michael:

Yeah!

Scott:

You're getting what you're paying for. I think the issue would be as if you're paying for an engineer based study that's at the highest level, because you would like to have some level of audit protection. You're paying for that, but you're not getting it, then you're getting ripped off. I'm not trying to accuse anybody of you know, ripping people off, but you have to deliver what you say you're giving and that's where we shine, we're very clearly able to deliver it and only that we can deliver your property to the IRS if need be. We can just send them the the walkthroughs and the 3d models that we have. And if they want to count the trees, they can count the trees they want to measure the drywall measure the drywall, they could actually do that. And that's you know, I think the difference that would that we bring versus other people.

Michael:

So if somebody was going to go get a cost segregation study done, and they were into being by different companies, much like I did, How would somebody ensure that they're getting the most, you know, bulletproof study results that they could? What questions should they be asking?

Scott:

The first question is an engineer base? That is what the IRS is mostly looking for. Okay. And this is this question would bound to come up to most people is when you're searching, you will find the DIY. And I mean that in a general sense, right? Like do it yourself kind of thing. So what you would do with those is you send in where your your addresses, maybe a few items, like roof type, and you know, things like that. And then they send you back within a few minutes, your allocation,

Michael:

The breakdown of your 5 -7 -15-27.

Scott:

Yeah, breakdown, five 715. So that would be really a rule of thumb or an estimate. And so and then what they add is, you know, kind of an audit insurance. And that is an interesting to cover, because when you read the fine print on that, what that means is, is that if you were ever audited, then they would actually come out and do an actual cost segue for you.

Michael:

Try and catch up.

Scott:

Yeah, but I go, that's not how that works. Let's think about our tax system. Right? our tax system is an honor system. So they're expecting you to do your taxes correctly. Right? Right. That's the expectation of the honor system, once you've been audited, you don't get to go to them and be like, Oh, whoops, I meant to not take that deduction that I didn't. It's too late at that time, you don't get to change the numbers. The numbers are what they are. You submitted them, and you signed off for them as they are true. Okay.

So even if they did come out and do a cost segue, what are they going to do perfectly match them to the estimate that they gave you, that's the thing that I just don't really understand is, you know, it's kind of like back and you probably remember back in the mortgage days, you know, it's like, guy selling a house. He's like, dude, I need this appraisal to be 300,000.

Michael:

Right, make it so.

Scott:

And then the appraiser comes in, like, hey, it hit 300,000. What do you know, you know, what do you know? Yeah, you know, not trying to degrade anybody who might have been in that industry. I mean, that, you know, as a whole system, starting from the financial side down, that, you know, that messed everything up, the whole thing was so messed up. So don't want to attack any one person or industry in that time. But facts are facts, you know,

Michael:

It happened, right? Yeah, that's how it went down. Okay,

Scott:

You know, we kind of make a joke about it, you're like, Listen, if you want to, you know, take your $500 and say, I took a couple bags down to Goodwill. And, you know, that's my charitable donation, I get 500 bucks. You know, a lot of times, you're not going to need a receipt for that. But the area that we'll deal in, is we're going to give you a $1.5 million tax deduction. So hold on to that receipt, you know, it's like it's Dumb and Dumber, right? This 250,000 IOU you might want to hold on to that one.

Michael:

Such a good reference.

Scott:

Yeah, I know, right. So we're gonna document document document, you know, we're gonna give you everything, you know, that any other company gives you from the exact numbers, you know, you have access to 600, 4k photos, 3d models, and a 3d walkthrough of the property. And I don't know if you want it to go to a different topic. But one of the interesting things about the doing a walkthrough, versus a photo is very, you know, I think it's actually really interesting. And how that is, is, if I were to say that I had 40, fluorescent lights, and my proof that I had fluorescent lights was a picture of a fluorescent light, right? There's no context there, right? I could take a look up, take a picture of my fluorescent light right here and say, Hey, you know, there's a fluorescent light, and there's 60 of them.

Michael:

There's 40, right?

Scott:

When you can physically walk from room to room in a virtual walkthrough, you know, hey, I'm in this room, there's four lights, and then I walked out of this room and walked into the next one, there's four there, so you can actually count them and know that he didn't miss anything.

Michael:

Yeah, that makes so much sense. And I love the 3d model, too, because I took this statistics course in college. And the first day, the professor handed out like a thing, it was a cylinder and said, Okay, I want everyone to measure it, and come right down what your measurement is. And everybody, of course, had a different measurement and the variance between, you know, the whole class was massive. It's like, we all have the same measurement stick we all have, we're all measuring the same device, but yet the disparity is huge. So I could definitely see that with someone walking through and measuring versus a walk through tour, where everything is, is is modeled out, we're all looking at the same thing.

Scott:

Sure. Well, I think to I mean, dive right into it. Let's look at the economics of it. Right. You know, the reason one of the reasons people didn't know about cost segregation studies, is it used to cost $30,000

Michael:

Hmm.

Scott:

And so in order to make it economical, you had to own a $10 million building, right? Because, you know, you better get a massive write off and have a lot of profit to pay 30 grand, right. Well, now those prices have come down, you know, they push down to the I don't think we do many under nine. I mean, you know, there's always massive buildings that are complicated, but you know, it's more in the three to six to seven ish range. The question is, is that how have the cost change. And we think about this constantly, the best part is we're super transparent, we've cut costs with technology is we don't have to send a construction engineer to your property, we can have a pilot operator, go to the property, scan it. And then we can have our engineers working from a computer. So it's a lot more efficient.

And so we go, we can cut costs, because we've added tech, right? And we go, how have you got caught? We look at those things. And we go, you're supposed to be sending an engineer out, and you go, right, but you make $10,000. Now you make three or four. Right? Okay, so what's cut?

Michael:

Right, what are you doing differently?

Scott:

You know, we have some guesses, we think that the, the amount of time spent on a property is being cut? No, here's some examples of that, you know, I don't want to be too accusatory. But, you know, we know how we do it. We use technology, right? And we use efficiency. And that's why, you know, how you're still able to get the top quality with the prices coming down. You know, and that's, you know, I'm sure your question that most people are going to want to know is, how is pricing set? And how much do these things cost?

Michael:

Right. So let's talk about that. And then we'll jump into who these are good and bad for? So is there a kind of a ballpark estimate? Or if I've got a $500,000 property, a cost segue might cost me this much? Or how do you determine price.

Scott:

I actually wrote a program that you can run a quote on our website, so it's our CG valuation calm, and then you just click the quote button, okay? It's absolutely free. And most importantly, you don't have to give us your information to run the quote,

Michael:

Awesome, I don't have to give you my social and credit card and my email address,

Scott:

You don't have to give us anything, you can just sit and run quotes all day. And it's free, you can make adjustments and see how the variables work, because that will adjust the price. And you know, how much you can depreciate. So the two different types of properties. So there's a few variables that kind of go into it. I mean, basically, it's pretty simple. It's, it's more expensive and more complicated, the cost goes up. If it's short and smaller, and simpler, the cost goes down. But the number one discount that we give people is doing multiple properties. So if you're running a quote on our system, and you go, Hey, I own 10 properties, but I'm, you know, I'm only looking at cost, like for this one, you can run several quotes and add that multiple properties thing up, and you'll watch your price, you know, drastically get cut. So, it's, you know, it's an it's an incentive to do more business, which we're, again, pretty transparent about, you know, yeah, we want you to do lots and lots of business classes. And maybe that's just, you know, kind of my background, but how do you incentivize someone to do more business financially, right, you know, like, your cost is gonna go down if you do more.

Michael:

So most of our listeners are in the single family space, I would argue in the 100 $150,000 purchase price. So let's talk about boo are good candidates to have a cost segregation study done. If I said that verbally correctly, who would benefit from a cost segue study, and Who wouldn't? You know, who should avoid these?

Scott:

Absolutely. So let's just start with the who wouldn't, is probably a lot easier, you know, and more narrow, and then you can just kind of balance yourself out, most flippers, just don't, and the reason is pretty simple. You want a very, very high cost basis, when you sell a property, because you're gonna pay a lot of taxes, we give people a very low cost basis. So you know, it doesn't fit, we'd like to see probably a five year hold. Some people say, three, I'm not super comfortable with that I would like to see over five years, and there's, you know, there's reasons that we can get into why that is, the cost can be prohibitive, right? Because what happens is, when you're when you get to a low enough number, we hit like a fixed cost, right?

So, for even for a pilot to go out, it's just like, Listen, it's gonna cost x plus time, right? So at the time, isn't that great? It still costs x. So you know, there are some hard floors that we hit that we try to do. But you know, that's kind of where you but if you'll see in our coding system, it is designed to make it cost effective. It really is just kind of a ratio. So you go, Well, I own this property, it's 100,000. Is it worth it? You got what you pay for it? Right? If it's, you paid nothing for it. And yeah, if you paid seven grand for it, then no, you know, so you have to understand what your costs are. Also, you're gonna have to understand what your tax year is going to be like, Well, you see some people that it might cost a little more, but they had a major windfall, and they just don't have any other way of reducing their taxes.

So give an example somebody that is trying to 1031 a property, they they bought a property, you know, 200,000 they're selling it for 2 million, and you know, they're trying to get the 1031 through and it's November and it falls through right. So now you got $1.8 million of gain and you owe capital gains on that. So I don't know what does that 400,000 ish, whatever,

Michael:

It's a crap ton.

Scott:

It's a lot. You know, let's just say that you don't have 400,000 in cash, you know, and whatever, I don't know. So in that scenario, you know, having $100,000 house and then you do a cost segue, that's, you know, 1000 $2,000, maybe 2000s a little rich for you, but you're not going to have a $2 million tax bill every year, it becomes imperative that this year you need as much tax deduction as you can get. And so then you do you know, several of them and, and, you know, you take the bonus on all of them, we had a client that had sold the business and had a windfall of somewhere in the range of $20 million. What are you gonna do?

Michael:

Yeah.

Scott:

You're going okay, so I just got this, and now I got a $5 million bill, I need to write a check for 5 million, what can I do, and and I'm not going to need it next year, right? The windfall is a once in a lifetime opportunity, I need the depreciation now. I have another client too, that they inherited double e bonds, basically, you don't pay any taxes until they come due. And these bonds they inherited were like 50 years old. So every year, they add an additional $120,000 coming due that was fully taxable, but it was only going to come due for another four years. So does depreciating over 39 years sound like the right way or maybe accelerate that over a four year period sound like a good idea for you?

I don't want to call it a game. But this is what we do with the IRS, the IRS is indifferent to tax timing. And that's why cost segregation doesn't necessarily raise your audit risk is because if you are allowed by law to depreciate a million dollars, and we keep that and that's the one thing that we make sure we do you don't depreciate a penny more or penny less than a million dollars. As long as you do that. They're more indifferent to when you do it. So they're because they're going okay, you're gonna take your million dollars early linear won't get it late. And so that's why that's different than tax credits and tax deduction, you get a refundable tax credit, they are not only out money, but they may have to write you a check, like just straight out money.

Michael:

Yeah.

Scott:

So they're going to verify that your tax credit is legitimate with tax timing, you know, I don't want to be misconstrued that they don't look, but it's less of a priority to them. Because they're just going well, it's a it's a timing issue. And the IRS never really cares about timing. That's why they, they don't need to catch you. You know, like, if you're, if you're cheating the IRS, they don't need to catch you this year. They don't care about time,

Michael:

They'll get you next year, the year after.

Scott:

And if you if we get you seven years later, the penalties are going to be pretty bad. So yeah, they're not in a hurry. So time is not necessarily matter. But what you can do is make that to your advantage. One of the secret sauce that we have is it does come from me being a CFA not a CPA, you know, I have the greatest respect for CPAs. And what they do, you know, we, you know, we feel we're an expert in about four to five tax codes, there's 9800 of them. So this is no eight denigrating what CPAs do, but it's just a difference of how I look at the world, right?

So I'm looking at things from a financial standpoint, how to grow a business. And so what we try to do is we go okay, so not to call it anybody's age, but we're decently young for property owners. You know, I think a lot of property owners are, you know, in their 50s and 60s, but if we had accelerated depreciation over seven years, how many times do I have to repeat that before I retire to three, maybe not a lot. And that's a tax timing thing. So I'm in my high income, earning years, where I want my highest appreciation, and I want to defer them to a time that I'm in a low income in retirement is one way of using timing to your advantage.

Michael:

Sure. And so it sounds like if somebody is contemplating getting a cost segregation study done, it really needs to be kind of a three way conversation. One is themselves the owner to is with their CPA, their tax planner. And then third is with a cost segue study to find out what the impact is going to be on their taxes and and the CPA can tell them, Hey, this is going to be beneficial to you now, or maybe you want to hold off, is that fair to say?

Scott:

I agree. The CPA is going to be absolutely integral in the cost segregation. And I think one of the questions that, like we were talking about a little before comes up is Why can't my CPA just do it? And the answer is, they don't employ engineers, right? They're, they're not construction specialists. And that's, you know, we have, you know, kind of three parts to our business. I was a joke with people I say, there's at least one part of my business that people's, the eyes roll in the back of their head, you know, it's like, oh, technology. That's super cool. Construction. Love it. Like taxes. You're like, yeah, oh, god, this is awful. Are you like taxes? You're like, dude, I'm a tech guy, man. I'm like, you know, love the numbers and the tech school and you're like, sweet, go walk, you know, do a bunch of construction. You're like, no, that's not that's not really my thing. You know? So So yes, it gives us a little protection for our business that somebody One part of what we do so the CPA has has their role, and they have to fit it into the overall picture, make sure all aspects of your tax life work and cost segregation is going to work for you.

We work very closely with a bunch of CPAs to, you know, help them understand, you know, exactly, just the ins and outs of a specific tax code, right. So we try to be experts in about four or five codes, which, like I said, they have to cover 9800. So insane respect for what they do. But when it comes to the four or five, you know, we can offer some help to the CPA and, you know, and to the client to help them understand a little bit.

Michael:

Awesome. So, when you did the costsegs, for me, I had just done some major extensive rehab on a couple different properties. So I had heard that, you know, cost seg are great for rehabbers people that have done a lot of value add people that have spent a lot of money on properties, but I had also heard that you could buy a turnkey property and still take advantage of a cost segs, is that true?

Scott::

Absolutely. I think that when you dive into it, so let's just take the, you know, look at them as two finished property. So if you have a multifamily residential, you'd be looking at somewhere about, you know, 30 to 35% of it that we'd be able to allocate towards a faster schedule. So like, kind of bonus side, right. So that's where you would kind of start now. Now go to your rehab, you not only had you know, all the remodel, but you had what we call disposal, or it's a partial disposal, I'll explain it this way, if you bought a property for a million dollars, and you found out you had to put a roof on it, and the roof costs $100,000. So on your balance sheet, a lot of times people would put that their property is $1.1 million.

But that's not true. Because you don't have to, you only have one, so you took a piece of property, and you disposed of it. And whenever you dispose when you have an asset that isn't worth anything anymore, then you have to take an immediate write off for that asset. So let's say that the old roof was still worth about $40,000, what we would do is you would have all of the depreciation, just like a brand new place plus, anything you had to rip out, and the cost involved with that, in order to, you know, to add to the cost segregation, you got 30,000 to the cost segregation, but then you would add, like the 40,000, for the roof you tore off and you know, all of the carpet and the toilets and whatever you pulled out of there, and that the stuff that you threw out, would also add to the cost segregation. That's why a rehab is very, very good for you. But it doesn't take away from that you still get about 30% you know, extra bonus right off just from buying a turnkey place.

Michael:

Wow. Okay, so is that kind of a ballpark estimate, then if I buy something turnkey? Let's say go buy $100,000 property? Roughly? I should I could expect 30,000 in bonus depreciation in your one ballpark?

Scott:

Depends what your land is.

Michael:

Oh, sure. Okay.

Scott:

But yeah, so we're talking building land is a big thing. And that's one thing that we can cover. And actually one of the things that I think that we do a very good job of, there's actually a lawsuit that came out of LA County. There's a property owner that wanted to reduce the value of land that they were appraising in his building. And what came out of that lawsuit was that property owners do not have a specific ability to differentiate the value of the building versus the land, they do have an ability to value the total purchase, because that's what they do. Right? They buy the entire thing.

So the it was ruled that the property owner was not able to do that. But that's where I come in, is, and we go back to what we're talking about with me having, you know, construction on it certifications being evaluation specialist, right. So I'm, you know, one of 40 cfaes in the state of Arizona, right. And I'm, you know, there's probably about 1000 of us in the entire country, right? So do I hold the specific credentials, to be able to value land versus building? I certainly do.

And we use that we will look at those and work very hard to make sure that your land is allocated correctly. And if it's not, we will provide the proof that it should be reallocated an example that we would see, and sometimes they're accurate, and sometimes they're not right, but the example that we would see is, you know, you have an allocation of land that we think is far too high. We will go and find land sales in that area over the last, you know, 10 years, and we use pretty conservative numbers too.

But let's say that they say the lands where you know, it's a million dollar building and they say the land is worth 400,000. We will go through and go there hasn't been a piece of land sold in that area over a 10 year period over 100,000 and so we would just go, the actual sale of land is more accurate than whatever calculation you're using to assess that land. And so, we would use statistical analysis. So, you know, you know, over 30 options, you know, pulling out and reallocating, you know, different outlier, high and low and, and use some very strong statistical analysis to revalue your land at, you know, at a much lower level, you know, if need be.

Michael:

So, Scott, this has been awesome, man, thank you so much for coming on. If people want to get in touch with you, Rcg for your services for cost segues, what's the best way for people to do that?

Scott:

Yeah, so RCG Valuation.com is we that's where we were in a quote on that, quote, you'll see somebody whose name his name is Tyler Baldwin, he is our Director of Sales, you can call him directly and by have anything to say about it, they'll call you really, really quickly. I really work on that very hard. And you know, I think Michael, you, you know, obviously, you've worked with us and you can attest to this. You know, once you start working with us, you will have my cell phone, you just call m . So, and I try to answer and we try to be as available as possible, you know, so we like to get out. You know, get our quotes and get the people as quickly as you can and help them save taxes.

Michael:

Love it, love. Yeah, Scott Roelofs Thanks so much, man. Really appreciate you coming on. And I'm sure I'll be calling you from the next caustic studies shortly.

Scott:

I appreciate it. We love it.

Michael:

Big thank you to Scott for coming on the show was a lot of fun. I learned a ton. Hopefully you did too. If you'd liked this episode, please feel free to leave us a rating a review whatever it is, you'll see your podcast and we look forward to seeing the next one. Happy investing.

Is Now A Good Time To Sell Instead Of Buy Real Estate May 01, 2021

Housing prices have continued to rise over the past year as listings have dropped by about half. Given this super-competitive market, is now a better time to sell or should you continue your acquisition cycle? In this episode, we discuss the investing philosophy and considerations you should take when thinking about selling your property.

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Transcript

Pierre:

Welcome to another episode of the remote real estate investor. I'm Pierre Carrillo. And today I'm here with the usual suspects Tom, Michael and Emil. And today I'm going to be asking them about rising home prices in the markets right now. And if it's a good time to sell instead of buy, so let's jump into it.

Pierre:

Alright guys, so, like we talked about previously, my brother and I are working on buying some houses right now. And one of the things that we're seeing is that compared to last year, active listings on the market are down 52% the prices of homes are climbing continuously, there's like 16% up year over year and they're continue to climb. A lot of the projections are saying that they're not going to drop anytime soon. Is this a good time to sell? Are you guys selling? And if not, like when is a good time to sell?

Michael:

Yeah, such a good question. Tom do you want to take a first crack at it?

Tom:

What's the acronym that Bitcoin guys say hodl, hudl, huddle? Do you know I'm talking about?

Emil:

HODL!

Michael:

We're not all Bitcoin guys. Now, Tom, we don't know what that is.

Tom:

I'm sorry. I'm excited. I bought my first little fractions sliver of one. And I just am using their acronyms now HODL.

So yeah, Pierre good question on, you know, looking at some of the stuff I think for myself, and I would assume also for Michael and Emil, is that we're pretty long term bullish and going through year over year, like there are going to be some trends. But like, over the long time, like, the way that I think about building my real estate portfolio is I just want to build this big cash flow machine. And like, yes, there's going to be fluctuations on like, what's available for sell prices are doing but looking at my North Star is just building this long term growth machine. Like I can't be like chasing a car just like falling metrics. And like, Oh, I should sell right now.

So it's like having a long term perspective. That's not to say that I don't sell because I think sometimes it is opportunistic to sell. A lot of my more recent dispositions have been consolidating in specific markets. So let's say I have a property in like a corner where I don't want to have any scale in that market, maybe it makes sense to sell it, maybe I've caught some nice appreciation, you know, I had a property in the corner of market where they have like, I didn't have a lot of properties. And also there was like, some, like legitimate, like weather concerns of like floods and stuff and like I don't want to sweat that out every single time if I'm not planning to get you know, the right kind of insurance to protect myself against that. So my meandering answer of a question is you know, sometimes there is a place to sell but I you know, I won't sort of panic sell and in monitoring those metrics, because I use my North Star to hang on to so enough pontificating Tom, somebody Michael Emil jump in quick.

Michael:

So I think it's a really good question, too. And so I actually am in the process of selling a couple properties. I think I've talked about it on a couple episodes in the past, but I have a six unit out in the Midwest that I'm under contract to sell. And then I just sold a luxury condo in Southern California.

Tom:

Oh, congrats, man. That closed.

Michael:

Yeah, that close. So I was super excited, thanks for short story long is that they asked for a reduction in rent, because of COVID, which we were happy to give them. The property wasn't cash flowing. Really before that. So then it was a little bit negative. And I said, You know what, there's been so much appreciation here, it's a condo, the HOA fee hasn't moved since I've owned it, which has been a significant amount of time. So I said, You know what, let's just sell the thing. See if we can get for it. We listed it we got two offers on the first day both over ask. So I took the stronger of the two offers, which was actually less money. But I knew it wasn't going to appraise for what the higher offer was anyhow. So it appraised right at what the reasonable offer was, again, over ask 30 day clothes, smooth, easy, made some killer appreciation on it. So I was really excited about that.

And nobody ever went broke taking a profit. So I said you know what, it will hit continue to go up maybe I don't know. But to own the thing for at negative cash flow just really isn't in my cards. And I said took the appreciation walked away. And then the other property was going to make it a value add play, long term buy and hold. But the market just isn't as strong as we anticipated it to be especially because the COVID. So we just say let's sell the thing, again, make a really nice return on it after I did some of the value added work and got it rented up. So I said yeah, now's a great time to sell.

But to your question directly, my personal thesis is that I'm not going to sell unless I have a better use for the money. So I'm not just going to sell for the sake of selling. So in that condo instance, there is appreciation and I had a better use for the money in my development project in the Midwest, there was a ton of equity tied up in there and to do a cash out refi would have just been A, a pain in the butt and B, would have made my cash flow even more negative. So I said I'll just take my profit and walk and then there are a couple properties out in the Midwest that have appreciated like crazy because of the value add work that I've done rehab and getting the property stabilized. So I have agents hitting me up like Dude, are you ready to sell or like the value is crazy? And I just have to for what like there has to be something to run towards as opposed to running away from something. And until I find that next investment there's just no point.

And for me right now and those properties specifically, I have like 10 year fixed debt at really low interest rates. And the properties are cash flowing like machines, because I have so little debt on that, because I paid cash for the rehabs. So they're just in a really good position. And kind of like, Tom, the aim of the game for me right now is cash flow. And so until I have a better option, I'm just gonna sit tight and ride it out.

Pierre:

Is there a reason you didn't do a 1031 exchange on that property down south?

Michael:

Yeah, it's really good question. A couple people have asked me that. So the reason I didn't is a couple reasons, I didn't want to go buy something else. I wanted the cash to use for my development project. And so it had to be one exchange, all that cash would be tied up in a new deal. And I would have had to go get a new mortgage, which I also didn't really want to do right now for investment property.

Tom:

And you live there, right? Isn't there pretty major tax implications if you live at a house for a certain period of time.

Michael:

There are but I did not live there. I bought it as a pure investment property. And I never but so if I lived there for two out of five years, I would have got $500,000 tax free capital gains as a married person 250 as a single

Tom:

Absolute value, same same number.

Michael:

So I mean, I wish I had lived there for two years.

Tom:

Nice.

Michael:

Yeah, but so I mean, I could have done the cash out refi which would have been a just a real pain in the butt and it would have made that property negative cash flow and use that cash for my project. But I said you know what, I just want my downpayment back and all of the cash flow, all the equity to use, you know, now, so to speak.

Tom:

Love it, contextual.

Emil:

So for me, I've been in same situation as Tom, I had properties I think I've talked about on a prior episode when I sold so I had properties all over the place. And I decided I was a little too scattered. If I can go back in time, I wouldn't have scattered myself across so many markets. So there was one property that I knew I wasn't interested in going deeper in that market. So like, to me that was the least valuable property for me to sell. And I wanted to reduce the number of markets I was in reduce the number of property managers I had to deal with. So I ended up selling that property. I had it listed right before all the lockdown started, we got into escrow lock downs happens. buyer gets scared walks away. We ended up selling like a month later for around the same price. So I got lucky there. That person has probably had some nice appreciation since then, since every single market has gone up a lot. But that's part of it.

But yeah, I use that money to actually go out and buy a triplex in St. Louis. So for me, the reason I sold the only reason I sold was because I was in too many markets. I wanted to reduce the number of unique markets I was in less property managers less hassle. So that was the reason I sold.

Michael:

Emil, A lot of people might say oh, well, you sold out of a cooler market at the time when you sold and bought into a hotter market. Did you think about that at all when you were buying your triplex?

Emil:

I think the market I sold out of which by a hotter than the one I'm in currently. But like honestly, if you look most markets right now, every single one seems to be on a tear. Like I haven't really heard of a market staying flat throughout this whole thing, especially for for single family.

Tom:

But one of the things we've talked about before is its timing in the market is just something that's just like not real. I mean, you can get lucky and get away with it. But like I don't know, my 10 cents is you know, getting on to the Ferris wheel. And not overthinking trying to time the market. Sorry, I kind of interrupted conversation. Go ahead, Michael continue going.

Michael:

It's a really good point.

Emil:

None of us are saying, Hey, we sold because we think it's a top or we're trying to look into our crystal ball and say oh, time to get out. You know, Tom wanted to reduce the number of markets he was in same with myself. And then Michael had some other better uses for his cash looked at his portfolio and said, this is the area I could take the most and use it better somewhere else because I have some negative cash flow here. So none of us really trying to time the market just finding better use for dollars.

Michael:

Yeah, and I think something else too, especially when it comes to buying and selling. I was chatting with my good friend Zack Breverman, who's a certified financial planner. We had him on the podcast on earlier episode. And we were talking about stock market investments just specifically and I was like man, I'm so scared to buy into or to exchange investments basically sell out of a really good performing a stock and buy something else because it just seems really inflated. And he goes yeah, but you're selling high and buying high. So he says at the end of the day, it's kind of a wash.

Similar with the real estate market. If you're selling high and buying high, you don't feel the impact as much granted now a lot of things are based on the purchase price like property taxes, for instance in California so that could have a really long term ramification but same thing in a down market. So if people are waiting until the market dips, well if they sell then they're likely going to take a hit. Yes, the prices on their purchase are going to be lower but so will their prices on their selling. So in an ideal world you want to sell high buy low but again that's you're trying to time the market so not quite sure what the point is there. Just figured it was good words to say.

Pierre:

I think the moral of the story is wait till it gets to the top and sell and then…

Michael:

and then wait till it gets to the bottom and buy and when you figure out how to do that call us and let us know how to do it.

Tom:

Only buy it when it's low and only sell it when it's high. Exactly. Hold on. I got something tangible on this. Also to add in. So where people have a bad time in real estate is when you like, have to sell. And you're almost like forced to sell, like, perhaps you need the money. Like that's really the way that you lose like in this game is being forced to sell when you perhaps at a discount, you have to sell fast like put yourself in a position to be able to weather like that type of a storm. And just kind of generally speaking, you're going to be in a better place, if you can, one, be proactive and strategic about your acquisitions and buying kind of based on context of what's going on with you. And then number two, like don't be forced to play your hand either, like you have to sell because you need that money for whatever. So just to be able to kind of control your exit and entry, I think is important. And the key to that is just making sure that you have the right reserves. Right. So you're not forced.

Michael:

That's so huge, Tom. And I think it's interesting. Oftentimes, when we see on listings, like motivated seller, that means like, oh, there's a deal to be had, because that seller is needing to sell for one reason or another. And so don't be the motivated seller be the unmotivated seller, and the person who has the least to lose, or who cares, the least in the negotiation is going to win. So if you're someone that has to sell for whatever reason, you're likely going to lose that negotiation.

Tom:

Yeah, I guess kind of a general theme and thinking about what we've been talking about is, you know, there's all these, these macro things that going on of list prices going out going up and days on market going down, or vice versa. But like really, in making these decisions around selling and buying is more contextual of you, you know, on like, What's going on with you and your strategy and what you're trying to do. So yeah, that's my little bow on the discussion around macro trends and making these types of decisions.

Pierre:

Cool. So if I can sum this up, what you guys are saying is always help the numbers make sense to you, regardless of what the market is doing. Don't try to time the market, it's impossible. And what else we have in there as a takeaway.

Tom:

I would say be working from a higher level of strategy of, you know, on where you're trying to get to in three years, five years, 10 years, and having that in the back of your mind, as you know, data points in your making your decisions of both buying and selling is, you know, gosh, I'm gonna mess this quote up. But there's like the difference between the weather and the season. That's it. The weather in the season, be thinking about the season, like the weather is gonna come in and do some stuff. But think about the season. I think I might be missing the mark a little bit, but I think you're kind of getting it a little bit where.

Michael:

That's a good saying even if it's not one already. We should make it one.

Tom:

Yeah. Don't get lost on the weather in the season. Now that it's not landing quite right. It's close. It's close. It's it just needs to bake a little bit longer.

Michael:

It’s like seeing the forest through the trees.

Tom:

Yes.

Emil:

It takes two to tango.

Michael:

Yeah. You know, they say there's no crying of baseball?

Emil:

If you can't beat them. Join them.

Michael:

Yeah. Well, I've got a question for the group here. So I'm looking at buying a new primary with my wife in the Bay Area. And prices are just through the roof here in the Bay Area. And the feds not talking about lowering interest rates anytime soon, which in my opinion, would be one of the biggest reasons that prices would start to slip a little bit or at least slow down.

Emil:

You mean raise interest rates?

Michael:

Yeah. What did I say? lower interest rates?

Emil:

Yeah.

Michael:

Yeah, yeah. So the Fed raises the interest rate that I could see as a big reason why the prices might start to slip or things might start to cool down a little bit more do you think is now too crazy of a time to buy in the Bay Area? Or is it is just going to get worse and buy while you can?

Tom:

Well, Mike, I would say it's a Michael it's contextual to kind of yourself like you know, are you are you looking to start planting some family seeds and insert? You know, white picket fencing? I mean, is it a good time for you? Right? I don't know. Please jump in. I'm just slopping around in the water. You're on the right track.

Pierre:

Where are you looking in the bay?

Michael:

In Petaluma?

Pierre:

Okay.

Tom:

Love Petaluma, good cheese.

Emil:

I think, Tom, you're on the right track. Do you feel the need? For me? I'm of the personal residence is not an investment, right? It's a place that you get because you want it because you know, you want to place your family, you want some more room, whatever, don't look at it like an investment. It'd be great if it is, but don't look at it like one. So do you feel like you need at home for a specific reason? And if so, are you in a place to do it, then? Yes, do it. But if you're like, number one thing is I want to deal I don't want to buy at a top or whatever, like you are treating it more of an investment. Maybe you wait, see how it plays out? That's kind of my personal feeling on it right now.

Michael:

Of course I'm treating it as an investment. Are you an insane person? There's a inability to look at it as a pure residents.

Emil:

I don't think so I think you can.

Michael:

I wish I could. I wish I could. I like can't get out of my own way in that regard. And so like my wife and I are planning on building some ad use or figuring out how to house hack the thing because it is just so expensive. I can't I just can't stomach that housing payment for just a pure housing payment.

Emil:

But you have these other investments like what are the point of investments? Is it just to keep growing money or is it to be able to enjoy certain things in life?

Michael:

Wow, wow, now we're getting real deep.

Emil:

The point of your investments aren't just to keep stockpiling cash and growing investments. It's like this is personal philosophy, it's to be able to enjoy some things in life to have them pay for either your your cost of living or I don't know, just feel to enjoy some things in life as well. Yeah, you want to keep growing it. But…

Michael:

I agree 100%. The thing that's hard for me to wrap my head around is, let's say you just go buy the pure primary investment and your investments do help supplement that housing cost, so it is more palatable. I'm worried about the continued growth rate and savings rate at that point, I want to continue to grow. If once my life is paid for via investments, now, I know my lifestyle is likely going to change over time, and we plan on having kids which I hear they're expensive family meals, is that fair to say?

Tom:

Definitely.

Emil:

Yeah. Yeah.

Pierre:

You can get them at a discount.

Tom:

You can get them a discount, exactly. Yeah, just follow the market.

Michael:

Is it like you buy two get one free at the hospital kind of a thing. Like that?

Emil:

Well, you buy two and then you just have a bunch of leftovers for future kids. So it becomes a little bit cheaper, I guess. clothes and toys and…

Michael:

Hand me down.

Emil:

Yeah, exactly.

Michael:

So getting back on track here, the savings rate will continue to grow to allow for additional feature investment, versus so much of our investable cash, and then investment income going to just cover the housing costs. But I agree 100% I know that there's you know, there's got to be a point to all this. And the investing as a means to an end.

Emil:

Yeah, you also work right I

Michael:

That I do.

Emil:

You're You're also making active income. Yes. So it's not just like your investments would go to pay for your house. Like you're still You're still young,

Michael:

Oh, I thank you,

Emil:

I know you you're not going to like hang your hat up and be like, I'm chillin, I just want my investments to pay, like, you're still gonna have active income for a while, right? So think about that as well. Yes, your savings rate may not be as high. But it's not like you're planning on retiring soon, where the investments are paying completely for your lifestyle and your your ability to save has just shrunk. It's just paying for your lifestyle.

Michael:

Totally. But counterpoint is that I am at a point, thankfully, in my life where we are quite close to if we didn't have a large housing payment, or if we had a small rent payment, we know whatever that looks like, yeah, that we would be able to not have to work.

Emil:

Right? Yes, you have the choice, but you're going to and…

Michael:

That's true.

Emil:

Right? Like you're you're in your 30s are you really gonna hang it up this early?

Michael:

Come on, now you've been to Bali? You know how good it is?

Emil:

Yeah, work from Bali? Like, hang out, sir. Yeah, do some work. You know what I mean? Like, I think you'd get bored real fast. This is a personal thing. I can't see myself like actually retiring for 20-30 years, like she'll just fun stuff to do and earning some money as well.

Tom:

Final tidbit on that discussion around, you know, should I be you know, buying primary residence, I think it's, it's a two kind of two sided vector, where one of them is how much time you're willing to wait. And the other is, like how good of a deal you want to get. So you know, you could get lucky and find something that is, when I say a deal, like probably before, like, just like reasonable, you know, but if you know, the sooner that you're moving to move, you know, to find a primary, the less likely you're going to get a, you know, kind of a good deal. But it's not to say that they're not out there.

I think another consideration, I think probably for yourself who like really is into like rolling up their sleeves and stuff is a property that needs a little bit more work, maybe a little more acreage, like you said, and getting an ADU unit on it. So I think you can thread that needle of still playing offense with your investments on your primary. But it just like I said, like, I think you'll probably just have a little bit of a longer wick of identifying that property. And it's not like, you know, a baby's not coming out like next week where that's important to mom or whatever to like, have that nest set up. So I think you're in a you're in a great spot, and depending on your time, you can, you can thread that needle.

Michael:

Alright, thanks, guys.

Tom:

If you get too cute for you know, with with buying a property and like trying it, like you could just wait a very long time, but I'm just repeating myself because I know people who was like, you know, put like 15 offers in like nada, nada, nada. It's like, sometimes in really hot markets. It's like, especially with a primary you just got to throw away your logic and say like, Okay, I'm gonna live here, I'm gonna pay what it costs, you know, go ahead Emil Tom done.

Michael:

Tom finished mic up, Tom out.

Emil:

I forget which one you said it but when you're in a hot market, or like if you're buying, when things are up, or selling when things are up, you have to buy into when things are up anyway. So like, when you buy your home and when you eventually sell it and maybe move I don't know if this is like you're looking at this as your forever home. But let's say it's your starter home, right? And you know, you're going to sell it later. Whatever environment it's in, like if you're selling and it stayed flat or whatever, you're buying into the same kind of environment. So it's not like you're gonna get screwed on when you move or something.

Michael:

Right.

Tom:

I do say there's something about seasonality for buying your primary residence. Like right now. I think it's starting to heat up a bunch, the very beginning of the year. I think sometimes there's opportunistic, you know, just coming out of like January or like deep into the winter you know, looking at stuff that's, that's been on the market for a long time…

Michael:

After the holidays.

Tom:

Yeah, the house that that I ended up buying and I'm living in it was you know, similar conditions it's like super super hot market and then the house was days on market was at like 25 days, which was like an eternity like in that whatever time period so when I looked at it, there was some you know, some kind of like goofy stuff about it, but I was like, Okay, this is all like fixable and you know, found something that was just a little bit weird enough that I think like people weren't about but here I am in a construction site and it's gonna be lovely at some point. It's no it is it's a great spot but anyways, I don't know I was going with that like looking at seasonality kind of like off market there's some good opportunities and based on market but all stuff that you know, Michael, all stuff that you know.

Michael:

No this is this is great. And we are so lucky, we're in the process of converting that van to go live in for a while. So that's gonna be our mobile home base to go check out houses and park in different neighborhoods and see what it's like to live there. So we're thankful that we don't have this time pressure.

Tom:

Awesome.

Pierre

Alright, everybody that was episode. Thanks so much for tuning in. Please like and subscribe anywhere that you listen to your podcasts and we'll see you on the next one.

What's A Realistic Time Horizon For Strong Real Estate Returns? Apr 17, 2021

How to do make money grow quickly, yet safely? Is real estate a good strategy if you need liquidity in 2-3 years? In this video, we discuss time horizons for real estate returns and what you could do if you need liquid cash within the next couple years but still want your money to work for you.

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Transcript

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider,

Emil:

and Emil Shour.

Michael:

And today's weekend wisdom, we're going to be talking about some of the different time horizons to be thinking about with regard to your investment. So should you if you need the money sooner? Should you be investing in real estate? Do you see it as a long term growth vehicle? Or is it something that you're going to need in the more immediate future? So let's get into it. So, guys, we were chatting before the show, Pierre brought up an amazing question he's dealing with right now. And with his family that he's investing with, they are looking at investing money into real estate. And someone brought up the question of, well, the kids are going to college in a couple of years, should we be investing this money in real estate? What is the different time horizons that we should be expecting for real estate investments?

So Emil, I'm going to kick it to you first, if you are planning on using a chunk of change in three to four years, you know, you're going to need it for something, whether it's a new purchase a car, kids going to college kids, you go into school, what have you? Should you be investing in real estate? What are your thoughts?

Emil:

Personally, I look at real estate only as long term investing. So if I was looking at something three years down the line, I would I would not take that money and put in real estate personally. Everything I buy, I'm thinking about in terms of at least 10 plus years. So

Michael:

And what are you worried about in that three to four year time horizon? Why wouldn't you put it in real estate? The last couple years, the markets been on fire?

Emil:

Yeah.Yes, yes, it has. But it's always hard to predict, will that happen? Just with real estate, in general, my thought is, on a long enough time horizon, it is much harder to mess it up. I'm, obviously I want to mitigate risk and do as good of a job and like, you know, you walk into a properties thinking like, Oh, my spreadsheet math is tells me I'm gonna make this much per year and blah, blah, blah. In reality, things happen, things break, you know, you have down years. And so to know that it's only going to be two to three years, it's very possible that that could be a period where either a the market goes down, we have some significant capital expenditure where cash flow for the year is negative, so you're losing some value there. So for me, I just I think two to three years, especially this is this is more of like a side hustle, quote, unquote, right? I don't I don't do real estate investing full time where I feel like I'm a pro and, and all that.

So just for me, personally, where I'm at in my career, I don't, I wouldn't take short term money and put it in real estate and be like, Alright, I'm gonna get on two to three years. Plus, when you sell a property, you're typically paying five to 6%. So like, even let's say you have five to 6% appreciation, after you sell and pay your commissions and closing costs, all those things like a lot of that could just be vaporized. So I like holding for long term.

Michael:

I mean, I've got a follow up question for you on the timeline. So let's kick it out to a 10 year time horizon. Let's turn the clock back to somebody investing in 1999. They have a 10 year time horizon. Now 08 hits, they're planning on selling in 10 years, and they just get decimated? Doesn't the same same risk factors apply 10 years down the road that we could be in a down market by the time you're looking to sell?

Emil:

Totally, totally. to that. I will say though, that if you look at like historical price charts, I've done this, you look at 2008. That was an anomaly over like 60 years, right? I think people there's crashes, but a crash of that magnitude is very rare. Like, again, look at charts, look at price value, average price value across the country. there's times where it goes flat, or dips a little bit, you know, softening, but like just a cratering. Like that is so so rare. So you could have that like mentality. Oh, we could see another giant crash. But my thought is that they are pretty rare in one's lifetime. The fact that we have went 2008 I wouldn't expect to see something of that magnitude for a long time. But that's just my opinion, not advice or anything.

Tom:

Yeah, and it also like that's crashing everywhere. That's not just real estate. That's like, you know, your equity

Michael:

The financial markets,

Tom:

The whole financial market, so it's like it's not like you're escaping it in one avenue versus another.

Michael:

Well, if I put it in my bed, I'd have more money. Yeah, but it stuck it away in the mattress. No, that's such a great point, Tom. But same same question over to you three to four year time horizon, are you putting your money in real estate?

Tom:

With a three to four year time horizon? I would probably put it in like an index fund. I real estate I think there's a better five year marker and to think of it just because of that really great point Emil made earlier about the you know, there are some transaction costs and frictions. I think a lot of it also is your risk tolerance, I'd say I'm, I'm pretty risk tolerant. But with that said, though, like where I'm taking my risks are pretty tried and true paths.

Actually, I'm going to contradict myself just bought my first little little bits of Bitcoin, little slivers of Bitcoin. So pretty excited. Oh, I'm in the digital currency world, the remote digital currency buyer we're gonna, that's gonna be our new podcast, we're gonna.

Okay, so back to the question three to four years, that's a little bit tight. So, I mean, I think five years is a is a number that I would feel better about. But I could see if, you know, the deal was appropriate, like I could see shrinking into like a three to four year horizon. But, you know, it starts getting a little bit thinner when you start accounting for those transaction costs.

Michael:

Makes total sense. makes total sense.

Emil:

What do you think?

Michael:

Yeah, so I personally probably would, personally probably, I feel like that's probably not grammatically correct. But I would, I would go purchase a smaller value ideal and look, to reposition a building at that point in time, because a three to four year time horizon to reposition a small property is very doable, it's very reasonable. If it were my first deal, probably not. But the fact that I've done it a couple times, I've been able to, and this is not me to to my own horn, but double building values inside of about 18 to 24 months, just with some value add repositioning stuff.

So that is absolutely a great investment in my opinion. But Emil, you bring up such a great point of the closing costs and the Commission's just eat away so rapidly at at your profit. Even if you buy something under market and try to turn around and sell it. The Commission's closing costs, just eat that up so quickly. And capital gains right?. If you're if you need that money, you're going to be using it. You also have to pay capital gains tax. So.

Michael:

Right. Right. So your your true. Gain isn't, it becomes much smaller very quickly,

Tom, go ahead!

Tom:

To follow up on your point on doing value add stuff. I mean, when I think of value add, I think of a little bit higher beta as in like kind of higher highs and lower lows. And, you know, if you have such a short time horizon, I would think you would want to do something safer. counter argument. Come at me, Michael.

Emil:

Let's go debate.

Michael:

So I think that when you look at cap rates, and I'm talking about multifamily value adds because multifamily trades based on cap rates, so if you look at adding value to property, and we can do a quick example, let me get my my calculator.

If you go by $150,000 multifamily property five units, and you're able to add, let's see, let's see, you buy it at a 6% cap rate, which is a fairly low cap rate for that price point, I would imagine. So what that tells me is that 150 grand, that property yields $9,000 in annual noi. So let's say it's a five unit building, and you're able to manipulate the value and you add a $25 bill back to every tenant. So you change nothing about the property except adding $25 to every tenant utility bill, which is 25 by 525 bucks a month. When you multiply that by 12 months, that's 15 $100 that you've just now added to that noi.

So now your building noi is 9000 plus 1500, which is 10,500. If the market hasn't changed at all, you should be able to sell that building of the exact same cap rate you bought it for a six cap. So when we take that noi divided by our cap rate of point O six, we get $175,000, which means that there's 25,000 in profit to be had. But per a meal's great insight. We need to be paying closing costs and commissions and a 6%. commission, we're paying 10,500 and closing costs. So our 175 gets eaten down to was at 165, 164 and change, leaving 14,000 in profit and 15k and profit 14k and profit. And then another two in closing costs are 13k and profit. So you'll pay probably 25% on those capital gains.

So 13k times point seven, five, you'll walk with about 10,009 and three quarters and 10,000 after a year on your initial investment depending on what that is, could be a great return could be a less good return. But this was just a real quick and dirty example of doing a minimal lift of a $25 utility bill back.

Now you add some additional dollars in there and doing rehab and you up the rents the rents by 100 bucks a month. You know that might be 500 bucks, so that's $500 per month by 12 is six grand a year. Now that takes her noi up to $15,000 again divided by that same six Cap, that's 250 grand. So you added 100,000 in value by manipulating every unit by $100 a month, increasing the noi, that is absolutely worthwhile. And I think that the returns on that would be, you would be blown away.

Tom:

I dig it. I guess my when I hear you say value add, I always think of like, you know, going into the walls and doing stuff, but like what you're talking about is more of just optimization of the the rent and like maybe bringing up to market rent getting involved in some big project. And I had a time horizon that I needed to get the money back, and it was like the money was accounted for at the year. I'm saying that's a good example.

Michael:

Yeah, I think you have to be really strategic around what type of value add you're willing to take on and a time horizon, like my development project, I'm working on redevelopment project. We've been in it now for two and a half years. So there's no way that that would be on the table for, you know, that three to four year time horizon, but a smaller project? Absolutely could? Absolutely could.

Emil:

You also brought up a good point in that. If you're thinking you're going to do this right on the first one. Don't delude yourself, like probably probably get one or two under your belt as like test cases. And then you can be like, you know what, I can probably do another one, get out in two to three years. And feel like you'll be successful versus like, I'm gonna learn everything on the first try and try to make some money on that, too. That's,

Michael:

And hope it goes well, yeah, yeah. Well, you're gambling a on that deal. But you're also gambling on whatever that dollars are earmarked for. So if that's your kids college fund, you have to say, Hey, sorry, I, you know, the deal didn't go as planned my bad.

Tom:

My bad!

Michael:

But, um, so, Tom, kind of, to your point, and your strategy, would you feel comfortable putting that money into the stock market and an index fund with that same time horizon? Because I mean, same same issue applies where you could lose the principle?

Tom:

Michael, did you just throw back on me what I threw at you?

Michael:

I may have.

Tom:

I mean, again, this is not like investing, advice, yada, yada, yada. All of that. I mean, the safest thing was just to put it you put it into into a CD, but that's like, not very fun. You know,

Michael:

It's your kids college should definitely be fun.

Tom:

It should definitely be fun. But yeah, putting the fun and fun college fund. No, I mean, I would feel okay, taking that. putting it into an index fund, you know, I'm not like playing to the penny stocks, like, just betting, you know, some some big. I'm not gonna say the name of the funds, I don't think we can, but just some big index fund that covers the stock market. And with low fees, and let it ride.

That's actually what I've been doing recently, with my rental income that I've been collecting on my portfolios, where before I had it sit just in cash. And now I've been really aggressive about moving it into an index fund. And it's like already like, like, meaningful income. Like, it's like growing in I. And for sure, like, it puts me more at risk to fluctuations in the market. But I'm in a position to be a little bit more pro pro risk in my life right now. So, that's my answer. Yeah.

Michael:

Yeah. makes total sense.

Emil:

To add there, I think it probably depends on what this cash is for. If it's like you want a nice sports car in a couple years, you know, you lose that money you're you have, you can get another car, if it's your kids college tuition, maybe maybe just played a little safe, right? Like, it's pretty damn important that you don't, the value doesn't go down so that you can pay for your kids college, which is important. So I don't know, that's, that's one of the thing I would factor in here is like, what is the money going to be used for? how important that it does not shrink at all?

Michael:

Yeah, it's it's a great point. But then, so doubling down on that question, let's say you get this slug of cash, and there's no more cash coming and you have to grow it into something in three or four years for your kids college fund. One, what do you do with it? How do you play it safe, yet still grow it?

Tom:

The boring side of the spectrum is just some certificate deposit or where the stream is? I don’t know, Penny stocks.

Emil:

This is this is very simple. You go to Vegas, and you put on black.

Michael:

That's a easy decision. double, triple, quadruple your money immediately walk away with college fund in hand.

Emil:

Literally, seconds, you can double it. You don't have to think about it or you'll go home crying one way or another. But hey, you don't have to think about it. It's just one other way. It's easy.

Tom:

Little Johnny's gonna learn something from this either way. You know what’s fun about this episode is we all had kind of different. Kind of, I guess me and Emil were more on the same camp, but we had disputing opinions on what to do.

Emil:

Yeah, we need now. Just goes to show you much groupthink here. Yeah.

Michael:

You don’t you guys get some individual ideas, huh,

Tom:

embrace debate,

Pierre:

I think that's something that they're experiencing a lot is that they talk to a bunch of different people, and everybody has a disputing opinion on what they should do. And then they find themselves kind of paralyzed by all of the options, because everyone swears by their strategy,

Michael:

Are these all people that have done what they're looking to do? Do you know?

Pierre:

They’re different financial planners and stuff, different people that are in the finance world, or people that are employing the different strategies?

One thing that I told them, take a step back and take the big picture view of the finances that they have available, and then maybe make a partition and say, like, this is the money that we absolutely need. And this is what's leftover. And this is what we can deploy towards, you know, real estate so that you can get the balance of both the short term, short term returns that are going to be liquid and the time horizon they need and while they're still looking towards the long term.

Tom:

Yeah, that makes a lot of sense. Go ahead, Michael.

Michael:

I was gonna say, I think another strategy I was thinking about, before we started talking about this is just splitting your funds, you know, maybe in half and say, Okay, I'll put half in the stock market and keep half in cash. So if things go Great, well, there's some upside there. And if they don't go so great, I've still got some cash, I'm not up a creek without a paddle so to speak. And that might work for some that might not be a reasonable, you know, the tough being in the tough spot of Hey, I've got this slug of cash, I have to make it into more How do I do that in a safe way as possible yet still hitting my yield goals or my my end end value goal.

That's it's tough and I think it can be different for every person and there are different ways as we were just mentioning to approach it and probably multiple right ways to do this. You know, at the end of the day, the whoever is right is only going to be known at that three to four year time horizon. So pick up pick a strategy that you believing in that you're in informed about and then just go do it.

Emil:

There you go. It's the one that you feel the most confident that maybe you have some edge with something right like maybe you just know tech companies really well and you're good at Tech stock investing whatever it is, or you're you invest really well in real estate, you have good options available to you or you have a business where you know, you can put them you know, invest that money in a business and make it double or triple whatever just like what is the best avenue that you believe you'll get to be able to like, grow that money.

Tom:

To complement this episode again. Wow. Really nice little full circle back here to this a great look. A nice little bow you put their meal very, very nice. Yeah. Know your risk tolerance know your strengths and their weaknesses. And Go Bears. Yeah, that's, that's great.

Michael:

Well, now that we've got that bow tied up all nice and pretty sure we get out of here.

Emil:

Let's do it.

Michael:

Thanks, everybody, for listening. That was our episode. Hopefully this was helpful. Hopefully, this begs you to ask some more questions, have some more hard conversations and be thinking about things looking into the future. As always, feel free to give us a rating or review wherever you wherever it is, you want your episodes and we look forward to seeing on the next one. Happy investing.

Tom:

Happy investing.

Emil:

Happy investing.

3 Ways of Thinking About Choosing the Right Time to Refinance Apr 10, 2021

Is now a good time to refi, should you wait? It's an important question to get right. In this episode, we discuss our approaches to assessing what needs to be in order to refinance a property with a desirable result.

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Transcript

Emil:

Welcome back for another weekend wisdom episode of The Remote Real Estate Investor. My name is Emil Shour. And today I've got,

Tom:

Tom Schneider

Michael:

and Michael album.

Emil:

And we are going to be talking about when is the right time to refi a property, whether it's an investment property, or even your personal residence. So let's hop into this topic.

Alright guys, so important question when to refi. There's obviously, yesterday, yesterday and last night yesterday, today, today, I actually refi every single month alone just keeps going up. But I keep refining. So it's all good. There's advantageous times to refi and less advantageous times refi. And sometimes, you know, you can grapple with Oh, is now the right time. Should I wait. So let's talk about when you guys have personally reified. any examples you want to start with?

Michael:

Go ahead, Tom.

Tom:

Go ahead. Michael, you hit the buzzer first, I saw you hit!

Michael:

A nice gentle nudge back! So I recently reified my primary residence, I did a rate and term only refi. We didn't do a cash out because the rate would have gone up quite a bit. So we were able to get down I think a full percentage point for basically free as they call it. So I just paid like escrow and closing escrow and title fees. That was like, I don't know, 1200 bucks. And I think I saved 150 a month was doing that. So that was kind of a no brainer in terms of cost to pay back benefit.

And so we just saw rates going down like crazy. And so yeah, let's jump on it. So did a refinance. If I had been able to, I would have absolutely done a cash out refi. Because basically, so I'll just I'll put it out there for everybody. So we were at a 3.875 when we bought our place like two years ago, just over two years ago, which was great at the time, we were super thrilled with that rate. And then COVID, hidden rates started plummeting. And so we locked in a 2.875 on our primary. And so the cool thing is that we've talked about it on prior episodes, that investment property rates on loans traditionally, are about 1%, spread higher than your owner occupant rate. And so what's really great to do is if someone has a lot of equity in their home and their primary, they can do a cash out refinance, borrow money at a much lower rate, and then use that money to invest as opposed to somebody else who's has an investment property with a lot of equity, they do a cash out refi, that rate is that money is going to be at a higher interest rate. And so it doesn't go as far your purchasing power is a little bit diminished.

But again, I didn't do it wasn't an option for us. So we didn't do that. But if I could have I absolutely would have.

Tom:

So was it a strictly a rate decision? Like once the rate got to a syllabus certain level you're like?

Michael:

Exactly, yeah, so they got to certain levels, we pulled the trigger, I was in contact with that same lender, and actually rates had dropped again. And so we were going to jump on it and do another one down to like two and a half. But then by the time we got around to doing it, then rates had tick back up. So that wasn't really a feasible option anymore. So we're still at a .2875, which is still great, very happy with that rate. Of course, less is better. But it just has to make sense. And so we could get down to a 2.75. But for the 1200 bucks, that's like I don't know, 12 bucks a month savings. So it just wouldn't really make sense for us at this point in time.

Emil:

So for anyone who's done a refi or just got a loan, you know, loans aren't free, refunds aren't free. So typically one or two things happen. Either you pay up front to do the refi, you pay all the costs, or they roll it into your loan value, and now your loans a little bit higher than it was before the refi. So I'm curious, do you typically roll it into the loan? Do you pay out of pocket? How do you like to do it?

Michael:

Yeah, so it depends for this one, because the amount was so small, we just paid it out of pocket, so that we could be done with it, you do the thing you think about is you're paying interest on those loan charges if you roll it in, and so you don't feel it out of pocket as much. But we were in a position where we had the reserves, we had the cash savings, we said let's just let's just pay it as opposed to financing it.

Technically, if we looked at the math, I mean that 12 $100 charge we rolled it in would be at 2.875% interest over that 30 years. So if we look at the total interest accrued over 30 years, yeah, that's gonna be a lot more than 1200 bucks. But also, if I could take that 1200 bucks, spend it elsewhere and get a better return than 2.875%. That would be a better use for those funds. But I said, Yeah, you know what, it's okay, I'll just pay it at a pocket and kind of be done with it. Keep the loan amount reasonable. Not that 1200 bucks on a several $100,000 mortgage is unreasonable. But you know what I'm trying to say?

Tom:

I've done a couple of reef eyes lately. And similar, you know, that question you're asking me, you know, did you roll the costs into the loan, and I did roll the costs, and I live in an area where the property taxes are pretty high. And it was part of the closing costs, they wanted some money for the taxes and yeah, so I just I like, you know, to have the property taxes that were, you know, part of the cash to close in escrow, you know, added into the loan, and got some financing on my 2020 property taxes. I just rolled them right in!

Michael:

That's really great.

Tom:

And I'd like I didn't think about it until after it happened. I'm like, oh, wow, I just got financing on that. So, on the original topic of conversation on, you know, when thinking about reasons derive without refi, I think there's a couple of elements to it. One of them, like Michael is, you know, if rates dropped to a certain level, and it's like, wow, just significant savings on your monthly payment, awesome.

The other is, if you get anything, this is most extra relevant with rental properties, I think, maybe not, is you just if you have such a surplus of equity, so your loan to value is really high, that you can redeploy that equity…

Michael:

Other way around your loan to value is really low!

Tom:

Your loan to value is very low. So if your loan to value is really low, so you know, quickly define that is, some of the the total loan amount divided by the total value of the property. If that value is smaller, say like 50% 40%, whatever, you can cash out refi, as what Michael was talking about before, so I think it's kind of a it can be a combination of both the environment that we've been in like recently with rates dropping and homes appreciating, it's kind of like a superstar refi situation where you have that option to cash out refi if you want to as well as lower your percentage of rate.

Now, if your cash out refinancing, your monthly payment is probably going to go up, because you're increasing the amount of debt. But if you know, if the cost of that debt is cheap enough, you might be neutral to what your monthly payment is, which is kind of a super homerun. So those are the the two main considerations that I'm thinking about is where rates are moving, and the amount of equity that you loan to value ratio, LTV.

Michael:

And your payments likely going to go up unless your name is Emil, sure. And then your payment you get a ton of money in your pocket tax free and your payment stays the same.

Tom:

Did you negotiate that Emil?

Emil:

No it was just so… like Michaels talking about it was it was on a previous episode. Basically, I bought this property in Indianapolis like three, four years ago, Indianapolis has had awesome appreciation, the values gone up. And my rate at the time, the current rate was about a point and a half less than when I bought it three, four years ago. So I could, I basically did a full cash out refi of my entire original investment and a little bit more. And my payment only went up like 29 or $30 a month because my rate dropped. So it was it was awesome. I didn't have to do anything, just rode appreciation wave and still cash flows well, great property. So that was the example Michael gave out.

So in that scenario, there's no reason not to refi it right, like rates looked low, I saw values were going up like crazy, did the math was conservative of what I thought the home would be worth, the appraisal came back even better. So it was just an absolute no brainer to to why not just pull the cash out. Cash Flow is not going to be affected too much lower my rate, all good things. So that one just felt like a no brainer.

I had another situation like you, Michael, I refinance my personal residence, I actually ended up doing it twice as well. So the beginning of 2020, rates were low. So we refi because it was going to drop our monthly payment like 150 200 bucks, which I will happily take. And then we did again towards the end of 2020. Which dropped, you know, we got to 2.875, which was I think was like point seven, five or a full point cheaper than what we had before. So all in all with those to revise our monthly payment on our primary went down $700 a month, which is amazing. Amazing. So…

Michael:

And how much did that cost?

Emil:

So I did the same as Tom, whereas I just rolled them in. So basically, so here's the thing, we took out a loan two years ago, and with the two reifies, because in the beginning, you're paying basically all interest, our loan is basically the same as what we bought it for two years ago. So we didn't have any additional equity from pay downs, because we kept I wish we only refied once but who knew rates? Were going to go down twice, but I will take a $700 drop in payment any day of the week, even if you know my equity stay the same. That's fine.

Michael:

Right? Right, man, that's incredible. Yeah. So something else to think about. And Tom, you were kind of alluding to it is, when you're looking at or considering at your refinance, you should look at what your loan term is how much life there is left on that loan. Because you know, just like you mentioned at the beginning of the loan, if you look at the amortization schedule for that loan, you're paying mostly interest, your principal is getting reduced infinitesimally small in comparison to the interest. So if you're at the end, the tail end of your loan, you're paying a ton of principal down, you're gaining a ton of equity every single month versus at the beginning. You're barely inching forward. So that's an important consideration too.

So I would say if somebody is at the end of their loan and rates have gone up as compared to where they are, but they have a ton of equity. Consider a HELOC. This is a really great way to tap into the equity without changing the loan structure that you have existing.

Because Tom, like you mentioned, we got this supercharged refinance ability here with that values have gone up and rates dropped. So that's really powerful for us.

But if we see that, you know, rates go up, and we still happen to have a lot of equity in our property because we've owned it for a long time, we might not want to cash out refi into a less advantageous product, or a more expensive product. And so that's where HELOC can be a really beneficial tool to utilize in the arsenal.

Tom:

Yeah, love a HELOC. If you hear construction in my background, that is the HELOC at work. The sound of HELOC.

Emil:

You guys both have the same middle name and it's HELOC, you love the HELOCS.

Michael:

We love them. The thing of it is talk to anybody that's used one they'll sing their praises. I don't know anybody that has one that's used it that's like it’s ok. Okay, like everybody I know who has one loves it.

Emil:

Very true. I have yet to use one. But I'm looking forward to using it at some point.

Tom:

Oh, man, I thought of a good non related question. What's something else that people when they use it? Just like love it?

Michael:

It’s the best?

Tom:

Yeah, yeah.

Michael:

A sous vide.

Tom:

Sous-Vide is great. A Traeger is also a very highly…

Michael:

highly revered!

Emil:

The Oculus blew my mind when I tried it for the first time like six months ago. Like everyone who tries the Oculus VR it is it's very cool. The first time you try a virtual reality headset, like I was blown away pretty amazing.

Michael:

As long as you don't have vertigo, it'll be a lot of fun for you.

Tom:

They fixed some of the vertigo stuff because like, it's what I've remember in talking to someone who was smarter than me, and obviously on Oculus and a bunch of different stuff, when you're turning your vision like knows to like, create gaps or something but when you turn with an Oculus, like it's almost like too much information. Okay, I'm gonna I'm totally butchering this, but anyways, yeah, vertigo, Oculus.

Michael:

So people with vertigo can enjoy the Oculus, or people with vertigo, just avoid the Oculus.

Tom:

What you got to do, Michael is what you got to do is go listen to this episode, you gotta slow it down a little bit. And in between my uums and pauses. A lot of good information there.

Emil:

You gotta get the Tom translator out.

Michael:

Yeah, play it backwards… Oculus is best for people with vertigo.

Tom:

The issue with Oculus is the vestibular view!

What were you looking at in your Oculus?

Emil:

My brother in law got one. And I was blown away with it. I bought one. It's funny because like, you try it. It's amazing. I haven't played video games in play a decade. And I was blown away. And so I bought it. And I was using it. Like on the weekends for like a month, month and a half. And now I use it maybe once a month. It's one of those things that it's so cool blows your mind and then the novelty quickly wears out. And you know, as much or I don't know, maybe I just got busy and I just don't played as much but it's still really cool every time I pick it up every once in a while.

Michael:

There is a balance beam one that I saw where you like walk out on the skyscraper balance beam and then my father in law, that'd be funny to push me. And I was like screaming as I was standing there, but following in my head. It's pretty wild.

Emil:

It tricks your brain very well.

Tom:

The videos of people like running into walls are

Michael:

So good. When we first came out they had to introduce the strap for the wrist because people were just breaking all their TVs because like throwing

Emil:

That's right. You got to play to padded room.

Michael:

Yeah, this really got off the rails guys. Nice work.

Emil:

All right. Welcome to the technology investor, the remote technology investor. Alright guys, anything else to add on the topic of refinances. Before we head out?

Michael:

The last thing I'll say is that with the rates being what they are now, you know, who knows about what the Fannie Freddie changes are going to bring for the world but I think a lot of people look to new acquisitions to make better cash flow when oftentimes just re optimizing their current portfolio via refinancing can make a lot more sense and can often be a lot easier so I'm that's what I've been doing. As of late looking to do more with less I encourage other investors to do the same as well.

Emil:

Yeah, can you imagine having just this massive portfolio and rates just bought them out to historical lows and you know, you refi and boom, you just make more money? It's amazing.

Michael:

Yep.

Tom:

My last tidbit will be on the refi piece is making sure that if you're going to do it, like make sure there's enough meat on the bone like I am doing like a burger or something like that, making sure that if you're going to refi you know you're you're making it worth your while so you know they bought a property for $100,000 like I wouldn't refi it and tell theirs, I could cash out a good you know 25k or get my at least my original downpayment back and that's probably a different number for everybody. But in doing a refi where you're doing a cash out, you know, it's going through that exercise might not be worth it. Unless there's a huge rate drop if you're doing a cash out refi unless you get you know, a good good chunk of money.

Michael:

Like $700 a month savings.

Tom:

No no for the actual like cash out. So like getting a good enough bump on equity would be my 10 cents.

Emil:

Not two cents?

Michael:

The full blown dime!

Emil:

Nice, 5x Tom. Alright guys good episode and I will catch you all soon. Happy investing.

Michael:

Happy investing.

Tom:

Happy Investing.

What You Need to Know About Multifamily Rentals & Portfolio Loans Apr 05, 2021

In this episode, Nate Trunfio from Lima One Capital joins us to share essential knowledge about multi-family rentals and portfolio loans. Nate and Michael also share some important lessons learned throughout their careers. If you are looking to transition from single family to multi-family or want to bundle your loans into a portfolio loan this episode is for you.

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Transcript

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined again by Nate Trunfio with Lima One Capital. And Nate and I are going to be talking today about making the jump from single family to multifamily and some things to be aware of, as well as portfolio loans and a lot of different things to consider when to use them, and maybe when to avoid them. So let's get into it.

Nate, welcome back to the podcast, man. super happy to have you back on.

Nate:

Man. I don't know how I made the cut for another one. But man, I'm just thankful to be here. So thank you.

Michael:

So I thought today, we could pick up the conversation. We had you on the podcast last time and we started talking about portfolio loans. And then we also started to dovetail into talking about multifamily. So we'd love to start with talking about portfolio and then we'll jump into multifamily Sounds good?

Nate:

Absolutely.

Michael:

Awesome. So I don't remember if we covered it on the last episode, but maybe for those folks who didn't catch it, what is a portfolio loan? And who might be a good candidate to use them? I think there's a lot of misnomers around the name itself. So give us the quick and dirty about what it is.

Nate:

Absolutely. Yeah, so just as a reminder, Nate with Lima, one capital providing financing solutions for all types of investors with a residential focus that's both single family and multifamily following the residential category, one of our favorite products is very large, a growing appetite for is portfolio loans.

And so essentially, a portfolio loan is in our world, at least anything that's more than one property. Alright, there's different functions of loans that are implemented when you have more than one asset, because it just things get a little complicated, right? What happens if one deal gets paid off, and there's were two in the loan, which we can certainly talk on, but our portfolio loans not only addressed the need for smaller size portfolios, you know, 2-5-10, but all the way up 50 and 100 plus, so there's a couple different variations. But the bottom line is if you want consistent terms, on all assets baked into one loan, that's when you're going to look for a portfolio. If you have one investment strategy for all of your assets, that's when you want to look at a portfolio. When you say when wouldn't I look for a portfolio and I own multiple assets, it's sort of back to what I just said, of, if you have numerous investment strategies, like you're very confident that you're going to want to take some assets to market soon, you might want to reconsider putting those into a portfolio. But the bottom line is if you have an investment strategy, and you own multiple assets, in all of the assets, that you're looking to finance have that same strategy, that's when you're going to go out and get a portfolio loan, it could be on the acquisition ends, you can buy a bulk property portfolio with a loan, you can take properties that are free and clear and combine them into a loan. You can take ones with existing debt and trying to get better terms on it, especially with nowadays low rates. Or you could have good rates on your existing loans on assets and want to recapitalize or refinance and take cash out. So a lot of different options. But the bottom line is multiple properties, but with a more singular investment strategy is when in a portfolio loan is going to be of good use to you.

Michael:

Okay, awesome. And so I know that the loan structure starts to change when you make that transition from residential to commercial in the multifamily world. And that happens at five units plus, so does somebody need to have five single families in order to be eligible for a portfolio loan?

Nate:

Yeah, great question. So with Lima one, we actually have two different products that will address both scenarios of sub five properties in a portfolio, or more than five properties in a portfolio. So I don't want to get too convoluted with that and simply say, No, you don't have to have the five plus properties in order to get a portfolio loan with us. But there is one of our subset of portfolio products that is only five plus properties. And it just has a couple of additional nuances. And I think you made a sort of great attribution to your point there is that product is more of a commercial type loan. And if you think of commercial loans, it's five plus units.

So that's probably a good way to delineate the two products. And there's different reasons why you take one versus the other, again, don't want to get too complicated because we offer numerous different terms and solutions, instructors, I should say, to all portfolios of all sides. So I'll just quickly go into that. And if we want to dig deeper, we can but the options would be interest only. So with us we have a five year and a 10 year interest only. We also have 30 year amortized products. So that would be a five one arm or a 10 one arm which means that the rate is fixed and guaranteed for five years or 10 years and the 10 one, and then it's subject to be adjustable thereafter.

And then we also have a 30 year fixed so you can tell there's numerous options there. If that wasn't enough options for you. There's other terms that we can play with and maneuver based on your investment strategy. Like one of the hot topics with portfolio loans is what are prepayment penalties. Unfortunately, for the most part, prepayment penalties are a nature of the beast of most long term financing options in the residencetial focused world. And so we can move those and make them wider and more impactful, which will hurt you if you're paying off assets in the near term, but you get a lower rate as a result, or we can shorten the impact in the amount of prepayment penalties, you just pay a little bit more in the rate for that.

So bottom line is no matter what your strategy is, you do want to work with somebody that has multiple options like us here at Lima one capital, because what we take pride in is customizing our financing products to what your goals are, because there's not really one portfolio. That's the same as another.

Michael:

Yeah, yeah. Awesome. And for those who don't know, what is a prepayment penalty?

Nate:

Good question. So a prepayment penalty is if you pay off a loan within the penalty timeframe, there is essentially fees associated with paying it off early. The natural question is probably why would a lender impose that. And it's really just because we're providing a very low interest rate long term debt. In order to do that, we as a lender have to hit some level of minimum returns. And so a prepayment penalty allows us to make sure that we hit the returns that are needed s o that you know, the lenders and anybody, you know, the banks, lenders on the institutional side, can make sure that they can hit their sort of return targets, if you will. So I hope that's not too convoluted there. But the bottom line is, you know, it's really hard to provide a call it 30 year loan at four to 5% if somebody pays it off in six months, a lender only made, you know, at a 4% rate 2% on that money. I mean, banks are, you know, getting money between one to two is not much margin for them to be able to stay afloat and provide more portfolio loans to other borrowers.

Michael:

Sure. So it's a way to basically incentivize people to not pay off their loans early is what they're designed to do. Right?

Nate:

Yeah. And unfortunately, that's how it would be interpreted. It's certainly not designed to do that. But it's it's an essence to allow lenders provide you with lower rate terms up front rather than no prepayment penalty and higher rate. And that's where with us, we can work through the option. So let me just get specific real quick. You typically on a five or 10 year, like fixed rate, or arm or balloon note, whatever you want to call it will have like a five year prepayment penalty, they usually call it a step down. The most common one is 54321. If you pay it off in the first year, it's a 5% fee penalty. The second year, it's for the third year, it's three, the fourth year, it's to the fifth year, it's one I hope you followed that.

We can also look to shorten it for a three to one, that's three years of penalty, the first year three the second year to the third year one. And because there's sort of less guaranteed revenue at the payoff early of the loan, you take a little bit higher rate on a three to one a three year prepayment than a five year prepayment. hope that makes sense.

Michael:

Makes total sense. It's funny, I was just actually getting a loan on a triplex I have commercial loan, and it was having this exact same discussion as they they wanted to give me a five step down and I said no, make it shorter, just in case I want to go ahead and refinance. I don't want to be stuck in that loan if rates come down in the next three to five years.

Nate:

And that's it, man. I mean, you hit it on the head. That's what we you know, financing service specialists will analyze, like, what's your investment strategy tied to a portfolio or an asset, and then we'll customize the solution and product to it. Because if you think you might sell in the next, you know, couple years, three years, call it, you're gonna want a lesser prepay and you'll sacrifice a little bit and payment rate, but if you know you're going to hold an asset for 10 years, you know, take the most aggressive, you know, an expensive prepayment penalty, because you're holding it for more than the prepaid penalty.

Michael:

Right.

Nate:

So in on a three year prepay, if you pay it off in the fourth year, there's no penalty, because it was only for three years with a prepayment penalty.

Michael:

Right, right. Not such a great point. And something I've heard in the past is that the term portfolio lender, the name kind of gets thrown around a lot. And that's someone that actually keeps the loan on their own books and their own portfolio. Can you talk to us a little bit about that?

Nate:

Yeah, yeah, great, great point. Another way to describe that is a balance sheet lender, right? Somebody that holds it on their own balance sheet, super passionate about, like the mechanics, the what's underneath the hood and underneath the skirt, if you will. But you know, most people don't know the mechanics that are behind the scenes. So there's really like two main I'll there's many, but I'll call it two main sort of function structures, and how lenders are capitalized.

It's one their balance sheet, or to what I'm going to call it, they use a capital markets, secondary markets, sort of methods and mentality balance sheet is they fund your loan and they hold it, it is on their books, right? It's it that's what you would call in the essence of a portfolio lender from that perspective, somebody that is a lender that use more of a capital markets and secondary markets mentality, they're funding your loan with their money up front. And then they're usually selling a loan off in the capital markets or the secondary markets, if you will.

So that's the difference in the two, a subset of capital markets secondary markets type lenders is they can either do servicing released or servicing retained again, I hope I'm not talking too much lending mumbo jumbo, as I like to call it,

Michael:

No it's great.

Nate:

But servicing released means that a lender sells their loan and the servicing is going to be done by somebody else, a third party, so many of you in in the residential world, this is a mainstay a common point except for some of the very large lenders, you know, like you think of your Wells Fargo's and stuff like that, but even they will use that at times on who is collecting your payments, you know, usually the first payment will be collected by the person who funded your loan. But if they sold it off quick enough, you might get introduced to a servicer, that, again, is servicing released. So now you've got the loan for one company, and then now you're paying a different one.

Servicing retained is when we fund the loan, and were the ones that you're going to see throughout the life of it from first payment to pay off, we are very pleased to say at least one capital, we always service our loans, we will never sell your loan off and and the servicing with it. And so you're always going to have an experience with us as your servicer. And in the investor world that is extremely, extremely important.

Certainly payment it makes it better with payment collection. Because we have in house I can go right down the hallway to get to somebody in servicing to talk to them, rather than call a third party servicer and get run up and down that the phone tree and things like that. But specifically for investors, when there's any form of financing and hold back of construction monies, it's important that you deal with one source that manages that construction funds.

So for us at Lima, one capital we have in house servicing in house construction management. So the same people that analyze your budget and approve your budget on a rehab, project fix and flip or multifamily are the same people that talk to you, as you're in work with you as you request draws. And that is very important, because, you know, we underwrite the budget and approve it. And then it's serviced by third party construction management company, most of the time, the left hand doesn't speak to the right hand, and that is just causes delays and getting clarity and the timeframe of reimbursement of draws is always slower.

So we're very proud of the fact that we have in house servicing, it's a big asset, certainly not only to us as a lender, but to all of our clients, because it just allows us to create true relationships and streamline communication.

Michael:

Awesome. And so is there a difference in regulation when it comes to loans that are sold off in a secondary market versus serviced on the balance sheet or in house? Really great question. So specifically, I will reference like commercial lending because residential lending is a little bit different world and residential is very much an answer of there is heavy regulation in all regards balance sheet or capital markets, type based models are showing, in the commercial realm, it's a little bit different. There are the best way to describe it's there's overarching guidelines, put out by the CFPB to make sure that lenders aren't egregious, and they don't provide terms the fall into usury, meaning too expensive of money and taking advantage of people. So there's some big overarching guidelines there. But a lot of the nuances that are imposed on the residential sector like Fannie, Freddie, primary residence type mortgages are not imposed on commercial lending. It's one of the big differentiations.

So it's not as much in the commercial world, but yet the government is put things in place to make sure that again, people aren't being taken advantage of, which is one of the reasons why nowadays where you've seen all this uncertainty due to the pandemic, when you know, the financial crash happened in the 2000s. Lenders were scapegoated for you know, half of the crash, right? Well, nowadays that we've tightened up the control, mainly from sort of the government on down to make sure that lenders are more diligent, and therefore, there's not really much risk right now of lenders being some of the problem in any potential downfall to the market or crash to the market. Because there's just all the regulation to make sure that we're doing things right, which is very important that has been done. So I think that hopefully puts things into perspective. I think it's a great question. I certainly don't want to bore too much with some of these crazy acronyms in the in the guideline and regulation world,

Michael:

CFP p ABC 123!

Nate:

You got it, man. And just forget about like, I was six, seven years in residential lending,

Michael:

Forget it!

Nate:

But it is important for, again, the safety of all consumers. And I guess the mentality of the government is if you're looking for a commercial in business purpose loan, which is what like investor loans are based in, they think that, you know, hopefully, you're a little more sophisticated, they like to watch it as much that sort of mentality. And then also we in business purpose and commercial lending, hold ourselves now to a higher standard because again, we saw what happened in the crash. So we don't want that to happen. We don't want the government putting more on us. We want to be able to help investors.

Michael:

Yeah, makes total sense. I reason ask the question is I was chatting with a buddy the other day and I got commercial loans and residential loans and I wanted to get a lower rate on my residential loan. And so I went to the bank and I said, hey, can rates have come down, what can you do? And they say, Oh, yeah, we can refinance. This is the rate, this is how we're gonna do it. And then I go to my commercial lender, and I was like, hey, rates come down, what do you do? He's like, oh, we'll just do a loan modification, your interest rate was here. Now, we'll just put it here. And then you sign a piece of paper, and it's all good. I was like, that's it cool. I don't do the whole refinance process. It was it's so much more flexible, like you're mentioning on the commercial side, they can just do things and it's an in house portfolio lenders, they keep it on their books, it's so much easier to deal with, as opposed to the entire refinance process jumping through all these hoops.

Nate:

Absolutely, man. And I will say, you know, one of the biggest differentiations from as you called portfolio lender, balance sheet lender, for somebody who sells loans off to loan buyers, usually institutional sources, is balance sheet lenders do have that much more control. If you have to sell your loan to somebody else, then now I got to follow their rules a little bit.

Most of the time, there is certainly negotiations, because the originating lender typically like knows most about the clients that they're trying to service and provide loans for. So there is a little bit of a back and forth negotiation between the two. But at the end of the day, if you you know, it's the golden rule, He who has the gold makes the rules. So if you control your money, and you keep it on balance sheet, you're going to be able to make your own rules more so than if you're going to have to use someone else's money to buy the loan.

Michael:

Sure, sure. And so for everybody listening, if they're interested in getting a portfolio loan or learning about at the lender they're working with are going to be working with is a balance sheet lender or not? Do they just simply just ask the question of the person they're speaking with? Hey, do you service your loans in house? You? How do you ask that question?

Nate:

Honestly, man, you took my answer. 100%, the easiest way to do it is simply ask, you know, who services the loan? Or will you also be the person collecting my payments? And then you'll essentially get that answer. You know, you can also just ask them that direct question. A lot of sort of loan officers don't know how to answer that to be quite frank, because it doesn't necessarily affect them. But I think your question is spot on.

Michael:

Okay, awesome. So let's transition a little bit and talk about multifamily, which is a fun topic. I'm a big fan of I know you are as well. So I think a lot of investors get their teeth cut with single family and then look to move into either small multifamily, residential, multifamily, and then ultimately, commercial multifamily at some point down the road. And so talk to us about some of the ways that you've seen that go well, and what products people should be on lookout for to take advantage of to help them make that jump.

Nate:

Absolutely, man. And I'm also going to plug maybe bring me back a third time, because the other thing is new construction and like build to rent one of the hottest trends in investing nowadays, too. So because one of the things I always bring up when you talk about transitioning from single family to multifamily is there's specific reasons why a lot of people want to do it. One of the easiest ones is described as you know, economies of scale, essentially be able to bring in more income because there's more units in one asset versus a single property, you know, rent alone versus one tenant in one unit. So that's sort of what's so attractive.

The other thing is that, you know, look at where we're at with supply and demand of single family assets. It's sort of the same in multifamily, which is where people started ago, a number of years ago. But now that's, you know, really significantly high demand that people wanted to buy multifamily. So the next thing has been, alright, let's take land and go ground up and start building and now build to rent is a huge trend as well. So I did want to plug that and we'll tease everybody, and maybe circle back another time. So Mike, put me back on track, though, with the right question here.

Michael:

Making that jump from single family to multifamily and what products might be helpful for someone to look into to do that?

Nate:

Yeah, so let's also take a step back to and just talk about a lot of the differentiations for managing and running and investing in single family, first multifamily. But one of the first things is, you know, well, what I'll say is there's just differentiation between the two, as much as it's so simple like to think that it's the same there are very different when it comes to the actual strategies and logistics of multifamily versus single family.

So from a debt perspective, where you really will want a need to go is to a lender that can read in between the lines, and understand, you know, your business strategy and the ability to get your financing multifamily, because if you start to go to a multifamily lender that provides permanent type debt, a lot of times they're going to want to see experience and then you're in that conundrum of Wait a minute, how can I get alone if I don't have experience? And how can I get a property if I don't get a loan?

Michael:

Right, right. Right.

Nate:

You know, so you got to work with the in betweens there. So you either go local to your banks that you have relationships with, you know, maybe the ones you call depository banks, you know, the ones that have your checking and savings accounts. Those are a great route to finance you transitioning from single family to multifamily.

The other one is is us right, a private lender and institutional nationwide, private lender. All we do is finance real estate investors. We have a single family, multiple single family products and multiple multifamily products. We're able to work with people that don't have a ton of experience in multifamily or any for that matter, but there's certainly some guardrails there. And I guess the easiest way to put that is if you're not a high velocity Single Family, you know, operator meaning you own, let's just use a number of 100 doors. It's tough to come in if you own 10 doors single family to get multifamily loan for 100 unit complex, right? It's just very different.

Michael:

Too big of a jump.

Nate:

You might be able to get the loan if you own 100 single families in 100 unit complex, but even then, it's looked at with some pretty close eyes. So I'll pause there if you had anything you wanted to add. But I think let's talk about some of the other realms that are just different between single family and multifamily investing. Not even just lending related.

Michael:

Yeah, totally. Let's definitely chat about that. But I just want to be very careful when we clarify and specify multifamily because the term gets thrown around so much and we've got duplex triplex quad, which you know, residential multifamily, of course, from an investment strategy and financing standpoint is is from a financing standpoint is quite similar, I would imagine to the single family space, but from an investment strategy standpoint can be different. And then as soon as you hit that five plus number, everything goes out the window. So let's just call it small multifamily to start for two to four units.

Nate:

Well, and I don't know if this is the right term, but this is what I use. So maybe we can make it a term like I call two to four unit multi unit property I call multifamily five plus, I think I made that up. So if it works for everybody listening, just let me know, I'll go trade market or something. But yeah,

Michael:

like multi unit multi unit.

Nate:

So you know, look from our standpoint, as a lender and you know, private lender financing real estate investors, multi Unit Two to four units, we actually treat the exact same as single family. So for us, if you're not really going to try the methodology of like a fix and flip on on a multi unit, we can go up to 90% loan to cost on a multi unit or a single family or one unit.

So we call that you know, in the same world not to confuse people. But in the residential traditional lending, Fannie Mae, Freddie Mac, they do treat duplexes tries and quads a little bit differently than a single family residence itself.

Michael:

I thought it was the same.

Nate:

So usually there are reductions in cash out that you can get and on the acquisition financing, usually, not all, but a lot of them will, for example, single family conventional without PMI is 20%. Down he percent right in the multi unit. A lot of times lenders are Max 75% got it same with cash out will be up to 80% on a single family, Fannie, Freddie and 75 for a multi unit. Not all lenders, but many of them.

Michael:

Sure. I have heard that as well. And so without getting too off topic here, with so much regulation in the Fannie Freddie world, I mean, how is that why do you see such a big disparity between lenders if they're all using the same programs and selling their loans in the same secondary market?

Nate:

Awesome question dude really awesome question. So yes, the simple answer and the word that I will use in the lending world. It's called overlay guidelines. So what happens is, I'll just focus on Fannie Mae, right. I mean, there's multiple types of residential lending. It's usually government sponsored entities, maybe not so much government sponsored soon. There's a lot of talks about Fannie and Freddie not being government sponsored right now. But it's Fannie, Freddie. And then there's the FHA, VA and USDA, those are like the five main realms, right?

So I'm just gonna focus on Fannie Mae, Fannie Mae puts out guidance on what their overall guidelines are, and no lender that wants to have Fannie Mae back there. loans are essentially provide conduits and outlets that Fannie Mae and other people who buy Fannie Mae loans can bay them in. you can't go above and beyond those guidelines most of the time, right? You can look for significant exceptions. It's a lot more paperwork and due diligence from an underwriting perspective.

So Fannie Mae puts out these guidelines that are very wide, and then each lender that wants to write a Fannie Mae loan can impose their own guidelines that are stricter than Fannie Mae's wide guidelines, those are all their overlays. So very much. The reason why you would see some disparity is Fannie Mae might say you can do 80% LTV purchase on a multi unit, but Chase Bank might say, Yeah, well, that's a little too risky for our appetite, we're only going to cap it at 75.

Michael:

Got it.

Nate:

So the overlay guidelines that a lender will in place in order to hit with their strategies are sometimes that's tied to their investors behind them is where you'll see the differentiation between the two. It's really hard as a consumer to identify who's doing what and why and all that stuff. Don't go down that road. But the bottom line is, Fannie Mae's guidelines will allow for wider lenders have their overlays, and Fannie Mae and Freddie Mac and all the other ones I listed have their own proprietary type automated underwriting guidelines they call them. And if you were to like print that those guidelines out with all the variables that analyzes in a couple clicks of a button, I don't know it's 1000s and 1000s of pages of code and variations of what can and can't happen and then lenders tighten it up.

Michael:

Sure. Okay. So I couldn't go Google lenders with the loosest overlay guidelines and get any results?

Nate:

Probably get some results but a bunch of junk.

Michael:

It's not gonna be lending stuff.

Nate:

And look, I mean, it's proprietary for the most part to lenders, because, you know, they don't want to give away their secret sauce. I mean, you know, nowadays, you know, residential lending is 100% a commodity, right? So there, they got to try and keep some proprietary nature to what they do and don't do. And then the other thing is the wind blows and they change their guidelines, their overlays will adjust, but you know, COVID hit, and people tightened up significantly.

So like, there were a lot of lenders even though Fannie Mae might allow it up to 80% cash out when COVID hit some lenders, because in order to reduce their risk, like shot, Max cash out loans down to like 65%, right, because they didn't want to take on that risk given the uncertainty in the market.

Michael:

Right, right. Right. Yeah, I'd seen that happen, too. All right, cool. So let's get back on the rails here and talk about investing strategies for single family versus multi unit and then up to multifamily.

Nate:

Yeah. So from a strategy perspective, multifamily is synonymous with either a buy and hold mentality, or in the residential world, you call it the BRRRR, right, the buy, renovate, rent, refi, repeat, that's very common as well. So the first strategy of just buying and holding without the other stuff is usually you're just getting permanent financing debt on something. It's what we call a stabilized asset, essentially, the occupancy of all the units is high, you know, definitionally, if that's a word,

Michael:

It is now it is now

Nate:

Just like multi unit, hopefully, yeah, find it in a a dictionary near you, or I'm sure media will pick up on it. But the bottom line is, like from an agency guidelines in residential in the multifamily world, there's just a lot more sort of restrictions out there. And from an occupancy and stabilization perspective, you need to be 90% occupied to be called stabilized in agency.

Michael:

Isn't it 90 for 90.

Nate:

Exactly. 90 for 90. You want to give the definition.

Michael:

Yeah. So it's 90% occupied for the last 90 days. Right?

Nate:

Exactly. Yep. So you have to season 90% occupancy for the last three months. And that will make you potentially eligible for like an agency financing and in the multifamily world, so that's sort of just straight down the middle, buy a property that stabilized cash flowing, well get a fixed rate, long term type loan.

Michael:

Just quick question for you. So if I've got a five unit building multifamily, yep. But I have one vacancy. Now I'm 80% occupied. Because of that one vacancy, I'm up the creek, I need to basically be 100% occupied because I can't possibly mathematically be 90% occupied.

Nate:

So a couple of things. The agency world of multifamily is not well suited for smaller what we call smaller balanced loans, smaller units, somewhat smaller unit size, more smaller dollar size. So typically, a minimum agency loan is about a million dollars, give or take some variations. Sometimes it's higher, even. But that usually will remove out five unit properties, at least in secondary and tertiary markets, your primary cities, you know, you you go to a boss in New York City, Miami, I mean, you're sure you get plenty of five units that are way more than a million dollars and million dollar loan amounts. But for the most part, the five unit, maybe 10 unit is usually best suited for a local bank, because they'll use some common sense. Like you said in the math, four out of five is 80. Not hit 90. But I mean, in reality that's pretty close to being stabilized without being 100% occupied. So there are options for it. But it gets a little tough for agency to wrap their heads around smaller unit types.

Michael:

Okay, man us little guys scraping the bottom of the barrel, it’s tough man tough.

Nate:

Hey, look, I might go to traditional local banks, then it goes through agency stuff. So when I say agency debt multifamily, it's the same government sponsored entities that I just said a minute ago for residential. It's Fannie and Freddie and FHA, essentially, are the main, you know, agency, as they call them multifamily lenders hope that's not too confusing. But Fannie and Freddie and FHA, are in both buckets, and USDA, technically, as well. So they're just completely different products. And they look at things very differently.

The other strategy, instead of getting just down the middle cash flowing in permanent type options, is a property that needs value add. So that's the other option. You know, whether it's larger unit size complexes, as I'll call them, or smaller multifamily assets, you know, you don't have to have a stabilized property, you don't have to be 90 for 90. bridge loan options, as well as what is called will allow you to take loans without the supporting cash flow or occupancy, then more of a permanent financing option would would require of you.

So that's what we specialize in at least one capital is bridge loans. So we can do what's called, you know, low to no occupancy and not having an occupancy requirement. We have one version of the product for that. And we have our own, not to get confusing, bridge loan stabilized type product, but our definition of stabilized is 75 to 80% occupancy, so it gives that buffer and then what we specialize in as well is Fannie and Freddie fall out, which means somebody went to try and get a Fannie Freddie loan on a multifamily asset, and maybe it was they didn't quite have 90 for 90 or some of the other nuanced guidelines in the multifamily agency world, it fell out, it might not mean it won't fit in there eventually. But at this moment in time, it couldn't qualify for it. So they'll take a bridge loan, our stabilized bridge 75 to 80 plus occupancy to lease up the asset, or season the financials, and so on and so forth.

So that's sort of the two options of there's a value add, which uses a bridge loan type of play, or there's a permanent financing option, which is more of your long term debt.

Michael:

And so just to recap, if I'm a multifamily investor, five units plus and I want to go buy a building, I can go buy a totally vacant building that has no occupants that needs a ton of work, and I'm gonna do some value add to it, there's a solution for me there. Or if I find a building that is 75% 80%, occupied, but maybe needs some rehab work done or is a little bit dilapidated. I can also go buy that building, and there's an option for me there as well.

Nate:

100%, you just got to go to Lima one.com. And we got you!

Michael:

awesome.

Nate:

Let me bridge this. Mike, can I talk about some of the things that just differ from investing in single family to multifamily? Is that cool?

Michael:

Absolutely would love that.

Nate:

Cool. So we talked a lot about the debt, I'm done. I'm done with that for now,

Michael:

No more debt talk.

Nate:

But a couple of different topics that are different. First is construction. So you would think you renovate a single family asset, it's no different, it's got X amount of walls and studs are not you know, whatever it is different. It can be very different in that usually I will not usually, but almost always code is different. You know, so the permit process that are different. So you need to be very cognizant of what the requirements are of now a commercial asset five plus units, I'm specifically saying versus residential, because the code is different.

That usually means you're getting a different type of contractor or GC to run the project. Because you have to know the code as well like things that pop up that people don't think of as parking spaces, different egress, which is you know, fire escape options, things of that nature can be very different in construction. And the other thing you got to keep in mind me do like renovations on multifamily, especially if you're talking the little bit middle to larger unit size is you want to have consistency in what you're doing with the product.

So you don't want to like you know, win single family on a single family asset. Let's say you know, the stove broke, okay, we just go to Home Depot or Lowe's and buy a stove, no big deal. You know, it's just what I need. But in the multifamily realm you want to think it through if you have a larger complex, because you're going to have to replace multiple stoves. Or if you're good, you don't want to replace the whole stove, you want to replace parts of it. So you want to get the consistent type of product, so that when the top burners break, you have the same type of materials to go get to fix it, making it a lot easier on the maintenance of it.

So a couple of just different reasons why the construction aspect is different in multifamily than single family.

Michael:

Yeah, quick, just quick anecdote with regard to the code. I mean, you couldn't be more spot on I've talked about on a prior episode, but I'll share with you I was I'm doing in the midst of redevelopment project right now converting commercial space into residential. And I went to convert one of the floors and they're like, yeah, okay, cool. Um, your permits are approved, but you got to put it in an elevator for ADA.

But, and I was like, there's got to be another way around this. And like, well, if you convert the bottom floor to then you'll have ADA compliance. And you don't have to put an elevator, but you got to put it in a sprinkler system.

Nate:

I mean, you hit the nail on the head look right now, because of the demands and lack of inventory in multifamily as well. A lot of people like to do an adaptive reuse, play in redevelopment play like you're referencing, which essentially take a different asset class, whether it's like industrial office, whatever hotel even and converted to residential multifamily. I can tell you that. I'm sorry. I hope I don't scare you, Mike. But most of the time, what we see is the ending budgets and costs, you have to expand to reposition those assets from that asset class to now residential multifamily. It's very hard to do it and be on point with the budget because of all these different requirements, man, so I'm hoping I'm not jinxing that deal for you, my man.

Michael:

No, no, not at all. This project has gotten so far off the rails and so far off budget when it's done, I'll have to do a whole episode about it. But basically, without getting too deep into I had two fires in the building during the course of construction. So insurance got about I mean, it's just been a frickin nightmare. It's now starting to get pretty close to completion. But now you're so right. There's so many things that pop up unknowns that nobody could have predicted at the time. It's really, really hard. I probably will not be doing another one of these.

Nate:

And they're so attractive because any pro forma on an adaptive reuse pilot, you know, you're your chief. So there is some more margin for error because they look really good. And you can buy them at a lower basis, as you'll say,

Michael:

Right? Right.

Nate:

But they're they're tough to navigate through. But I would tell you, man, you know, you get through this one successfully, you'll have much more knowledge to actually be better at the next one as scary as that may seem. And I need to do another one, my man. So

Michael:

I know. I know. We'll have we'll have to chat offline about how to get some financing done because the lender I'm working with is just such a pain in my side. So

Nate:

Yep,

Michael:

We'll, we'll chat.

Nate:

We'll do we'll do my friend. So another just couple more real quick. The the first one I'll say of differentiation from single to multifamily is your tenants, right? So like, okay, I own one unit, a single family home, I can put anybody in there I want because doesn't matter like the neighbor, I probably don't own the property next door. So I could put in a tenant that I don't have to screen as much. And they could cause a lot of ruckus. And yeah, it's a headache, but it's not gonna affect the rest of the asset outside of potential damage to it.

But in a multifamily realm, you have to be cognizant of what you call your tenant base, like, what is the sort of profile of the tenants that you have in an asset? And you have to be very mindful of that. And so when you look at, okay, I think I can get x rents on these units. Well, does that fit the other demographics that have the tenant base that's in there now, and this is a lot of the challenges even on five and 10 unit, you know, in that range properties that people don't think of, because they'll see Yeah, all right, a 1200 square foot apartment, very similar vintage, which means age and sort of style might rent for 1200. But it might be a little bit out of town. And it might be all, you know, higher end type of tenants, if you will, I don't know if that's the right way to describe it. But if your existing tenant base might not be of that caliber, it's gonna be really hard to take somebody of the a class type property and put them in, when the surrounding tenants are making a lot of noise.

I mean, one way that I'll probably politically correct for some not as upper echelon tenants is the elements that you can have in some tenant bases, you can't really get away at times. So like, if you're investing in an asset that's infested with gangs around them, it's hard to get those gangs out of there. So you have to be cognizant of who your tenant base is now. And is that going to work as you you know, move new tenants in it. And just be cognizant that essentially, everybody's sharing walls. And so if they're not of similar, you know, sort of demographics, per se, you know, we're not trying to redline Don't get me wrong there. But it just might not always work as easily as you will think.

And then, you know, the worst thing you have is then vacancies or people that don't pay as a result, because they move out because they're mad that you know, they're just not the right fit for them. Yeah. So another variation that is different.

Michael:

It's such a good point. And something also I want to point out and kind of piggyback off that is, when I talked to people about this all the time, when making the jump from single family to multifamily, they might be evaluating a single family home at sale prices to 25 to 25,000 rents for two grand a month, versus they see a four Plex on the market for 150 that rents for 2000 a month, because each unit rents for 500 bucks, those are two very different types of tenants and two very different types of assets.

And people see that for you. And like oh my god, the cash flow is amazing. But that person renting that $500 a month unit is going to be a very different person than who's going to be renting that $2,000 a month single family. So super important to keep that in mind as well. We are getting long in the tooth here. And we've got so much more to talk about. We're gonna have to have you back on and pick up this conversation where we left off because this has been awesome.

Nate:

Hey, last thing I'll say on the topic of single family to multifamily, you can do it. I don't want to scare you in any of this. There's great multifamily deals and as long as you do it diligently and if you don't know what you're doing, you can certainly research it but find a mentor, find a mentor near you, and they will help you along the way because there's a lot of things you can't read about investing in multifamily solve it, it's a self learned by experience.

So be diligent about your decisions. And if you don't have that experience, you can read up as much as you can, that will certainly help you but also find a mentor to help you help you get into it and know how to navigate through some of these deals, strategies and challenges per se.

Michael:

Yeah, and go find a mentor who's missing a couple teeth that means they got him kicked in at least a couple times.

Nate:

I love it. I love it my style too.

Michael:

Awesome, Nate well thanks so much for hanging out with us again man.

Nate:

Super appreciate it.

Michael:

This was awesome and always always a pleasure and so looking forward to doing it again because we've got a lot more to unpack here.

Nate:

Thank you appreciate you having me on and I hope your listeners get some value out of it.

Michael:

Certainly more to come totally take care man.

Alrighty, everybody that was our show. A big big big thanks to Nate use a lot of fun to have on the show and we look so forward to having him again, when we can pick up the conversation and dive more into some multifamily asset investing. If you'd like the episode, please feel free to leave us a rating and review wherever it is. Listen, your podcasts those are super helpful for us and getting our show ranked. And as always, if you want to hear a certain episode idea, have a suggestion, leave us a comment and we can look at making an episode on that particular topic. Thanks so much for listening and happy investing.

Parents Can Make This Power Move to Make Their Kids Rich Apr 03, 2021

The 7 Dollar Millionaire joins us to share 1 simple tip that will help you make your children rich. The 7 Dollar Millionaire will be joining us for a full length episode on his book (linked below) very soon!

The 7 Dollar Millionaire is the author of Happily Every After: Financial Freedom Isn't a Fairytale https://www.sevendollarmillionaire.com https://www.sevendollarmillionaire.com/happyeverafter/ https://www.goodreads.com/book/show/55402867-happy-ever-after

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Transcript

Michael:

Hey everybody, my name is Michael Albaum and welcome to another episode of The Real Estate Investor. On this weekend wisdom, we have a very special guest with us, The $7 Millionaire is going to be talking to us today about some tips and tricks you can use for your young ones when they're just starting out to help them get ahead financially later in life. Let's get into it.

Michael:

So, Michael, I'm curious to know, Tom, has his youngster Charlie sitting on his lap here. And so we were chatting a little bit before the recording. Are there any tips, tricks, advice recommendations you have for folks that have really young kids where maybe the book doesn't make sense for them, but things they can still do to help their kids or young ones get ahead?

The 7 Dollar Millionaire:

Yeah, it's it, I wouldn't put this in the book, if I discovered it before yesterday, which literally, when I discovered it, I was so frustrated because I do this stuff. And I'm a spreadsheet geek. And I'd never done this. But I worked out just yesterday that if you put it in $7,777 into an investment account for your kids when they're born, and if it makes 7% returns during their life, they will be a millionaire by the time they turn 70.

Now 7% is just the number I pick because it's the number I use and all the other stuff I do, but the s&p 500 has made nine and a half percent returns for every 50 year period for the last 90 years. So yeah, if you put in eight grand the day they're born, that could be a huge number by the time they're 40 or 50 just life changing for a grant. So I think that's one of the things that even if the kids are too young to learn these concepts, you can put it away you can talk to them about how it's growing. You know, you can talk to them about what they can do with it you know when they can use it all that kind of stuff really powerful.

Tom:

That was a great par to just kind of follow.

The 7 Dollar Millionaire:

Yeah.

Michael:

Yeah. So Tom, you've got no excuse now for not making Charlie a millionaire. The pressure is on!

Tom:

All right, awesome.

Michael:

Sorry for throwing you under the bus.

Michael:

You know, it's it's so funny you say that? I think one of the best lessons my father ever taught me was for my 12th birthday, he bought me a couple shares of GMC stock. And we said every day we looked in the paper and said, Okay, this is what the value is doing. It's going up, it's going down and and learning about just financial finances from kind of that basic level, I think is so eye opening. So when you can do things to help give people in your life a leg up. I think that's that's super helpful.

The 7 Dollar Millionaire:

Yeah. And so I did it totally. I mean, one of the reasons for writing this book is I have in my day job, I get to meet billionaires and families or billionaires. And one of the common things that they talk about is the fact that their parents would talk about business across the dinner table from a really young age. And the rest of us don't have that we don't have I don't have any billionaires around my dinner table from a young age. But the more we can do, the more we do it, the more chance our kids have of having that level of skill.

Michael:

Yeah, I love it. And was it was it Albert Einstein who said compounding interest is the eighth wonder of the world or seventh one or the world.

The 7 Dollar Millionaire:

No, he the internet said it. If you get out, get out get that one. On Snopes. There's like a great quote from a physicist. He's like, do you have any idea how clever Albert Einstein was? He's not impressed by compound interest!

Tom:

That’s basic algebra. Yeah.

The 7 Dollar Millionaire:

This is not the kind of thing that impresses him.

Michael:

That's too funny. That's too funny. Well, Michael, thank you again was really such a pleasure to have you on and I'm sure we'll do this again sometime soon.

The 7 Dollar Millionaire:

Excellent. Thank you very much.

Michael:

Already everybody that was there episode a big big, big thank you to Michael for coming on the show. It was a pleasure hanging out with you all the way over in Singapore. Really great tips. I know Tom is going to be taking massive advantage of what we talked about today. If you enjoyed the episode, please feel free to leave us a rating or review wherever it is. You listen to your podcasts. We look forward to seeing on the next one and happy investing

What Do Fannie & Freddie's Recent Changes Mean for Small-Time Investors? Mar 27, 2021

Fannie Mae and Freddie Mac recently announced that they will be allowing banks to have only 7% of their books as second homes or investment properties. In this episode we discuss what these limits mean for small time investors.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode we're going to be talking about a topic that came up recently on Reddit, it was related to Fannie and Freddie Mac's new announcement that they will only be allowing banks to have 7% of their books as second home and investment properties. We're going to talk about broadly what that means, kind of some crystal ball thoughts on how that could impact remote investors and real estate investors in general, and just kind of riff on it. So Alright, let's do it.

Welcome back, everybody. So before we get into it, just a reminder, this is the hosts opinions and thoughts. This is not opinions and musings of Roofstock. This is this interesting news came out. But before we get into it, who do we have on the call right now? Who am I co hosting with today?

Micheal:

Michael Albaum,

Emil:

Emil Shour

Tom:

Awesome. Alright, so let's unpack this news that came out today related to Fannie and Freddie's guidelines around allowing banks to only have 7% of the books as second homes and investment properties. So Michael, do you want to lead with an initial little speech about a kind of unpacking this this update?

Michael:

Yeah, totally. So I mean, it's really interesting that they came out with this announcement, and that they're really going to be limiting the amount of loans that they're purchasing, which is I'm imagining going to have an upstream a pretty dramatic upstream effect on folks. And so basically, as it stands right now, when somebody goes to buy a home, for as an owner occupant, they can typically get what's called a conventional loan through a lender, then that's bought on the secondary market by Fannie or Freddie, these government backed institutions, and they subsidize the cost of the loan, which is why the interest rates tend to be so low versus going to a hard money lender or a private lender, the rates tend to be a bit higher.

So investors can do this too, we can go get conventional loans, or conventional lender that gets sold in the secondary market for investment properties, we tend to pay a little bit of a higher interest rate, because it's not our primary residence, and that's perceived as a higher risk. But we can still get access to very cheap debt.

Now, the fact that Fannie and Freddie are going to be limiting the amount of total investment and second home loans on their books means that they're just going to be buying a whole lot less of the investment property and second home mortgages from those origination lenders. So I think that it's going to force a lot of investors to have to go outside the conventional route. And they'll probably be looking more towards commercial and private capital, my guess is there's going to be some new players that emerge in the space to service those types of loans, because now there's a real opportunity, investors are not going to slow down acquisitions, any, they're just going to have to pay a bit more for the debt. And so the the days of super, super cheap debt being backed by the federal government, probably behind us, and I think it was, as of April 1, these new guidelines are going into effect.

Tom:

Yeah, you know, I guess, like kind of down the line, it's going to be tighter for investors, you know, loading up on conventional loading loans for investment properties. And I guess it's the same, but for owner occupied buying those properties, it's just, I guess, frees up a lot of those traditional lenders to just serve as more of those type of loans.

Michael:

Yeah, I think we're gonna see a lot more house hacking because of that.

Emil:

I wonder if this just means, you know, banks make money every time they do a loan, right? They make money on closing costs, all the fees that they charge to originate a loan, all that stuff. I wonder if you know, will the fact that investors they can do less investor loans? Is that going to cut into their revenue enough? where they're going to have to start just trying to do more owner occupant loans? And do they loosen the standards there? And then do we get a run up of people buying owner occupant? Do you have something like we saw, I don't know 2007 2008? Where it's easier than ever to get a loan, even if you're less qualified as an owner occupant driving prices?

I don't know if the investor market is that significant of a revenue stream for a lot of these lenders. But that could be something interesting that comes out of it. No idea.

Tom:

I don’t know you'd like in getting like doing refinances all of them are so so busy, I wonder if this is an exercise, just to kind of slow down the amount of volume, you know, that Fannie and Freddie are taking, you know, I think they're shrinking the by, you know, putting this limitation on in second homes and investment properties, this surely is going to tighten up the number of loans that they're originating. So I wonder if this is like purposeful, just to to limit that liability of how many additional loans they're taking on, you know?

Michael:

Kind of similar to Emil’s point, I would be curious to know of the refi surge, how many of those have been investment properties versus owner occupant properties? That's a good question. I don't I don't know how we find the answer to that. But I'd be very curious. And also, like you mentioned about the profit margin coming from investors versus owner occupants. I've got to imagine I mean, investors, we talked to agents to like, investors buy tons and tons of properties regularly. They're buying and selling, buying and selling constantly versus your owner occupant. That's a once in a several year typically occasion. And so if you can have investors on your books, I would imagine that they're more of a repeat customer more regularly than your owner occupants. So it seems almost counterintuitive that they would want to decrease the amount of mortgages that Investors are able to get.

Emil:

It looks like this is being disguised as better underwriting, making sure that there's less chance for default and things. I actually think that it's the opposite. Those are the ones that default more. I mean, if you look back to 2008, it wasn't, yes, there were tons of investors losing homes, too. But it was a lot of just owner occupants losing their homes. So I wonder like, is this a way to help more people be able to get into homes so less investors are going for single family homes so more owner occupants can get into? I wonder what the dynamics at play are here besides what they're kind of saying is just smarter underwriting or whatever.

Michael:

But it seems that they already have that a bit with the pricing as it stands today, prior to these, right, you're gonna pay usually around 1% more and your interest rate, because of the fact that it's an investment property versus owner occupant. So there already does seem to be incentives to be an owner occupant buying a property and with low down payment requirements, I mean, there's a higher down payment requirement for investment property.

So it feels like they already have that. But maybe you're right, maybe this is just an additional layer that says, hey, you can't even get a loan from Fannie or Freddie as an investor, you know, if their limits are full for that year.

I mean, this might change the buying cycle two for folks, and that if they look at the calendar year, January to December, well, 7%, if it fills up in January, well, maybe we're Tough luck, everybody buying in April, May or June.

Tom:

I'm marinating in my opinions are forming as we're having this discussion. So something that I like, just thinking about this a little bit further, that doesn't sit with me, like super well is, you know, this is very much impacting us as investors like individual, you know, investors, and what an advantage for like bigger companies that have big institutional lines of credits to buying now that it it's less competitive for individual investors…

Michael:

Yeah!

Tom:

…to get, you know, cheaper debt. So this just hit me right now and thinking about it. I mean, if I'm an institutional investor, and I'm competing against individual retail investors, this is great news. And that retails, one of their strongest points is being able to get really cheap debt through Fannie and Freddie back loans, it's going to be less available for them. So I don't know, this just kind of hit me just thinking about it right now. Like, you know, foods and of the different players that's involved, like, Who is this hurting? And the little bit, but I think it's still going to be available, I don't think it's going to completely dry up being able to do conventional loan for investment properties. But you know, I think it's going to be just a little bit less accessible, these really cheap, cheap kind of debt that you get.

Michael:

So do you think that's going to drive prices in kind of that middle market where the institutions don't play and the kind of, you know, one off investors don't play where it's kind of the more semi sophisticated kind of professional investors play that now that they can't get access to some of that cheap, cheap debt? Getting it's gonna drive prices up or down?

Tom:

I think possibly. I mean, I wouldn't, I wouldn't anticipate, you know, big swings…

Michael:

Come on Tom 50% swings!

Tom:

I think in the larger markets, I think there's so much institutional money buying stuff like I don't think you'll really see much of a difference. But perhaps in those first year in secondary markets, there could be some impact. And again, as I said, in the beginning episode, this is all our our hosts pontificating on this news updates. I don't know, Michael, I mean, maybe a little bit and some of the smaller markets, but I wouldn't anticipate the larger markets where it's already just so competitive, both from the owner oxide as well as institutions that are buying?

Emil:

I don't think so either. I think you think about the small investor like us who's using conventional financing to go buy single family homes, that is a drop in the bucket of the overall people buying single family homes, I think about owner occupant, and then once you start really growing a portfolio, you can't even get conventional loans anyway. So like you're getting private money anyway. So I think the interesting opportunity here might be you touched on a little bit in the beginning of the episode is, is there growth in private lending now? Like, can more private lenders enter the game to help these smaller investors get into investment properties?

Michael:

Yeah, something I talk about a lot in the academy is oftentimes new investors, I mean, myself included, look at loan products and see one at 4%. And one, two, and three quarters presenting, oh, my God, I have to go with the two and three quarters, it just makes so much more sense. When at the end of the day, if you look at the loan amount, and what that actually translates to, and what your monthly payment look like, you know, on a 65-75-$80,000 loan, even that one and a quarter percent spread might only be 35-40 bucks a month difference.

And yes, that would be better to have than not, but if you have to jump through all these hoops, and it might be more expensive to go even the traditional route, you know, sometimes it's just worth it to pay a little bit more and just be done with it for ease of transaction for ease of scaling. And so I just did that recently. I just got a private loan. It was at 4%. It's a commercial product on a triplex I own it was a little bit expensive, like my total closing costs, including points was like 3.7% of the loan amount, which isn't that unreasonable for a loan and especially for a private loan and 4%, like that's just not that unreasonable for an investment property. So I think that we just really need to understand and recognize that yeah, if that's our only option. Let's just go do it. And as long as the numbers still make sense, awesome, like, there will be a time down the road when interest rates will be less than they are now, maybe or there'll be higher, and that 4% will seem like a screaming deal. Right? And if they go lower, I'll refinance.

Tom:

That's interesting, Michael, I mean, you know, you had a triplex and with four units and below, you could have gone for a more conventional loan, which is, you know, drawing up a little bit right, with this new announcement, what made you go private, right away, is it just the maxed out the number?

Michael:

so it's interesting, I couldn't actually go conventional, because I am technically self employed. And I don't have two years of tax returns to show. And so Fannie and Freddie, nobody will lend to that's a requirement for my understanding for Fannie Freddie loans, you need to have the self employed for two years, and show that on your tax returns not be employed for two years. So if you started in May, in a given year, you're kind of up a creek without a paddle, so to speak.

So that was the big hurdle for me, I could have got something probably in the low to mid threes. But at the end of the day, this was so easy to get, and I could get it it was available to me. So I said, Let's jump on it.

Tom:

Yeah.

Emil:

So what's the big takeaway here for our listeners?

Michael:

No price changes, go talk to your private lenders. Yeah, I think just exploring all the different options that are available, still talk to your lenders, your conventional lenders, and absolutely look to take advantage of local lenders as well, who can often be a bit more flexible, technically, that could be considered a private lender, in that there, they might not be regulated by Fannie and Freddie as much because they're not selling those loans at they're keeping those loans on their books, they can be a lot more flexible, and so they're likely not going to be subject to these the same requirements, since they're not selling their loans on the secondary market anyhow.

Tom:

My takeaway would be to build your bench of conventional lenders, just because you might find some, you know, don't want to underwrite for investment loans with you, and some may have some more flexibility. So, you know, it's not like a monogamous relationship of you know, once you find a lender, you're only using that lender, lender.

So there are, as Michael said, there are local lenders, there are national lenders and meet a lot of people, a lot of lenders out there that don't limit yourself to one if one will not, you know, for whatever reason, maybe they're impacted by this change with Freddie and Fannie, in the secondary market, you know, some might be more impacted than others based on their current portfolio of loans that they have out. So, you know, get out and mingle, you know, meet some lenders meet some, as you're sourcing new conventional loans.

Emil:

If you have a lender who is pre approved, you check in with them, make sure you're still good. Make sure everything you know, if you're out shopping, just check with your lender, make sure it'll still be good April 1st.

Tom:

Awesome. I think that's great, guys, as always, thank you very much for listening. Have a great rest of your weekend. If you're listening to this weekend wisdom on the weekend, and if you liked the episode, subscribe like us all that good stuff and as always, happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

Considering a Vacation Rental? Let's Hear From a Vacation Rental Veteran Mar 22, 2021

Dream investment or real estate nightmare? On this episode, we have Bryan Bailey on to talk about his experience with the vacation rental investment strategy. We cover motives, returns, reserves, startup costs and everything else you need to consider to be successful with a vacation rental.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode we're talking about Vacation Rentals with Bryan Bailey. Bryan is a vacation rental veteran. And he's going to talk about how he started his portfolio, some of the costs all that good stuff. Alright, let's get into it.

Tom:

Bryan Bailey, welcome to the remote real estate investor. Before we get into the topic today, why don't you give listeners a little bit about your background?

Bryan

Yeah Tom thanks, I'm really happy to be here. Well, well, let's just stick to the real estate portion. I've had a very eclectic background. But you know, I got into real estate, like most people listening to podcasts reading, you know, the, all the books about how to get rich quick, you know, and it got enamored with that. But essentially, you know, out of college, I started in commercial real estate on the west coast. I loved it. I was doing structure finance, working on some big deals, and San Francisco and LA and Portland up and down the West Coast and absolutely loved it.

And, you know, I wasn't looking to get into SFR. But through a series of circumstances, yeah, I took a job at a small company that was buying single family homes at that time that that company was Waypoint homes. And in 2011, when I started there, we maybe had 300. In total, you were the first employee there, I believe, Tom and I was right after you. And you know, we grew that company to over 15,000 homes from 300. You know, it took the company public and eventually sold the firm. And as some of the listeners may know, the former waypoint is now part of invitation homes. So you know, that was a great run. And now I've been at roof stock for three years as a co head of investment services. And, you know, we're doing great things over here.

You know, I would just say, I feel like I've been a pioneer in the institutional, single family rental space, the past 10 years has been unbelievable, but when you see what's happening right now, with all the attention that the industry is getting all the institutions, even a lot of individual investors are getting more excited about the space, I think the next 10 years will be even better than the last.

Tom:

And something that just kind of sticks out is you know, working at those companies are growing really quickly, you end up wearing a ton of different hats. And I thought one of the roles you had was so neat is whenever this company that was buying a bunch of houses would open a new market, Bryan would be the tip of the spear and basically, you know, work with some of the local pros and get the growth in these as we would open up Dallas as we would open up Atlanta, Bryan was the the road dog in opening up those new markets.

Bryan:

So I was a road dog and the high school and college too. Just so you know.

Michael:

I'm sure you've been called the worst things.

Bryan:

And yeah, when we were running on empty is like, Yeah, I was a road dog. But yeah, to your point, Tom, I've worn many different hats and SFR like you have and it's just been awesome experience, you know, of a lifetime.

Really, you know, like you said, when we open up new markets, there really wasn't a playbook. There was no industry. So it wasn't a commodity business. Like it's starting to get now on these platforms. And so you just kind of have to figure it out. And I remember many times, as you were saying, whether it be you know, a Dallas or a phoenix or in Atlanta, you would go there and sit in a Starbucks with your first employee and just start mapping things out. So yeah, from there to heres is a lot of fun memories. We drink the entrepreneurial, gritty Kool Aid they have. Yeah, the stable is awesome.

Tom:

So very awesome back ground professionally, but you also dabble as an investor as well, correct?

Bryan:

I do. I do. You know, I have, you know, SFR my portfolio and today we'll get into it, but I do own vacation rental and thinking about adding to that portfolio. So have not only, you know, experience from you know, working in the industry, but like hands on personal experience in the space.

Tom:

Awesome.

Michael:

Awesome. Well, I'm super curious to learn how you ended up getting into that vacation rental. Tom, do you want to wait to talk about or should we jump right in?

Tom:

Perfect segue, Michael, you're nailing the segue. Let's let's get into it. Go ahead.

Michael:

Awesome. So I think a lot of people end up in Vacation Rentals as accidental landlords, you know, primary residence and move out of it and they could turn into a second vacation home. Was your approach similar? Or was it more targeted? And you thought, Okay, I'm gonna buy this as a vacation rental.

Bryan:

I mean, I wish I could say something like super cool and awesome, where the audience would just say, like, Man, what a strategy but let me just back up for a second and I'll get into there but first thing that I had to do was get off the couch with my first rental property, just straight rental property. And I think like a lot of folks get into analysis paralysis. And you know, you read a bunch of podcasts and books and like looking for the right opportunity and you just, I couldn't just get off the couch. It literally took me like four or five years.

Once I made decision that I wanted to invest by the time I invested. I wish I had all that time back. So I want to say that first.

So, regarding the vacation rental, you know, as Tom, you alluded to, I had this job at waypoint homes where I was traveling the country and open up all these markets. And one of the places I love going to was Phoenix, like, you know, eight, nine o'clock at night, it's 90 degrees. Like, I just loved it. I mean, who doesn't like the desert, you know, and then

Tom:

Spring training!

Bryan:

Spring training, I mean, just fell in love with it. And you know, at the time I was a runner, I used to run a lot, yes, I just fell in love with it. And I not only what I go there for work, I would also, you know, vacation there, you know, a couple times a year ago for a week and hang out. And one year, some buddies of mine, we went on a golf trip, instead of getting hotels, we rented a house and you know, fairly nice house, but not like over the top. And I couldn't believe what we were paying for. And but then when you compare it to a hotel, it was cheaper than a hotel. And then that just, you know, the light bulb went off on like, I got to get in the game.

And so I bought a home there. And it's been tremendous. Now we'll go into different facets of it. And as you know, the podcast goes along, but it's it's been one of the better investments in my portfolio.

Michael:

Did Did you have a conversation with any of the people you were sharing a house with about that idea? Or did you anybody, there's other people invest? Or did the light bulb click for them as well, were you like, off in a corner somewhere being like, holy crap, I just had this lightbulb moment.

Bryan:

The guys I went with are in real estate as well. And they've dabbled, I didn't necessarily tell them at the time, like, Hey, we should all you know, go in together, or you should do it. And I should do it. It's just something that just kind of marinated a little bit. And I'd say within two or three months after that trip, you know, I hired a local agent that I'd already known from, you know, my business days. And I'd said, Hey, we need to start looking. And so you know, the trick is to find the right spot. So that's also took like another two or three months.

But now it wasn't long after that, that trip that I knew that that's what I wanted to do.

Michael:

Right on. And so that first property you bought was was out there in Phoenix as well.

Bryan:

Yes. Just outside of Phoenix and Scottsdale, Arizona.

Michael:

Okay, and what year was this?

Bryan:

This was in 2015.

Michael:

Okay, so Bryan, I'm so curious to know if we can dig into the details a little bit more on this house. So I dabble in Vacation Rentals as well. But I really am curious to know, how are you managing it? And what kind of rents are you seeing on average on a monthly basis?

Byan:

Yeah, that's a great question. So I bought it for 450,000. I'll tell your listeners, you know, even really need to understand the marketplace and some of the barriers to entry and limitations and potential issues that you might run into.

So the key in a place like Arizona, especially the valley and Phoenix, like there's HOAs is everywhere. And so there's a lot of limitations. I get short term rentals. A lot of Hoa is even today because of noise and traffic. They just don't want it in their neighborhood. So they're they're putting in riders in the HOA, I think that's why you would you would refer to it as that minimum stays 30 days, things like that.

So yeah, the first thing that we had to do was like, there would be a great property, but then it's like, okay, is it an HOA? We had to read the CC&RS in the HOA, that was the first thing that we went through. So the filtration…

Michael:

And these are single family homes that have these HOAs.

Bryan:

That's right, that's right, single family homes that have the HOA and so each market is going to be different, whether you're buying in the mountains, or on the beach, or what have you. But like, people go to go to the desert, they like, you know, they like to hang out the pool, they like to barbecue in the backyard, like, obviously plenty of space inside for recreation. So that was another thing. So it needed to have a pool, because I use it for personal use. We'll talk about that later, it needed to have a hot tub. You know, and so I had big time criteria, but when we finally got to it as 450,004 bedroom home, you can't get a couple of families in there easily.

Michael:

Okay, so 450? And what kind of rents are you bringing in? And then we'll talk about how you went about managing it or setting up management?

Bryan:

Yeah, so there's a lot of things I didn't realize before I bought a vacation rental just like in any investment. So obviously you got a huge startup cost at the furnish the whole thing. So I knew that we'd have to do some things to it, but you're basically furnishing a home that you're not living in. So if you can think about all the costs associated with that. So you know, 1000s and 1000s of dollars,

Tom:

This is a pretty high price point, I would assume the rent just kind of based on the price, like you know, you need the furnishings to match, you know.

Bryan:

You definitely do and I think the problem that a lot of novice investors get into is you'll read a blog or like, listen to a podcast and I'll tell you like, Okay, well, the tenant will should just have streaming service. So all you need to do is just maybe have a television or there's like a lot of dogma out there. And the way that I look at it is that maybe you'll catch me once and I'll stay in it. But once I realized that, like I can't watch you Sports Center at night or whatever that I want to do, like, I'm not coming back.

And so like, I really had to set up the house as if like, I wanted to be in there, you know, for me to be really comfortable. So there was a ton of startup costs, like I said, you know, the furniture that you're comfortable in sitting in, you know, like looking at on the walls, you need to have like a good coffee maker, you know, hotel type amenities like hair dryers, all that good China. And it just, it really just starts to add up.

And then the rents, I had to answer your question, Michael, so the rents throughout the year, I average about 5500 a month for 12 months,

Michael:

Holy crap.

Bryan:

But in this one in particular, during the high season, I'm at eight or 9000 a month, and then in you know, in the shoulder season, I get, you know, somewhere around three.

Michael:

Dude, killing it. That's amazing.

Bryan:

Well, it's all relative, right? So like, if you think of all the startup costs that I had, yeah, and then the expenses just go through the roof, right? So in the desert, it's hot, obviously. So water is more expensive. So water bills through the roof, your electric is through the roof, because like you're running, I mean, AC is on all day long. You got more pool maintenance, you know, you have more cleaning fees, and various things. So my expense ratio is over 50% pretty consistently on it.

And so the rents are high, but obviously the the expenses go up. And as we know, people can choose whether or not they want to vacation, they can't really choose whether or not they want a place to live. So that makes regular SFR you know, single family rental more predictable, whereas vacation rental? Yeah, you know, I have these great months, but you need to keep putting money into reserves for you know, the rainy days or the early days of COVID. like nobody stayed for like literally two or three months.

Tom:

On the furniture Brian and the furnishing of the property. Was that all something you did yourself? Or did you have a professional manager or stager company help you do that? I did it myself with a designer friend of mine. So it's kind of one in the same. But you know, I had some ideas of what I wanted. Cuz really, if you're in the mountains and you have a homeless of vacation rental, you probably want to make it..

Tom:

Critters or bears. You got to pick one.

Bryan:

You got a woodland critters or bears? That's exactly it. I was trying to think of the term but that's perfect. So the desert, I was like…

Michael:

Snakes or scorpions in the desert. Yeah, snakes or scorpions?

Bryan:

Well, almost right? If so, you know, it's a desert theme. And then I got some, some artwork that really pops and pictures. So I got to stand out amongst everybody else on Airbnb, and VBR Oh, and booking.com, which I'm on all those sites, I'm on like 30 different sites. So I had to get somebody else with a better eye than myself. But I had an idea of what it should be like.

Tom:

And I didn't know I never thought about those startup costs related to furniture because I use Airbnb pretty regularly and those type of sites and all filter like man, it's got to be like a 4.8 or above or like a really high rating. And you know, if you try to be cheap, and you know, go to the back of IKEA, just take whatever furniture they're throwing out, like for that just type of strategy you got to be make sure that stuff is high on the up and up.

Bryan:

That's just it, Tom. And I think there's a lot of bad information out there. You know, obviously, I have my own experience, and I'm talking about it, but leading up to this call. It's like, Oh, well, I'll just kind of, you know, read some blogs and and listen to some podcasts just to see what people are getting in like this idea of skimping is not a good one. Like I said, like, you might be able to sneak one pass the goalie once but they're not going to come back to you. Now that I've been doing this almost six years, I have people that through property manager, I hear about it. It's like every year they come down and they stay for two weeks, you know, so I've got a handful of those repeat customers. And yeah.

Tom:

A couple of questions on assumptions around financials. What do you see typically as like an occupancy percentage, like let's say you were to evaluate another home, and in that same area now, like what would you pencil in for occupancy? And then my second part of this is property management, like those type of fees. And that's probably a whole nother little subsection to talk about. But let's start with occupancy.

Bryan:

I'm around 60%. And I feel that's pretty good. So I can only speak to the desert, but between, let's say, you know, Labor Day and the end of April, that's the majority of the time is full, I'd say my occupancy during that time is 80%. Right.

And then so in the summer when is 190 degrees out, not a whole lot of people want to vacation in the desert, but what you do get are people who maybe live across town and they just want to change the scenery. So I get a lot of that stuff in the summertime.

So the occupancy isn't as high maybe it's, you know, 30 40% in summertime, but it's a different crowd during the winter season. In the desert. You get a lot out of towners, you know everybody's heard the term snowbirds, so you got a lot of Canadians and people from Michigan coming down, paying premiums for real estate or to stay in your home and then during the summertime it's more locals.

And then from a management standpoint, it is quite expensive. So here's the other thing too. So everybody says the same thing, man, you're killing it on the rents. And it's like, well, my expenses are like through the roof and management, I pay 15%.

Tom:

That's not too bad. I mean, that's a lot. It was a, you know, a year long tenant, but for what I've seen for rental, just because there's just a lot more overhead as a property manager for a rental unit 15%, it doesn't seem that bad at all. Did you look at many other rates of other managers? Or did you like find that the pm manager that you wanted right away? Or what was that process like?

Bryan:

I looked at a couple of different property managers? Initially, I was like, well, I'll do it myself. Because as we, you know, we're talking earlier on the calls, like you and I have been doing this for years along with Michael, it's like, I probably know more than the next guy. Right? So there's a little bit of hubris there. After about 10 minutes, I knew that no way.

So I dated a couple property management firms, and I found the right one for me. And I can't stress that enough, like how a good property manager can like really change your life, you know, whether it's single family rental, or vacation rental, the group that I'm with, now, they're really good. They understand pricing dynamics, it's not like, okay, it's between these four months, we're going to charge this rate, you know, they're just, they're constantly looking at all the data, and keeping my average daily rate as high as possible, and my occupancy as high as possible.

And, you know, expenses with all property managers, there's going to be some areas where you might question but they're pretty good.

Tom:

So circling back on the cost aspects, so you pay your property manager 15%. And there's no like, I guess, no leasing fee, because there isn't really much of a leasing. But is there any other type of fees that they're taking on, on top of the 15% of the gross amount that the person is paying just to kind of undead all the different costs?

Bryan:

Obviously, there's a cleaning expenses. And so the property manager has the cleaning company, so I'm sure you know what they're charging me. It's not cost, right. So they're making a margin off of me. They're, they're not making a margin off of any of the maintenance, at least that I'm aware of, I'm sure, maybe there's some, you know, some deals going down behind my back. I'm not sure but just in any industry, but I would say the things that most people don't think about are like little things like welcome packages, right?

So we come stay somewhere, right? You want to have like some soap you want to have like, maybe you leave like a couple of cups of coffee for him to get started. You have like toilet paper and paper towels and things like that. And so I have a pretty nice welcome package that I've worked with my property manager on creating, and that's like 20 bucks a pop, you know, and so if you're, you know, let's say 60% occupied call 200 days a year for easy math. And the average day is four or five days, it's a lot of welcome packages. So there's just I mean, little things like that, that you wouldn't even think about in your costs.

I want to get back to the startup costs really quick, because like that goes into your basis of the home, right? And so like when you do your internal rate of return calculation, like you got to factor in, you know, 20,000 bucks, at least I did, and startup costs. And so it's like, you need a lot of excess rent over time to make up for that. So if I'm holding on to the property, I think it will continue to bear fruit average daily rates continue to go up. And obviously that service goes down. And you know, it'll more and more of that equity wedge I'll be able to take and higher cash flow. But I'd say it's performing as well as some of my best single family rentals. Even though I'm getting a lot of rent.

Tom:

How would you compare the ongoing repairs and maintenance? I guess there's not really any term cost because it's like always a turn. How would you compare that to the multifamily and the SFR? in your portfolio?

Bryan:

It's really, you know, it's a crapshoot, right. So you can't discriminate. Obviously, there's fair housing, but you know, you get the right tenant in the single family rental, you know, your long term rental, and you get a good one man, that is like gold. Yeah, it really is gold. And so you know, your expense ratio is really low on long term rental, when you're running to like, more and more people, you know, in these four and five day clips throughout the year, it's just inevitable that you're going to get a bunch of people coming down the party or, you know, a bunch of little kids that might take a crayon to the wall or whatever. So I just find that little nickel and dime maintenance has gone up. Yeah, I mean, your towels get stolen, you know, I mean, they do believe me, even in a vacation home, obviously, you want to have really nice bedding. And so there's a lot of turn there. So we're constantly buying you know, new bedding and furniture and things like that. And so you know, the China gets broken various things and then the pool is getting used more often. And so I have pool maintenance a two to three times a month whereas if if I was renting that out to somebody long term, it would be once a month. So is starts to add up.

Michael:

But so on that kind of nickel and dime maintenance and repair costs, Brian and then also on the cleaning stuff, aren't you able to pass those expenses on to the renters in terms of cleaning fees or security deposit to cover those types of damages and repairs?

Bryan:

Some of it, the way that I'm set up is, you know, I absorb those costs. So the cleaning fees and what have you, then I also I feel like I'm getting a little bit better rate. So okay, the only thing I passed through really is are things that are blatant months ago, I had somebody stay, and they broke a table. So you got to pay for the table. And so the property manager, you know, they have really robust language and the the tenant agreement, and they have a credit card on file and like high reserve, or deposit, if you will. And so I feel that I'm protected.

I mean, if they stole the house, we've collected the 1000 bucks, 1500 bucks before from people who have stayed and just treated that like,

Michael:

Like a frat house?

Bryan:

There you go.

Michael:

And so Okay, good to know. I'm curious. On the expense side, I know you were talking about some of those nickel and diming expenses are going to creep up. But are there any expenses that you just don't have at all in traditional single family long term rental versus you do in short term rental, like, if we're going down line by line, then you've got insurance, you've got taxes, you've got property management, you got repair, maintenance, capex, all that kind of stuff. But are there any things that are unique to short term rentals exclusively?

Bryan:

I would just say, you know, I alluded to it briefly in the beginning, like just little things like you know, amenity cost, that wouldn't be in normal operating costs, right. And, you know, taxes, insurance, maintenance, management, utilities, right? I mean, those are some of the basics for long term rental, but, you know, like cable TV, it's a couple 100 bucks a month, I pay for that, you know, whether somebody is there or not. So when the tenant is ready, they open the door, it's like, they can relax from their flight, turn on sports center, you know, do all that. So I don't leave anything to chance so that cable and internet are actually a pretty big expense, it's over 200 a month, that's $24/25500 a year. And like I said that, you know, these welcome packages, that one may not factor into their underwriting. I mean, that gets upwards to $1,000 a year, just little things like buying these, like, like I said, laundry detergent, you know, k cups and various things So, and then your utilities are getting used more. So, yep.

Tom:

Now, super great points to other kind of categories of questions I want to get with before we jump off the call today. So COVID in personal use. So I would do COVID. First, I'd love to hear kind of the how the pandemic has affected your vacation rental portfolio. I mean, it seems kind of like it like a tale of two, two halves. I guess I'd love to hear that. How that has impacted your vacation rental portfolio.

Bryan:

Well, I don't want to sound like I like I'm definitely concerned like the next person regarding COVID. But I'll tell you, it's been a tale of two cities, I guess. That's the right term. In the beginning, like, people got spooked. And I had a ton of cancellations. And this was like, right at the tail end of winter, if we can recall last year when you know, the shutdown started to happen. So, you know, once COVID hit and March spring training was canceled. And like nobody came down and stayed. And then, you know, the Barrett Jackson, you know, Auto Show, which is a big deal in Scottsdale. And so March and April and getting into May, like nobody stayed. So I was like, okay, the good thing is like a good real estate investor, I have a lot of reserves, I'm not over levered, you know, I keep my leverage low. And I have a lot of cash reserves.

So I was planning on 2020 being almost like, I wouldn't say goose egg, but just very minimal revenue coming in. And then all of a sudden, it was like, everybody kind of got COVID fatigue, if you will. It's like I don't want to be in my house anymore. I want to go somewhere else. So the flip side of that is once that kind of clicked in for folks, it's been unbelievable. Like, my wife and I, you know, would go to three times a year, and we're having a hard time finding like a window for us to like sneak in and use my own house in the desert.

It was booked up for six months straight up until like a few weeks ago. But again, it wasn't so much people from you know, like Michigan coming down, but it was like California. It's like, Man, I'm just tired of like being on zoom meetings all day in San Francisco, California. Like let's go do ever want to do this. Let's do it in the desert. So just tons of that over the last year and like I hope we all get back to normal soon. But like if this continues I foresee 2021 being the exact same my bookings are already like really solid so far for the next couple of months. I'm usually about 60 days out I can I can see how the calendar is lining up. And I yeah, it's been great. So I imagine more and more people continue to get out of Texas go to the desert or you know, what have you.

Tom:

As that occupancy is just become so tight, you know, like no availabilities. You talking about with your property manager, they automatically adjusting the rent rate up? And if so like, I don't know, what can you quantify, like the percentage of like rent increase? And like how that's changed through it?

Bryan:

Absolutely, absolutely. I would just say in general, right, because like, there's a lot of again, there's a lot two rules of thumb and lots of dogma in real estate investing. I think you just, you know, take the knowledge in, but then you just have to, like, think about your particular situation.

So I'll answer the question this way. If the Super Bowls in town, change your rate, yeah, charge more. You know what I mean? Like, it's just, it's like a no brainer. And so because we're seeing more and more occupancy, it's like, okay, let's see if we can't get more. And so I won't get into specific details, but my property manager and I, and we also use a third party, you know, maybe I'm cheating, because I have a lot of SFR experience. But you know, we're using a firm that could also help us with like pricing dynamics. And so we're trying to get that incremental dollar, you know, so it's like, okay, during spring training, there's nothing out there in Scottsdale, I'll talk to my property manager once a week. And they'll say, Hey, I think we can start bumping this up 23 bucks a day, and your occupancy won't change.

So we just kind of play with it that way. And I'm not saying that's for everybody, like, you know, your typical investor isn't going to be as involved as maybe I will, you know, I'm already paying 15%. Like, I want to be hands off, but this is my hobby, too. So it's like, I just kind of geek out on it. So that's what we do.

Michael:

That's awesome. I got two totally unrelated questions. Bryan, before we let you go. The first one is, what kind of research platforms utilize to get an idea of you know, what type of occupancy or rates you could expect to get before you made your purchase. So if people are interested in investing in the short term rental market, you know, what resources are available to them? And then, once we talk about that, I'm curious to know how you've got this place insured? Because I want to geek out on that for just a hot minute.

Tom:

Great question, Michael.

Bryan:

Okay, those are great questions. There wasn't a whole lot of sophistication before I went in, it was more just kind of like gut feel. Like I said, it's just, you know, my personal experience was we were more than happy to pay the rate that we were paying for a long weekend. And then like, wow, this is pretty incredible. Now I did, I just started reading, there wasn't any like, particular search that I did, or data source that I look to, I just started doing a lot of reading.

And I would go on to Airbnb and vrbo and places like that. And just to see, like, other properties that I thought were going to be comparable to the one once that I was thinking of buying and just seeing how they leased up and what kind of rates that they were getting. And so I just kind of backed into it that way. And then as I was saying, you know, the property manager, you know, once I was before I bought the property, I was engaging them already. And they were giving me good ideas of, you know, what I could expect from a rent standpoint.

Michael:

Okay. Awesome. Super, super simple and repeatable.

Bryan:

Yeah, I think so. Okay.

Michael:

And then now, shifting gears entirely insurance is this insured as a second home as a investment property as something in between? So I know that there are companies that underwrite specifically short term rentals. But talk to us a little bit about that.

Bryan:

Initially, I purchased it as a vacation rental second home, so I was insured that way for a while. But, you know, because I'd show the rental income on my taxes, I seem to be a target for audits, like it's just everything, like, even though nobody's going to check my insurance. It's just everything is as it states. So if I'm calling, you know, a vacation rental, then I get vacation rental insurance, and it is a little bit higher. I mean, because I do have the pool, and there obviously, there's more people going in and out. So you know, higher liability and things like.

Michael:

Sure. And so as you were talking to an insurance agent, is that synonymous with an investment property policy? Or is it tailored specifically to short term rentals and Vacation Rentals?

Bryan:

It's pretty much like any other type of rental policy, like I said, like you're paying more of a premium for liability, because I mean, there's just more opportunities for people to have slip and fall or what have you. So that went up again, you know, because of certain amenities within the house. You know, I do have a pool, like I said, so that's a big red flag for a lot of insurers, like you know, just all the people coming in and out of there. So that jacked it up quite a bit too. And I would say from an insurance standpoint, on the whole versus like just a regular long term rental, vacation rental paying about 50% more than I would on a long term rental.

Michael:

Okay.

Bryan:

As much as I'd like to claim it as a long term rental, the real estate Gods wouldn't like it if I did.

Michael:

You probably get smited for that one. Yeah, we've also got all of your personal property, you've now got to insure in that because you furnished it versus long term rental, unless you're furnishing that I mean, it's next to nothing minus the appliances, if you even own those.

Bryan:

That's exactly right. So that's a really great point. So I've got a personal property, that's part of the policy as well. And then another thing just kind of outsides insurance but more from a liability standpoint, I have all of my real estate and LLC is not just one LLC. And so this one is in an LLC, for you, no extra protection.

Michael:

Awesome.

Tom:

Do you mess with home warranties within your vacation rentals?

Bryan:

No, you know, I saw some sure that stuff, you know, obviously, and I think because of my own experience, maybe I'm in a different position than somebody else, but I know what to look for either be a roof, a water heater, and hv AC system appliances. And so you know, I just kind of make my own judgment, you know, is it worth 800 to 1000 bucks a year for a home warranty, or why go ahead and just like essentially self insure, when these things break, I'll just have to take care of so that's what I've chosen to do. But I mean, I don't blame anybody for wanting to do that. It's peace of mind. I have home warranties on other properties that I own. And it's makes me feel better at night.

Micheal:

For anybody listening who's not familiar with self insuring what that is, is basically Brian keeping the would be paid premium. So in that case, 802,000 bucks a year, and just putting that in his pocket as a reserve for paying whatever bills come up. And after three years, you know, he's got three grand set aside, as opposed to paying those in premium so he could afford to make 3000 and repairs.

Bryan:

That's right.

Tom:
I like framing it that way. I'm gonna start framing it that way. Cuz I I'm in a similar camp, I self insure my utilities. So last question for you, Bryan.

Bryan:

I got all the time for you guys, whenever you need.

Tom:

All right, good, good, good. Using your rental property. So you see you men.., you alluded to it a little bit earlier. What does that look like?

Michael:

And how can we come with you? When are we going?

Bryan:

Yeah, that's the real question. Yeah, we're going for three weeks in April, if you want to join. Yeah, you know, I didn't coined the phrase, it's really, you know, lifestyle investing. I mean, as the world is changing, you know, it's like, I want to be in the desert, like I told you, even before I bought it, like I was going down there, you know, golf trips with my friends that I told you about. And then, you know, I would vacation there two or three times a year. So it's like, why not get the best of both worlds? Right.

And so not only this property, but I'm thinking more and more about vacation rental for my portfolio, because I also like going to the mountains. And I also like the beach, I'm originally from the Midwest, I do have long term rental properties in the Midwest, but why not just have a vacation rental in the Midwest as well.

So point being, it's like I go to these places every year as it is, is there a way I can have my cake and eat it too. And so from a utilization standpoint, the property in the desert, I mean, I want somebody else paying me rent, right? And so I don't go there when I know somebody else, oh, well book it, but there are times during the year where it's like, I'm just going to enjoy it.

So I probably spend in total a month in the desert. But again, that's during that those off times I told you, you know, maybe 60% occupancy so I just utilize the 40% of my advantage and like if pencils like so I basically don't pay for my vacation time in the desert and then like I said, I'm going to try to replicate this model in the mountains in the beach and what have you there's never enough SFR in your portfolio but like I want to diversify a little bit and like I think I understand vacation rental enough now from like, we're mentioning dislike all the hidden costs and the nuance of it and startup costs and some of these associated expenses. I can do it also.

Michael:

So you're not lying awake at night in your vacation on being like Dang, what if I had gotten the last minute booking? I could be baking cement right now!

Bryan:

No what normally happens, I lay out stay awake at night saying Dang, I should have bought Bitcoin at a buck.

Tom:

Oh Man.

Michael:

Another problem entirely.

Bryan:

Yeah, you can have the vacation rental. I just wish you know, I should have taken my salary in Bitcoin.

Michael:

Tom, you were gonna say something?

Tom:

Just Yeah, I got distracted with Bitcoin. I totally lost.

I think you kind of answered this. So you're thinking you're probably your next investment continue along the lines of vacation rentals?

Bryan:

Well, I was telling Michael before the show, I'm actually in contract now for on a long term rental in the Atlanta area, and I'm doing another real estate investment with a friend of mine. So I've got those two things going. But right after that, I think it's I'll buy one or two more vacation rooms.

Tom:

Jump back in the beach or the pool.

Bryan:

I tell you, Tom, I mean, I know you're a new father, right? It's like you're not going to Europe anytime soon. So you might as well get that place in the mountains or on the beach, you know, within a two to three hour drive.

Tom:

Totally subsidize your vacation trip. That's love it.

Bryan:

There you go.

Michael:

Tom, you were talking about that. Up North right up in outside of Tahoe and we chatted about that.

Tom:

I know but like home renovations kind of kick getting, slowing me down a little bit, but uh, yeah, not too not too distant future.

Michael:

Right on, Bryan. Last question, I promise and then we'll let you out of here. How are short term rentals taxed? We understand you're not a tax professional or a CPA, but is there any difference versus long term rental, like short term capital gains or long term capital gains?

Bryan:

I've talked to my accountant and it's basically it shows up on my schedule e on my taxes, you know, on my real estate owned and it's just like any other rental, it's like, here's the revenue here are the expenses here's the you know, the mortgage interest I paid and we'll write off what we can and you know, wish for the best.

Michael:

Right on and are you finding that the depreciation on the purchase covers most of the income? Are you are you ended up paying any kind of tax?

Bryan:

Yes, it does. But, you know, to each their own, my tax situation might be different than the next guy. But yes, to answer your question in general.

Michael:

Right on, have you ever looked to do a cost segregation study?

Bryan:

No. You know, if I ever get to that point, then I will have arrived.

Michael:

Yeah, it's a promised land.

Michael:

Awesome.

Tom:

Awesome, Bryan. Well, thank you so much for coming on and letting us pick your brain on your vacation rentals and lifted up the rug a little bit on your portfolio, super enjoyable and educational.

Michael:

We'll have to have you back on after that other property closes on the east coast.

Bryan:

Anytime, guys. It's really a pleasure to talk to you. Thanks, Brian. Take care man.

Tom:

Thanks again to Brian for jumping on the episode. And as always, if you liked the episode, please subscribe please like us. All that good stuff, give us a rating. And if you're interested in the coaching aspect, Brian is actually one of the coaches at Roofstock Academy so it's Vacation Rentals is something that you're interested. Check out Roofstock Academy. It is the all in one program on demand lectures, one on one coaching, group coaching all of that good stuff, so check out roofstockacademy.com happy investing

Our Top Tips for Setting Realistic Expectations for Your Investments Mar 20, 2021

Many investors get upset when they buy their first property and realize the expenses that are bound to come up in the maintenance of a home and how that can eat into cash flow. In this episode we cover how to calibrate expectations about your returns, setting aside sufficient reserves and what you can do to glean the most out of an inspection report.

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Transcript

Emil:

Hey everyone. Welcome back for a weekend wisdom episode of The Remote Real Estate Investor. My name is Emil Shour and my co host today are

Tom:

Tom Schneider

Michael:

And Michael album.

Emil:

And today's topic we're going to be getting into is setting the right expectations for owning remote real estate. So we've talked about expectations and cashflow, specifically for the financials and cash flow side. But now we want to talk about a little bit more about the ownership side of things and things you should expect as an owner, especially in the beginning. Alright, let's get into this one.

Alright, guys, so this is um, we were just chatting about before we hit record, and I think it it hits a nerve with all of us. And it's something you will particularly see with people who I think our new a new to real estate investing and be just haven't had the right exposure to the education or the expectations that can come with rental properties.

Michael:

That was great alliteration. I mean, expectations and education. Love it.

Emil:

Thank you. I try. I try hope it's it's stickier with alliteration, you know. So this is stuff we hear about through our community channels, maybe somebody just purchased a property of they or they've owned it for a couple months, and an issue comes up. And it's often met with expectations of Oh, I you know,

Michael:

I didn't expect it to be this much, or I didn't expect it to happen to me, or I didn't know that this was an issue that even could arise.

Emil:

Yeah, exactly.

Michael:

You know, we were talking about before we hit record here, me Oh, you brought up such a good point. It's like, Yeah, but it's a house. Like if you've ever lived in a house or lived anywhere, there have been issues, if you live there long enough issues with the water heater issues with the pain issues with the mechanicals of the property. So just because you're now an owner, as opposed to a renter or a tenant or even an owner in your own primary. These things happen, their mechanical systems, just like you take your car to the maintenance shop to get fixed and worked on. Same thing happens with any piece of rental, that's how the world works,

Emil:

Right. Especially when you only been renting and you know, you call up management company or the owner and they come and fix things. You don't see the bills, you're not really exposed to the costs for these things. You just, you know, you just call it in when something breaks. So that could be one thing. I think it's especially hard when you just buy a property and something happens, right? It's your first property and something breaks, and you get hit with a $500 bill or a $1,000 bill and you're like, oh man, there goes my cash flow for the first couple months. And maybe you you kind of just like think, well, is this gonna happen forever? Do I have really bad luck? Did I buy a lemon, whatever it is, but I think the message we want to tell people is that's common. It's this is this is part of owning real estate, there's going to be expenses, we call it a lumpy business, you'll have times where nothing happens. And then other times where it seems like everything is happening all at once.

Michael:

The sky is falling!

Emil:

Yeah, yeah. So I mean, has that been your experience as well, guys?

Tom:

Yeah. And I'd say, you know, a term that I've used a couple times is peanut butter spread, like the risk and to unpacked that peanut butter spread the risk is like over enough volume. And over enough period of time and volume of units, things tend to average out but it's not unreasonable. It can seem extremely frustrating where you know, you buy properties and maybe pretty early on like some things come up over time that peanut butter spread analogy is the lumpiness evens out over time?

So you know, we had this conversation of this idea for weekend wisdom came up and just looking at like YouTube, looking at like comments on forums and all kinds of stuff and people get frustrated but important like kind of perspective to have in mind is things come up as an investor but over time things tend to even out with myself you know have roughly like a dozen properties or so and it's like some of them have never had anything happen has just performed like a champ.

Michael:

Knock on wood dude!

Tom:

And then some of them it's like you know, I'll have a run where a year where it's like, oh man, there's a leak in the bathtub or something that didn't get seen and then you know, the sub flooring and real estate is a not a get rich quick game like it is a very much long term wealth building game. So to kind of lose it you know, with one kind of thing coming up early on in your career it can make you want to like point fingers or you know, I you know, I got tricked blah blah, but it's a little bit of, you know, the dices are stacked in the investors favor just because there's so many wealth building levers in it, but you know, with any type of investment, there's a little bit of risk that comes into it. But going back to my original point is that peanut butter spread year over year and getting, you know enough units that you know, you do the process right and evaluating it, that risk is going to be peanut butter spread cross over time long rant

Michael:

No, that's so good. And just to kind of piggyback on that, Tom, one is not a sample size, right. Nobody goes and buys one stock and says, Oh, you know, the loss value, right, it went to zero. So the stock market sucks, I shouldn't invest, like one, it's just not a reasonable sample size. So to your point, exactly, given a long enough, big enough volume and a long enough time horizon, that's when you can start to really build out a reasonable sample size and come to a determination. And like, my first property was about as turnkey as you could get it was in a five star, what would be a five star neighborhood. And the first month I got hit with a $1500 tree cutting bill, because there was a big storm, and we had to cut these palm trees down, that was not in my pro forma.

Now I know if I'm buying houses that have palm trees account for cutting down trees or trimming the trees every couple of years. That's an expense they all incur. I couldn't put my finger at anybody other than myself and go up. Well, I should have asked that question. But I didn't know enough to ask that question. So I think, again, education is so key and talking to other people about Okay, what do I really need to be aware of what I need to look out for is so hyper critical, because if you've never ran before, you're probably going to trip. And so I think it's really, really important to have those open and honest conversations with other fellow investors and learn about what really goes into owning and operating rental real estate, especially remotely, because that adds a whole nother layer of complications.

Emil:

Yeah, great points. You guys already touched on it a bunch. And it's easy for us to say this after years of investing, right? Like, Oh, don't worry about the expenses that come up on your like, first property. second property, take it from us, we had the headaches too, when these things happen, we got really frustrated, it's impossible to just not get frustrated when these things come up, especially when you have one property, right.

But as things grow, as your portfolio grows, it won't feel as bad because you have it multiple properties. So one bad thing happens to one, you know, the other three or four or however many you have, they're doing okay that month, so it doesn't feel like as big of a hit. Whereas when you just have this one thing you're focused on, it just feels much bigger than it is.

The other thing, one quick mindset shift that I've tried to have is in the beginning, I'd look at any repairs and be like, you know, damn, it costs. This sucks. There's one silver lining, I like to look at. Now, let's say you have a furnace that just breaks I'm using this as an example from myself, we had a furnace that just went out in the middle of a storm. And you know, that's a 2000 $2500 bill. And obviously, that sucks. But one way I try to think about it is okay, cool. Now I don't have to worry about a furnace for another 10 to 15 years, right. So it's like the silver lining is that you don't have to potentially replace that thing for a while. So that's another way to look at it.

Michael:

I would just say kind of a counterpoint to that a meal to your fryer point about getting frustrated. And it's impossible not to get frustrated. I think that if you truly go into this eyes wide open and have realistic expectations for the performance of that property and a reasonable reserve, I think that you could not be frustrated by some of those nuisance expenses that pop up, I think not setting the expectation on the front end, or not having folks set the expectation for themselves in the front end sets them up for failure in that they do get frustrated with those expenses that they pop up. So again, I think they should be going into this eyes wide open, knowing kind of what the worst case scenario could look like. And be prepared for that. Because if you can't stomach the worst case scenario, you might not have any business as an investor, right.

And as tough as That is to say, we don't want people going in dealing frustrated or tricked or deceived or anything like that they need to understand this is a business and it needs to be treated and run as such. And in business, sometimes businesses fail.

Tom:

Yeah, the last point that I'll, I'll make on this topic is we're not saying you know, throw a dart randomly at an investment property, go buy it and don't be mad when something goes wrong. It's you know, have a process have a process for your acquisition, in understanding the property condition, kind of the occupancy situation, all of those details come in and just like Michael said, Be eyes wide open.

And when something happens that maybe like wasn't to plan, that stuff happens sometimes as a real estate investor, you know, still have a solid acquisition process, but have the foresight, the long view kind of in in knowing that this kind of stuff comes up and it's part of being an a real estate investor in general is managing these kind of costs that come up and yeah, I think I got it in there. I think I got it in, my point was trying to say…

Michael:

It's totally in there.

Tom:

Yeah, okay, good.

Emil:

Good. points, guys. Okay, any final thoughts here?

Tom:

Like I say the last thing is like don't put in money that you like absolutely can't afford to lose so like if like whatever worst case scenario you know, don't have next month's whatever food to feed your family you know, yeah. putting into buying a rental house. So that'll be my last last point. Yes. Done.

Emil:

And that's a good point for just reserves right. Like don't think everything you have in this like you got to maintain reserves for this exact moment. Right. things go bad. That's why we say maintain reserves. So if you have reserves, you're expecting these things to happen. So yeah, Michael, anything else?

Michael:

No, I would just say to echo Tom's point, if you're going to go put $1,000 in the stock market. That should not be $1,000 you need to grow for next month's something your rent, like you mentioned Tom or food budget, whatever Same thing with real estate don't make this investment with it teetering on the fact that it has to work out exactly as you planned in the immediate short term future. Long term. Absolutely. We can count on that. But again, short term, no, that's not how that's not how real estate works.

So maybe another thing to keep in mind, before we let folks go is with regard to inspections. And I think that there's this really big misconception out there around inspections, and that if I go get an inspection report done, the inspector is going to highlight and find everything that's wrong with the house. And I can go get a budget and bid to repair those things. And there's not going to be a penny Moreover, that well, that's not always the case. There's there's a couple things keep in mind.

One is inspectors are human. And humans make mistakes. So while they are professionally trained and licensed to be inspectors, sometimes things get missed, they shouldn't be missing the big things. But sometimes things get missed. The second thing to keep in mind is that these inspectors are looking at safety issues. And so the best example I can think of is I've heard people complain, so I got my inspection back there was $2,000 worth of needed repairs. And then the property manager came in and said, oh, there's additional $3,000 for paint because we got to repaint this whole house, because if the rooms are green, pink and yellow, well, an inspector is not looking at the paint color of that property because that's not a safety issue. That's a property management type issue that guards to habitability.

So a tip that I always like to give folks that I speak with is Hey, have your property manager go walk with the inspector on the day the inspectors doing their inspection, if that's an option, if it's not send the property inspection report to your property manager and get their two cents on it. They're going to be catching those things like those off colored walls are things that need to be repaired before you can get a tenant in place. And now you have a collective picture of Okay, here's the safety issues. Here's the habitability issues Let's marry the two and go get a bid to have that work done. That's going to be likely my make rent ready costs. Soap box dismount.

Emil:

Great one because that is one that comes up so often is well this wasn't in the inspection report. Why is it coming up? So I think you nailed it. Those are fantastic tips. Cool.

All right, guys. Let's end it here. Thanks, everyone for tuning in. We will catch you all on the next episode. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

How A Serial Entrepreneur Identifies Promising Markets, Great Deals and Solid Partners w/ Gregor Watson Mar 17, 2021

In this episode, Roofstock co-founder Gregor Watson shares about the his current businesses and about how he analyzes markets, deals and potential partners.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, we have the chairman and co founder of Roofstock, Gregor Watson, and we're going to cover a lot. We're going to talk about some of his other portfolio companies that he has either co founded, or is on the board of. We're also going to talk about his general principles and philosophies of analyzing markets and analyzing individual properties, all that good stuff.

All right, let's do it.

Gregor, welcome back to the podcast. Thanks or jumping on.

Gregor:

I'm super excited to be here.

Tom:

I think the main theme we were talking today is going to be just on some principles of analyzing the markets, businesses be at individual properties. But I want to start with you are a very busy serial entrepreneur, what's going on with some of your portfolio companies, either that you co founded or sit on the board of, and I'm just going to work down the list of your LinkedIn page. So Lessen what's going on with that company?

Gregor:

Yeah, so this is a company we started about a year ago, with a guy out of Phoenix, Jamie key, he is longtime SFR background. And we we sat in a boardroom and kind of hashed out a plan and talked about some of the, you know, the real pain points around repair and maintenance and turns. And we started really thinking about Airbnb. So the super hosts and how there's all these companies that are being built, you know, to, to buy and, and renovate and manage short term rentals. But none of them are getting enough scale in a market to run an efficient model.

And so when we started talking about, you know, the money that was being made, on the SFR side, the multifamily side, the Airbnb side, you know, I said, Look, there's, it seems like all these, all of these widgets have similar problems, they, you know, the water heater goes out, you've got a leak in the kitchen, something happens. We don't need specialists. For each one of those, what we need is a real network effect. And so we started off down the path of really identifying where are those key pain points? And what are some of the drivers that most institutional investors and super hosts are looking for? And what are the vendors looking for.

So what we've done is we've created a, a marketplace for repair and maintenance. So when on one side of the marketplace, our large institutional investors, super hosts on Airbnb. Now on the other side are vendors that are, you know, looking for work in the middle, we lessen it as quality control, does routing of all of those requests. And then we create a digital wallet that allows vendors to get paid faster. So the vendors love it. Because typically, if you're doing a Blackstone or something like that can take 3090 days to get paid, we can pay them instantly once we and they'll take a discount, they get paid instantly. And they pay a SaaS fee to be a part of the part of the platform.

The real estate owners love it because they don't have to have a huge infrastructure out in the field. So it's a little bit of think of it like Amazon Web Services, where the more people that are plugging into this network, the better the costs are, the bigger the margins are, for both sides. It's pretty exciting. It's it's a it's about a year old, General catalyst, General catalyst, Nava toss. And Kosta ventures are back in that company on the board.

Tom:

Very cool.

Michael:

That's so cool. Yeah it makes total sense where the short term rental owner fits into that scheme. Do you have a place for long term investors as well, long term buy and hold investors that maybe are self managing from a distance?

Gregor

Yeah, I mean, it's early, right. So it's early, a similar rootstock, we really started with a lot of the larger owners to really like, it's like going to the gym, right, you can build the muscles. And so you can then start you know, working with that longer tail of owners and, and make sure that you work through all of the kinks. Right. So the idea now is start with the larger owners and then eventually move it down. So anyone can plug into it. The the use case, that was probably the most poignant on the short term rental side was cleaning, doing the laundry, right, the old way that people used to do the laundry for these, if you're in a hotel, you have these big commercial laundry facilities, and you can do you know, 1000s of sheets at a time. But if you're in an Airb&b, you know, a lot of times those people are cleaning the sheets in the unit in that washing machine that they're not high power, they're not as good, they just don't clean as well. And the turn time then is very difficult. And sometimes, you know, I'm not sure they're always getting cleaned, right. And so what we did is we went into these markets and we actually bought and built institutional level cleaning facilities. And so now we have RFID tags on the sheets. And so we can route our sheet service along with the actual cleaning of the unit very quickly. And so now if I have 10 homes in Phoenix, I now have institutional level cleaning and laundry at a fraction of the cost of what it used to what it used to be for me.

Michael:

Wow. That is so cool and is the goal to be on a national level. Have a national footprint.

Gregor

Yeah, yep. Yep, we're growing really quickly. The idea here is, you know, it's picks and shovels, right, so on to the gold miners. And so how can you really provide? A it's not a very sexy business, right. But I think it's sexy because it's creating a real efficiencies and there's real technology that we're able to build into just really trying to understand demand peaks around labor, understanding, you know, what are the pain points, you know, throughout a large portfolio, and then drive those costs down. And that's, that can only be done if you build the right technology.

Tom:

So solving problems. Awesome. All right on to the next company. Zibo. Tell us about Zibo.

Gregor:

Yeah, yes. Zibo is a digital vertical bank and insurance platform focused on independent landlords. So, that idea was started when I was just really kind of sick of dealing with the banks where, you know, you want to borrow again, from a bank that you've already borrowed from, and it's like, you walk in they, you know, they shake your hand, they're really excited to see you, but then they pretend they've never met you. So they're like, okay, what's your personal financial statement? Okay, send in all these documents key, okay, we're gonna have the lawyers draft up a loan document.

I was like, How can this be happening? Like, why do we have to get lawyers involved? Again, on the loan side? Why do you I just sent you this stuff? Can't you just like, Can we update it? Yeah. And then we started really digging into the idea of buying a bank. And so we actually raised money. And we're out looking to buy a bank that actually made some offers to buy banks. And one of the reasons we didn't buy the bank is what we realized was that the regulator's wouldn't allow us to be as focused as we wanted, we wanted to be very focused, we thought we could build a bank that would allow us to provide world class products to a subset of the market, and that we really understood and we'd have their banking information, bank account information. And we can actually see where they ranked amongst their peers. And we could then provide them with ideas for to help them increase their returns.

That only works if you get really deep penetration, you get lots of data. But the regulator's want a bank to be very kind of like a generalist. So you can do auto loans, and you do real estate loans and student loans and small business loans, but you can't do one. And so I thought that was broken. So and that's why I think you're seeing more of these kind of digital vertical banks being created, where they're plugging into the traditional banking infrastructure, they're providing the front end user experience, and allows them to scale much more quickly. Regulators also kept CRO at a bank that they don't if you're you know, if you're if you're a technology company plugging into, you know, a bank or a subset of bank.

So that business is about two years old, starting to get some likes, really, those are tough problems to solve. And so, you know, we started, you know, with a bank account, we started allowing tenants to pay through the Zeebo pay app. We recently became a insurance provider. So you know, you can now bring a one apartment building or portfolio apartment buildings, we can provide, you know, instant pricing on that. And then and then lending. So, what a lot of wood to chop, but it's, you know, I think it's a it's just a complex, frustrating problem that needs to be fixed, and Zeebo hopefully, he's gonna fix that.

Michael:

Yeah, I'm just I'm always looking for for ways to make that market more efficient, because I think as most people know, you it's a pretty sluggish market. And so, how so Zeebo is actually the carrier, or Zeebo is the is the broker that places the coverage?

Gregor:

where the broker that places the coverage, I've been spending time working on another platform that's more on the reinsurance side, which would allow us to plug into more insure tech companies and provide a better level of service, more velocity, and better rails to be able to actually process policies, because it's really tough, you can build this really slick front end business. But if the back end, if no one's there, to catch it, and use utilize technology, to make it go fast, you don't get 100% there. And so, you know, we're getting very close there. But you know, you when you're relying on third parties, which you know, everyone's doing right now, it's a challenge. So, but it's getting better. There are carriers, and there are reinsurers that are starting to focus on trying to utilize technology to to increase the velocity at which you can process these policies.

Micheal:

That's great. I was just I was having conversation with my broker the other day, and he was saying, Oh, I gotta mail a check to my insurance carrier. And I was like, you can't do like a credit card payment or an auto draft technology. Come on. It's so antiquated.

Michael:

No, I think that's what's happening broadly, right? Like we invest in prop tech, you know, one sharp, and what we're seeing is, you know, the built world changing, right, whether it's on the investor side, people utilizing technology and data to try and increase noi, or whether it's on the consumer side where it's about ease of use comfort, you know, changing the way people interact with buildings and spaces. And so it's accelerating right? It's gonna be one of those you either adapt and embrace, you know, the use of tech utilization of technology, or you get lapped.

And I think you're seeing it on a couple front you're seeing it and really starting to get real estate, or early there, but it's happening, you're definitely seeing it in insurance. And we saw it in financial services through the last downturn. So the last downturn, we saw the emergence of some amazing, you know, FinTech companies that really have taken a big piece of the market. And I think we're gonna see the same thing in prop tech, you're coming out of, you know, the post COVID world, that was a, you know, a downturn that kind of reset everything, and people are now scrambling to try and figure out ways to, you know, make more money.

Michael:

Yeah, makes total sense.

Tom:

The last company to check in on Juice.

Gregor:

Juice, yeah, so my best friend growing up, Ezra, and I, we took different paths in business, he ended up going to LA went to UCLA got involved with Al Gore and Current TV. And so he was one of the first employees at current tv and, and that was kind of the idea there was democratizing media, right? Putting the power of media into the hands of the consumer didn't work, right. But he was like, 24, they, you know, drove all around and gave him coffee, and, you know, learned about the business, and then went down at LA and started to really see his emergence of YouTube.

And YouTube, you know, was really starting to take hold. And he was the first one to do a product placement with some of the YouTube stars and influencers. And now, it's a thing, right, everybody's, you know, all the companies are trying to figure out how do you partner with these influencers, and, you know, they're making a lot of money. And he went on to build two companies in that space, basically, creating, like, the United Artists of creators, sold that business to Disney sold the next one to at&t, Time Warner, Warner media.

And this, and so we teamed up, I was very focused, focused on this vertical bank idea. He was focused on the the emerging power of influencers and creators. And we started talking about what are the needs of the Creator landscape, and it was pretty clear that they need a platform where they can monetize their, what they're creating, and that they can go to at the beginning of the day, or at the end of the day to understand, you know, from business intelligence standpoint, how are they How are they doing, and then a marketplace to allow them to, you know, sell pieces of their channel. So it's, it's early, we've got a bunch of term sheets in here that then we go CEO, so that businesses just just getting kicked off. And it's a, it's been fun to learn about that whole the whole part of the market.

Michael:

How exciting.

Tom:

Yeah, and I guess the last one, one shark, which you alluded to a little bit earlier. Still pretty active. Acquiring this?

Gregor:

Yeah. Yeah. So yeah, one sharp is an asset management firm. So we manage about a billion and a half of equity, investing credit throughout the US and Europe, we spent a lot of time on housing, housing themes, and we can't we tackle it kind of from credit side, the equity side where we own SFR, we own multifamily. And then from the technology side, so prop tech, we've been around for five years and going strong, it's less sexy has some of the fun tech companies. But uh, you know, it's, you know, it's I like building businesses, and we're able to create some pretty interesting business opportunities there.

Tom:

It's funny, you mentioned kind of SFR and multifamily as well, as a theme that we love on this episode is we do this sort of like concept battles. And we have this one that I think a lot of people enjoyed, where we debated multifamily homes versus single family homes. And I'd love to give you a platform to switch to both sides. So put your single family house on and then put your multi family house I think, understand both sides of the fence really well.

Gregor:

It's it's a good question. And there's so many different layers to this question. And there's not a right answer, which is great, because then I'm not gonna be wrong. Which I'm usually wrong. But this is a nice one, right? Yeah, can't can't be wrong. So single family has a lot of components that I really like. One of the main attractions for me is the diversification you get owning a portfolio of single family homes or not all the homes are the same that owns the neighborhood, tenant base is slightly different. And the duality of the exit, right? The ability to sell to an investor on a cap rate basis, or to sell to a homeowner who's going to go get a mortgage and live in the home.

That's huge, right? If you're an apartment world, you are selling to an investor. So, you know, chalk one up for SFR in terms of your exit optionality.

I also think that it's as a retail investor, I like I like SFR a lot. It's more bite sized. It's tangible operations. There's a lot of good third party platforms out there to do the property management and financings readily available multifamily. I kind of break it down into two categories. There's the core multifamily in New York, San Francisco, la high rise buildings. I've been less of a fan of that investment thesis over the last decade. That has been all about adding more and more amenities and pushing rents To the point where it's become, it's just not affordable. And you have to believe a lot. And I think COVID is, you know, really kind of exposed some of those flaws, you know, Class A building trading, you know, sub four caps. And those markets, there's just not a lot of yield there.

There's a lot more yield in SFR more garden style Class B class C multifamily. I like I like it from an institutional investor standpoint, because you can get scale. I think there's some inefficiencies that and laziness that some of the existing multifamily operators have kind of grown up with, because the business just hasn't changed. So when I look at the difference between technology usage, and SFR, versus multifamily, it's night and day different, it's clear winner is SFR. And it's because that industry started, we started that industry in 2008 2009, embracing and creating all new types of systems, platforms, utilization of third party software, where multi families could have been utilizing the same rules of thumb and same software for a long time. And they just haven't picked up on that efficiency.

So I think you're starting to see the some of those big multifamily REITS wake up to that and say, geez, we're gonna, we're gonna get lapped by the single family, guys, if we don't start, you know, really embracing technology, which is great. So long story short, is I think it really just depends, right is in all things. But, you know, I definitely have a soft spot in my heart for SFR.

Tom:

Awesome. And last but not least, Gregor, let's hear a little about Rooftstock.

Gregor:

Well, I mean, you guys talk about rootstock all the time. So I'm not sure you know why you want my take. But I think Roofstock is, is probably the coolest company out there. It's been a fun, you know, five years building this, you know, starting from the idea of really trying to create a global marketplace for investment properties, breaking down those geographic barriers and reducing the cost and friction associated with buying and selling as far as where it is today, where we've dominated that market, we've created more liquidity, we've reduced all those costs. And we're still feels like we're in the first inning of what is a very big opportunity. So super excited for the whole rootstock team and everything that we've been able to accomplish there. And you know, there's some pretty fun things that will be coming out over the next, you know, quarter or two, that I think will get people really excited about what we're building.

Tom:

Awesome. We'll definitely bring you back on as this as items are rolling out to give them more insight on them.

Gregor:

The juicy stuff.

Michael:

Yeah, that's right.

Tom:

All right, cool. So let's go ahead and jump into next section of today's discussion. So let's talk about analyzing real estate. And the way that we're going to break this down is we're going to start wide funnel, talking about markets, maybe even neighborhoods, then to individual properties, and some kind of guiding principles that you have. And then talk about key partners. So thinking about selecting property managers, kind of a maybe a sniff test, or a process that you have in layering those types of people on your team. So let's go ahead and start with markets. So generally speaking, what's your process of selecting a market? And this can be? Why don't we stick with to kind of a single family decision? So are there particular metrics that you follow? Or? Or, you know, what's

Gregor:

By the way, I think they're, I think, for the most part, it's the same, right? Like, when you're looking at a market, you're gonna try it, you have to believe in that market. Right? So, you know, if you're gonna say, you know, I want to go into Detroit, right? Like, well, that's a pretty bold call, like, Why? Why do you want to go into Detroit, right, you got a declining population, you have an oversupply of housing. But look, some people do it. And they've got like a real thesis behind why they want to go in there. I think, you know, if you stay higher level, and you're saying, hey, how do I pick my first market? You know, I think it's important to have diversification from where you live. And I think one of the greatest things about Roofstock is that we've been able to break down those geographic barriers, right, everyone needs to just own their first rental property, you know, within about an hour's drive of where they lived. That's very correlated to where you obviously were your primary residences and where your job is. So if you're in a Houston market, and there's a, you know, energy, or an oil crash, and now you've got all your investment properties there, you may have lost your job. And your your primary home is down 10%. Like that. That's not great portfolio theory. So I do like the idea of being in different types of markets.

When I look at markets, I look for, you know, some of the basics, right? I look for what you know what jobs, right? The jobs are going to number one North Star companies leaving the area, they coming into the area, you have population growth, what and then I start looking at size, right? I like liquidity in anything I do. So I want to make sure I'm kind of in an MSA that's got at least a million people. You know, you've got enough scale that if you need to sell your home, there's nothing's trading.

If you go to some rural community where you know, you've got, you know, a couple 1000 people, you may have a great deal on a home, but who's the next buyer? Right? So liquidity is super important. And then there's just general themes that you look for, right? Are you looking for, and do you believe that there's a growth story? Right, do you look at Austin, do you look at Nashville and you say, Look, my if I buy a home for $200,000 I'm gonna borrow 70 70% against that home and I'm going to see home price appreciation in those markets because they're on fire of greater than, you know, 4%. Well, that's a pretty strong return not from a cash flow standpoint, but from a pure appreciation standpoint.

And then there's the cat, then there's more of the yield play, right? Where you're going to say, I like Pittsburgh, I'm going to go into Pittsburgh, I don't think I'm going to get anything more than kind of inflationary growth of like, you know, call it two ish 3%. But I'm getting a strong current yield. And and I think it depends on what what your goals are. And, you know, and, and what your the rest of your portfolio looks like, I personally like to look for yield, look for value and I look for yield. Yeah, and I've a lot of think a lot of other institutional investors look at growth, because if you get outpace on growth, where you're getting seven to 9% growth, and you've got levered home price appreciation, you're making 20% returns, as opposed to my boring, six to 7% return. But there's more volatility,

Tom:

Definitely. I mean, that growth piece is like, it's been on fire for like, how many years now?

Gregor:

40 years? Yeah, like, if you think about it, really over 40 years, like there's just been mostly growth, right, the idea back in the 1970s, you saw, you know, stagflation and you saw people really looking for value, and it wasn't about growth. Now, it's all about growth, and GameStop, and others are creating kind of a complete dislocation from fundamentals. And it's more of a technical trade. So we'll see you know where this goes. But I think the housing market itself has got a lot of strong tailwind, we're chronically under supplied. So when you have that kind of frothiness, and some of the broader equity markets, it's nice to trade out and buy stuff that's got good, strong fundamental.

Michael:

Gregor, want to ask you to look into your big crystal ball here and ask in this post COVID era, do you see some of those metrics that you look for changing? Where in the sense that like remote work could become more commonplace? So yeah, we might have a company coming into Austin, but they could be workers living in, you know, Idaho?

Gregor:

I think it's a big thing. I think it's gonna continue, right. I think that there's different industries that will require people to be in a factory in an office. And then there's the distributed workforce. And I think that is going to continue, I don't know, my question is, does it continue full time? Or is it a part time thing where, you know, hey, the offices in San Francisco, I live in Boise, I'm in the office six days a month, five days a month? Right?

I think a hybrid model is probably where it goes. But I think you're seeing that people now feel very comfortable. You know, this is if this pandemic had lasted from a work perspective, and lasted three months, six months, I think everything goes back to normal. Now we're looking, you know, potentially 18 to 24 months, the idea of getting up and doing calls, doing zooms. It's been long enough, we've had to really create new ways of interacting and working, you're going to see change and already seeing growth change, we need to look at Florida, when you look at Texas markets, when you look at Nashville, there's a lot of people leaving when you look at Idaho, there's a lot of people leaving kind of higher priced markets and moving into more favorable tax treatment markets and lower cost of living markets. I don't see that shifting dramatically in the near future.

Michael:

Okay,

Tom:

So talked a little bit about markets. Let's talk about individual property analysis and selection live to hear kind of general thoughts. I mean, there's a variety of variables, there's property condition, if the property is occupied, there's a myriad of return metrics.

Gregor:

Yeah, I look at affordability. Right. I think that's a big one. What Can someone pay? If the rent was a mortgage? What could they buy? And what would that say that mortgage is not, you know, 3%? Say it's 5%. Right? You know, what's the affordability level in that neighborhood and you see neighborhoods where it's clearly a better option for someone to buy than to rent but they may not have the downpayment, they may not have the credit scores, but you've got that really increases your odds of an exit to a homeowner.

If you're in a place where you've got mostly owner occupied higher price point homes, rents tend to flatten out you have a lower yield and that exit opportunity to an investor's you know, not there. So I like to look for affordability. I think it's it's just math that you can look at, and understand, Hey, is this is this a good deal? Then I start looking at neighborhoods, right? I want to be in the best neighborhood I can be in from a crime and school score standpoint as possible and still get a decent yield. And so I think those are some of the big the big factors.

I think, walkability livability, you know, those are all important factors. But you know, most of the markets where I think as far as probably the best value, it's less about traffic scores and you know how close you are to a grocery store. It's more about what is the school what's the crime look like.

And in terms of the individual home, I just think you want to stay as vanilla as possible, right? You want to three bedroom, two bath ish. Anytime you get outside of that and it's into something funky like a six bedroom, six bath house or a two bedroom, one bath home, the number of your the end buyers, you just have limited to your pool and you also start creating, you know, some just operational challenges.

But if you're looking at kind of a three bedroom, two bath home, which is pretty standard, you know, it's on a decent lot, you don't have any real physical barriers, you don't have high tension power lines in the backyard or, you know, across the street from a gas station, if I was buying a smaller portfolio, so I look for now if you have some of those things, it just needs to be priced in, right. So you need to make sure that you're like, Okay, I'm buying interior location for this neighborhood. This will always trade at a discount. And you just need to make sure that you're getting that you're taking that into account when you buy going in.

Michael:

And on a personal level. What metrics are you looking for putting a lot of weight into? Is it cap rate? Is it IRR? Is it monthly cash flow?

Gregor:

Yeah, I look at cap rate, right, I think it's pretty pure way to, I always like to analyze deals on an unlevered basis. And I think it's a fair way to look at and compare opportunities. And then you can lever, right, and leverage cuts both ways. Right. So it can get bad fast, you can get good fast. So I like to use a moderate amount of leverage, you know, call it 65 70% of my cost basis. And then I'm just looking for as much you know, yield as I can get in a neighborhood or an area that I think is going to grow.

Michael:

I like that a lot. It's something I talked to a lot of folks in the academy about is that the cap rates kind of that great equalizer, because you and I could buy the exact same property have the exact same income and expenses. But if you lever at 60%, and I leverage at 75%, we're gonna have vastly different cash on cash returns and monthly cash flow amounts. And so it can muddy the waters pretty quickly.

Gregor:

Yeah, start with the basics right basics are do I like this asset? What is my, you know, unlevered yield on this asset? And do I like the broader market? And then start adding complexity and risk? Right, which is, you know, leverage?

Tom:

Yeah, I think a lot of people think that they need to speaking with people with an academy that they need to like put some sweat equity and like buy a property that needs to be fixed up, I'd love your your thoughts on kind of turnkey solution versus needing a little bit of a little bit of work.

Gregor:

Depends on who you partner with right now. I think the term there's a lot of turnkey solutions out there where I don't trust them, right, they're putting in a bunch of stuff and into the home, they make it look pretty, but it wasn't the greatest quality of work. And then they turn around and they show you all the homes in the neighborhood that you know, are selling for more, but reality is they sold those homes too. So there's a lot of like games.

So you want transparency, right. So there's local turnkeys, you know, providers are making a very big margin for the you know, ease of use, one of the things I like about the way rootstocks operated is, you know, under the full transparency model, as if we do do the work on a home, that we're going to lay out what that cost is, and, and you know, what the, what the value add was. I think that that's a better model, especially long term is partnering with someone that can do it at scale, and can do it cheaper than you can do. Even if you are putting in that sweat equity.

I mean, the reality is, you know, if I want to put in new appliances, and as an institutional investor, I have relationships, and I'm going to be able to buy those appliances, the whole package for less than $3,000 installed, if you go to Home Depot, you're going to spend a lot more than that, right. And you're going to waste a bunch of your time trying to figure out what to do and who to do it with. So you know, what my first couple homes like there was no Roofstock, there was no, there were no platform that I could plug into, we did the renovation ourselves, and we painted the walls, and it was like a cool experience. But it probably wasn't the best use of my time. And I don't know that I did anywhere near as good a job as the professionals and probably ended up costing me more in the long run.

So I think there's definitely a time and a place for sweat equity. But if you're an investor, you're you're better off spending your energy, researching neighborhoods, analyzing markets, you know, and picking those investments than you are with a roller and a bucket of paint.

Tom:

But there's no less than either makes a lot of sense. There's a you know, knowing your skill set and value of where your time is that great segue into the next question, analyzing partners. So thinking about things, let's print, you know, we can keep it set property managers, lenders, and perhaps even some contractors, but we'd love to hear your principles and the way that you select and that these core partners, especially as a remote investor,

Gregor:

Well, who you work with is probably the most important thing besides picking the the house you know, make a good buy and a house, you can get a cover up a lot of issues with your picking the wrong property management firm, it's a lot better off, it's more fun when you pick the right people. And so trust is a big part of it, right? So you know, you want to look for platforms that have enough scale that have been around long enough that have trusted people that you can call as references, you know, it's not just Hey, you get this sales pitch from property manager, and they tell you that they're managing 1000s of units, and they've got the coolest software ever.

It's like, that's great. I want to talk to a couple landlords that work with you and understand, right, so there's this next level of diligence that I think most retail investors are scared to ask and you know, they get the contract and they get the pricing and they get the dog and pony show. But you know, just take an extra hour and look, look up online, look for reviews, call, get a couple references. Try and find someone on LinkedIn that works at the company and try and get ahold of them. There's a lot you can do from being remote that I think is really helpful.

I look for in a property manager. I look for someone that has enough scale that has a long track record and as well To share data with me, they have data on how well they operate their properties. And I want to see that I want to know if there's a leak, do they have a plumber that they have pre negotiated terms with that it's going to be lower than what I could get if I was, you know, managing this myself? Or are they going to call roto rooter and charge me an extra 800 bucks, on top of, you know, whatever the work is done for overseeing a very expensive partner.

So, you know, I think the contract itself matters and the data matters. And you know, more importantly, you know, who's going to be on your account? And how strong is that person.

Michael:

On this subject of reviews? Because this is one that we've debated in the past on the podcast with specifically for property managers, how much weight do you put in online reviews? Because I know that people say…

Gregor:

That's a good one. It's a very good point, only people that are giving reviews on property managers, are the people complaining,

Michael:

Right, complaining tenants!

Gregor:

Yeah. And I think the challenge is and I’ve been a tenant for a long time is that when you have something that's not working? Do you want everyone to act like you're at the four seasons and come running over with, you know, an A giant service truck and write hardhats and, you know, fix your light bulb. But the reality is, if it's an emergency, people should be able to it right away, if it's an annoyance, like the screen door is squeaking, you know, they're going to get there in a reasonable amount of time, right? To try and help with some of those issues.

A lot of times, tenants are having an issue, either paying the rent, or they have some something going on in their life that makes it difficult, and the landlord has to take stronger actions. And that's when you see reviews being written that are pretty negative. So you do have to take property management reviews, the with a grain of salt, you know, if the property manager does everything they say they're going to do no one takes the time to go write up a five star review on our property manager, I don't know that I've ever seen a review of all the the property managers I've interviewed that's better than two stars, and maybe maybe a three star I've never seen a five star,

Michael:

Right. It's a very tough business. It's a very tough business. Yeah, I think that makes total sense.

Tom:

Kind of diving in a little bit on working with property managers, I don't know I'd love to do you have any like kind of stories of Oh, this, this property manager didn't work out very well, or other types of vendors that you would work with that, partial lesson of maybe not vetting them quite the way you should have.

Gregor:

I’ve got a lot of stories Tom. On the property manager side, we've definitely had people that we scaled too quickly with them, and they just they couldn't keep up, they were at a small business mentality. And you know, they may have had 2000 homes under management, we added 1000 to them, and they just didn't get in front of it from a staffing standpoint, or system standpoint, and then they weren't unable to deliver, you know, the reporting needed to understand actually what's going on in the home. That's an issue, I think, that we have had the most issues is contractors.

You know, I started my career in the restaurant business. And we used to call it breakage when people were stealing from you like or you like broke a case of eggs, or someone knocked over something. But I also had a guy, one of my restaurants, we didn't sell any sort of like steaks or anything like that. And I pulled up one day, and I was walking around the back of the restaurant, and this guy's walking out to his car carrying a box of steaks. And I'm like, hey, Zack, what's going on? He's like, I'm just throwing this away. And I look at it, it's got New York steaks, you know, on the side, I look and tiger, you're gonna throw away a bunch of steaks, why would you do that? He's like, Oh, well, you know, I I you know, basically, guy was stealing robots, right. And he had ordered it and eats it eats the all these steaks. So he was no longer with us.

Contractors. This is where having a professional is important, or, you know, really digging in and being diligent is now I've had, we've had guys where we needed to replace, you know, eight windows, and they build us for eight windows, and they replaced a window, took a picture of the window, right? And charged us for eight, you know, that that kind of stuff, or you know, painting, you know, part of the home not the whole home, I've had guys paint just the front of the house, not the whole house. Right? And so when you're

Tom:

Disneyland Mirage

Gregor:

Quality control, right, trust, but verify, I guess is the name of the game when when working with vendors. And that trust builds over time, right? I think the in my experience people that have taken advantage or tried to take advantage of me in the past it was relatively soon in the relationship. And you know, there's always these times where the vendor maybe there's a miscommunication, Maybe something happened, but if the vendor, you know, makes it right and does the right thing that builds a lot of trust. And I think that trust then you can do more responsibility and you still need to verify everything, but it just it gets a lot easier.

Michael:

Taking that a step further Gregor I love the trust but verify mentality and kind of om How do you or mo I don't know. MO I think is the is the correct acronym there something like that. How do you do that? What methods have you found to be useful? Because I think a lot of us as remote investors don't want to ruffle any feathers don't to insult somebody. So what are some good methods, tactics that you've used in the past to follow up?

Gregor:

That comes back to the partners right when you pick them your partner, especially like on a property management standpoint, ask them questions upfront, tell them you're going to be kind of a pain in the ass and see how they react to that because they're really all you want is you want a clear line of communication. Okay. So and So, you replace the water heater. You charged me 3000 Jeez, that seems like a lot. Can you show me the bids that you got for that water heater? It should be $800. What's going on?

They should be able to communicate with you. And it could have been something very complicated, right? Like, this water heater wasn't up to code. When you bought the place. We had to bring it up to code, we had to do this. We had to replace this. We had to then patch the walls, we had to pour new concrete like, yeah, it was crazy. But we had three bids. If they're unwilling to share the detail in the background, then that's a problem.

My experience is most professional firms have systems in place, they expect you to ask questions, you should not be embarrassed to ask questions. And then you need to trust there needs to be some trust on your side too, that they they actually did the right thing. So not all vendors are bad. I'd say most of them are very, very good. And you get you know, occasional bad apple.

Tom:

Yeah, yeah. Well, that's setting expectations up front of I'm gonna be a pain in the ass.

Michael:

That's a great way to say,

Gregor:

Yeah, but I do think it's an important thing, because you want people to understand from day one that you're not just going to be sending in blank checks. There's a partnership. You know, you work for me, I work for you. We're in this together. If this works out, I'm going to do more of it with you. You just be nice to people but like, get the documentation and check on things or find someone that will do it for you. That you trust.

Tom:

Love it. Awesome. Michael, do you have any Any other questions?

Michael:

Now? This was great, Gregor. Thanks so much. Yeah, it's so interesting to learn about all the things all the irons in the fire that you've got going on.

Gregor:

A lot going on, but…

Tom:

And the steak thieves.

Gregor:

Yeah. Steak thieves. That was great guys anytime happy to help and answer any question.

Michael:

Awesome.

Tom:

All right. Thanks, Gregor.

Gregor:

Thanks.

Tom:

Thanks again to Gregor for jumping on. If you enjoyed this podcast and enjoyed this episode, we would love it if you would give us a rating review. Subscribe, all that good stuff on wherever you listen your podcasts and as always, happy investing.

The Episode on Advanced Tax Strategies with Amanda Han & Matt MacFarland Mar 01, 2021

Tax season is nigh, that is why we have authors and real estate tax experts, Amana Han & Matt MacFarland join us on this episode to highlight what you need to know to keep as much of your money as possible.

Amanda & Matt's website: https://www.keystonecpa.com/

Suggest a topic for the podcast: https://linktr.ee/remoterealestateinvestor

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Transcript

Michael:

Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co host, Tom Schneider. And we have with us two very special guests, Amanda Han and Matt McFarland authors, CPAs real estate investors extraordinare. They're gonna be talking to us today about all things tax related that real estate investors should be aware of. So let's get into it.

Amanda Han, and Matt MacFarland, thank you so much, again, for joining us on the podcast. Really, really appreciate you coming on.

Matt:

Well, thank you for having us.

Amanda:

So excited to be here, lots to talk about

Michael:

Lots and lots and lots of talk about so I want to be very respectful of your time. So before we get into it, I would love Love, love. If you could both give us a little bit of background on yourselves a little brief introduction of who you are and how you got started in real estate and tax. You both have been guests on numerous other podcasts including the bigger pockets podcast, so floor is yours.

Amanda:

Yeah, I guess I'll go first. So my name is Amanda. I tell people's I'm the third generation of real estate investors in my family. My grandparents had real estate investing, my parents dabbled in it. But I was never taught to do real estate investing. I think like a lot of people I was taught to just go to school get a good job. And it wasn't until several years after I worked as a CPA for real estate investors that I realized that you know, real estate is such a great tool to wealth building and to tax savings. So that's where kind of Matt and I got started in real estate

Matt:

Yeah I'm Matt MacFarland and I married well!

Yeah. But yeah, our practice focus on real estate investors, it's kind of where we got our start and what we like and what we understand, and we don't focus on, you know, manufacturing clients or retail clients, just because that's not what we know. So I've been doing it over 20 years now. And Amanda is close to that as well. And so probably 80 90% of our clients are real estate investors. So it's, it's always fun stuff to talk about.

Michael:

So that was your family also involved in real estate, or how did you get involved in that space?

Matt:

You know, my parents did a little bit of it back in the 80s, when it was kind of you know, everybody in their mother could invest and get right off skin before they change the tax code. But we kind of got into it through the job. You know, I remember like, my mama was working on some of these taxes, who was probably in his 60s, and he was retired and he was making, you know, like six figures in cash flow. And it's like, Okay, this is, this is what we got to do, you know, so that was kind of how I got turned on. Yeah.

Amanda:

Yeah, it's so interesting, because, you know, for me, for both of us, even though we worked in taxes, you know, that was our profession is to do tax planning and tax strategies for for investors. And for me, specifically, growing up in a family who was, you know, fairly extensively involved in real estate, we never put the two to two together, you know, and for years, we just kind of went to work that our thing, never thought that maybe we might do real estate for ourselves, you know, until we read Robert Kiyosaki his book, Rich Dad, Poor Dad. So it took us just, you know, reading a book, not about taxes to really apply that to our own situation.

Tom:

I was curious, you know, you said like a third generation, what kind of investing did your parents do and your grandparents? Who is it all kind of similar residential real estate? Or what type of real estate investing did they do?

Amanda:

Yeah, all sorts. So I think my grandparents, I'm from Taiwan originally, so my grandparents, they were business owners who, you know, also bought the underlying real estate, which ended up being kind of a very, almost like, you know, Time Square type of a property back in Taiwan. And when they first immigrated to the US, they dabbled in land, you know, which is different, right? No, no rental stuff. But if you guys follow the real estate of Vegas, those have appreciated so much, right, like all various parts of the US. And then yeah, you know, just single families, condos and things like that. So I think like a lot of real estate investors, you kind of start out with one type, but you end up expanding into different types of real estate as well.

Michael:

Okay, so I would love to dive into the meat and potatoes of the subject here. And if you could give us a little bit of insight into how real estate is taxed, and whether or not that's different than somebody's earned income, and shed a little bit of light on kind of the high level tax picture, that is real estate.

Amanda:

That's a really great question. I think there's a misconception about that, that real estate has a different tax rate. But the reality is a real estate is actually taxed at ordinary income tax rate, which is the same rate as your W2 and other income. Okay. So, uh, rate wise, you know, you don't get any lower tax rate or preferential rate.

But the benefit of being a real estate investor, though, is that we are afforded with a lot of write offs. So when you hear people talk about, hey, the tax code is filled with loopholes and write offs for business owners that really Is the Golden Nugget because real estate also falls under the category of business owner. So when you're a landlord, when you own rental properties, you you are able to utilize those same tax write offs as business owners do.

Yeah, I mean, it's actually incentivizing you to build a business invest in real estate. And so that's the key that they're they're given these incentives that you know, you can make the money but with some of the write offs, you get, like depreciation and things like that you can kind of shelter, you know, some or a lot of that cash flow that you're making from, you know, buy and hold property, for example.

Amanda:

Yeah.

Michael:

So, Matt, you when you talk about business, and having a real estate investing business, you know, I don't have an LLC. So do I need to have one in order to qualify for these business deductions or to be considered from a taxation standpoint as being a real estate? Or is having a running a real estate business?

Amanda:

Yeah, I love that question. Because that is always naturally the question that follows when we talk about, you know, the business deductions. And that is such a misconception in that a lot of investors are told that they need to have an LLC or a corporation in order to take tax write offs. And, you know, unfortunately, it's something that we see every day when we meet new investors is like, Oh, I'm sorry, I love your podcast, but I don't have an LLC. And that is not correct at all.

Basically, if you are a landlord, right, meaning you own rentals, or if you're a flipper, or wholesaler, you are able to use these business write offs, whether or not you hold your rentals in a legal entity. So as an example, if you know, Michael, you have a property on Main Street, that's a rental property, you can take a tax deduction, you know, write off part of your home office, part of your car expenses, certain business meals, travel costs, you can write those off, regardless of whether that Main Street property is held in your personal name, or inside of a legal entity.

So IRS actually doesn't really care who holds the real estate, what they care about is that they expense is actually necessary or reasonable for you as a landlord, your landlord, your rentals, is it reasonable to say that you invested in a real estate course or you traveled to Tennessee to look for properties? Those are the things they're looking at, more so than did he have a legal entity for?

Michael:

So then, if I understand correctly, and I know that we can't say anything with the total blanket statement, but is there really then no tax benefit to having or investing via an LLC?

Amanda:

There's no absolutes in the tax world. So there are going to be instances where Yes, someone might get a little bit of a tax benefit, if they were to, you know, hold their real estate in an LLC. But I will say 99% Okay, for 99% of the…

Matt:

For rental properties, at least.

Amanda:

Yeah, for 99% of investors were landlords, the vast majority of expenses that we normally have on a day to day basis, that are legitimate deductions, you can take those with or without an LLC, it's a little bit different if you're someone who's doing fix and flip or wholesale in terms of, you know, different tax treatments of those, but for landlords, for the most part, you know, if you're just someone starting out, you got one, two or three single families, make sure you're tracking your expenses, right? Because those are deductible. Even if you didn't have an LLC for last year, right. A lot of us are maybe getting ready to file last year's tax returns or getting rid of this year's taxes, do make sure you track those and present your tax preparer or CPA with it. Because a lot of those are legitimate write offs.

Tom:

Do you think there are deductions that most people could be taking that are not necessarily aware of it? Like I know, one thing you talked about is, I don't know like a trip to Nashville to look at or I don't know, I'd be curious on common misconceptions on like, what falls in the deduction bucket versus what doesn't fall?

Matt:

Yeah, no, it's a good question. I think there's a lot of them, actually. I mean, the ones that are probably the most common ones we see are our travel expenses, like you mentioned, auto deductions, just people using their vehicle to kind of run their day to day real estate business. They're just not capitalizing on the opportunities, they're not maximizing their deductions because they're, you know, not keeping track of their miles or what have you, or they don't know that they can home office deduction. That's another one that we see a lot that gets missed.

Amanda:

Yeah. I mean, you know, most investors we work with are working from home, you know, we rarely have someone who's a landlord that goes out and rent an office space, just to manage their rental properties. Unfortunately, there are still a lot of CPAs out there who have are using the scare tactic of if you claim a home office, you will be audited. You know, it's not you're not able to do that as an investor in that information has been so outdated. The IRS has actually in the last couple years, they've made it easier for investors or anyone to claim a home office deduction by giving us a standard per square foot write off.

So the IRS is you know, they're understanding that a lot of people are working from home and I certainly you know, if you're someone who's tax advisor saying hey, you know, you shouldn't take it as a huge red flag, then it might make sense to look elsewhere interview other CPAs because you're likely getting very outdated information. But I think to second what Matt was saying the, you know, some of the most commonly missed ones are like the travel in the car. And the reason is because a lot of people feel that they can only write off these expenses if it's directly related to a property. Right? So so you might be going to Nashville to look for properties, but you don't own one yet. So people think, oh, maybe I can't write those out, because I don't own a property yet. But the tax perspective, you know, if before you left for that trip to Nashville, you had already scheduled meetings with realtors or brokers or property management companies, then you have a really solid case to make the argument that the reason you went there was for real estate investing, and therefore it's a real estate related expense.

Michael:

Oh, fantastic. Okay. So can you talk to us and our listeners a little bit about something that I've heard often called is the three DS of real estate investing and why they're so powerful from a tax point of view.

Matt:

Yeah, if you want to refresh your memory about what the three Ds are! Dirt Dogs and something?

Tom:

Dinosaurs.

Matt:

There you go. Yeah.

Michael:

Yeah, it's depreciation deduction and deferment.

Amanda:

I like that. Maybe I'll use that as a…

Michael:

Yeah, consider yours

Matt:

Apparently we should be using that as marketing.

Amanda:

I like it. You know, we already talked about deductions, right, which is all these you know, legitimate write offs, Home Office, car, travel, you know, cell phone, computer, laptops, things like that. That's the low hanging fruit, because these are expenses that you are spending money on anyway, right? You have a home, and you have a car. And a lot of people have, you know, cell phone, computer, we have those anyway. So it's a way of shifting that from what's usually non deductible into legitimate write offs

Matt:

and stuff on the actual property side, most people don't, they don't miss the insurance. The mortgage is just the property taxes, the repairs, or utilities for the rental properties, those that I get to talk to, but those are ones that kind of get overlooked.

Amanda:

Yeah. And depreciation. I mean, clearly, it's just something that we love as real estate investors.

Tom:

My wife works in tax as well. And every time I say write off, she's like, you mean deduction, Tom, you mean deduction? And Am I understanding that correctly? Am I being corrected correctly?

Matt:

Yes, your wife is correcting you correctly? Yes.

Tom:

I knew it. I just, you know, yeah, good. Good.

Matt:

Yeah. And then depreciation is a form of a deduction or a write off. The main difference between that and the man was saying, though, the auto and other expenses is that you're not actually paying for the depreciation every month or every year. I mean, obviously, you bought the property, you paid something for the property. But the incentive in the tax code is that, you know, you put $100,000 down on a rental property, but the purchase price is 500. Your depreciation expense, which is really a paper write off every year is the starting point for that calculation is your purchase price, not your down payment, they're letting you write off, essentially, the bank's money, right. So that's why we like it, because you can use leverage, you can use that right off to shelter your cash flow. So you've got the regular deductions, you've got the depreciation, and then talking about on the deferral side.

Amanda:

Yeah, so I mean, for tax deferral, you know, usually people are referring to 1031 exchange, right, where for real estate investors, you have the ability to sell a rental property, and instead of paying taxes on the gain, you are deferring the taxes by purchasing one or multiple replacement properties instead. So it's the whole concept of, you know, play Monopoly where, you know, three red houses trade up to a green house or something like that.

Matt:

I think it's a green house for red hotel, house or red hotel, maybe, maybe you're right, to verify that what the what the pull out our Star Wars monopoly house.

Amanda:

So that, you know, what's so interesting about the 1031 exchange is that that's a tax benefit, or some people like to call it a loophole that's been available for years and years and years. But actually, back in the back when the tax cuts and jobs act took place couple years ago, there was a significant change that was made to it, where prior to that tax change, businesses could have also done 1031 exchange as well. And they took that benefit away. So in the past couple years, 1031 exchange was only available to real estate investors. And, you know, but we don't hear about that a lot, you know, within our industry only because we specialize in real estate, but what you know, people used to be able to 1031 exchange, like a car, you know, a business card, they could have done a 1031 exchange.

And of course, you guys probably heard that there might be potential changes or limitations to 1031 exchange that might be coming up under the new proposals. So it is something that we're definitely keeping a very close eye on because although some people say oh, they'll never change that. They'll never take that away, because so many people use it. But you have to keep in mind that a big part of that was taken away in the tax cuts and JOBS Act. So as of today, this strategy is really only limited to real estate investors. And I think in the next, you know, few months or a year or two, we'll we'll see kind of whether investors still get that deferral benefit of the 3ds increases.

Tom:

Such a neat aspect of just on how it's just like such a moving target, you know, on on the tax code. And you had mentioned before looking at some of taxes, and back in the I don't know, I think you might have mentioned the 70s, were kind of just curious of super high level, you know, some of the major, like changes to the tax code in history from, you know, in the 70s, to how it's moving today.

Matt:

What I remember is that, you know, I made it look like I'm 70 years old, I was only born in the 70s. So, the major change, actually, the tax code happened, and I think it was 1986. So my understanding prior to that was that it was, you know, you are a limited partner, limited investor, you know, you're investing in somebody else's real estate deals, and they were allowing just, you know, no limits to your right off. So if the entity split off, you know, depreciation, net losses, whatever, everybody could write off their share of it without any limitations. So they really kind of tweaked that in 1986, to, you can still get write offs for investing in other people's real estate deals, it's just not as easy anymore, it's a really want to incentivize the, I guess, the day to day investor, the person doing it all the time versus the you know, the kind of the passive investor on the side who's just earning their income, you know, working a W two job, but then investing all of it on the side and hoping to offset all their w two income as a passive investor, I think that was the major change that they did.

Amanda:

And that's where the real estate professional status that we are always talking about nowadays, right? It's kind of the big hurdle and the big opportunity. So prior to the major change, that wasn't even an issue, you know, you just are able to utilize rental losses to offset other income. So yeah, the good old days.

Michael:

So I have a question about the depreciable value or where the depreciation number comes from. So I know that you can only depreciate the building value. And when you buy a piece of real estate, it's broken down into building and land value. So if the county tax record shows the building value at 10,000, but I bought the thing for 150,000. I mean, how do I figure out how much of that is land? How much of that is building? And if the tax record number is different than my purchase price? How does that work?

Matt:

Yeah, it's a great question. Because obviously, unlike a situation like that, a lot of times your property tax basis is lagging behind your purchase price, right? Because you, you know, it's based on the previous owner, the brand previous two owners for that matter, and then you buy for 150. And they don't update that for, I don't know, six months to a year, right. But essentially, your starting point for depreciation is going to be based on your purchase price.

And then typically what will happen is you can use the property tax records, but what you're looking for is not the the actual number, per se, you're looking at for the breakdown of building versus land. So even if they have it as the property's worth, right, so if they have is probably worth 50, but you paid 150, for it in that 50,000 they have, they're still gonna have a breakdown of building versus land, you know, maybe it's 35 for building and 15 for land. So it's a percentage, that's, you know, I can't do math in my head. But you know, whatever that ratio is, you would apply it to your purchase price. That's how you apply that ratio to your purchase price. Now, that's the I think that's probably the typical way most people do it. There's other ways like, people sometimes use appraisals, if that works out better for you, if it gives you a sometimes you're looking for, as you mentioned, Michael, you know, you can only depreciate the building part. So in areas where you know, Southern California, like where we are, land is, you know, most property tax statements, you see the land is 80%, or something not great from a depreciation perspective, because that only these 20% are right off, right?

So in ways when you're looking to get more building, then with the property tax ratio is going to give you sometimes you can base it off an appraisal, if the you know, the appraiser is saying, Yeah, you paid one do this property is worth 150. But the building is really worth, you know, $130,000 or something like that, you know,

Amanda:

Yeah. And also, if you're someone who is going to be doing a cost segregation project for your rental properties, this cost segregation firms sometimes use different methodology to re evaluate so that you get a higher percentage to the depreciable building and less to land as well. So there's multiple ways I think, you know, if you're just someone like doing your returns yourself, usually just use the property assessors information.

Michael:

So if you get an appraisal done that chosen a new value, does that open up a can of worms with the county? And are they able to then tax your property at a different rate? If you say that there's more building value there for your tax purposes?

Amanda:

No, not at all. So you're not challenging the county at all right? The county is not involved. You're just saying for income tax purposes, when you're preparing your tax return your CPAs preparing the tax return. We're just saying we're using the appraisal information to calculate our depreciation. At no time do we contact the county to say hey, I realized that.

Matt:

I would like to pay more in properties.

Amanda:

Yeah, exactly. Yeah, exactly. So they're completely different. So so we're using the information, but those two numbers are always still gonna be, you know, fairly different.

Michael:

So the IRS is willing to utilize an appraisal for the building portion of the depreciation values. I mean, that that's good enough. They're not gonna rely just on county tax records or anything of that sort.

Matt:

Yeah, I mean, it's more than what we've seen is if you're hiring like a qualified appraiser Give me a written report and everything that usually will is enough to hold up to it, you know, if it got audited or scrutinized for any reason, that's usually enough. But typically, like sometimes clients say, Can I just get like a online, you know, Zillow or some other, you know, opinion that's not not from a, you know, qualified appraisers that in our experience isn't enough to pass muster. If you've got questions.

Amanda:

you know, we are talking to someone just last week, they said, hey, I've heard of CPAs, you know, for high areas like California or coastal places where the CPA just says, I think it's going to be 15% land, I'm just going to use that for all my clients. So that's the kind of stuff you want to avoid. Because I CPAs we have no license or any, you know, we have no standing to say what, what exactly is this and of course, a house on the beach versus a house inland is going to be very different. And you just across the board, say 15% land, you know, there's no substance behind that. So that's kind of what you know, that's the kind of stuff that they would try to disallow.

Tom:

Could you change your appraisal method? Like, if it was advantageous to use like an income approach with like a cap rate? Or is it just strictly like sales comparables in using in your basis for depreciating?

Matt:

I mean, that's a good question. I haven't To be honest, I haven't dived into details enough to know that I mean, I would kind of my recollection of those. And you guys may know better than I do, I think they typically lay out like three or four different methods, right? And then at the end of the day, the appraiser decides on, you know, based on these four methods, this is what we went with or something right, like, Yeah, I don't know, if it ever got, if they go that deep into it, if they could challenge, you know, like, hey, well, yeah, you decided to use this one. But on page 12, it mentions this one, you know.

Amanda:

I mean, I don't think you know, in the tax world, I think what they're looking for, obviously, is just that, I think the main thing would be that it's done by an actual qualified appraiser, right? That would probably be the key versus getting into the nitty gritty of which methodology because, you know, at the end of the day, from an audit perspective, don't assume all auditors understand real estate, right? And of course, you know, not many of them understand.

Matt:

So that might be Mind blown right there for everybody listening to.

Amanda:

Fortunately, we don't have a lot of audits go through our firm, pretty proud of that. But I always hesitate to say, because I feel like I'm not bringing us bad luck. But in the few that we've had, you know, in the past couple years, I've come across auditors who really have very little understanding of real estate, where, you know, I have to sit down and walk through a closing disclosure, HUD with them to say, this is what this line means. This is what that means.

Matt:

So in today's training your agent, we're gonna go over hud.

Amanda:

So yeah, so when we, you know, and we know so much about you every line on the HUD and like you're saying different methodology of appraisals, I honestly don't think that they're getting into that level of detail. For the most part.

Michael:

It's so funny, you say that Amanda, I was just chatting with a lender the other day, and I sent them over my tax records and returns and stuff and applying for this loan, and they go, Oh, well, it looks like your real estate didn't perform very well. You got all these negative cash flows here. And I'm like, Yeah, because I did a cost segregation study, and I'm using depreciation, it's not actual loss. It's like, come on,

Matt:

It's funny. You mentioned that. I mean, I got an email like two days ago that that exact situation where someone's like, our client, you know, kind of done a cost segregation study, which is, you know, more advanced strategy, I get that, but they're like, why is this big? $200,000 write off on line 19. And, you know, you give him a line explains what it is, or what the tax code says it is. And they're like, I still don't understand that. I can't help you. I'm, I'm not the lender, you know, like, yeah, it's just one of those signs that maybe you're not working with the right lender, right. Like, and to be fair, you know, totally fair. Not all CPAs or tax people understand real estate. But not all doctors do the same thing, either. Right. Not all lawyers do the same thing. So it's just, you know, making sure you're working with the right people on your team. Right. I mean.

Amanda:

Yeah, I think as an investor, one of the things that you want to make sure you do, as you're getting ready for tax time is make sure when you meet with your CPA, provide them with the closing disclosures, right, any properties you've purchased this year, and you've sold this year, any refinances you've done this year, make sure you bring all those closing disclosures, closing statements with you, because it's one thing for us to say, Hey, I bought a rental for $100,000. But we really paid probably more than that, because we had closing costs, we had fees, we have title transfers, there's all kinds of costs associated with it, and not all CPAs. Ask for that. Right? And so sometimes they'll just say, hey, how much do you buy for 100,000? Great, and that's the number you use, but just by not bringing that information could be 1000s of dollars of write offs that you missed out because they're not seeing a closing disclosure.

Right. And I know a lot of people did refinances last year and probably going into this year just because of interest rates. So make sure you bring all the closing items from the refinances because there are a lot of costs associated with that for the most part.

Michael:

Okay, I want to shift gears here a little bit. And Amanda, you said something you mentioned this previously, and so doesn't want to circle back to it. What is a real estate professional status? So what is it? How do people use it and do I have to be a real estate agent to take advantage of it?

Amanda:

Oh, yeah. All right. So at a high level, the IRS, you know, we're talking earlier about back in the days anyone could invest in real estate. Yeah, you can use real estate and use that to offset, you know, W2 and other income, right? There's no limits or anything. But under current rule, if you're someone who makes less than $100,000, total income, then you can use up to 25,000 of rental losses to offset w two and other income. And by loss, we don't mean actually losing money. We mean, you know, after you take your home office and travel and depreciation, right, so we create a loss from a tax perspective strategic. And so usually, if your income is under 100,000, you can use up to 25,000 of that to offset taxes on the W2.

So that's really great. Because the more real estate you buy, the larger write off, we can create, and then you start to see your taxes go down significantly, once your income exceeds 100,000, let's say you're between 100 and 150, then your ability to use those losses start to decrease, as income goes higher, your ability to use the losses goes lower,

Matt:

So say 25 grand gets phased out, basically. So once you get to 150, that cap of 25, where you conduct is now down at zero.

Amanda:

And once your income reaches 150,000, this is as a married couple, okay. And once your income exceeds 150,000, then you can no longer use rental losses to offset taxes on the W two and other income you have. So that's the issue we have is a lot of high income earners who also happen to invest in real estate on the side, maybe you don't get to use the benefits to offset W2 So you're still paying tax on the W2.

So the main thing I want to tell people though, is it's not the end of the world, okay, doesn't mean we lose out on the deductions, you get to carry forward any of the losses you're not using. So if you claim the home office car expenses, if you're not able to use it this year, you do carry it forward indefinitely. And you can use that to offset taxes from future rental income, or eventually when you sell the property, you then can use that to offset taxes from your W2 income, so we never lose it. I know we have people who say, Hey, you know, I tried to hold my expenses, but I'm not seeing the benefit. But that's okay, because you will see the benefit in the future. Right, it will still help you offset taxes. So that's one of the restriction,

Michael:

It's like going back to the future.

Matt:

We can talk about the future if you want!

Amanda:

Back to the Future. Exactly, exactly. So one of the ways around that is if you or your spouse can qualify as a real estate professional, then you can use the rental losses to offset w two capital gains and all types of income without limitation. So if you're someone who makes a million dollars in your W2, and your spouse is a real estate professional, you can then use rental losses to offset W2 income without any limitation. And that's, you know, the the benefit of being a real estate professional for higher income.

Michael:

And so when we talk about these income limits, something I've always struggled with, and I have a hard time putting my finger on is what is that based off of. So let's say I have a salary of 130,000. But then I make contributions to a retirement plan. And maybe I pay for medical, and so I'm bringing home, you know 110,000 after that, how does that work?

Matt:

It's technically based on adjusted gross income. So in that situation, if you know typically your retirement contribution of work as a pre tax deduction, if your medical that you were referring to is also a pre tax deductions or like in a fringe benefit plan that your employer provides. So if your taxable w two gets down to 110. And that's all you have, they're gonna base it on the 110. But it's also the W2, its interest in dividends, it's other capital gains, it's, you know, other business income, if you have an unemployment comp, you know, a lot of people have unemployment right now, you know, it adds a lot of things, basically to get to, you know, what they consider adjusted gross income.

Amanda:

Yeah, so the ones that will help you to get lower, the main ones that you mentioned would be retirement contributions, because that does bring down your income, and then any pre tax medical that you're taking advantage of. So for some people, you're kind of at the border, where you say, hey, yeah, if I just maximize my retirement contributions, and I can get there, but you know, sometimes we have clients who, you know, who alone is, you know, 300 400. So, you know, it's a lot more difficult to say, hey, how much retirement can I do to get that down to as low as possible?

And that's where real estate professional comes in, right? Where it's, you know, if maybe, if you're someone who is married, and you have a spouse that's either working part time or not working out, you know, because they're staying at home or something like that. That's where the real opportunity comes in. In that you can be making 500,000 of W2, but we don't really care if because one of you is able to claim real estate professional status.

Naturally, one of the questions we get is what is a real estate professional, right? How can I be a real estate professional, something you mentioned, you know, do you have to get licensed or be a realtor, and you actually don't have nothing to do with what licenses you hold so you never have to be licensed as a realtor. In fact, a lot of our clients who are real estate professionals don't have their license, it doesn't hurt, of course, right? If you also want to be licensed, sure, that's fine. But really, it's looking at a hours and activities test. So to be a real estate professional, there's really three main criteria. One is that you have to spend more time in real estate than your job where other jobs, okay, so if you're someone who's working full time of 2000 hours a year, that's probably difficult, because you need more than 2000 hours in real estate, to be a real estate professional. But if you are someone who's working part time or stay at home, then you can probably fall under the second requirement, which is at least 750 hours in real estate. Okay, so looking at January through December, are you able to spend at least 750 hours in real estate activities, then If so, you might be real estate professional.

Matt:

It’s that situation talked about earlier to where maybe one spouse is working full time, the other one is working on the real estate. And that situation, that first test of spending more time in real estate they do their job is doesn't apply because they don't have another job, right? So then it would come down to the 750 hour requirement. And then the third main requirement is which is also vitally important is that you've got to be what they what the IRS calls materially participating in all of your real estate activities. So what that means and you know, layman's terms is that you're kind of doing a lot of the day to day or boots on the ground, you're really involved in your rental properties or other real estate activities, if you have them to get to your 750 hours, what they're trying to prevent is the you know, we kind of alluded to it earlier, right? The passive investor sitting back collecting a check from their property manager once a month looking at the property manager statements. And you know, even if they have an extreme example, let's say they have 100 properties, where they're doing this on, they just sit back and collect a check. And somehow they can get to 750 hours by doing this, because they have so many properties, that won't qualify as a real estate professional, because they're not, you know, materially participating. They need to be, you know, doing a lot of the day to day stuff that, you know, active investor would be doing, I guess, for lack of a better term.

Amanda:

Yeah. But I think that, you know, a common misconception too, though, is people have been told they have to self manage their rentals in order to be a real estate professional. And that's not necessarily a true statement. Because, you know, we do have a lot of clients who have out of state investments, you know, they invest in out of state properties that are not local to them, it's very much a case by case situation.

An extreme example, if you're someone who works full time you have one rental property out of state that's a turnkey with tenants in them, you're not doing anything at all. Sure, that might be difficult for you to be a real estate professional, because how will you need to have 500 hours of working on the property or working with property managers. But as that person's real estate portfolio grows, maybe they go from one property to five to 10, then it becomes a lot easier, even though they have property management companies, there's probably still quite a bit of stuff that they would need to do as an investor. And then it might become easier and easier to qualify as real estate professional.

Michael:

So question for you both. I'm a W2 employee, but I'm just really, really, really efficient with my time hope my boss isn't listening. And I only need 1000 hours to do what most employees do in 2000 hours. Does that make it easier for me to qualify as a real estate professional?

Amanda:

I love that. I love that. You know,

Matt:

You're you're a creative real estate investor at heart.

Amanda:

Yes. You don't know how many times I've heard that question. That's exactly the question that was brought up in several court cases under the IRS. Right. And what Matt said, although sounded like a joke, does your employer know this? That's kind of the the stance of the IRS. So they said the way they look at it is, hey, you're paid as a full time employee, your full time employee benefits, and don't really care how efficient you are, the time assessed for your job is going to be a full time. So 2000 or, you know, 2100 hours, whatever that is the full time equivalent.

So yeah, that's not the you know, the best answer, but that's how they've looked at it in court cases to say, you know, sure, you might be efficient, but we're still looking at it that your full time salaried employee, and therefore that's still the number of hours to meet.

You know, numbers wise, we don't have a lot of clients who are full time workers that qualifies real estate professional, we have some, but the percentage is fairly small. The ones who are are really doing a lot of stuff in real estate, but maybe in your situation, you know, where you have a bunch of rentals, you run a real estate company, you also have podcasts, and you're just doing a lot of different things for real estate, where maybe real estate is taking up, you know, 2000, or more than $2,000. But I think, you know, for most investors, right, it's like they're really working on the full time job, they got a couple properties, you know, here or maybe out of state, that becomes a little bit more difficult to be able to beat the number of hours that way.

Michael:

That makes total sense, Tom, forget everything you just heard. So I just want to highlight really briefly here the fact that you both have written not one but I think two books now that are about tax strategies, is that right?

Matt:

Yes, that is the rumor.

Amanda:

Yeah, the first one is called Tax Strategies for the Savvy Real Estate Investor

Matt:

The Advanced Book on Tax Strategies. Along with the 3ds, we should probably really know that.

Amanda:

Yeah, I mean, the book, we use a lot of real life stories from clients that we worked with throughout the years in showcasing what strategies can work, you know, how is it done when it's done correctly?

Matt:

Horror stories for ones that didn't work?

Amanda:

Yeah, exactly. So it's kind of like the you know, I don't know Chicken Soup for the Soul type of book in story format. But the Themis is tax savings.

Michael:

And for all of our listeners, I've read them both. They're both excellent, excellent books, and very easy to digest with a lot of actionable steps, and actionable takeaways. And then we just read the advanced book on tax strategies, their second book at the Roofstock Academy book club, and Matt and Amanda, you both joined us for our book club, happy hour session at the end of the month, which thank you again, for joining us, it was a lot of fun, and all the members of the academy had a really, really good time

Tom:

There on Audible too. So I joke that I don't know how to read, but I can listen really well. So they're on Audible for folks that want

Matt:

At least you're honest, right?

Tom:

Yeah.

Michael:

So I want to ask you both the question here, as we're starting to wrap up, but what can we as real estate investors do or you know, any real estate investor, for that matter, do to work more cohesively with their tax professionals, or to make their lives a little bit easier?

Amanda:

Gosh, that's a great question. I think one of the most important things, as an investor that you want to be able to do is to keep your line of communication open with your tax advisor. And what I mean by that is not really waiting until, you know, January, February, or April to talk about last year's taxes. And that's very difficult for, for people to do because nobody likes to think about taxes in our day to day where we're so excited about investing and growing their wealth. And, sure there's tax strategies, but I'm sure my CPA understands it. And they're going to do all that next year when I go to them for taxes.

But that's really not how it works. We just talked about real estate professional status, right? And how do you try to qualify? And so the best time to learn how to qualify and get your documentation, right, is actually at the beginning of towards the beginning of the year. Why? Because now you have all year to make sure you're doing the right things to qualify as real estate professional, right versus have no now it's next April, and you talk to your tax person say, Hey, I really think I should try to qualify, while they're going to come back as if you have documentation. What did you do? And, you know, maybe you didn't meet the number of requirements for hours but you could have done that, had you done a little bit more in real estate, or maybe if you had bought one more rental property?

So I think the two main ways to work cohesively is one understanding, what are some of the things you should be doing throughout the year? How do you track those items throughout the year, so that you'll be you know, ready by the end of the year with everything you needed to do like, you know, checklists and worksheets, and, and ways to track all of your expenses. And then the second thing is just to make sure you keep that line of communication open with your tax advisor, are you buying a property? Are you getting into a new state that you're investing in? Did you form, are looking to form an entity? Did you do a refinance, these are all times to talk to your tax person, it doesn't always have to involve, you know, very long extended conversation.

Matt:

Yeah, it can be just a simple email, right? Like I'm have just closed on this property, or I'm thinking about doing, you know, especially if you're selling properties, it's always we want to know that you're selling a property before you even enter the contract to sell the property. No. So you can, you know, plan from a tax perspective, how much gain Are you going to have? What are your options? What are you going to do with the money? You know, is there deferral opportunities, 1031, exchange, you know, things like that, that that's a lot better and easier conversation to have up front, then it's March and I sold a property eight months ago, what can I do to reduce my taxes? Right?

Amanda:

Exactly. Because at that time, there's very few things that could be done, you know, so we talked about real estate professional, and there are a lot of other strategies you can use. If you don't qualify as real estate professional, right, maybe you get into short term rentals. And there are easier ways to use losses from short term rentals to offset w two and other types of income. So if that is a strategy for you, maybe instead of looking for long term out of state rentals, maybe you start looking for short term rentals, whether in state or out of state. So yeah, just think your tax advisor should be part of your team when you're making investment decisions as well throughout the year.

Tom:

Fantastic.

Michael:

So Matt, Amanda, I want to be very conscious of your time. Thank you both so much for hanging out with us. if people have questions, comments, want to reach out to you for your tax services advice. What's the best way for folks get in touch with you?

Amanda:

The best place I think is just check out our website. It's www dot Keystonecpa.com. We have a lot of great information on there. We have some free downloadable ebooks and things like that. So that's the place to start.

Michael:

Thank you both again, really appreciate you coming on. I would definitely love to have you back on the podcast at a future date when there have been some tax changes and really thank you both again, look forward to catching up. soon.

Tom:

Thanks, guys.

Amanda:

Thanks a lot, appreciate it.

Michael:

Hey everybody that was our episode a big big big big thank you to Amanda and Matt, thank you both again so much for coming on the show. It was such a pleasure. So great to catch up with you guys also at the Roofstock Academy book club session that was so much fun. We look forward to having you both on again. And if you have any comments questions, ideas for an episode, please feel free to use the link tree in the show notes of this episode and submit those there. If you liked this episode. Want to hear more please feel free to leave us a rating or review wherever you listen your podcasts and we look forward to seeing you on the next one. Happy investing.

Why the Owner Occupant Sales Exclusion Strategy Is So Powerful Feb 27, 2021

Authors of The Book on Advanced Tax Strategies, Amanda Han and Matt MacFarland explain the owner occupant sales exclusion strategy.

Amanda & Matt's website: https://www.keystonecpa.com/

Suggest a topic for the podcast: https://linktr.ee/remoterealestateinvestor

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Transcript

Michael:

Hey everybody, welcome to another episode of the remote real estate investor. I'm Michael album and today I'm joined by my co host, Tom Schneider, and two very special guests, Amanda Han and Matt McFarland, two very distinguished notable authors, CPAs, tax experts and real estate investors. And in today's weekend wisdom, they're going to be talking to us about the owner occupant sales exclusion, that can really boost real estate investors gains. So let's get into it.

So one thing I want to make sure that we highlight for for listeners, and a question that I want to ask too, is about the owner occupant sales exclusion. Can you talk to us a little bit about what that is? And how folks might be able to utilize it?

Matt:

Yeah, it is actually a great strategy. And, you know, again, why don't we use the word incentives that they provide people out there in the tax world, essentially, homeowners, if they own and use a house for at least two out of the previous five years, and they go and sell the property, they a single person can get up to $250,000 of gain tax free married couples, $500,000.

So that's just by itself, you know, if you're a homeowner, you're not even, you know, investing in rental properties. And that's great. If you're looking to sell your property, and you, you know, lived in the last five years, you've got some game, you know, good chances are, you know, a good chunk of if not all of it can be totally tax free.

Now, the cool thing is, we've actually seen this coupled for real estate investors. So and you know, and a good example would be somebody lives in a house for two years, they move out for whatever reasons, but they don't sell it right away, they rent it out for up to three years. So let's say they sell it right before the end of the year five, they say if they're looking back, they meet the two out of five rule, they can actually still exclude the 250 or $500,000. Again, even though it's been a rental property at the time of sale. So that's we've seen clients take advantage of that. Now, if you will, you know, you want to totally supercharge it, we've seen clients take advantage of that. And then also, maybe their gain is more than the 250 or 500, then they do a 1031 exchange to defer the rest of the gain because they're selling a rental property and buying another rental property, you know, so there's a lot of different ways that you can use it to your benefit.

Michael:

So question for you both if I if we want to string a couple of these concepts and tactics together, could I buy a owner occupant house live in it for two to five years, rent it out for just under three years, then when I go to sell it for a gain of more than 500,000? Maybe called 750? I do a 1031 exchange and get the owner occupant exclusion so that I get that 500 tax free. And then I can 1031, the additional 250 on top of that, go buy an investment property and then have it be an investment property for a little bit and then do a refinance to an owner occupant primary mortgage. Is that possible?

Matt:

Yeah. So on the front end, they're selling your property, there's a primary they're gonna, you know, probably pay some taxes, whatever the exit the gain, it was an excess of 500. Yeah, what you do with the money doesn't matter with respect to those rules. So you can still utilize exclusion if you're buying an investment property on the on the back end. But yeah, you can always buy an investment property and change it into a primary, but there's definitely things you want to be aware of. And there's things you can do with a 1031 exchange, if you're selling a rental buying another rental, and then you move into that rental later on, then you can do that. But I think that the key is you want to give it enough time as a rental property that if it ever got question is not that, hey, my intention all along was to move into it for four months, you know,

Amanda:

Yeah, there's always facts and circumstances that come into play. So we actually had a client who did a 1031 exchange, a very large transaction, he bought a rental property, but because of fires where he was living at the time that volcanoes erupted in Hawaii, he decided to move. And you know, the best placement to move into was that replacement property for the 1031 exchange. So he ended up doing it. But you know, that's a kind of an extreme scenario where we thought, well, you can clearly demonstrate a change in facts where, you know, it was supposed to be a rental, but he moved into it shortly after it because of the location and things like that.

But the key like Matt, what Matt was saying, the key is at the time of the exchange, your replacement property should be a rental, or at least the intention of it should be that it's going to be a rental, that you move in thereafter. You know, that's not that big of a deal.

Michael:

So what you're saying is that you should get your tax professional involved on the front end and not after the fact and tell them Oh, hey, by the way, I sold this property

Matt:

Ahead of time!

Tom:

Proactive, not reactive,

Amanda:

We had a client who use that, you know, primary home exclusion rule, not as rentals, but just as primary home. They just use that over and over again, you know, so they move into a house, they do full rehab, they live in there for a couple years, they sell it, you know, 500,000 tax free gain and move into another house and do that whole thing again. And so you know, that's a strategy to you know, that's you know, if you're not really looking to to rent it out, but just continue to get that tax free gain, that's also a possibility

Matt:

as long as you like moving and rehabbing properties and you can totally take advantage of that.

Amanda:

Exactly. If you have spouses or kids they have to be okay living in for two years.

Michael:

Yeah, that's a pretty amazing strategy. I mean, if you just think about the pure math behind that every two years, you could be generating an additional $500,000 in tax free gains that that's a million bucks every four years. It's pretty unbelievable.

Matt:

Yeah, for sure.

Amanda:

Yeah. Exactly. of waiting federal and state taxes, right. I mean, that could be as high as 40%.

Michael:

Hey everybody that was our show. Thanks so much again to Matt and Amanda. So such a such a pleasure having you both on looking forward to doing it again soon. If you liked this episode, please please feel free to leave us a rating review and subscribe wherever you listen to your podcasts. And if you have any comments or ideas for episodes that you'd like to hear, please leave those in the link tree in the show notes of this episode. Thanks so much for listening and happy investing.

Considering A Private Loan? Here's A Crash Course On Private Lending Feb 22, 2021

In this episode, Nate Trunfio shares a wealth of information on the domain of private lending.

Find Nate at https://limaone.com/nate/

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, we have Nate Trunfio of Lima One Capital. This episode, we're going to cover a lot of materials focusing specifically on portfolio loans. All right, let's do it.

Awesome. And welcome to the podcast Nate. Thanks for jumping on.

Nate:

Hey, thank you guys for having me. honored to be here.

Tom:

All right, so before we get into the main content, let's start with a little bit about your background.

Nate:

Sure, yeah, I'll try not to bore too many people here. My career in life has been spent in all things real estate related, and specifically financial services and lending, younger ish type of guy. So graduated college in the mid 2000s, and got right into the residential mortgage lending world sort of conquered a lot of that through becoming a top sales producer, than stepping into the management came very early on. So some great learning lessons as a leader and manager, 24 years old, managing people twice plus my age, and then really just continued on that path through just growing and climbing the ladder.

The residential lending space serves a huge need, but it's a lot of red tape and a slower sales cycle than what I was looking for. So I jumped out of residential lending into alternative b2b, ran to different private debt funds there that led to another big need of small businesses in dire need of capital, especially today in this COVID world. And then I found my happy home and private lending over the last four years was the president of a smaller company, prior to now being at Lima One where I run all the sales and marketing and throw my hat in the ring of just a lot of other areas just to help the business grow.

And my sort of inner inner driving question is always How can I make myself others people process and things better around me, and that's what just keeps me ticking every day and has led me throughout the journeys and stops in my career.

Michael:

I feel like we're about to interview a Swiss Army Knife of residential real estate investing, this is gonna be super exciting.

Tom:

So when you started, was it more in like traditional residential lending versus private capital?

Nate:

Exactly, yeah. So learn through the red tape and all the rigmarole but you know, it's important in that world to be very knowledgeable and all the nuances if you want to be successful. But yeah, so when I was getting into financial services, it was very much a refi. Boom. So it was mainly focused on refinances to homeowners predominantly their primary residences, certainly to del purchase as well, with that got me you know, introduced to financing and real estate in general.

Michael:

Were you involved in that space during the 08-09 housing crisis, Or did you exit prior to then?

Nate:

That's when I got it right around there. So it was a great welcoming to all things, real estate,

Michael:

And you still managed to become a Top Producing salesperson during that time?

Nate:

Yeah, man, look, I certainly don't have the looks for those on video. I'm not, I'm not the smartest guy in the room. But my nack is I just I grind. I work hard. You know, I think that's the lesson to anybody younger in their career. You know, you don't have to have all the skills, knowledge and experience to be a top producer and anything. You just have to work your tail off.

Michael:

Yeah, that's great advice.

Tom:

That's fantastic. So let's learn a little bit about more about Lima one right now. So I've been to several conferences and somewhat familiar but for audience who have not heard of Lima, one capital?

Nate:

Yeah, absolutely. So Lima, one capital is a premier private lender in the top three to five in the nation, we lend in 46 different states, our sole purpose and mission is to provide financing solutions for real estate investors, because we know that the residential realm just doesn't suit investors who need to move quickly. They need different products than you know, traditional financing. And so that's exactly what we provide.

So we lend on all things related to different real estate investment strategies. It's fix and flip new construction, single family rentals on a single asset level as well as large portfolios. And then last but not least also multifamily. You consider us to be a private lender, most people will call it hard money. although in reality, I'd liken it to a lot more soft money. It's not hard money like it used to be. It's become somewhat institutionalized. And at least by that I mean that Wall Street has has an appetite for it, which is allowed us to drive down the cost of capital in terms that we provide out to investors.

So you know, we are a very big player in the space and again, we help numerous different types of real estate investors, whether it's their first deal, they do 100 deals a year, they buy, you know, 200 unit multifamily complexes to five unit complexes. I mean, no matter what shape and size you are, no matter what your investing strategy is we should have a financing solution for you.

Michael:

Awesome. is one of the 46 states Alaska or is that on the no go list?

Nate:

That is on the no go list, if I recollect.

Tom:

Contiguous. Michael, you gotta be contiguous.

Michael:

I know. I know.

Nate:

We're in Hawaii though.

Michael:

Oh, yeah? Oh, man. All right. Let me know when you guys are up in Alaska.

Nate:

Will do yeah,

Michael:

I'll be your first client!

Nate:

We'll fix and flip some igloos.

Tom:

I think you kind of answered my next question I was going to get into is the customer profile that you guys serve. So but it sounds like all over the board from individuals to funds, if you guys have like predominantly like more in one area are really pretty spread all over the place.

Nate:

Yeah, I mean, we're pretty diverse. Our core client is somebody that sort of graduated to real estate investing full time. But it's not to say that we don't finance a lot of people that are doing it is sort of a second job or supplemental income or creating additional cash flow on top of their W2 jobs, you know, our products in a process or they're designed to move quick, without a ton of paperwork, we don't collect tax returns on any of the products that we have, just to put that in perspective. And certainly, that's a mainstay in residential lending.

So we look at things a little bit differently. And we're customized to make sure that we can provide investors with what they need from a product perspective, but just as importantly, a process as well.

Tom:

How about if I'm buying through a self directed IRA, and with that type of a product? I can't get traditional lending, because I'm buying it with LLC? Do you guys do a lot of work with that type of customer?

Nate:

The short answer is yes. The lending to somebody who's purchasing through an IRA can be a little convoluted we, we absolutely have solution for it. But yeah, I mean, that that's definitely one of the corners of our customer segments that we service, most of the time you find people with that sort of investing strategy to be, you know, have a W2 job or retire from their W2 job in our investing is, you know, for long term cash flow purposes. So we absolutely service that as well, as you know, people that are using combination of that strategy of IRA, verse raising their own private money for their own equity, among many other different types of categories of our customer profile.

Michael:

You mentioned that you guys are private capital lenders, but also been classified as hard money. What would you say is the difference between the two? Because people are categorizing number one, as both? You know, should somebody go Google private money? Or should they go Google hard money? How do people know where to go look for those types of different options?

Nate:

Awesome question we could go on. And I can talk about sort of the debate in our industry. Yeah. Regardless, whatever you look up online, you're probably gonna find us and certainly our peers slash competitors in the same realm. But there is a differentiation, when you truly look at, you know, what I would call the definition of the nowadays private lender, versus hard money. And when the use cases are so hard money, if you didn't know actually started BC, before Christ times. So it's been around forever, it's one of the longest forms of lending…

Michael:

I thought it was before COVID, the new BC now.

Nate:

That's a good one, I might steal it.

I'll save you from the litany of other, you know, historical progressions from there, but it is one of the longest, you know, oldest forms of financing is hard money. Hard money is asset based lending, truly looking at an asset and lending off of the the assets value, really without taking much else into account.

So when you're looking at prior hard money today, it would be somebody that doesn't maybe have a track record of investing in real estate maybe has some blemishes on credit, and is looking for just a more of a financing solution that is just truly based on the asset for a number of reasons. Private lending is really developed because of Wall Street's appetite for it. And some of the backing by the largest institutions in the world. Now invest in this space, it's become institutionalized. They call it on Wall Street residential transition loans, because what I was told was over in Asia, they didn't like the sound of fix and flip, it just didn't go well. So they named it residential transition loans, sort of on the trading desk level at Wall Street.

So the difference is that private lending does look a little bit at the combination of borrower and asset level, although we don't look at tax returns, we predominantly look at an investor's track record and experience in investing, because we believe that shows proof of concept so there is a little bit more paperwork. And you know, in our world, we are appraisals, where as hard money is typically more lent by somebody in that region that doesn't need to go through formal processes of like appraisals, and they're looking at just the asset value, they know the market well, they know the asset well, they give a low percentage of the value of the asset to mitigate against the other risks and not looking deeper in the profile of the borrower. So hopefully that does that help give a sort of delineation between the two?

Michael:

It does, it does. And it would be great to learn a little bit more about kind of some case uses or case studies about if you could define and describe your ideal borrower, who are they? What kind of things would they bring to you versus who might be not a good fit for private money? Or for the one specifically?

Nate:

Sure, yeah, so the easiest way to answer that question, which is a great one, is if you're looking to continuously grow and scale and investing in real estate and do it on a consistent basis, you're going to get a lot more value and benefit out of the private lending realm, mainly because of two reasons. One, we'll be able to provide typically higher loan amounts more proceeds, which allows you to spread your capital to more deals and assets, and then to our cost of capital is going to be cheaper than what true hard money would offer you. There's a lot of different variables and reasons why somebody uses hard money and it certainly has its use cases.

But most often you find it's somebody that maybe isn't necessarily in real estate investing per se, or focused on scaling and growing in it. But yet they have a real estate based asset that they want to pull some quick cash out on. Maybe they have some blemishes on their credit profile, whether it's bankruptcies, previous foreclosures, or what have you, but as people that do have equity and assets that want something quick in order to obtain financing on it, but for the most part, people that consist, you know, that are the most common and using hard money, it's really hard to grow and scale a portfolio with just that type of lending compared to, you know, higher leverage and lower cost of capital in sort of the private lending world.

Michael:

Great.

Tom:

I'd love to walk through a couple of use cases of just as it relates to product as well as process. So I think a common one with a lot of remote investors is you know, they take advantage of the the 10 loans they can get just within their own name. And then it's like you get beyond that it's like, okay, what's next?

So let's say I an investor, I have whatever 10 properties to my name, and I'm acquiring a small portfolio of five, like, what would that conversation of kind of strategizing with that person? Like? Do you roll it all into a portfolio loan, this is getting very much kind of in the weeds in the tactics, I think that this type of a conversation is probably pretty common for a lot of investors who are getting some traction within their portfolio. And and they're growing. And I'd love to hear the different products and process as it relates to a solution like Lima One.

Nate:

Yeah, absolutely. And we're excited about the continued partnership with Roofstock, because our financing solutions are an add on to those that, you know, typically are growing their initial cash flowing rental, you know, assets or portfolios with traditional financing, which, as you said, allows them to typically get up to 10, under Fannie Freddie type rules, and then they had to look for alternative options where absolutely those alternative options. So let me continue down that path. And then I do want to talk briefly on the do I package this in a portfolio, do I get single loans on assets, that's another great point that you brought up there.

So where we come into play is either you don't qualify any longer for conventional financing, meaning Fannie Mae, Freddie Mac, you know, investment loans, or you surpass the maximum 10 loans. Either way, we come into play because we don't follow any of the underwriting guidelines of Fannie and Freddie. It's sort of our own world and rulebook. And the way that we look at deals is on what we call from a rental perspective, debt service coverage ratio.

So we don't get tax returns, we don't look at personal income, we look at the income on the asset compared to the underlying debt. And then we make sure it cash flows properly. And we have very similar like loan to value leverage mechanisms that the residential world would have, you know, we're minimum 20% down on an acquisition in that world and 75% cash out on a refinance. So you know, whether you hit the ceiling of 10 deals a Fannie Freddie, or you got through a couple and now your lenders telling you, hey, you have a dti, you have a debt to income ratio problem, we can't qualify you because debts outweigh your income to the 45 ish dti that they underwrite to, that's when we would come into play.

The other thing is, for the most part, across all our products, we can close a lot quicker than residential lending. We don't for better or for worse, we don't have to follow what they call like respa and Tila, which is different disclosure processes that are very impactful and really helped right side the residential lending industry from some of the wrongdoers in the 2000s that were scapegoated for the bust, you know, but that does slow the process down by having those disclosure process put in place, anywhere from three to five total days. And you know, to us investors, we know executing and showing up at closing it, you know, at the close of escrow date is imperative to retain your name and then get further deal flow from the sources that you do.

Michael:

Oh, that all sounds that sounds great. Nate curious. For most of our listeners, I think they're very familiar with conventional mortgages, Fannie Freddie mortgages, government subsidized cheap interest rates, especially right now when we're recording this in February of 21. into twos and threes and investment properties, similar 30 year fixed products, what are some different products that you've seen investors use to scale quickly? I mean, do you have 30 year fixed products? Or what kind of interest rates are you seeing in today's market?

Nate:

Sure, a couple of ways to attack that question. So we delineate our product suite amongst sort of two sections. One are bridge loans, and the other are more permanent financing loans. So to talk about the permanent financing first, those would be products that have a 30 year amortization, we can do them in a five one arm, which is the lowest rates at seven 110, one arms, adjustable rate mortgages or a 30 year fixed. So we do offer those types of terms.

Now because we're not doing as deep of a dive is Fannie and Freddie would from an underwriting perspective, and we're only looking at you know, debt service coverage ratio income on the asset predominantly, there is more perceived risk to us in the way that we lend. As a result, we have to pass along higher interest rates, right. The inevitable question becomes, well, what how much higher and what do they look like? So you know, your Fannie Freddie investment property rates will certainly vary depending on a number of factors, but for the most point, our product in the private lending world rental type investment loans, it's going to be about 200 to 300 basis points higher, what that is, is two to 3% higher than conventional rates, typically. Certainly exceptions to that where it can be less than 2%. But I'm going to be conservative in what I say in the estimates.

And then a lot of listeners might be saying, Oh, crap, I'm never gonna call these guys because that's way too expensive of money for me, right. And certainly, that may be the case for your investing strategy. But as I said, Before, we find our niche and our void to where you're looking to grow significantly. And you by nature and laws of residential lending, you can only own 10 investment properties unless you start trying to cheat the system some way. So which there are ways to get around that by having other borrowers buy the properties and things like that, we won't go down that road. But not only that, you just need to make sure that your investment strategy aligns with your financing vehicle. I think that's just an important point. I mean, there are a lot of really great real estate investors that do use hard money, true hard money, that's more expensive than us, but only because, you know, maybe they move even quicker, they can get loans on assets that we might not land on.

But the bottom line is, you know, you can make money in real estate any which way, you know, there's different beliefs in Should I financed or do it all in cash, we definitely won't have that conversation, because that's a deep one. But if you're going to use a financing vehicle or a loan of some sort, you have to make sure that the vehicle is aligned with your strategy and your end goals. And yeah, I mean, it will eat your cash and cash returns a little bit or your total returns because the rates higher your interest payments higher. But at the end of the day, if it allows you to buy more assets and add to your overall cash flow, that's the essence of continuing to create true generational wealth, that end of the permanent financing products. And yes, we do offer 30 year amortized 30 year fixed might be a little bit more expensive, but certainly serves its purpose.

And then on the bridge side, just to put it very simply, a bridge loan is taking an asset or a financing vehicle that allows an asset to go from A to B, right, we are the bridge between A and B. So those products are you know, the the bread and butter is a fix and flip, we're buying a distressed asset that needs X amount of renovation work or some level of repair, sometimes they're severely distressed. So we financed not only the acquisition, but the renovation hold back so that you don't have to come out of pocket for that in full and wait for it to sell. And then we allow you to navigate through the reposition the value add as they say, to get to destination B, which is either one of two items of sell the property and flip it or hold it and you follow along the lines of the investment strategy of bur I can't roll my Rs so pardon me. Buy renovate rent, refinance, repeat, right. So that's the burn mentality, we can service the bridge loan for the repossession and the renovation and the rental loan, or you can go get a conventional loan, if you have less than 10. And qualify, that's sort of where investors use those different types of products. And sometimes they're combined, and you're using two vehicles to one strategy. But the bottom line is, you know, we're here to serve as either end of that.

Michael:

That's such a good explanation. And a point I want to touch on is like about the expensiveness, or the cost of the loan or in terms of the interest rate. So often I hear that same issue is like, Oh, you know, I've met this lender, and they give me three and a half for this lender Give me three and a quarter. But at the end of the day, I think it's so important to look at like the bottom line is okay, how does that half a percent or maybe in this case, two to 3% affect your bottom line in terms of dollars and cents. And on smaller loans, it tends to become more negligible. And so again, to your point, if it gets you in the deal, and you're still cash flowing, versus not doing the deal and not cash flowing, sometimes it is worth you know, paying that extra cost.

So, again, to all of our listeners, don't let the numbers scare you. But go see if the deal makes sense. And then move on.

Nate:

One other quick tip I do want to give here because it is a great point. So I appreciate you articulating and summarizing my points probably better than I did. But one thing that's important to you know if a lot of listeners are used to the conventional, Fannie, Freddie world, and some may use that product to almost fix and flip assets. Well, the problem with that is if you think that through, you know, conventional loans, Fannie and Freddie have started to come out with renovation type loans for even investors, it's a lot more tedious than ours, they take a lot longer to close, and then to move through the like the draw and rehab process is extremely cumbersome.

So that aside, if you're going to look to buy an asset and say put 20% or 25% down and then invest another 25,000 renovation on top of that you're not only down you're 25% down payment and the 25,000 renovation, you know, but you're also paying for holding costs along the way. With a bridge loan, like a fix n flip will finance the combination of the two purchase and renovation amount. So you don't have to be out that 25,000 renovation because you don't get that money back until you either refinance and recoup and recapitalize or you sell the property, but that 25,000 could be used to go buy another $100,000 asset at 25% down. Right?

So that's where a lot of people will overlook that we will provide higher leverage when you're using a method that involves renovation. And by going the conventional route that yes has a lower cost of capital less interest that you pay, it can be well designed if you're only trying to do one offs. But if you're really trying to scale and spread your money among multiple deals, using a lender that gives you the highest proceeds and loan amounts to facilitate the transaction is going to serve you and be best suited.

Tom:

Makes a lot of sense. I'd love to hear you touch on, you know, this use case, again of you know, having whatever 810 properties and that question of Okay, do I roll this up into a portfolio loan? Or do I just, you know, do a bunch of, you know, 30 year individual loans? When would it make sense to do either or say you have this growing portfolio?

Nate:

Yeah, so great question. And to me, and this is the same for any type of loan product, it's, you know, first you really need to understand where you're going to go and what your overall vision investment strategy is. Because if you're going if you're you think you only have the capacity and the goal and the dream to acquire a smaller amount of assets, it may not make sense to put a portfolio loan sort of into your plans, if you're looking to really significantly scale you do you want to analyze looking at portfolio loan options for a number of reasons, a lot of the portfolio products will allow you to remove them from Fannie Freddie loans, which then opens you back up to using those again, number one, but it also just depends on again, the overall your overall strategy.

So if you know you're going to hold assets for a long time, and you know, you're not going to sell them no matter what the markets doing, you know, then portfolio loan may make sense. But the word portfolio on won't make sense, if you really know you need that flexibility of moving one asset in and out of your own portfolio, because in portfolio loans, they have what's called a turbo pay down, which essentially, you pay down your loan amount a little bit more per each asset that you pull out, which therefore you don't get access to as much of the return of capital on selling an asset. So that's where I go back to, you need to know your long term vision. And if it's to acquire a lot of properties and hold them for a long time, a portfolio loan might make sense.

And then this is shared necessity of a portfolio loan is, again, you know, conventional, you can only get up to 10 assets, Fannie Freddie, so if you're looking to buy in bulk, you know, you have to get some form of portfolio loan. And you know, even if you don't you do them individually, you're going to be limited at some point cost can be costs are consolidated in a portfolio loan. So a lot of times it can be cheaper than doing them on a single asset basis. And then you'll eventually get to a level of the portfolio realm, that the terms are significantly more favorable than when you do get them on a single asset. So not to confuse people. But what I talked about before was sort of a, like a smaller single asset rental loan, we have large portfolio rental loans, that's for anything of minimum five properties 500,000, up to 5100 properties, 10 $15 million in total assets value, and that product is maybe 100 basis points above residential lending, but you have to gain that critical mass to be able to get eligible for that. So I know I'd sort of shotgun and spread among that question a little bit, but hopefully gave some valuable tips.

Tom:

Love it. Yeah.

Michael:

Nick, can you give everybody an overview of what a portfolio loan is for those that might not be familiar? And also, if we could maybe touch on the differences? Because I think there's a lot of misnomers around portfolio lenders and portfolio loans. And the portfolio lenders keeping it on their books versus portfolio loan, what that product looks like. So, riff on that for a minute, if you would.

Nate:

Yeah, absolutely. So, a portfolio loan is simply put, you know, writing a blanket loan across multiple assets. So what happens is, you know, whatever the amount of assets you want to say is, let's say 10. You write one loan, that encumbrance all 10 units. And within that loan, there's different segments of the of the larger loan that is assigned to each property. By doing that, and taking out portfolio loans you can alleviate, you know, the need to go conventional and the limitations of having 10 properties at a given time. As well as there's some cost savings by doing things in bulk. Just like when you go shopping at Costco and BJs. When you buy in bulk, a lot of times you can get discounts. And that's probably a good way to look at a portfolio type loans.

So we have a phenomenal product when you own one you either own or you're buying five properties and 500,000 that are $500,000 or more, we'll put it all in one big portfolio rates on those are very aggressive. They're only about maybe called 1% 100 basis points above conventional rates. And the reason why it's lower is it's less risk, we have more assets to sort of pool into the loan, again allows us to pass along cost savings to investors.

Michael:

Real East Coast guy with the BJs drop in there.

Tom:

I know I noticed that. Is most of the portfolio loans that you guys originate, like off of the acquisition or through a refinance, or is it pretty split?

Nate:

Yeah, great question. I would say it's probably 7525 refinances. So I think that's a great point is that the other purpose portfolio loans a lot of times is that you're buying one offs, whether you're buying them with a conventional type loan, or you're buying them with a bridge loan and fixing and repairing them. And so you're aggregating them, and then you go take it out with permanent financing and a portfolio loan. So again, that is either allowing you to pay off more expensive bridge loans, or wiping the slate clean of Fannie, Freddie and then starting back at zero, because you just paid them all off the ones that you accumulated. And then you can go and run wild and getting Fannie and Freddie rooms and dealing with all the red tape over and over until you get back to your 10.

Michael:

So I got a portfolio loan a couple of years ago, and I think they're the best thing since sliced bread. I got them with a commercial lender out in the Midwest, and I've got them on to commercial properties. How does a refinance work? Let's say two of the 10 have appreciated. How does a refinance work? Are you looking aggregate at the entire portfolio value? because these things are cross collateralized or talk to us a little bit about that?

Nate:

Yeah, great question. I'll touch on two points in reference to that. So we do look at the values of everything combined. So because they are cross collateralized, you're essentially looking at the, you know, gross total value of all the properties in a portfolio loan. And then there's a guideline called seasoning, that will depend on exactly how much you can take sort of cash out on. So seasoning references, how long somebody own an asset, typically, in the portfolio realm, it's either six months or 12 months. And once you've surpassed that timeframe, and you've seasoned the properties, then you can get a loan that's just based on the loan to value of the accumulation of the assets.

So if it's two or three assets that accumulate to a million dollars, and you've owned the property for two years, you've certainly passed those seasoning guidelines that I talked about, you know, for us, we provide 75% cash out. So on that pool of million dollar properties, we'd be able to give a $750,000 loan amount.

Michael:

Great. Now I want to touch on kind of shifting gears just a little bit is value. It's a super hotly debated topic, I think in the real estate community. Most of our listeners, I think, are very familiar with single family homes, and going to get an appraisal done determines the value based on a comparable sales approach. Versus in the commercial world. They use the income approach for the appraisal to determine value. If I have 10 single family homes as part of a portfolio and I'm trying to get financing for it. How do you How does Lima One determine the value? And I mentioned DS debt service coverage ratio is very looking at income. Are you looking at comp sales?

Nate:

Yes, the very easy answer as both.

Michael:

Okay.

Nate:

So when we value and get appraisals, as you said very well on single family assets, we do use and look at a sales comparison approach. So to determine what we can lend in the LTV, the loan to values, which I said 75% cash out will be dependent on the sales comparison approach determined by an appraiser and then we'll lend that X percent up to it again, cash out world we can go up to 75%. Now, where it comes into sort of both, is that we have to make sure that that loan amount based on our maximum loan to value also passes the debt service coverage test, essentially. So again, the debt service coverage ratio is looking at your assets income compared to the liabilities in the asset, which is not only the mortgage, but it's also the property taxes, the homeowners insurance, any HOA dues as well if it's a condo or pod or anything like that.

And so as long as it will surpass the minimum ratios, that is the income based approach. So the values themselves are not based on income base. But there are underwriting guidelines and stipulations that require a certain income level. And the easiest way to put what is that income level, it's typically anywhere from 1.1 to 1.2, debt service coverage ratio.

So again, your income must surpass your mortgage payment debt, your taxes, your insurance, and your HOA dues, if applicable by 110%, or 120%. Why is that important? Well, the easiest answer I'll give you is we too, as a lender, we don't want to take your properties back. So we want to make sure that you can afford to pay your mortgage payment and your expenses. Therefore, we want to ensure that we underwrite a loan amount that doesn't make your debts and your expenses higher than your income and puts you in that tough situation. Unfortunately, a lot of landlords now with COVID with you know, people not paying rent are in that situation regardless, but that's why we put that rule into place is to make sure your property cash flows with our debt.

Michael:

Yeah, great explanation that makes total sense. And Darren, that's a bummer. It'd be so great, right? If we can get all this killer performing asset Well, that's worth a whole crap ton more awesome. So we can we can borrow against it. But that's really good to know. And I think that's really the responsible way to do it. Right, is make sure that people aren't biting off more than they can chew.

Tom:

Absolutely. I look into my notes. I have one more question on costs of going through private capital. How do origination fees differ from traditional loan using private capital? Are they love to hear your thoughts?

Nate:

Yeah, great question as well, to be very blunt and transparent. Typically going through the private lending realm is going to be more expensive from a fee perspective. You know, there's a number of ways to price out conventional Fannie Freddie loans that you could incur more fees, but most of them is, as they say, in the residential mortgage world are written at par, which is essentially you know, you're paying usually just an underwriting fee and no people think is very evil points, right? In the private lending world points. origination points is something of norm.

So typically, it's anywhere depending on sort of the the level of investor that you are anywhere between like one and two, one and two and a half percent of points, origination fees on the loan. So that is more expensive for from that regard. But the lender, excuse the credit excuses, it's more risky. So there's a cost effect as a result of that.

Michael:

Nate, for those people who aren't familiar, what's the point?

Nate:

A point is 1% of the loan amount, so on $100,000 loan 1.1% would be $1,000 in fee.

Michael:

Perfect, love it. Well, don't love it. But that's a great explanation.

Nate are a lot of the private lending world or maybe just you know, speak for the Lima one, are these non recourse loans? Or all these are these full recourse?

Nate:

Yeah, really good question. More often than not, they are full recourse. But there are also alternative options to get non recourse on most products. So that's speaking generally here at Lima One, we do have non recourse across most of our options across most of our product sets. But you know, in the world of private lending, especially the bridge side of it, you sort of should expect recourse, you know, which is the same as Fannie, Freddie, you know, that those are recourse based loans as well. But a great question, we can certainly service a non recourse loans and provide them, it just depends on a couple variables. And sometimes there is a little bit of an interest rate price to pay, not much, but a little bit just for that compensating factor.

Michael:

Sure.

Tom:

This is a quick kind of definition, do you mind defining recourse non recourse,

Nate:

It means that you are guaranteeing repayment and that you are liable for repayment of the full loan amount, no matter what happens, you know, if you can't pay off the existing loan, so whether that's, you know, you can't make payments, and you can pay it off in full, then you owe the full balance. Or if for some reason, like in a flip scenario, the flipped info is what you thought and you sold the property for an amount that's less than what you owe, then the lender has recourse or the ability to go after you for that remaining difference of what you sold the property for versus the larger amount that you owed on the asset.

Non recourse essentially means that, you know, there's not formal ability for a lender to take the mortgage back as a liability against you personally, most of the time non recourse or all that I know at least is written to an entity. So the entity still has to like there's still the ability to go after the entity for it, but you as an individual warm body person, or not on the hook for it. Unless you can commit what's called a bad boy act sort of what it sounds essentially you commit fraud.

Tom:

Reminds me of those like shirts from like the 90s. And early on that bad boy shirt. Nevermind.

Michael:

Like that movie with Will Smith, bad boys.

Tom:

Sure, yeah.

Michael:

Good, both good enough.

This is gonna seem like kind of a to Prague, maybe silly question. But first and foremost, if somebody if you're gonna be working with somebody, you're like, Oh, I want non recourse a, is that a red flag? And B, if that's an option, why wouldn't any everybody go the non recourse route?

Nate:

Yeah, another great question. Why wouldn't everybody go the non recourse route? Well, sometimes it's just not available. You're absolutely right to most people, I would rather have non recourse and recourse. Yeah. My counter to that. And rebuttal is always do not have confidence in your project, you know, do you not have confidence in your ability to execute on your deal in your strategy, to not have confidence and paying back this loan? Are you going to screw me? Right? I mean, that's sort of so so that leads me to the you're the other part of the question, you know, yes, from to some extent, maybe that's looked at somewhat negatively, but at the same time, non recourse is most prevalent on larger loans, larger assets, with larger scale operators and real estate investors that do this for a living.

Many of them have companies of employees that work under them within their real estate, investing arms. And in that world, it is just a lot more common for non recourse products, the multi million dollar type loan scenarios. And that's just because you're dealing with typically very high net worth individuals that, you know, certainly have potential meat in the bone that a lender could go after. And yes, they're confident in their business strategy. But they've also worked their entire life to build up the 5, 10 million dollar net worth and they don't want to sacrifice the Armageddon potential instance, or the COVID type of pandemic world events that we've occurred is unforeseeable, that could come back and bite them in the butt.

So it's a great question. Yes, sometimes there's a negative connotation from the lenders perspective on some sorts of deal levels. But as you go sort of upstream, as I'll say, that's when it becomes a lot more than norm and is not really not looked at negatively from a lender's perspective.

Michael:

Okay. Good to know.

Nate:

And it doesn't hurt to ask, right? I mean, just like anything, asked, you might as well ask because the worst thing you get is No, we can't help you.

Michael:

Sure we are getting pretty long here. I feel like we could go on for days chatting with and asking questions. But I know we were chatting before we started recording here that you are also drinking the Kool Aid when it comes to real estate investing.

Nate:

I try man, I got my sippy cup.

Michael:

So you mentioned that you're in the middle of a couple of flips. Can you give us just kind of a high level overview of what you're doing? And then do you use Lima One capital to fund some of those rehab projects? Yeah, so the first is a resounding yes, absolutely. Use leave on capital. That's just the truth.

So I have two projects going now. I honestly never really have the ability or time to do more than two, you know, a lot of people watch HGTV and house flipping is really cool and sexy and probably easy to do. It's, you know, is it cool? Yeah, you know, beauties in the eye of the beholder. You know, sexy, I don't know about that. But it's not necessarily easy. So I want to make that clear. It's not to scare people away from it. But it takes a lot of work. There's a lot of variables, there's a lot of things that can go wrong. I will also sort of give my one piece of real estate investing advice. This is probably very cliche, but you make your money on the buy in a real estate investment.

What I mean by that is that if you buy a property at a discount to what it's worth today, it's hard to not make money on it. And so why I say that is the only deals that I'll personally do are ones that I know I'm buying, right that technically, there's some room for error, because on the two deals that I got going, there were some errors and you know, I can't point fingers and blame COVID you know, you know, very real, but at the end of the day, you know, they didn't go as planned. Most people lie on the real estate investor side, when they try and say like, Oh, I can predict my budget on a flip in a renovation very accurately. That's not true.

Michael:

Bunch of garbage.

Nate:

The average variance even for your top tier flipper is probably 15 to 20% in cost on your renovation expected budget, I'm already self deprecating that I'm not the best at it, per se, I'd work in the lending space into this supplementally. But I mean, I ran into that through COVID, you know, and I've gone through, I needed to connect sewer to public sewer on one property, the initial route that I predicted to go wasn't available, it couldn't happen, didn't work, had to go a new route, had to fire a contractor through COVID because he ran out of money, really unfortunate, but my project was dragging and he was ahead of me on sort of terms and payments, I then had to step in as my own GC, find my own subs. I mean, it was snowballed, and it was very cumbersome.

But the bottom line is, you know, you stay disciplined. And I'll make money on both those deals just because I bought them right. And so I know I cover a lot there and can go into deeper detail on sort of this any stories you'd like within it. But the bottom line is, you know, I will opportunistically invest in real estate because I've tons of passion for it. I like to think I know what I'm doing. You know, at least when I tell myself that. And you know, the bottom line is as long as I'm buying right, it's it's going to be hard to lose money on the deal. I'm not going to make as much money as I would have thought. But at the end of the day, because I followed sound principles, I will make money on both these assets.

Tom:

Great, make the money on the buy. I love that it's so good is like pretty much stapled up on the wall. And one of the one of the companies that I worked at one of the very first single family rentals was make money on the buy make money on the buy. I'd love to hear one of your stories you'd mentioned before. You had one I don't know if it was what it was related to get time.

Nate:

Which story do I want to tell so honestly, you know, one cool story of one of the properties I had that literally was bought, I mean, I'm under contract to sell it, but it was bought March 12 of 2020, which was not too long before the formal full nationwide announcement of COVID. But it was actually crazy enough. I'm at home working right now. It's my neighbor's house. It's right here. So what happened was over about two month period of time, I saw nobody was living there anymore. Every week when there's trash day, they'd be pulling out two or three trash cans worth of junk among some bigger items. And one day I just approached him said, Why are you doing this? Because I have a feeling I know why. And sure enough, it was you know, the patriarch and matriarch of the family that bought it in the 1950s passed away, pass it on to kids who couldn't take care of it anymore. They had one of their kids in the property she moved out and now they're you know, they needed a quick option to sell it. I said, Look, I can buy this property, essentially cash without you having to move any more junk out. And what a great project for me because it's literally right there next door to me. And you can find deals anywhere that way.

So to me, that was a pretty cool story. You know, I would never have imagined fixing and flipping my neighbor's house. And now since I'm under contract, I'm doing my best to not let the buyer know that I did the work because I don't want to door knocks on my door a week or two later saying Hey, isn't this done right or I want you to fix it. So we're trying to secretly trying to sell it right now.

Michael:

How cool is that? Yeah. So are all the projects you're working on? Are they all flips? Or do you do any burrs any kind of long term buy and hold or are buying hold?

Nate:

Yep. So good question. I'll liken it back to what is your investment goal and strategy. The last couple years, my world has been focused to drive income larger amounts of income, which means that right now I'm only doing fix and flips. So to me since it is a lot of my late night work or early morning work before I plug in for, you know, full days of Lima one, I want that larger gratification tied to that extra work. And that's why I'm currently fixing and flipping but I know there will be distress coming in the market. You know, I think 2021 is going to be a good year. But soon at the end, or thereafter, we'll be transitioning to buying and holding, because I think there'll be a lot of product that comes online that it'd be a lot easier to find. It's hard to find deals right now. I mean, it's it's one of the hardest challenges that real estate investors have.

Michael:

Cool. Thanks for sharing.

Tom:

Awesome, Nate. Well, thank you so much for coming on. I feel like we have more episodes in the future with you. I mean, we're, very quickly, you know, over 45 minutes onto it. But thank you so much for jumping on any final plugs on how to get ahold of you or Lima One?

Nate:

Sure yes. So check us out online Limaone.com. To get in touch with me directly or to make sure that you get in touch with a senior sales representative to find out your financing options for real estate investing. You can simply go to Limaone.com/Nate, that'll come right to me once you fill it out. And I'll make sure you're good hands and we take care of you and work towards finding true solutions for your investing needs.

Michael:

Fantastic. Oh, Nate, this is great, man. Thanks again.

Tom:

Yeah, thanks again.

Nate:

Thank you guys. Just let me know when Episode Two is teed up!

Michael:

Totally.

Tom:

Thanks again to Nate for a very insightful episode on portfolio lending and Lima one. If you enjoyed this episode, please rate and subscribe us wherever you listen to podcasts. And as always, happy investing. Happy investing.

Here’s How Much Cash Flow Emil Generated From $44,788 in Rental Income in 2020 Feb 20, 2021

In this episode we run through Emil's year end financial report and see how his 3 property portfolio performed last year.

Emil's Blog: https://emilshour.com/blog/

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this weekend wisdom, we're putting a meal on the hot seat. He just finished an exercise of looking at his year in financials and we're gonna ask him about how his portfolio did. Alright, let's do it.

Emil, end of year, how'd you do?

Emil:

Yeah, so I run a personal blog where I talk about real estate investing and stuff. And at the end of it every year, I do like a full rental income report where I look at how much money came in how much money went out. So how much do we make at the end of the year. And so this is our 2020 rental income report. So total, we had we ended the year with four properties, six doors total, so three single family rentals, and one triplex and our gross rent was 44,788. But that's just gross rent.

So let's dive into all the other numbers. So operating expenses, which is things like I put property tax insurance, any owner paid utilities, property management, hoa, repair, maintenance, all that stuff goes into my operating expenses that came in at 17,464. And then my mortgage payments total on those properties came out to 17, zero to 117 $1,000 21. And so my cash flow, so 44,788 minus my expenses and debt payments, our year end profit came out to 10,300.

And, and a couple quick things to note on that we had a property that we sold about midway through the year. So we had another single family rental that we sold in May. And then the triplex we bought at the end of November. So the triplex really didn't have much in terms of cash flow. Actually, it had negative because we had to come in and make some repairs right away. So that's basically on like three and a half properties that we made last year. And last year was a pretty no big expenses, no turns. So this was a pretty good year for us to have $10,000 in cash flow on basically three and a half properties.

Michael:

That's amazing. Just one thing I want to point out to everybody listening is you said your operating expenses were like 17,000. And your gross cash flow was roughly 44,000. Right?

Emil:

A gross rent 44,000. Yep, yep.

Michael:

So if we take 17,000 divided by 44,000, to determine what your expense ratio is, you're down to like 38 and a half percent, which is pretty stellar. When most people we talk about that 50% rule, we throw away 50% of the expense, excuse me throw away 50% of the income just to expenses before the mortgage, you cut that down by 11 12%. so nicely done. And that's awesome.

Emil:

Well, thank you. But it's not really me. We've talked about this offline. I think real estate is a lumpy business. Some years you'll do well another year, you could have to replace an HVAC and have two turns and then you're having a not so great year. So 2020 was a smoother year for us. And that's why the ratio is good. The 50% if you probably look at a lifetime, you know, maybe you own a property for 10 years. I bet you that 50% is much closer.

Tom:

Peanut Butter bread.

Michael:

Do you guys know what Maltomeal is? Just real quick side tangent.

Emil:

Maltomeal?

Michael:

molto meal. It's like, like Quaker Oats kind of like oatmeal. But I think for more older people, I used to eat it all the time as a kid and my dad like you have to pour it in with hot water. And if you don't like stir it, it gets really lumpy. And so anytime It was like, really lumpy, I just think of like, eating maltomeal meals a kid and my dad made that was gross. Alright, thanks for coming on that ride with me guys.

Emil:

And then you found $20

Michael:

Yeah, it was great. And then I took the gross multi meal wasn't such a big deal. So that 10,000 in cash flow. Can you share with us how that represents a cash on cash return metric for you?

Emil:

Yes. So if I'm looking at just last year, it's a across my portfolio to 7.7% cash on cash. And the reason it's seems low for that good cash flow is that triplex I bought I'm looking at my total cash invested was $47,000. So that was basically $47,000 at the end of the year with no cash flow. So that's gonna bring my my cash on cash average down.

Michael:

So if you got rid of that, yeah, that's gonna skyrocket.

Emil:

Okay, so if we take out the triplex from the cash invested and just look at the three single families as a 17% cash on cash return,

Michael:

WOOOH yeah, buddy, yeah, yeah, that's awesome.

Emil:

Yeah, so Goodyear and Goodyear won't always look like that. But Goodyear?

Michael:

No, of course not. What is your triplex projected to perform and if everything goes according to plan? What type of cash on cash? Are you expecting to expect?

Tom:

Great question Michael.

Emil:

Yeah, on the pro forma once we get rents up to where we want them to be where we think market value is it'll probably be in nine to 10% on pro forma.

MIcheal:

Okay, awesome. You'll be sitting in the double digits likely from a portfolio cash flow perspective.

Emil:

Yeah, depending on the year again, I don't want it to this is like this is what you should expect every year when you have a portfolio. It's like this is what a Good year on a small portfolio can look like three three properties is nothing. So I mean, you think about like, where a lot of people have 50 plus units like, that's where I'm really interested to see what is this thing look like?

Michael:

Yeah, but don't sell yourself short. I don't think three properties is nothing I think three properties is a huge deal. And so I think people who are just starting out look at three and think Holy crap, that's light years away for me. So you just happened to start that journey? A little bit sooner than that. I think you're selling yourself mega short. Nicely done.

Emil:

You're right. I shouldn't belittle three. I remember when I was at 0, 3 seemed like a lot. So thank you for calling me out. You're right. It's just like, I think with any business as you start growing it you just look at the next goalposts.

Michael:

Right. You're growing into it.

Emil:

Right. But you're right, you're right when you're at 03 seems like a lot. So I won't belittle that

Michael:

Tom beat up Emil a little bit. Give ask him some tough questions.

Tom:

I know. Come on. Take the gloves off, Tom. All right. So Emil, what are you gonna do at that 10K.

Emil:

Okay. So for me, it just sits we've talked about in previous episodes, for me just sits in my real estate checking account, and anything over a certain threshold that I think will cover any major expenses that could happen. That just goes back into reinvested into new acquisitions. We haven't touched a single penny of cash flow since we started our portfolio.

Tom:

Awesome. Long term greedy. Is those new acquisitions continuing down multifamily line?

Emil:

Yeah.

Tom:

What are you thinking about for your next acquisition?

Emil:

I'm probably next going into the five plus unit multifamily. I want to test that out. So going into the commercial multifamily. I was talking to my wife about this this morning. I don't know if it's the property we bought, or if you know, it's a very old property built in like 1908. But every single month, there seems to be way more expenses than with my single family. I don't know if that's just a, you know, classy multifamily. That's just how it goes. You know, people talk about that. And so we're experiencing it.

But I want to probably look at a full year and see what does that look like even with the increased expenses? Is the cash flow still better than some of the other places I'm seeing? It's also just, you know, for me the size of portfolio I want to get to, it's just harder doing a lot of single family people do it and they do it? Well, but yeah, I'm gonna keep messing up multifamily, probably for the foreseeable future.

Michael:

Hey, Emil, pop shot, multifamily question for you. Unit 2 has a furnace down, you can repair fe hardbox, replace over 1800. What do you do

Emil:

Depends on how old it is. If it's 15, 20 years, I know that thing is just gonna, I've experienced this in my own, like, we bought a home and the entire HVAC system was like 15, 20 years old. And so we kept putting money into fixing it, and it would break in six months. And I wish I had just replaced the thing. So depends on how old it is. If it's 15, 20, and it's past its useful life, I will probably replace it unless the tenant is like, I don't know, if they're way under market and we're waiting to get a new tenant into like, fix a lot of things. Maybe I'll just do it on a turn or something.

Michael:

Sure. Cool. Reason asked. I just got a text. It's from this furnace from 1994. So I think it's a replacement for the good call.

Emil:

Yeah, I think it's time man. We sunk like $1,000 into fixing our h back and it was 6K to replace it. I wish I had just used that 1K to replace it. Yep. Cuz fixing an old thing. It's once it's replaced money down the drain. Basically, just kick the can down the road. So replace it.

Michael:

Yep. Okay, I think that's what we're gonna do.

Emil:

Do it.

Tom:

Awesome, guys, any final weekend, wisdom thoughts.

Nah, Thanks so much for sharing. This is really great insight. And you just use Excel to track all this?

Emil:

I do. But I'm probably going to be switching things over to stessa which is like the QuickBooks of rental properties. Probably going to move these things in a stessa because it's becoming a nightmare to manage in a spreadsheet.

Michael:

Mkes sense. Oh, this is great, man. Appreciate you being so vulnerable with us.

Emil:

Yeah, happy to this is the good stuff. You know, I think this is what people want to see like, okay, we can talk about performance and stuff. But how do portfolios actually perform and I always wanted to know when I was getting into investing, so it's always nice to see when people just share the numbers.

Michael:

Yeah, getting into the guts. No this has been great.

Tom:

Awesome, everybody. Well, hope you enjoyed this episode. And thanks again to Emil for land lifting up the rug for us. If you enjoy the podcast, we'd love it. If you guys would subscribe. Leave us a rating wherever you listen your podcast and as always, happy investing.

Michael:

Happy investing.

Simple Asset Management Systems To Avoid A Tax Nightmare Feb 08, 2021

In this episode, we cover how to set up your accounts to easily track your expenses and simplify your tax process.

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Transcript

Emil:

Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today we're gonna be tackling getting your financial house in order. So a friend of mine hit me up on Twitter asking for accounting best practices. So we're gonna read his question and start tackling it piece by piece to show you how we do our accounting and keep everything in order. So let's hop into this episode.

Emil:

Alright guys, so I'm going to read Alvin's message to me and then we'll start tackling it.

So, hey Emil, fan of the pod think y'all are doing some awesome work there. Thanks, Alvin. One potential topic to consider for an upcoming podcast is accounting best practices. I'm just getting started with my first property in one area that I'm wrapping my head around is how to best set up bank accounts, like operations, reserves, etc. credit cards, all those things. So I'm not dealing with a tax nightmare next April. Thanks for considering and keep up the awesome work.

All right, Alvin, this is a great question. I think we, I think we covered it inside of an AMA. But we wanted to break it out and dedicate its own episode, because it's definitely a good topic and something to think about, especially as you're you're just getting started. So do you guys either one of you guys want to start just mentioned how you set up your financial accounts, either checking savings, things like that

Tom:

I’ll lead the way, so I probably have a super simple structure. So I have one separate bank account that I took out through one of the big banks and with that account, I to connect my mortgage payments to it. So I do an automatic withdrawal to pay that within the mortgage accounts themselves, I will have an escrow in there where they'll take out a little bit extra every month to manage my taxes and insurance. So I don't have to worry about that throughout the year. But if I want to be more proactive and not let them have my float of escrow account, I could pay that you know when it's due, but I like the past 70 of just setting up that impound account.

So you know, checking account automatic payments in and out to the mortgage and kind of a similar structure with my individual property managers where I have my bank account connected with my property manager, and they hold a little impound account where with each property that they manage for me, depending on how many that property manager manages, they'll keep a couple extra couple $100 if any maintenance or issues come up, and I set up with them a not to exceed limit. So if the price of any work that they're going to do is over 200 bucks, I want to know about it. If not I trust my property managers with most of them. I've been using them for over a year. So I feel okay about them making decisions on some smaller stuff.

You know, I never thought about until this episode that with both of these sort of key partners that I have I let them both have a little bit of an impound account. So I have, you know, my main checking account where funds are coming in funds are going out. And then both with a lender as well as with the property manager, they both have little escrow accounts to manage the stuff that they have to pay via insurance or taxes or any maintenance stuff.

Beyond that I don't have a credit card that I use for any real estate stuff that I do the most of the transaction that I'm making. Personally, you know, outside of the initial acquisition and end and downpayment in acquiring the property, there isn't really a lot of transactions that I make that would be manual, everything is is pretty automatic set and forget it, you know, monthly money in pumping money out and then these two little separate escrow.

Emil:

It's basically what is your financial house look like? Do you have a separate checking account? Good mention of like the the impounds with property manager and lender, which is very common, it's nothing unusual. So yeah.

Tom:

And I heard the question before within Academy members asking, Hey, do you set up a different checking account for every single property if you have multiple LLC? Sure, do it for each LLC. But for me, I don't get a unique checking account for each property. And also, what I love about that as having a separate checking account for my rental properties is I know that money's in that bank account, I'm not taking it out. And it gives me a really good finger on the pulse on where cash flow is going month over month as funds are going out and funds are coming in. So I like that canary in the coal mine of the checking account balance level that I just look at pretty regularly.

Michael:

That’s great.

Emil:

On the same note, I have a chase personal checking account. And when I started, I created another checking account that all of my rent goes to any expenses come out of so it's just completely separate from my personal. I just use chase because I had them with my personal banking and I manage it the same way. Just keep them separate all properties go into this one checking account, nothing fancy no credit card or anything like that so far.

Michael:

Sweet, nice, simple clean. So I started very similarly to you both just having a separate checking account and then I had two properties that both went into that account. And then again, just like I mentioned, I kept it very separate, very unco mingled. And then I add my third property purchase. I started an LLC and so I moved everything over to an LLC account. And so then I need to open up a new LLC bank account. And have everything flow through, they're still keeping it totally separate, no commingling and so everything just got paid out of that account. Really the only difference in operation was that it had a different name. And it was a business checking account rather than a personal checking account with the name of the LLC. But from an operational standpoint, it was still handled in the same fashion to was handling it previously.

And it wasn't until this past year, because I've opened up several more LLCs over the years, as I've purchased new acquisitions in different parts of the country. And so this most recent year, I've been working on this massive rehab and my contractor started accepting credit card payments. So I just applied for a business credit card this year got approved and got that and that's been awesome, because it's money you're spending anyhow. So this has a 0% interest for like the first 12 months so I can carry a balance on it if need be. The problem is that it's a super low balance, and I'm constantly paying for rehab. So for that purposes only make a lot of sense. But there's cashback incentive, which is nice, because again, it's money I'd be spending anyhow. So it's kind of a nice perk.

But Tom, kind of like you mentioned, there's not outside of that rehab and…

Tom:

Getting some airline miles there?

Michael:

Yeah, that's it. I mean, I get…

Tom:

Cashback, at restaurants, Starwood Hotels?

Michael:

That's, that's right, we get my Marriott points...

So yeah, so outside of that, you know, there's really nothing I put on credit cards for the business or the LLC expense. Most of that stuff, I could pay directly added that the debit account, by property taxes and insurance, I could set up to be pulled directly from that account, all the mortgage stuff went directly from that account, it was very little that I would need to be spending on a credit card anyhow, so it just didn't seem worth it to have the extra overhead or extra tracking to have a credit card for each LLC. So I only have one for one of my LLC.

And then as far as tracking the expenses. I think that was part of Alvin's question too. I personally, I just use Excel, I have an Excel sheet. And I think we've talked about it in a prior episode, like you're mentioning me on one of the other ama is where I just have it broken down by LLC at the top, whatever LLC it is, and then all the different properties within that LLC. And whatever the expenses are associated with that LLC. I track the date, what the payment was, what the expense was, and then how much I paid. And then I sum everything up at the property level and the LLC level. And then I just send that file to my accountant at the end of the year.

And there's not a whole lot that actually has to go into that because like I was mentioning, I pay my property taxes separately, I don't have them impounded. And so for a lot of my stuff for some I do for most I don't so I don't impound my taxes, I pay it off separately, I pay my insurance separately, and then any kind of rehab stuff that I have to pay that gets all tracked on that sheet.

So at the end of the year, I see okay, how much did I pay for this property outside of what the property manager paid, because the property manager gives me a summation, a year end profit and loss statement that shows Okay, you paid this much in management fees as much in repair and maintenance this much in whatever snow removal. And so I just said everything to my CPA, and he's like, great, here's your tax return

Emil:

Perfect. And some property managers will like literally pay all of your bills for you. So it's tracked in this system that Michael mentioned, in St. Louis, I own a single family home. And St. Louis is weird in that they split the water bill from the sewer bill. And so the water bill is under the tenant, but the sewer bill goes to me and I have a property manager who will take over all my bills, so I can tell them to be the name on the sewer bill, they pay it directly right out of the rent. And then I get my profit and loss like Michael mentioned right out of their system, because they handle accounting much better. And I don't have to like, you know, think about how much I pay and sewer bill times 12 track that in Excel blah, blah, blah. So that's another option you have is talking to your pm seeing if they can take over your bills.

I guess if you didn't do this proactively, what would you do? Maybe print out your checking account for the entire year, look at all the money going out and maybe say like which property it was assigned to and what it was for? I think that's maybe like, but that's kind of the nightmare that Alvin was talking about that you probably don't want to do.

Michael:

Yeah, that becomes a pretty big lift, especially trying to keep track of like what the expense was and on which property? Because you definitely I've been told what to keep everything on like a per property basis. And so like whatever expense associated with property a key with property a and so if you've got everything in a single account and aren't tracking it, that becomes Oh, where was that $57 expense, which property was that for? becomes pretty, pretty confusing pretty quickly.

Emil:

An awesome tool I want to shout out here that can help people not have to do what Michaels doing in Excel.

Michael:

If you want to be way smarter than me,

Emil:

I need to do it too. Because I haven't been doing a good job of this, I need to go sign up for is Stessa great tool. It's like the QuickBooks for your rental property. It'll see all the you know, you'll tie it to your checking account. It works with all the major banks tie it to your checking account, it'll look at each thing coming in and going out and you can just assign those to a specific property and a specific expense. I can say this is the St. Louis property and its sewer bill right and then it's all tracked. At the end of the year I get a nice easy export that I can send to my accountant. So definitely check out Stessa if you want to make this make your expense tracking much easier.

Tom:

I use Stessa, I like it the document it's like simple but just effective and we've talked about it For the podcasts and documents, storage, you can connect your bank account to it as well. But it's a very cool tool.

Emil:

Absolutely. Another part of Alvin's question, which I think is is really interesting. And I want us to tackle a little bit harder, you'll see a lot more different stuff is in terms of reserves. So I'm curious, do you guys you know, a lot of times you look at a pro forma, or how a property expenses and everything should look like and you'll see an item for cap x or things like this, like money, you're gonna put aside for major repairs. And I'm curious if you guys like, actually on each rent check that comes in? Do you take a amount or a percentage or whatever, move it to a different checking account? Or how do you guys handle your reserves.

Tom:

I know that I have this pool of money within this checking account once they're coming in. And I already know that I have these escrow accounts I talked about before that the property managers are holding based on the number of properties in the portfolio. So I'm not doing any extra work, once the funds are coming in and moving them to a separate bank account, I'm getting that fool of the main bank out is as fat and happy as it can and then use it to reproduce to make a new property to feed the beast.

So you know, I know roughly how much money I want to have in that general funds. And once I get to the point where I can acquire another property all take money out of that pool, buy another property and just plug that into the system and then let it run. So I'm not moving on a monthly basis. Now I'm not moving moving into any separate checking accounts.

Michael:

It was the same for me when I was first starting out, and I didn't touch any of that money, like what would be cash flow. And I just left everything in the same checking account. But what I did do is as I started to want to use that money for things other than just investing, I like open that faucet a little bit. And so I based on my pro forma and based on past history, I would say okay, well, I made about 200 bucks a month cash flow per property. So if I had three properties and call it 600 bucks a month, so I would just set up an auto transfer for like 400 bucks from my property checking account into my personal checking account. And so that was like my portion, that was my cash flow. So everything else stayed in the account. So the reserves, everything else that wasn't cash flow just stayed in that account. And so whenever I needed to do something, I would just dip into that account and pay for whatever capex item was needed.

But I was starting to feel the effects of the cash flow. But I just made it a smaller amount than I had anticipated for it in case I made a mistake somewhere. And at the end of the year, if there was a ton of money leftover in the account, I could square up with myself, so to speak, and give myself an extra pay.

Emil:

Solid.

Michael:

How do you handle it Emil?

Tom:

Putting it all in GameStop Emil?

Emil:

I take all my money and I put it in whatever Wall Street bets tells me to know what I what I did is when I first started, I basically have a minimum balance that I keep based on unit count. So when I bought my first property, I think I put $3,000 in this account, where did I come up with that number, I don't know, I just kind of arbitrary, it was like a 3000 that should cover any like minor expense. And if I have anything big, I'll figure it out.

As I bought subsequent properties, I just made sure that minimum went up higher and higher. And basically anything above that minimum, I would like you Tom, that's just funds to go help with the next acquisition, right. So if I say my minimum is 10 K, and I have 17 k in that account, I know that seven k delta I can go use when I go buy another property or whatever, or that's available to me to for acquisitions.

So that's kind of my strategy right now I don't set it aside, it just stays in that checking account. But it's just a minimum based on unit count. And it just goes up a little bit more with each subsequent property. But this is just my personal opinion, I don't think it needs to be linear. So let's say you started with three K, right? It's not like you need three k for every unit. So when you're at 20 units, you don't necessarily need to say I need 60 k in that account. The reason being is is like I think ownership is lumpy, you'll have expenses on property one year and then expense on another property another year, it's not like five roofs could happen. But it's unlikely that five roofs are gonna go out same time. So just allows you to have an expense kind of build up the reserve again, and then another expense comes in like that.

Michael:

It makes total sense. And I think about it the same way, like what's the statistical likelihood of having those five roofs go out on the same year across all five year properties is pretty low. So yeah, I think like you mentioned lumpy is a great adjective to use. And so you have expenses pop up on one property. And so the other properties can support the payment for that. And so they all just look to to keep each other afloat, so to speak. And the more properties you have, I find that the smaller dollar amount per property needs to be kept in reserve.

So if your number was 3000 per property, maybe if you have one property, you keep 3000. If you have two properties, you keep 5500. So your next property might be an additional 2500. So like you said the sum total is going up with each subsequent property, but the dollar amount per unit is actually decreasing. That's how I think about it.

Emil:

I think we we covered most of Alvin's questions. So

Michael:

I got a quick question for you both and I think I know the answer. So I think I asked you all you both probably about a year ago. Do you guys track your depression? And mortgage pay down on any kind of calculator sheet

Emil:

In my spreadsheet where I have all my properties, and I'm looking at all the numbers on a yearly basis, I calculate all my cash flow. And on that yearly anniversary or whatever, I'll go look at the estimated property value and update on my sheet. And I'll go in and look at my outstanding loan. So it will like, you know, calculate how much equity am I sitting on in my portfolio? So I'll do that once a year.

Michael:

But you don't have to, like the depreciation for most of us is going to be a straight line depreciation same amount every single year. Do you have that calculated or written down anywhere to see, okay, am I gonna be paying taxes on this income on this cash flow income? Or am I totally covering it?

Emil:

I do not let my account handle that.

Tom:

Trying to try to make us feel bad Michael trying to put us on the spot.

Michael:

No, I was just I just curious.

I try to figure out how big of a nerd I am. No, no,

Tom:

You're up there. Man. I love it. I am as well. But I have not done that exercise. I mean, I'll take a look at end of the year when the CPA fills it out. But I like the exercise. I like the exercise a lot. I personally don't do it, I take advantage of it and have a CPA who has that type of expertise to do that. But I haven't How do you do it Mike, why don't you work us back?

Michael:

Sure, yeah, I'd be I'd be happy to use it's a fun exercise. For those of us that are numbers driven, which I think many of us real estate investors are. So basically you can only depreciate the land portion of the purchase. And so that typically works out to about 80% of the purchase price. But if you look at your property tax bill, it'll say land value and then building value. And so you can only depreciate the building value of that. And so you take that value, residents property depreciated over 27 and a half years, you just take that value divided by 27 and a half, and that's your annual depreciation amount. So we'll make the numbers fairly easy on $100,000 property, if I assume 80% is in building value, that means I take 80,000 and divide that by 27 and a half years and I can depreciate $2,909 every single year on a straight line depreciation and so if your cash flow is less than 2900 bucks, you likely are going to have a negative or paper loss for that given year with the depreciation covering your all your cash flow.

So I think you have to remember, though, about that is that your your principal portion of the mortgage payment is not a deduction, I think only the interest is and so you have to get add the principal portion back in and then look at the total. But at the beginning of a loan, the principal payment contribution is so small, especially on like $100,000, or an $80,000. mortgage, you know, it's probably going to be 100 bucks or so you can look at an amortization schedule to see what it is.

But add that back into the equation and then take out your depreciation and see if you are still negative in terms of cash flow. And if you are, you know, it's highly likely that you're not gonna be paying taxes on those dollars in your pocket, which is a pretty amazing phenomenon.

Tom:

Love it. And then any, you know, costs that come up. So yeah, that's your depreciation schedule, but any deductions you have so some R&M, your property management costs isn't up to you pay for some nice education through Roofstock Academy. This is not tax advice, please talk to your tax advisor. But that is, from what I've heard is doable.

Michael:

Absolutely. Emil. you like that rant?

Emil:

Yeah,

Tom:

I love a good rant, I love it.

Michael:

The other thing to keep in mind too, is chatting with your tax professional and strategizing a little bit if you have major repairs to make at the end of the year, you know, that year or at the beginning of next year, because that could have an impact on your taxes. And so I think to be more strategic and proactive can be really beneficial. And so talking about these types of questions and strategies with tax professionals is a super good use of of time and money.

Tom:

Yeah, that's a that's a great way to you know, interview tax professionals that you're potentially using them as needle them on some of these different questions. I was just speaking with my tax professional about building a small office like unit and I was interesting learning about it like to be able to use that as a deduction of the costs of building that and again, this is please check for yourself, this is not tax advice, yada, yada, yada, all that preamble, you can only use that space for that particular activity that you are, you know, assigning it for and as soon as you do something else in it, it's violated, right? It's totally not the right way to word it. But there's a couple of very specific rules on building little little offices of being able to deduct that

Michael:

Don't let anybody catch you playing fool in that space.

Tom:

That's right or whatever working out. Yeah, that's right. Cool. We have two little rants out of that two little baby rants out your answer. Mine a little bit less in depth and technical. Yeah,

Emil:

What would an episode of the remote real estate investor be without a couple rants? Guys?

Michael:

That's a really great question. Boring.

Emil:

Very, very boring. Not entertaining at all. Alright guys, let's end it here. Thanks, everybody for tuning in. Hope you guys got some value out of this one. And like Alvin did, hit us up on Twitter. I'm at Emil Shour. Michael, your at AlbaumMichael and Tom. You're at

Tom:

TSchneido. I think I came up with that when I was like 16.

Michael:

Like how you give out your email like skater do 27 Yeah, I made that when I was 16 like there's embarrassing. Yeah.

Tom:

I just think it's the better things to say but funny names but yeah, nope, not gonna say them out loud. Keep em on the inside.

The old AIM names that are just so ridiculous thinking back to like those and the names my friends had it was ridiculous.

Alright, so that's our episode. Hope you guys enjoyed. Hit us up on Twitter if you have a question we'd love to tackle on a future episode. And we'll catch you guys in the next one happy investing

Tom:

Happy investing.

Michael:

Happy investing.

How to Intelligently Add Value To A Home and Set Competitive Prices Feb 03, 2021

In this episode, we have one of the SF Bay Area's top real estate agents, Brandon Kersis, talk to us about how to be smart with renovation projects and pricing strategies.

Brandon on Instagram: https://www.instagram.com/wcrealtor/

Brandon's Website: www.thekersisteam.com

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Transcript

Tom:

Greetings and welcome The Remote Real Estate Investor. On this episode we talk to a selling agent Brandon Kersis one of the leading agents up in Northern California in the East Bay. We talked to him about how to set price, his thoughts on ways to add value to the sale price and all that good stuff so all right, let's do it.

Welcome to the show, Brandon. Thanks for jumping on before we get into the the meat of the conversation. Let's give a little give a little introduction about yourself.

Brandon:

Yeah, thanks for having me on and happy to be here. Um, my name is Brandon Kersis. I run a real estate team in East Bay, called the Kersis team and we sell mostly around the woman Creek lumber and Lafayette Alamo, Danville areas, do a lot of residential real estate. We got involved just created the team about four years ago growing since we were number one broker at our company this year, and I got involved with my family and happy to be on and share my expertise.

Tom:

Well, we are a remote real estate investing podcast, you primarily do owner occupied stuff. Is that right?

Brandon:

Definitely. Yeah, a lot of owner occupied stuff. But we do some duplexes and a little bit of multifamily but mostly single family residential owner occupied.

Tom:

Awesome, awesome. I think the theme today, I think there is a lot of kind of just general principles of maximizing the value of the sale. And I think when we were talking about scheduling this, you had recently won an award for like most sales, like within the company. Is that right?

Brandon:

Yeah, yeah. Top single broker at the company.

Tom:

Yeah, awesome.

Michael:

Yeah. Good for you. That's awesome.

Brandon:

Thanks. Yeah, it's been a lot of hard work. I think what makes us a little different is that we do have a lot of experience getting properties prepped really well for market. So I can definitely speak on that today.

Michael:

Well, Brandon, I'm super excited to talk to you today. selfishly, we always joke that half these podcast episodes are self serving. So I've got an investment property that I'm planning on selling to an owner occupant down in Southern California. So we'll definitely be picking your brain as we go through this.

Brandon:

Sounds good.

Tom:

Alright, so we have a couple of a rough agenda. And I think the general theme that you know, transcends between owner occupied as well as selling rental properties is how do we get the most value on the sale and the categories that we have identified ahead of times, and you know, like, all episodes is going to be conversational. So we'll probably go down some rabbit holes, but one of them is related to construction projects. So you know, upgrades in the kitchen, that marble, all that kind of good stuff, we're gonna talk a little bit about price setting strategy, we're gonna talk about marketing collateral relevant, not only as a remote investor, but just in these times of a pandemic of getting the most bang for your buck of perhaps virtual visits are not actually seeing the property.

So Brandon, I'll let you kick off the conversation. So thinking about maximizing the value in doing work on the property and preparing to sell it, I'd love to hear your sort of philosophy. Go ahead and ramble on. Let's hear it.

Brandon:

Yeah, I mean, the whole thing about maximizing value, you know, when you prepare a salad, trying to get the ROI, right, you don't want to spend any money that you're not going to get back. And that's regional. And it also depends on what kind of house you have. I think the first step is understanding your local market and also understanding the house you have, right because if you have a very specific house to a specific buyer, your strategy is going to be a little bit different. If you have a house that all the buyers want, there's no objections, everyone's going to bid on it. So that's one thing to consider when prepping.

Basic realtor makeover that everybody does in the past has been, you know, paint stage make it look really like plain and kind of newish. But there's different strategies you can do, especially with investment properties. Sometimes people want a bite of equity when they come into the property. So you may want to actually present the property as a fixer. There's buyers out there, they're doing left and right swiping, and they want to see dirty carpets, they see brand new carpets, they're gonna do a left swipe right. So.

Tom:

Yeah.

Michael:

How do you know Brandon, if you have a, like you said he like a unique property or a property that everybody would want to bid on?

Brandon:

Well, like one thing, like in particular in our areas that schools are really large driver of the market. So we take a look at that. And then what else do you want in a house schools are really important, flat grassy areas. So flat grassy backyard is going to bring you 13% more than a sloped yard on average. So that's a pretty big number when you have a median home price of like a million plus, you know, that's going to be a significant boost in value.

So if that's the case, and you're catering to a market that's really specifically driven for schools and lifestyle for the family. You want to make sure that you landscaped that space really well. And now it'd be you know, maybe a considerable investment That people in the past may not have considered as much. But with the COVID pandemic, and just the different dynamics at play with work from home, you may want to consider actually, you know, doing a larger investment in landscaping and yard like that, because that's really what you're selling, right? That's one of the big selling points of the property, good schools flat, grassy backyard, you'd want to try to embellish those positive features of the property.

Michael:

Interesting.

Tom:

And thinking about this and rentals. I mean, I think that's one of the main tailwinds of a single family rentals, where you get a little bit of premium rent as it relates to having that yard where you might not necessarily be getting that if you're buying an apartment complex.

Have you seen changes in the type of scope that you do in preparing to sell over the last several years over the last, I don't know, five or 10 years? Where before used to be like, Oh, we got to do the kitchen, we got to do XYZ? I mean, I love that strategy. You're talking about it being more targeted where, hey, maybe you want to leave some stuff undone some stones and turn just so it gets the buyers imagination? I mean, have you seen that evolve?

Brandon:

It's an interesting question. You know, there is a lot of cheap money out there, right. So the time is really one of the tricky things. And if you have people working from home, doing some remodeling can be pretty tough. So you know, actually probably have seen it evolve more, it's having a property finished as much as possible when preparing for market.

But if you look at what sells houses, Kitchens and Baths, typically, right. So if you have, let's say, a property that you can kind of with photography, I just do a little bit of an update on the kitchen, maybe, let's say by doing a countertop span, you know, depending on the market, and 7000 bucks, changing a countertop and a kitchen and then painting the cabinets. And then we'll do something like staging around the bathrooms, if the bathrooms are dated to try to get an impact for the buyer that they kind of pass by the defects of the bathrooms, because they're focused on the kitchen beam. So it's trying to strategically pick a few features of the property that you can really have stand out. And again, embellish those features and try to get them to buy in to the good parts of the house.

Michael:

Interesting.

Tom:

Yeah, it's interesting about wanting more turnkey buyers are looking for because, you know, there's just an endless supply of television shows of people, you know, making it their own. I'm doing my own thing. And I think that I think maybe people have cycled through and tried to do home renovation and then realize it's really hard. And it takes a long time.

Brandon:

A ton of buyers probably that are interested in this podcast, specifically do not want to pay for other people's updates, right? You have to be careful. That's like a pretty big, you know, like, I don't want to pay for somebody if they don't do it, right. So if you do make choices, you do want to do a good job.

Michael:

So Brandon, but that brings me to a question I have for you. So something we talk about a lot in the Roofstock Academy is knowing where your highest and best buyer is going to be when you're prepping to sell a property. And so how do you coach your clients about either making upgrades or advertising it as a fixer upper? I would just imagine that somebody who's gonna buy a fixer upper is gonna be less particular than somebody who wants a turnkey product. They're gonna find every single zit and pimple on the property, right?

Brandon:

Yes. So like with the fixer upper, you want to focus on negotiation, right? You gotta pick a fixer, you want to do some preparations around negotiation, because that's going to be a pretty, pretty big thing that you're going to be dealing with. So you can do some pre inspections and stuff like that and just be prepared with market knowledge to know where the price should be in depth. You don't want to double discount, right? You don't want to sure price the property low and give a discount for condition as well. That makes sense.

Michael:

Okay. Okay. And so how do you coach people through whether to you know, make the repairs and marketed as a turnkey versus marketed as a fixer?

Brandon:

That's a good question. Yeah. It depends on how close you are on the spectrum. Right. If you're pretty far away on the spectrum of being being a fixer, I think you go with it being a fixer. And you just mark it that way. Yeah, that's that's pretty much it. If it's got a lot of wood damage. That's a pretty big one. Wood damage can be pretty costly. So we stepped into a listing for the agent property management property in Walnut Creek, East Bay, and she fixed it out she put a nice floor she did a new kitchen. They didn't fix any of section one stuff. The framing was fungus damaged with moisture. And there was like a $40,000 pest report on the property. And then they'd been newly remodeled.

Michael:

Ugh they put lipstick on a pig.

Brandon:

That's like the antithesis right? You don't want to open up a can of worms. You know, that would have been a great property that just kind of leave as is and just market when it could be.

Michael:

Handyman special or TLC?

Brandon:

Yeah, people love that.

Tom:

Totally unrelated, I had a good friend in college or Somali who his car was like dying like it was bad news like it was on its last couple miles and he's like, well, you know, I'm gonna give it a carwash, I going to enjoy the last few miles that I had with it, it's like the same thing where you have a house, it's falling apart, you just dump a bunch of paint on. I guess it's…

Michael:

Put a bunch of money into it.

Tom:

Yeah. brutal.

Brandon:

Yeah. You don't even want to paint it? I don't think, I think you probably let it go, you know?

Tom:

Yeah, that makes sense. And I guess that kind of ties into this next type of question on price setting.

So I'd love to hear your kind of philosophy and talking with a client about price setting and the ways that you're thinking about, you know, are you setting it low and opening it, a lot of bids are setting a little bit higher to raise the baseline?

Brandon:

Yeah, I can't price setting it's super specific to the market and the property. And you can be way more comfortable. If you've got, you know, a good strategy pricing low if you don't have a lot of objections, but you really want to know where the market is. But if you're pricing aggressively to draw a bunch of people in, you want to know where your target is, you need to have a pretty good idea of how high above asking you can get. And a lot of that can be done locally. Like if you guys are investing, you know, in an area that you're not super familiar with, you might not be living there, just create really good relationships with the real estate agents in the area, make some friends, and just call them and talk to them. And if you'd be friends and agents, they will give you all their secrets, they will give you all their opportunities, they will tell you everything that's happening in the market.

So for instance, we have this upcoming property, we did a listing presentation last night, we recently broke the record in the area as a townhome, and it was an original condition. And all the comparables nearby were about 750 we were a fixer, we spent two weeks we spent $30,000, we just got 830. So the appraisal came in at 100 a day to come up with $30,000 cash is the way the appraisal contingency. And we set a record.

So we got this new listing that's completely remodeled, super modern, you know, German appliances, and just everything's really, really sweet. And I told them, you know, 819 list price is really good, because we'll be able to beat a 30 and possibly set a new record. And I was really confident that 819 she on the other hand is like oh 819 it's so much money, you know, and I brought her another net sheet at 860. I said I think the 860 site, I don't even want to see it. Don't even show it to me, he told me to throw it away. Maybe I'm crazy. Maybe 860 is nuts. You know, that night, I go home, I talked to another agent friend who has same unit, not updated two doors down in contract, beating the 830.

So having access to that information, you guys can set prices low or even even move the price up from what you think might not be low, but still get that metric above asking, right. So if you're pricing low or giving the impression that you're pricing low, you're expecting above asking. And you can do stuff like that, like setting offer dates, right when you hit the market, just like coming on the market, just saying offer date in a week.

And they're like, oh, wow, that's really confident like you're already setting an offer daily. This is one of those desirable properties, no stuff like that. But if you do want to hit your number, like if you're in a luxury price point, or you like you've got a property that's like on a hillside and not everyone's gonna want it because the property you may want to price more accurate, right and just kind of have a longer market time and wait for that specific buyer.

Michael:

Interesting.

Tom:

So I'm going to paraphrase a little bit. So just on that last little piece that you're talking about that that was so interesting, in the listing where a lot of people are going to be interested, that's where you it's a little bit safer to try to go for that type of setting the price that's going to result in an over the top, it takes a certain type of person to love this type of property, that's where you would want to price it a little bit more accurately to what we think the price is going to be that right.

Brandon:

Yeah, I agree. That's exactly right. So if you've got a specific buyer, a smaller buyer pool, yeah, you may want to price more accurately, but if you've got a really driving market, that and a property that adheres to a lot of buyers, you're safer and probably better off pricing on the lower side.

Michael:

So okay, so now I'm going to bring in my personal situation and get your thoughts so yeah, I've got this it's a class a condo, great schools, great neighborhood, you know, relatively new was built like six, seven years ago. It's a very hot condo association people are selling very quickly.

So I'm wondering kind of the psychology behind buyers so I think my agent things sort of go for for 2424 something like that. Like let's say we price it at 400. We go low with it in hopes of getting it up if it ends up going at 420 or 424 are people going to be more frustrated that they saw it listed at 400 and have to come up 20 over asking to get it versus pricing it at 415, 417. And they've only got to go that, you know, three, four or $5,000 delta over asking.

Brandon:

Yeah, it happens, buyers get frustrated. And they're like, where they missed or like, why did they price it so low?

Michael:

Right, right, right, versus just starting it off in that midpoint. They only have to come a skosh above that to get to my number. So what are your thoughts on that? How do you price that like thinking about buyer psychology to.

Brandon:

Yeah, well, the trick about the buyer psychology, there is also the market, what's what they're used to, if they're used to always adding another 20, it's not going to be a huge stretch. Sure. Also, it's kind of a little bit of a situation your agents gonna do, where the whole period the properties on the market, they're kind of thinking 400, and they're falling in love with that condo, right? So they're like, 400, it's kind of sweet, I can walk down and get Starbucks and all this stuff. And then you know, the agents like, yeah, 400, you know, like, come check it out, you like it, like the disclosures. And then day three, how's activity going, it's starting to pick up a little bit, right, so you're articulating that to the agent, that agents telling the buyer and it's like a slow movement up to the highest price.

So that the day before, you really don't want to scare people off, because you don't know how many offers are gonna come in, there can be not a nice feeling, you never know until you receive the offers. But one thing that you don't want to do is scare them off early, you want to bring them to the finish line. And then when you get there, that's the point where you can be really a little bit more forthcoming about how much activity there is. And that one buyer that really wants it is going to be able to take it a little bit higher than the next person.

I wouldn't worry too much about that delta of the buyer sentiment of being frustrated with paying that amount. Because in the long run, like it's great to own real estate that also has a little bit to do with the contingencies of the offer, too, and how safe you are when you first accept it. You can leave room, right like for the townhome that we sold where we got that record price for 830. Or this townhome we got a record price, we got a 30 they had no appraisal contingency, but they had an inspection contingency. So the appraisal came in at 800. They had to come up with 30,000 cash to cover but then they negotiated a little bit with us on things they'd probably normally wouldn't have. And we play ball with them. Because we knew Hey, you guys gave us great offer. So we gave them some cash back.

I mean, what else is selling? Right? Like what else is selling your buyer what else is on the market with the condo.

Michael:

So there's one that just sold in the same complex at 415. Same floor plan similar finish about a month and a half ago. But there's like nothing on the market, things are just getting gobbled up down there.

Brandon:

So that townhome I wanted to price it at 730. And my fly I sold a lot of properties if you wanted to go 770. And I'm glad we did. I would probably hit it at 415 you'll probably go over because there's nothing right.

Michael:

There's just no inventory.

Brandon:

Yeah, yeah, you'll probably do well, and we just came out of this like winter season. This January is typically a mind that like there's no inventory and good properties can go really high over their market value that come on early.

Tom:

This is a great segue on seasonality they didn't think about asking, you know, a lot of people asked like, Oh, you know, it's probably a little different from owner occupied versus rental. But I'd love to hear your input on seasonality of selling and buying if you know that I don't want to use the word like a better time or a worse time to do it. But I'd love just to kind of see some kind of general trends you've seen in your career in seasonality on the buy side and sell side.

Brandon:

Yeah, typically there's a lot of seasonality around schools and activity with you know vacations and stuff like that. It's kind of been flipped on its head lately. You guys say that's accurate?

Michael:

Yeah, because the rules of school are so different now.

Brandon:

Yeah. It's been bizarre. showings on Mondays and Tuesdays. Typically it's you know, we can think you know, past like two or three years I've been feeling like January is a good month and I feel like we get a ton of traffic late January, but not as many people that want to pull the trigger. You know, obviously the spring markets always like you know, the area that everyone feels is the best so like beating out that market a little bit the strategy I think a lot of people take on in our market but I do feel like people are a little bit reticent. When you come on early, get a lot of foot traffic and stuff. Got a nice house but people aren't ready because they're waiting to see other stuff as well. So March is a great month, March and April.

Tom:

Have you ever played play a fantasy football like auction style.

Michael:

I never have no.

Tom:

This happens every year. I think there probably is some similarities. So like you'll have like the best player come up and he always is a little bit of a discount because people are like holding on to their pennies because you only have so many dollars you can spend in this auction and then when you start getting to the third fourth and fifth best player they go for way over what you because people don't want to get left out. So do you think that as sort of like a parable to like the real estate market beginning of the year people a little more pinching their pennies, Not sure. Then the middle of the you know, the spring, the main, like purchasing time, you know, things are maybe a little bit inflated and selling for a little bit higher. Am I just making this up?

Brandon:

No, I think that's it.

Michael:

That's so good.

Brandon:

Yeah, it seems accurate.

Tom:

Christian McCaffrey, man get healthy man, you You hurt me this year, you hurt me this year.

Awesome. Let's transition to talk about how marketing has evolved. I think this has been a real boon to remote real estate investing just how good it's gotten for being able to capture, you know, condition, feel all that stuff without actually being in the property.

So go ahead, Brandon, I'll let you take the lead. And kind of just the way that is evolved some stuff that you guys like to do some things that you think are more effective, all that good stuff.

Brandon:

Yeah, that's a great topic, you guys can always talk to the agents in the area that have, you know, the best marketing presentation and find out who their photographers are, and just get access to really good photography and tools. So you can do virtual showings and to making it look really good online. So the photography can make a huge difference. It really can when you capture enough light. And I can tell you, I can give you so many examples of palaces that were photographed with a poor photographer and a good photographer, and just how much more of an impact that makes. So don't ever, ever short money on photography. And that is an expense your agent should be paying if you have a real estate agent. So that's their expense. And don't let them short on that, because that's the first thing people see that's it makes a huge difference.

So a lot of people are doing that Twilight photos for single family homes, you can even do it on a multifamily unit. I mean, you could do a drone shot where they fly up a drone in the evening around five o'clock, and you have a lens that closes for a long time and captures all the light, and then the lens opens or the shutter, what we do is we take two photos, we take one with a really long shutter speed and then one regular and then we superimpose them on top of each other. So we have like a really cool evening shot with our ambience and the blue light from the sky comes in and all the lights in the house really shine. You can do that on a multifamily rental if you wanted to, you know, it's a few hundred bucks, but it can really stand out when you're looking at properties. And you see something like that. It seems like it's something special. Right? You know, you took a little bit more of an effort to spend on that.

But yeah, Matterports are a huge thing that 3d scans. That's pretty pretty new thing. That's pretty cool. If you don't have anything special there and you do the matterport you're kind of bored with it. You'd be like, Oh, this is all the hous is?

Tom:

Yeah, you know, so you may not want to do, looking a little too much out of the rug, or…

Michael:

Yeah, yeah, that's such a good point, though, to be thinking about.

Tom:

Yeah, I can totally see seeing a photography bill of saying seeing like, you know, 100 or 50 or $200. And you're thinking yourself, oh, why would I spend that much I can do this on my phone for free. But it's like, Man, what a Pennywise pound foolish way to go go about it. I mean, great point on just the photography and just how critical that is and probably for marketing on the rental side as well. That's just something that it's totally worth spending an amount way more than you think would be worth. But is definitely is worth it.

Brandon:

For sure. Yeah. I've got a friend that does a ton of rentals. He's like Airbnb King. Hmm, does really good photos. Always gets pretty tenants that…

Michael:

Brandon, you mentioned something which I want to circle back on with regard to cost and who's paying for what cuz I think when people think really listen to this episode, or think about selling a home, they're thinking, Okay, I gotta pay my agent commission, maybe I have to pay to get the property ready or staged or painted. I mean, who typically pays for all that stuff to get a property prepped to sell?

Brandon:

It depends. Everything's negotiable, right? I go through a lot of situations where it makes a lot of sense, just to not do you have any preparations. And if you know the market value, you can trade that property pretty easy. And then you can basically not have to go through the expense of having an agent because agents, you know, the fees can be costly, but that's a negotiated thing. Who pays for what all that stuff is, is negotiable, sometimes.

But marketing typically is the agents expense. And if you get a good agent, they're going to do a few things really well for you. They're going to negotiate really well. They're going to price really well. And they're going to market the property really well. And the thing about it, it's like you're only as good as your last deal. So like for me, it's really important that my clients choose specific options because it's my reputation on the line and I want the property to look a certain way so that I can get more business and have good results.

It's all results driven, you know, like staging, cover staging, oftentimes, you know in the price point that we're in, and photography and those two things for single family homes specifically, it's really, really important the ROI on those are huge. So that's the first ROI choice that you guys have when choosing an agent is basically pretty important. Right?

And then a few other cool things we do is like you know, light fixtures suggestions, really simple update to the house to make it hip and trendy is to switch out the light fixtures. It's usually inexpensive fix and then coordinating colors with the stager is important. So having the stager pick out contrast walls like what Tom has right behind him darker color, having a few of those that you know,

Michael:

Tom, you're so hip and trendy man.

Tom:

Moonshine! I was trying to make a color like, like

Michael:

Moon shadow.

Tom:

Moon shadow. That's the word Yeah. It's like why is our dark side of the moon shadow?

And then Swiss coffee. You ever get a lot of Swiss coffee out there? Swiss coffee is a very popular white. Anyways, yes.

Brandon:

But yeah, like, floor plans are cool to see.

Tom:

Yeah, there's a couple of other insight maps is another company that does similar type work.

Brandon:

Yeah. So the matterport is a 3d scan. And it takes quite a while. And then there's also this new thing called LIDAR, which is another laser scan that you can do 3d images of the yard. And that's kind of a new technology that's not quite out yet. You know much about it, but seems like it would be pretty cool.

Tom:

Put on a virtual hat and run around the backyard. Incredible.

Brandon:

Put an Oculus and your kids.

They have that now, too. They've got 3d matterport for Oculus.

Michael:

Holy smokes.

Brandon:

Yeah, you guys tried Oculus.

Michael:

It's unbelievable.

Brandon:

It's cool, man. Imagine walking through a house like that.

Tom:

It made me kind of sick to my stomach. I mean, I'm I tried it like, what was it that we described like when you like turn to the side, it's like, smoother than your eyes are. Remember, it was a while ago, several years ago, but it gave me a little bit of a headache doing one of their like tours. But yeah, now that stuff is very cool. Very, very cool.

Michael:

Pretty unbelievable.

Brandon:

Yeah, I was in Big Sky a year ago…

Tom:

What was that?

Brandon:

Nothing. I was just gonna ramble on about Oculus.

Tom:

I want to hear some more Oculus stuff, which is that we're a bunch of friends are in big sky. And we did it for the first time. I just like had like the best workout in my life, just shooting people. And

Michael:

I also was quite sweaty. After I got done playing. I was like, wow, Holy smokes.

Yeah. All right. Brandon, I have a final question for you before we let you out of here. And that's just what can folks do, either on the buying side or on the selling side to work better with their agents.

Brandon:

So communication in the beginning, basically, setting expectations is important. And just communicating in a way that's effective for both people, trusting your agents really important. Like it really helps us to have confidence from our clients that they're telling us, hey, you know, it's fast to trust you, we know that you care about us, we need the best results, you know, and that gives you a little bit of a boost of confidence, but you want to do a good, good job for them. You know, so just having a really good relationship where you trust them, and you pick the right agent that's going to make good choices for you. And then communicating your needs.

Michael:

In that same vein, how does someone know if an agent's doing a good job for them? Or they're just another kind of notch on the belt so to speak?

Brandon:

Yeah, that's a great question. I'm communicating every day, you know, just being there giving reports emailing what's happening, knowing what's happening, knowing what else is going on in the market. So they should know if the house were active nearby. And if it went pending, they should know what the buyer sentiment is. They should be able to speak to each buyer that's been through the property, what they liked what they didn't like about the house. That's really important, because you can't just put a sign up and you know, just have people follow you and they want to buy it.

Michael:

Right, right, right. Yeah. Okay, so great. Great tips.

Tom:

Yeah, one thing I'm gonna throw at you at the end here, Brandon, this is the some quickfire questions. Okay, so these are just general kind of philosophical You know, one word answer don't have to overthink it. We do this with with some guests on related to investing in real estate. So you're ready for some quickfire questions.

Brandon:

Sounds good. Yeah.

Tom:

As ready as you can be.

All right. consolidation or diversification?

Brandon:

Consolidation.

Tom:

High property taxes, or high income taxes?

There's no necessarily right answers to do it. You don't need to overthink it.

Beandon:

Yeah, that's a tough one. Probably property taxes.

Tom:

Okay. High rent growth or Low vacancy?

Brandon:

Low vacancy.

Tom:

I like it just a couple more for you throwing you on the spot here. Cash Flow or appreciation?

Brandon:

Appreciation.

Tom:

Debt or equity? You guys hate that one though.

Michael:

No, no, it's all good. There's no right or wrong.

Tom:

Totally. We talked to Academy members. It's like, you know, a huge part is like what's your investment thesis? You know, more cash flow more appreciation more balance. So yeah, no appreciation is great.

Brandon:

A lot of my friends are cashflow investors yeah.

Michael:

Because you can't get it in the Bay Area.

Brandon:

It's really thin. And it's like, you know, you lose tenants. If you could go south.

Michael:

Yeah, really quickly.

Tom:

Last couple of questions. Single Family or multifamily?

Brandon:

I’d say multi multi family on a wide scope.

Tom:

Yeah. Yeah. Well, more cash flow there. Local or remote investing?

Brandon:

Local.

Tom:

Turnkey or massive project?

Brandon:

Man as an investor just for making money massive project.

Tom:

Sure. All right, non -real estate related, Midnight Oil or early bird worm.

Brandon:

Early Bird worm.

Tom:

Text message or email?

Brandon:

Text.

Tom:

And the final question. Olive oil or butter?

Brandon:

Oh, great question. Butter!

Tom:

All right,

Michael:

Good answer.

Tom:

Yeah. Good answer. You made it to the quick fire as well. Brandon, thank you so much for coming on. And joining us today anyways, if one of the people wanted to reach out you know, questions on selling and all that good stuff.

Brandon:

Yeah. If you want to see us on Instagram at WCrealtor, and you can see a lot of our stuff on there. And we've got a website www.thekersisteam.com, feel free to reach out and give us a shout.

Tom:

Awesome. Thanks again for joining us.

Brandon:

Thanks so much for having me guys, that was a lot of fun.

Tom:

Thanks to everybody for listening. We hope you found this episode entertaining, enjoyable, educational, all of that good stuff. And if you did, if you could subscribe and like our podcasts wherever you listen to your podcasts, give us a rating and as always happy investing.

Michael:

Happy investing.

5 Tried and True Real Estate Strategies (and How to Determine Which Is Right For You) Feb 01, 2021

In this episode, we cover, at a high level, the top 5 investment strategies and who they might best work for.

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Transcript

Michael:

Everybody and welcome to another episode of The Remote Real Estate Investor. I'm Michael and today I'm joined by my co hosts,

Tom:

Tom Schneider

Emil:

and Emil Shour

Michael:

and today we're gonna be talking about some different strategies that you could pursue with your real estate investing. So I think a lot of people are very familiar with a couple different strategies, but today we're gonna be talking about high level what the different strategies are, and what might be a good fit for you if you're just getting started. So let's get into it.

So, in this episode, guys, I want to talk about five major strategies, your categories, if you will. So I talked about wholesaling, fix and flipping bur in long term buy and hold or just rather buy and hold and then we're gonna end with house hacking.

Emil:

Guys before we start talking about these topics, I want to give a quick shout out to K winters 34 who left us an awesome review recently, I've been listening to this podcast for the past year since it started I cannot say enough good things the hosts interact in a light hearted manner to make it a very easy Listen, I have learned a ton and it reinforces my belief that this is the way to financial freedom. Thank you so much. Awesome review. Appreciate it. I'm with you. This is my path to financial freedom as well. So leave us a review. We'll give you guys a shout out in a future episode.

Michael:

Thanks so much. Kay winters I guess my mom was right. I do have a face made for radio.

Tom:

Oooooh!

Emil:

There you go. That lightheartedness coming out.

Michael:

So Tom, do you want to kick things off and talk to us a little bit about wholesaling.

Tom:

Wholesaling, yes. So I think before getting into some of the pros and cons, we're gonna put a definition out of these different strategies. So with wholesaling This is a really interesting industry and basically what this is, is this you are getting a property into contract and then selling the contract and the difference between that sale price and what you sell it for that's what you're making as your commission so you're never actually taking title and owning the property you're doing sort of an arbitrage where you're getting right in between so there are some states where it's there's a little bit more nuanced the technical aspects but but at a very high level you know, you're not buying the property you are selling that property and I'm sure a lot of you who own properties or have seen signs on the on the road that says we buy ugly houses, those are all forms of wholesaling.

And I get in my mailbox every day guaranteed like a couple of letters that was written by a robot that made it look like it was a handwritten saying I'm looking to buy your property in blah blah blah. And these are just wholesalers, it's their game and you may get phone calls to like hey, I'm a local investor interested these are wholesalers and as an owner I find it kind of annoying a little bit it just you know just creates a lot of clutter in my mail and my voicemail,

Emil:

Okay Tom.

Tom:

In all of this stuff so nothing against wholesaling I guess maybe something against wholesaling. Jamming got my inbox.

Emil:

Yeah, dude, you're definitely got something against wholesaling.

Tom:

Yeah, you're right.

Michael:

You're raining on a meal's parade, man.

Tom:

It's funny. I'm. Oh Emil! Well, you know, he's using some of the techniques as a wholesaler but he's not wholesaling, though, right? He's looking to buy it.

Michael:

Yes,

Tom:

Wholesaling is good honest work and what is I'm going to just keep kind of riffing on wholesaling, wholesaling. Oftentimes, these people are looking for quick sailors. And man, I was at a real estate conference and I heard this acronym talking about wholesaling, and it was kind of dark, but I think it's like kind of true. Like, it's I think it's like death divorce. And there's like one more D like death is with a lot of people who are trying to sell quickly. It's like some traumatic event happen, and they're just looking for someone to buy it pretty quickly. That's where wholesalers are, I'd say like pretty active.

I personally wouldn't ever want to sell to a wholesale, hopefully I don't I'm not in a position I need to just because if you're selling to a wholesaler, you're often selling below what the market value is, you know, and the upside of doing that is you'll be able to sell very quickly but I wouldn't recommend okay enough talking about my personal thoughts on wholesaling. But anyways, Tom rant on wholesaling done over the air, somebody call here quick.

Emil:

Wholesaling has gotten a bad rap. There's a lot of bad wholesalers out there, but the good ones, they find people who were in some type of distress, like you mentioned, they have a death in the family and divorce. They're trying to get rid of a property. Maybe it's someone who can't afford their mortgage anymore, whatever it may be, and they help that person get out of distress or they can right. A lot of times wholesaled homes are not in very good condition. Like if you're an owner and you needed to sell your property and it's in good shape. You could probably just go list it right but it needs a lot of work. If you need a quick sale. All those things also can actually be a great option for those people. Yes, you're not going to get top dollar, but it potentially gets you out of a hairy or difficult situation for you as the owner

So they, you know, I know they get a bad rap, but they do have a place and a purpose, I think. And on the flip side, they help investors who don't do this acquisition effort on their own, they help those investors who are looking for distressed properties need some work, whatever it may be, they help them find that and in return, they get that difference that you mentioned. Right? So wholesaler finds a property gets it under contract for 50 k has a list of investors, one investor agrees to pay 75 K and the wholesaler made at $25,000 for doing all the marketing all the work that was required to get that contract, which is a lot of work to get one contract, let me tell you, so that's kind of the value that the wholesaler brings to the table.

Emil:

So great synopsis. Tom do you have something to add?

Tom:

You do want to get on the list of the buyers of wholesalers. I mean, wholesaling is good hard work. You're blasting out a ton of people trying to get it, you know, very low percentage high volume game of actual conversion. But if you don't have capital to buy a property like this could be a way to get in the action as a wholesaler.

Emil:

Exactly.

Michael:

That was getting me my question who should consider being a wholesaler? And who should consider buying from wholesalers? Yeah, so Tom, I think you just touched on who you know, who should consider being a wholesaler is someone who doesn't have capital to get in the game, their own capital getting game, this is a good way to generate some cash. But understand that you do need to go understand the local rules and laws governing real estate transactions in your market because they do vary like you were talking about. So make sure you go understand those before doing anything. But so then who would be a good person to utilize a wholesaler as a buyer?

Tom:

I mean, I think anyone an acquisition, right? I don't know. Do you have any preconceived answers to this question? I mean,

Michael:

No asking for a friend.

Tom:

Sure. That's what they say Michael asking for a friend.

Michael:

I mean, like Emil, you were touching on if you're on the buying side, and don't do this on your own very regularly, it can be a good way to go. It's just tough because a lot of times those types of investors buying from wholesalers are looking for under market deals. And if the wholesaler is making a spread in the middle, a lot of times that value can already have been extracted from the property. So I think anybody could be on the list as a buyer for wholesalers. And just evaluate the deals they're sending you make sure that there's still enough meat on the bone for you. Because a lot of times, like you're saying, Emil, all these properties need rehab, and you're buying them under market value. So make sure that you're still buying them under market value and the rehab you're doing when that's done, there's still equity spread in the property.

Emil:

That's the key. It's like if the wholesaler is usually going to, you know, let's hear on the wholesalers list. They're gonna say I have a property three bed, two bath x square footage. Here's what I'm selling it for. Here's the estimated rehab. And then here's the after repair value, retail price, I would say the person who should be buying from the wholesaler is someone who really knows the rehab numbers, like if you have pictures you can have in your head say, Okay, this is what I think it will be. Never take the wholesalers estimate to be true, right? Like a lot of times they know the numbers that need to work to make it look like it's going to be a great deal. But you need to know your numbers.

So I would say if you're brand new, I would I would be very cautious about going and buying from a wholesaler and see if you've done a couple rehabs yourself you're like, you know your market, you know, whatever rehab budgets within a margin of safety, then I think it's probably safer to go to a wholesaler as my two cents.

Michael:

Love it.

Tom:

I like that recommendation too. Yeah, good call.

Michael:

Okay, so let's move on to our next strategy, which is fix and flip. So a meal Do you want to start us off by talking and defining what a fixin flipper is?

Emil:

Yeah, so it's similar in a sense to wholesaling in that you are typically finding a property that is in distress and need some work, you can buy it for under market, and then instead of flipping the contract to somebody else, you're buying the property, you're doing the renovation yourself, and then you're making your money on the sale, once it hits that after repair value that we mentioned with the wholesaler right? So you buy a property for $100,000 and needs $50,000 worth of work and you estimate you can sell it at 225 so now you're making 75 k on that slip you know obviously minus all the fees you pay when you sell but the idea is that you actually buy it you fix it yourself and then you flip it either to you can flip it to an investor you can flip it to an owner occupant, you're doing the whole process yourself.

Michael:

Awesome and thoughts on who makes good fix and flippers as a strategy?

Emil:

This is another way to make money faster I would say you know with like buy and hold it's typically like you know you're playing a longer game with fix n flip you need capital, or you need hard money, either one, but typically, it's like you have some capital and you're looking to to make short term profit versus holding long term and making cash flow and appreciation all that so I guess it depends on are you trying to make money in the short term or are you trying to do a long term hold and make money and compound over time?

Michael:

And on that too, just keeping in mind that the money that you earn from a flip profit is taxed very differently than the money you earn from rental income.

Emil:

Yes

Just be aware of that when you're counting your numbers. In that example you gave in that $75,000 profit, you know, minus your closing costs, let's forget that for a minute. But that 75,000 is going to be taxed very differently than if you made 75,000 in a year from rental income. So just be aware of that when you're when you're running your numbers.

Emil:

Right.

Tom:

I guess we’ll meander into pros and cons. So two huge risk variables in the fix and flipper, one of them is on the property themselves. You know, if you're buying a fix and flip, there's likely some major things that need to be fixed. And unless you're really good at estimating those costs, then you could get underwater very quickly, where you're end up, you know, paying more. So that's a major risk, I wouldn't recommend doing this remotely, I wouldn't recommend doing this if you don't have a construction background, or you're not partnering with a very strong construction, skilled acumen you know, partner.

So that's one other risk, one risk, and the other one, I think is getting your hand in the cookie jar, if like the market was to turn, unlike a long term buy and hold where the risks of the value going up and down are going to smooth out a little bit…

Michael:

Peanut butter spread!

Tom:

Peanut butter, chunky, smooth, now we're talking about smooth peanut butter. More of a chunky guy myself… Anyways, okay, you in doing, buy, fix and flip, you're just way more at risk to fluctuations in the market. So those are two really important variables that you are opening yourself to risk in doing this fix and flip strategy. But there are people that do it and make a lot of money with it. But I know there's also people who do it and bite off a little bit more than they can chew.

A huge, really important aspect of a fixin flip strategy is speed of redeploying capital. So with a property that you're doing a fix and flip on, oftentimes people will count their returns on a yearly basis. So like, let's say, I'm doing this with $100,000. And I, you know, buy a property, fix it up. And I turn that capital over multiple times, instead of just say making like a 15%, or 20%, or 10%, whatever that number is, if I redo that same compound that multiple times in a year, that's how successful flippers make money is being able to move very quickly, because the the holding cost of capital is pretty high, especially if you're borrowing money. And having done some consulting for companies that do flips like this, like a really key metric that they're following, you know, not as closely as, obviously, the dollars and keeping that inside, but it's totally related is how quickly can they get the property rent ready, you know, get to the market, and then how many days on market it is and so they can take the money from the sale and just redo it again, and rinse and repeat, rinse and repeat.

Michael:

And Tom, those are really great points, any tips for folks on how they can mitigate some of the risk associated with the market volatility while they're doing a flip?

Tom:

I think where there is seasonality, you know, kind of like if you can kind of time your completion of projects out to be where properties are most marketable, which oftentimes is in the spring after the school season. But if you're racing through doing these fix and flips as fast as you can, that maybe that doesn't matter as much, you're just trying to move as quickly as possible, I would say, know your lane, like know what you can estimate really well like, again, the ability to estimate those costs, and avoid the kind of unknown costs as much as you can, is just really, really important. And I mean, anyone who's exercising this strategy successfully knows that Yeah, but uh, if you are going to do it know, your cost really well know your cost basis.

Michael:

And just to add to that, to kind of alley-oop myself, I would say, evaluate every flip as a long term, buy and hold. So that if things do go south, while you're mid flip, you can just hold the property, rented out cash, flow it, and then flip it, do your flip portion at a later date.

Tom:

I'm going to drop another one of these real estate conference comments. So I think it was talking with some of these folks who were fixing flippers, and a lot of them just ended up turning into buy and hold. And to Michael's point, if the market does go south, a lot of these people who are doing fix and flips ended up just to being long term, buy and hold, investors liked it.

Michael:

And so just the thing to be aware of is making sure that your capital, however you're funding these deals, you have the ability to convert it into long term financing, or it's you can still hold on to it. And the deal still makes sense, which leads kind of segues very nicely into our next strategy, which is the BRRRR method. And Emil, I know you're working on one of these right now. So can you define for us what the BRRRR is?

Emil:

I'm doing a cheater BRRRR where interest rates have plummeted and home values are skyrocketing. So traditionally, in a BRRRR it's buy, renovate, rent, refinance, repeat, it's kind of like flipping but to a bank is the best way to think about it. So you buy a home that's distressed needs work. So you buy it for under market value you put in your rehab to improve the property and then you take it to a bank to refinance out most or all of your capital and then the last are being repeat. So you go and do that process over and over again and especially after I think like 2010 and currently like, because the market bottomed out and started going back up for years and years and years, this was a very, very, very popular strategy people were using to quickly grow a portfolio. There's a lot of like, nuance and details into how do you do this correctly. So you can pull out most if not all of your capital, but that's the gist of of how this works and why people use it.

Michael:

Okay, and so who would this be a good strategy for and who might this not be a good strategy for?

Emil:

I think it's probably similar to wholesaling and fix and flip in that I think it's best for someone who knows the rehab budget, right, it's really easy to mess up the rehab budget, or 10, think you're getting a deal when you're not. And then you think the after repair value, right is going to be higher than it, it could be. So there's just a lot of learning that comes with this. I don't know if you know someone does on their first try, they get it perfect. But I think it just, you know, you got to say I'm willing to take that risk and get your feet wet with it. And the two big variables are knowing your after repair value, what is it going to appraise for and the rehab required to get there, and then do the numbers work in that formula.

Michael:

Mhm. And I would say to this is definitely for someone who, who wants to take on some risk, who likes a project, but you mentioned about not getting it perfect. And kind of being leery of that, I think it's really important, again, to identify the numbers and to really call out what that means even if you do miss the mark. So if you buy a property for 50 K, and you put 30 into it, now you're 80 into it. And so you know, you think it'll appraise for 100. And so you can go get a loan at 80% loan to value and get all of your 80 k back, let's say it only appraises for 90.

So if it appraises for 90, you're gonna go get 80% of a 90 k loan, you'll get $72,000 back, which means you left eight k in the deal, which still probably isn't too bad. I mean, if you run the numbers on the return on investment on that deal, that could be fantastic. And then if you were to go buy that same $9,000 property at 20% down, you'd have to put in 18,000. So you get to have this property for only, you know, set whatever 7.2 or 8000, whatever number I said.

So it can still be a really great strategy. Even if you missed the mark, you just don't want to miss really big,

Emil:

Right.

Tom:

This is good for growth mode Brr. So like if you don't need the cash flow now, because in the process of doing a Brr, you are increasing your monthly debt obligation. Now you might net making it and have more cash flow, you should add when you're done with slipping that new refinanced capital that you're getting out of it into a new property, you should cash flow more, but in between time, you are increasing the amount of debt that you owe on the property, so your monthly payments is going to be a little bit higher.

So I think it's a fantastic way to grow faster and leverage appreciation by doing the whole refinance aspect of the BRRRR. But if you're in a position where you don't want to increase your total debt, and you want to have as high as loan to value ratio as possible, than doing that refinance aspect of BRRRR, which is really the key are in BRRRR strategy is maybe not the right fit.

Michael:

Perfect.

Emil:

The only thing I was gonna add is that I forgot to mention, typically investors when they're buying, they're doing it all cash. So that's another thing to think about cash helps you buy from the seller quicker, right? So that makes your value prop to the seller better. And if the home really does need a lot of rehab, the bank oftentimes may not lend on that because it needs a lot of work. It's riskier for them. So that's one of the other caveats is you know, you need that capital, a lot of times you're buying these properties all cash to to do the deal on the front end.

Michael:

And something else along those lines, keep in mind is that lenders often have requirements about how long you have to own the property for before they'll give you a refinance. So definitely ask that question and have that conversation on the front end before you purchase the property. Because the last thing you want is to get buy a property, you already have it for a month, and then you can go get your money 30 days later, when in reality, it might be six months to a year.

So you just want to run your numbers while you're owning the property for however you financed it at the beginning, however you purchased it, and then also run your numbers about after you put debt on this thing. What does that property performance look like? And make sure those numbers make sense in both situations.

So let's shift gears here and talk about house hacking. Tom, do you want to give a kind of high level definition of what that is and talk to us about who might be a good candidate for a house hack?

Tom:

Yeah, so a house hack is you are buying a property to live in and you're renting out either the other rooms or perhaps it's a duplex or triplex the other units or perhaps there's maybe even two little houses on the property Isn't that nice? A little community but, at a high level house hack is you're living in one room unit and somebody else's living in the other room unit or the other little house we're so fortunate to have that

Michael:

But Tom this show is is called remote real estate investor if I'm buying a primary that's not real estate investing.

Tom:

Well, Michael, I'm hoping you're alley-ooping yourself because I just I missed you threw up for me to dunk.

Michael:

I wasn't an intentional alley-oop, I thought it was a lob, but I think it's definitely a hybrid of both…

Tom:

I was looking the other way!

Michael:

You know, it's it's definitely a hybrid approach in that you get to cover your own housing needs, expenses, often with rental income. So you get to experience being a landlord, whilst getting your owner occupant financing, which is the best type and cheapest type of financing available, and you get to live somewhere. So I think it's, it's a really, really cool hybrid approach. And it's got a lot of benefits and allows you to toe dip into being an investment property owner without having to do that fully. And so you get to kind of hold it close to your vest have some degree of control. And so this is we're talking about who might this be a good strategy for who might this not be a good strategy for? Well, this is definitely not for a remote real estate investor. Because by definition, you can't be remote and do this you have to go by be an owner occupant to begin with, at least what you do after the fact is totally up to you. But you need to go live in the property and living it.

Tom:

You know, cool kind of related to this strategy that a lot of cities are getting looser around guidelines of allowing ADUs. So you could buy a house, and it's just the house and you're living in it with whatever your family or whatnot or your friends. And then you can build a small little dwelling units. And there's so many cool companies popping up that allows that does these prefab little houses.

So you could even back into this strategy, not even planning on it, you know, necessarily upfront when you buy your house. But there's a lot of tailwinds and supporting kind of a reverse a lighthouse hack, with cities getting friendlier of building these small units, as well as companies that build these small units getting cheaper and better and faster.

Michael:

Awesome.

Tom:

And it's something that we're like kind of considering, you know, putting a little ADU, in-law unit.

Michael:

Yeah. And so for those who might not be familiar, what is an ADU?

Tom:

ADU stands for accessory dwelling unit.

Michael:

Awesome. And so Emil, who do you think would be a bad candidate for a house hack other than you know, someone who wants to be a remote real estate investor,

Emil:

I don't think there's a such thing as a bad candidate.

Michael:

Booom!!

Emil:

I will tell you personally, that like, if you're cool with it, you should 100% do it. I will tell you, personally, I'm married, I have a kid at this point in my life. It's not something I'm interested in, I would have loved to have done this when I was single or whatever, you know, didn't have kids. But now it's like, we have a home, we have a backyard. We have our own space. I like that. If you are in the same situation as me and you're like, I still wanted like power to you go do it. There's no reason you shouldn't or couldn't do this. It's really just about personal preference, I would say.

Michael:

Yeah. And like Tom, you were mentioning, the space aspect can lend itself really well to this. If you have two properties, you know, two single family homes in the same lot or a duplex, triplex or quad, you know, you can still often have your own space, you've just got to decide if that's something that you're okay with based on the setup of the property.

Emil:

Yeah,

Michael:

But definitely look for opportunities. You know, large lots are great, zoned multifamily, lots are great. So I think that there's a lot of opportunity out there, especially like what you were mentioning, with cities changing guidelines and regulations around adding additional ad use. Yeah.

Emil:

Yeah, so many people in our community are converting their garages to an edu. I honestly would love to do that. But are we have a detached garage that's in the backyard. If it was in the front, it's kind of like they're separate. They have their own entrance and stuff, but with the backyard, it kind of changes it. So we've decided to hold off on converting into a deal now but a lot of people in our community are doing it.

Michael:

Right on. Alright, so let's shift gears here, guys to our final and probably bread and butter topic, the buy and hold strategy. So Emil, do you want to walk us through what the buy and hold is? And then Tom, maybe you can take us through who might be and who might not be a good candidate for this strategy.

Emil:

Michael, I would love to but you know what, I'm gonna pass the baton back to you. You know, Tom and I have been carrying the load this entire time. And you know what?

Tom:

Oooooh!

Emil:

It hurts. You're up?

Michael:

Are you guys's backs exhausted from carrying the team?

Tom:

Yeah, and Michael's out here doing all this fancy alley loops and crossovers and we're gonna do it to you Michael. Learn to shoot a free throw Michael shoot a free throw.

Michael:

The ironic the ironic thing in all of this is that I like I suck at basketball. It was like that and volleyball were the ones like the two sports I just never could get good at and I remember I always like I shoot the basketball from my chest. It's how I throw at people like really? like really? Like you're like You're a grown man.

Tom:

I have weird body control like I think like repeating like a little action great at it but like basketball they called me technical Tom because I like I don't think I like had good at it. I would just a flail little bit.

Emil:

Oh god.

Michael:

Now I don't feel so bad.

Tom:

I get rebounds. You know?

Michael:

Yeah, I'm a good passer. That's for sure.

Tom:

In unethical ways. Okay, sorry. Go ahead.

Michael:

All right. So the buy and hold strategy is at its Crux kind of in the definition. So it involves buying a property and literally just holding on to it for some certain amount of time. And there's you might have often hear different time periods associated with this. You may hear the short term buy and hold the long term buy and hold

So, for me personally, a short term buy and hold is anything inside of five years and a long term buy and hold is anything north of 10, seven to 10 years, I would say.

And so you buy it, you hold it or whatever your goal is, whether that's appreciation, or cash flow, and collect those things, whether it's cash flow, you're hopefully collecting cash that whole time. And if it's appreciation play, you're hopefully gaining appreciation inside of that time. And then you can decide what to do with it. Once you've accomplished your goal, whether that's a cash flow number and appreciation number, you can decide to sell it and utilize it maybe a 1031 exchange, or you can refinance it and tap into some of the equity, which is kind of what Emil was alluding to previously, that he's got a BRRRR without the renovation is he got lucky and bought well, and there's been a lot of appreciation in the area. So that in itself is what a buy and hold is.

So you guys want me to keep talking about pros and cons of who might be a good candidate?

Emil:

Yeah, go for it, man, we'll just chip in.

Tom:

Sure. So I would say a good candidate for buy and hold is anybody with a decent time horizon, if you are looking to make money yesterday, or tomorrow for the next thing, then buy and hold is probably not going to be a good fit for you. This is definitely a slow and steady wins the race type of strategy. And as Tom, you always say, to get rich, long term greedy, right. So it's, it's a very slow process, it's definitely not overnight, so don't expect things to change rapidly. And so if you're someone that is looking for that rapid growth, this is probably not a good fit for you.

But you could definitely combine a couple of these strategies like the BRRRR method with a long term buy and hold, you can buy a property, then you hold on to for a long time. And so you can you can grow really rapidly that way. But just in and of itself, buying a property sitting on it, you don't tend to see rapid changes very quickly. So just know that.

So Alternatively, you know, this could be a really great strategy for anybody that's got a long enough time horizon that doesn't necessarily want to be super active with their investment strategy. They just want to buy something and hold on to it kind of like a stock and just let it do its thing over the years, this is a perfect strategy for you. So if you have some capital to start to make a purchase, so you can partner with someone that has but you don't, this can be a really phenomenal strategy. And you look back in 5,10, 15 years about on the investment you thinking, Man, that was awesome. You know, this was such a great investment. I'm so glad I did this 5, 10, 15 years ago, hopefully, is the sentiment not tarnished. Why did I buy that stupid thing 5, 10 15 years ago.

But I think given a long enough time horizon, if we look at historics and values and what they've done, again, given a long enough time horizon, they've gone up significantly. And when you compare that against the stock market, when you compare your total return in real estate against the stock market returns, I think people are very pleasantly surprised with how real estate performs as a general asset class solid. How did you guys?

Emil:

Nailed it?

Tom:

You did great. You. You made both of the free throws, they …swish!

Emil:

From the chest!

Michael:

I did? Did the grandma bounce into the bucket?

Tom:

Hey, don't knock it if it works, man. Don't knock it if it works. That's it.

Michael:

That's what I'm saying.

Tom:

Yeah, I agree with everything Michael said. I mean, the way that I think about it kind of long term is I'm looking for something with pretty low overhead. I'm not doing it to make another job. I'm doing it to create wealth and just kind of build this machine that when I'm ready to turn on the spigot for just, you know, to live off of I can I can do that if I want to, or I can continue to work if I want to. It's just that optionality is with a is what I'm just trying to build with my long term buy and hold strategy.

Michael:

You can work if you want to.

Tom:

Sure. Yeah.

Michael:

Por que, no?

So something to just keep in mind to final thought is that these are some high level strategies that are available to folks be thinking about what interests you if you're unfamiliar with any of them. If you've already mastered some, you can think about expanding your tool belt into others. And also keep in mind that a lot of these can be combined into one another and mix and match. It doesn't have to be one or the other. But I would definitely say if you're starting out, just be cognizant of getting smooth peanut butter spread too thin across too many avenues, it can happen very quickly, you can get shiny object syndrome. So pick one, go learn about it, see if it's a good fit for you and look to pursue that because you can very easily get distracted.

All right, everybody. That was our episode. Thank you so much for listening, feel free to give us a rating and review wherever it is. You'll see your podcasts. Those are really helpful for us and we'd love to hear feedback from you all, as well as any episode ideas that you want to hear more about. So thanks so much for listening. We'll catch you on the next one. Happy investing

Emil:

Happy investing!

Tom:

Happy investing.

Coach Carson On The Importance Of A Due Diligence Checklist Jan 30, 2021

In this episode, Chad Carson shares about the importance of having a due diligence checklist for buying new properties.

Get Chad's checklist here: https://www.coachcarson.com/newsletter/

Checkout Chad's Podcast here: https://www.coachcarson.com/coach-carson-podcast/

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Transcript

Michael:

Hey, everybody, welcome to another episode of the remote real estate investor. I'm Michael Albaum, and I'm joined by my co host,

Emil:

Emil Shour.

Michael:

And we have a very special guest for this weekend wisdom. Chad Carson is with us again. And Chad's gonna be giving us a little bit of insight into how he does his due diligence and some tips and tricks he's developed over the years to do it really well. So let's get into it.

Chad, we were just chatting about a process that you use to close on every property that you close on, right?

Chad:

Yeah, basically, I think the analogy we used was, you know, when you get in an airplane, and you see these pilots at the front of the airplane, and they're, they're walking around the plane, they're looking at things, they're testing things, they basically are going by a checklist, because who wouldn't look at a checklist to make sure you don't make a mistake before you put a huge metal plane into the air right with all these passagengers in the back? And I guess my point was, why wouldn't a real estate investor before they go buy a property with hundreds of 1000s of dollars or at least 1000s of dollars? And this might this property might be with you for a while right? And you want to make it work? Why would you not have some kind of process, some checklists that you would use when you're buying a property?

So I guess my main message is like, have a checklist, right? Even if it's like three or four things, what are the things you got to do and check those off the list, I started doing this with my business partner at the very beginning of our business, we just got lucky and read a book called The E myth, e myth mastery, I guess, just the E myth, right when we started our business, and that was that idea of checklist was like at the heart of that book. And so we just embrace that. And the idea, though, is that you can build a checklist for everything in your business, everything in your life if you wanted to. But every time you do a process, you're simultaneously doing the thing.

So you're closing on this property, you're doing the closing. But you should also be thinking about working on your business, and actually writing the checklist so that the next time you close on the business or the property or if you delegate it to somebody else, they can actually go through and do that same process as well. There's the kind of lesson itself of the closing checklist. And there's the meta lesson of just building your business around standard operating procedures and checklists. That has been so critical for everything we've done.

Michael:

I think it's so interesting. And I know for me that confidence can be the like, biggest enemy here. And that Oh, yeah, I've done this 10 times, what do I need a checklist for? But to your point, I mean, that's when people really start to get complacent and mistakes get made. And so I'd be curious to know what's on your checklist.

Chad:

Some of them are really mundane, like, hey, you're about to buy this property, make sure you turn on the utilities. Yeah, it's pretty straightforward, right? But I had some properties you bought and all the contractors show up and they're like, Hey, is the power on can't turn ourselves on. We'll be back in a week. Because we have other jobs, we have to get to now like, Nooo, delivering the dumpster like some of those kind of just like transitional pieces, those are definitely on there.

But even before that, I've got some items about how to like to send a instructions to the closing attorney or the title agent. That's a part of the checklist. And then there's a much more detailed checklist about due diligence. So once you get a property under contract, you get this period that we probably all have heard of where you just want to make sure that all your assumptions are right, make sure the values is what it thought you was, make sure the repairs are what you thought they were. And so that's a much more thorough list.

Everything from checking out like red flags in the neighborhood, making sure there's not like a vicious dog like jumping in the backyard, go different times a day. Look for powerlines look for weird smells look for it as we did every time I made a mistake. I kept on adding it to my checklist saying, Alright, there's another mistake that I'm gonna add to the checklist, right? So it just helps me to think through the deal and to analyze it, I think we're all susceptible to is that you you get emotionally attached to a deal. Like you want to do this deal. You get committed, like once you've started moving, once you're committed to it, you made the decision, you don't want to like show yourself that you are show everybody else perhaps that you made a bad decision. Right?

And so sometimes you got to have this checklist to bring you though some cold water on your, your excitement and to say, all right, take it easy here have some cold, hard calculating the questions to ask yourself. And the checklist is like my little computer brain kind of bringing myself back into the rational world.

Michael:

It's so good. I know that for me personally, like after I've made that commitment, that emotional commitment, which I am trying to fight tooth and nail every single day, when I'll get probing questions of Hey, what about this? What about that? I find myself getting defensive.

Chad:

Yeah.

Michael:

And I'm like, wait, this has nothing to do with me. They're asking objective questions about the deal. It's not a reflection of you as a person back off. Yeah. So I know I need to I need to work on that big time. But I think that's great points that you bring up with your closing checklist.

One I'll add from a mistake that I made or almost made is when you receive wiring instructions from the title company, call them and verify the information that you're seeing on your screen is what they sent you. There's been a lot of wire fraud as of late and so somebody could intercept that change the instructions and then you still receive it from the title company. But in reality, you're receiving instructions to wire to Joe Blow in, you know, not the title company. So that's one that I picked up on over the years.

Chad:

Absolutely. Yeah, there's a lot of good ones. This is something when you're a network with a purpose, like ask people, what do you do before closing? And then you can add those kind of things to your checklist, because there's so many, so much good wisdom out there from other people.

Michael:

Yeah, there really is.

Emil:

Chad, do you have a checklist or something people can download on your site? I know you have tons of resources. Is there some where people can go see your checklist?

Chad:

Yeah, actually have a free toolkit. Anybody who goes to my website, like if you go to coach Carson comm forward slash newsletter, and you can actually get that on the homepage as well. And it's got my closing checklist. So you can you don't have to reinvent that wheel. If you just want to borrow that and download it. There's also some other stuff like I have a deal worksheet and some spreadsheets and different rental Tenant Screening kind of checklists and things like that. But yeah,

Michael:

Awesome.

Chad:

If y'all want to put that link in the show notes are something that people feel free to get that free and get downloaded for themselves.

Michael:

Fantastic. We'll definitely check that out.

Emil:

I might go get that myself can feel like I can always improve. I don't even have a checklist. So get on that you got it.

Michael:

You can always expand it even if you glean one thing from every 10 people you chat with or network with or check out I mean, that's time well spent. I think so never stop learning. If you're the smartest person in the room, it's time to find a new room.

Chad:

Exactly right. I'm gonna plan on being my last day on earth. I'm gonna be like, adding to my checklist and learning something new.

Michael:

So there we go. Awesome. Well, thanks so much for hanging out with us, man. This was really really great stuff as always enjoyed it.

Chad:

Thanks for having me, guys.

Michael:

Catch on the next one soon.

All righty, everybody, that was our episode. Thank you so much for listening in a big, big, big thank you again to Chad Carson. Super fun guy. It was a lot of fun to record with him, he’s super gracious with his time. If you haven't checked out Chad's podcast, there's a link to it in the show notes as well. We highly recommend you giving it a look. And we always appreciate rating and reviews wherever it is you listen to your podcast. So thanks so much for listening and happy investing.

Go Small Or Go Home w/ Chad Carson Jan 27, 2021

In this episode, Coach Chad Carson joins us again to talk about an important article he wrote for BiggerPockets on making sure your investment goals are in line with your life goals.

Link to article: https://www.biggerpockets.com/blog/go-small-or-go-home

Link to Chad's website: https://www.coachcarson.com/

---

Transcript

Michael:

Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co host, Emil Shour. We have a very special guest with us today. Chad Carson is joining us again, and Chad's going to be talking to us today about his article that he wrote for BiggerPockets. Why the Massive Real Estate Empire you think you want won't give you the life you imagine? So let's get into it.

Chad Carson, thanks so much for coming back on the podcast, man, we so appreciate you taking the time out of your busy schedule to hang out with this.

Chad:

Happy to do it. Thanks for asking me back.

Michael:

No, of course, of course. So you wrote an article that got published on BiggerPockets. And we're gonna link to that in the show notes. But the article is called why the massive real estate Empire you think you want won't give you the life you imagine? So we're gonna have you read an excerpt from this article. But I would love to know to kick things off. What made you write this article was kind of your inspiration.

Chad:

Yeah, I wrote a lot on bigger pockets I haven't written as much lately, but also wrote a book for bigger pockets. And so I just I love the ecosystem of BiggerPockets. I love the team behind the scenes. It's just a great service to real estate investors and was immersed in a lot of that, though, I think I heard a common refrain. And it's not necessarily a bad thing. But a lot of the podcasts, a lot of the articles you read the ones that really stood out, were the ones talking about get as big as you can, you need to syndicate, you need to get it 1000s of units.

And that was exciting. I guess it makes you know, my podcast hosts your podcast, it makes exciting, you know, headlines when you have this person who bought 50 properties in one year. And that's amazing. But as I thought about it, like the people I knew, both in like the non famous people, nobody even knows who they are, but they have tons of lifestyle, and they have flexibility. And they do what matters to them. A lot of these people had like five properties or three properties, and they had paid them off. And they were really simple. And it was nothing to write home about supposedly.

But if you measure things a little bit differently, it actually was pretty incredible. And so I wrote the article to try to tell that story and to explain kind of my point of view on that. And the headline was, you know, go small or go home, because the Grant Cardones of the world are saying you need to 10x otherwise you're no good, you know. He in particular, you know, maybe I get Grant Cardone on my show one day and have a discussion.

Michael:

Have a chat with him.

Chad:

Yeah. But I wanted to be kind of the the foil to that not because that's wrong, not because people shouldn't get big and go big. Like, I'm not saying that. What I'm saying is all of us who think keeping things simple, and going small, is just perfectly fine and actually preferred. I wanted to give a voice to that for those people and make an argument, why that's actually a better thing, in many ways.

Michael:

Awesome. Love it.

Emil:

I love that I stumbled on this and like the perfect time because I was starting to have that internal conflict where I'm like, man, am I just not thinking big enough? Like, I think this is what I want. But you see it everywhere, like you mentioned, like everyone's saying, Oh, I just took down 100 units here. And he starts to be like, is that what I need to do to be successful? And I love that this reframes that. So yeah.

Chad:

Yeah.

Michael:

All right. So let's jump into a chat if you want to kick us off here and tell us this a story of three real estate investors.

Chad:

All right, great. Yeah, I'm gonna get my place here. So a story of three real estate investors. And I got to give a little background to this before I start reading it, because I actually got this story from other people, as many stories come from actually a real estate investor named Jack Miller, who was a teacher for many years, he's now passed away, but he was a really good teacher. And I used to go to seminars with him early on in my career, and pretty sure I got the story from him. He probably got it from somebody else as well, but I adapted it for my own purposes.

The story goes that there were one summer there were three real estate investors, and they were their couples. And they traveled together to Europe and these investors that originally met each other as beginner investors in the BiggerPockets forum, and they liked each other a lot. And they helped each other kind of grow along the way. And so they became friends. And then about 15 years later, they each had experience some success with the real estate business, and they wanted to kind of go and enjoy the fruits of all of their efforts, because why not? Right, so they decided to go spend 14 days together visiting the Mediterranean coast.

First they were going to go explore some ancient cities in Italy, like enjoying some amazing foods and good wine perhaps. And then they were going to continue with a high quality kind of a Mediterranean cruise that would stop at Croatia and Greece. And they even go to one of my friends. Another bigger pockets author, his home country Arian Shehi lives in. It was from Albania has family still in Albania. He's from there originally. So another cool place.

So could these investors afford a nice trip like this? So you can imagine going to Italy and go on the Mediterranean coast? Well, let's take a look at the financial scoreboard to see how they could afford it using their real estate.

So couple number one was Liz and Tom and they are in their 50s and they live invest in self manage their properties in Missouri in the state of Missouri, and over the last 15 years they've bought 10 single family houses one by one and good neighborhoods. Liz and Tom search hard to buy these houses as fixer uppers. So they needed some work, they were able to buy them below value because of that. And they use the BRRRR strategy to recoup most of their cash on each deal. So they would kind of recycle their cash, buy another deal, fix it up, get it rented, do another deal. And then they would use what's called the Debt Snowball technique to pay off their mortgages early. That's something I talk a lot about as well. So they started with a BRRRR, they got loans, they paid off their debt. And so now their houses produce $7,000 per month, or $84,000 per year in positive cash flow. So that's number one.

Number two, Tiffany and Darius are in their early 40s. They live in New York, and they invest in North Carolina using a property manager. And 15 years after they started, they now own 150 unit apartment building, Tiffany and Darius began with smaller properties. And then they used a 1031 exchange. So a tax free exchange to kind of trade up from the smaller properties into these bigger properties until they had enough equity for a down payment on that the big 50 unit building. So they have 50 unit building has a solid fixed interest, 25 year mortgage. And the property itself after paying all their expenses produces $10,000 per month or $120,000 per year in positive cash flow. So that's couple number two.

Couple number three is Mike and Martin. And they're in their late 40s. They live in Nevada, and they own properties all over the country. 15 years after they started, they now have 500 units, Mike and Lauren began with their their rentals, but they because of their ability to put together great deals. They also began syndicating deals by pooling money from other people. So they were the general partner and they they recruited money from other people, their portion of the rental income equals over $30,000 per month, or $360,000 per year, their portfolio produces the most money out of all three couples.

So it's pretty clear to see we got into the weeds there. But all three couples can easily afford to pay for this nice European vacation. You know, money is not the issue. This is exactly why all of them began investing in the first place. But the story it gets a little more interesting as they approach the end of this trip.

So let's extend the trip a little bit. By the end of this trip. All three couples have had a fabulous time. It's been great so far. In fact, a couple number one, Liz and Tom propose, hey, let's all stay a few weeks longer. You know, there's a lot more to explore here. We're already here. Why don't we just do that Liz and Tom's rentals are full of self reliant tenants who automatically deposit their rent each month. And the tenants can email or leave a voicemail with any kind of maintenance emergencies if they come up, but this rarely happens and with no debt or immediate plans to buy more properties, their business schedule is amazingly flexible.

Couple number two Tiffany and derrius. They check their calendars. They have a few community and church functions, but they can put those off until later. So their property manager is very competent and in control the day to day issues on their 50 unit building. And because there's no major financing or remodeling projects looming, they happily agree to stay over as well.

But a couple of number three, Mike and Lauren have some challenges they want to stay and can easily afford the expensive extending the trip. But there are projects looming back at home. Remodeling contractors are waiting for their guidance on some recent value add apartment purchases they made, a new property manager needs to be found to replace them underperforming on with some of their units. Their corporate bookkeeper and administrator need help some of their equity investors want to meet with them to discuss some past and future projects. As a result, Mike and Lauren regretfully declined the vacation extension.

So this kind of leads me to one of the main points of this is the myth of the passive big business. Mike and Lauren do not have a bad business. In fact, it's financially the most successful business of the three investors. But here are the questions I always ask to the Mike and Lauren's of the world. Did your investment business meet your true goals? Are you spending your time doing what's most important to you, and what alternative approaches have met your goals just as well with less hassle and less risk along the way? Because it's possible that Mike and Lauren are happy with the current situation that they are like more power to him, I'm happy for him.

But my experience has shown that many people in their situation are less than happy. The extra money that they have, has come at a cost. And I'm sure I can get examples from all sorts of people listening to this with comments about Shark Tank hosts and famous entrepreneurs and BP you know, bigger pockets, podcast guests and other people on the podcast who've built really big businesses that also check all of those goals off the list.

Now I'm sure they're out there. And it's fine to provide those successful examples. But the bottom line is you the person listening to this? What are your goals? And what's the best way to achieve them? Are you a shark tank host? Or are you just a regular person like me, and who's trying to free yourself from the nine to five grind so that you can live an extraordinary life. So I know a lot of real estate investors. I know a lot of entrepreneurs, and at least in my experience, the ones with the most money, have big businesses. If that's your number one metric like go for it. Go for the big business. But the ones I know the most free time, if that's what you want, the most flexibility are the ones that have, and also the ones that have less stress, have smaller, simpler businesses and portfolios. And interestingly, I don't see these smaller investors worrying that they have a smaller net worth than the big investors. It seems they're too busy enjoying their life.

Michael:

Ah, it's so good.

Emil:

So good, so much better when Chad reads it for us.

Michael:

It really hits quite differently.

Emil:

Yeah.

Chad:

Yeah.

Michael:

So Chad, is this something that you've applied to your life? Have you always known this? Or is this something that you came across kind of later in your investing career?

Chad:

Now like, I'm the kind of person has to get smacked upside the head by anything. So I don't want to act like I've got any, like prior knowledge here.

A brief version of my story was in 2007, my business partner and I were like, kind of following that path a little bit, you know, like the, hey, let's get bigger and bigger is better. You know, just honestly, it was like looking at goals of other investors who we admired. Like, we admire these people, they were really good. And there was fun, and I'm, I played sports in life. I'm a competitor, like, I think it's fun to go compete for something. And it's, so we did the same thing. And we were we had in 2007 39, closings, some of those closings had, and those are all acquisitions closings. And some of those are multiple properties. You know, like some multi unit apartments. Some of those are flips, or buying, fixing, and flipping. Some of them are buy and hold rentals. But we were like, really, really busy. But we kind of took a step back, and I have to give credit to my business partner has my 50-50 business partner who we've been together from the very beginning. And he kind of pushed back on it more than I did, saying, like, wait a minute, like, we're so busy. And we've made some money this year. But what are we trying to accomplish here? Like, where are we really like moving towards the goals?

And we actually sat down and had like a kind of Heart to Heart business meeting where we each wrote down on a piece of paper, like, what are the things that are really most important to us? Or more specifically, like, what would we spend our time doing? If money were no object is such a good exercise, I encourage everybody to do it.

And the kinds of things I wrote down at that time is a 27 year old, and I just got married that year, where I wanted to go play basketball, pick up basketball in the middle of the day, for two hours, I wanted to go hiking in the woods with my wife, I wanted to travel abroad and do some things like that. Now some of those costs money, like traveling abroad cost some money, but like playing pickup basketball for two hours, hiking in the middle of the day, like that cost zero money, but the biggest limitation was how much free time and flexibility I had.

And at that time, I did not have flexibility and free time. And I was like, wait a minute, like, what am I doing here? It sort of reminded us and again, get my credit my business partner, and also maybe reading books, like the four hour workweek, I think kind of hit me upside the head a little bit too, you are in control of how you build your business. There's no, nobody telling you, you have to buy a certain number of units. There's nobody telling you how to run it a certain way. Like you are the architect of your business. And how you build that real estate business will determine how much free time and flexibility you have. So it's up to me, it's up to you to be able to do that.

Michael:

That's so good. It's so good.

Emil:

When you came to that realization, did you put a new goal in place? like okay, here's the goal. And I'm always curious about like, the way this kind of happens for me is I set a goal, we reach it. And then like anyone who's kind of Type A the goalpost changes. All right. Now he did that. What's next? And so like, I'm just curious how you've dealt with that over the years?

Chad:

Yeah, I'm the same way. I think we all are this, like the hedonic treadmill idea, I think just built into our psychology is that we get to something or like, Oh, that was nice. Let me get the next piece of candy. You know, like, it's just what we do.

But I found something that I don't know where I read this or heard about it that but if you make goals for experiences, and transformation, those actually tend to last a little bit more, or at least you had the memories of them. And I think it was from the four hour workweek that kind of inspired me to start taking some mini retirements. And so we actually made a goal my wife and I did to travel abroad, like, let's not wait, we're old to do this, like, we had the money like we were saving money, we live frugally. We're making good money. And it was more about just I need to like, build some systems into this business in order for us to be able to travel for multiple months at a time.

It took us a while It took us like a year, year and a half to really detach ourselves from some of the things that we had going on to build systems in the business where I had some other people doing things that I was doing prior previously. And then also just working with my business partner to say, Alright, what systems Am I running? What systems are you running? How can we automate this? How can we do some things remotely into 2007? We kind of had the aha moment. 2008 and then 2009. In August 2009, my wife and I went on a kind of our first big mini retirement where we got the backpacks out, went to Spain for six weeks, I learned to speak Spanish, she was already fluent in Spanish. And then we it was a little higher dollar in Spain. We loved in Spain, but we also wanted to go to South America. So we flew back and went to Peru and stay there for a month in order to keep up Peru and just loved it. And that's where I really learned to speak Spanish at that point. And then we traveled down to LA and hiked around in Patagonia kind of southern tip of South America.

Then came back up to Buenos Aries and spent some time there and along the way met so many amazing people, other people traveling other people who lived there locally.

It was one of those like for a type a person, you know, like one of those experiences where like physically like about eight weeks into that trip I felt like a not like untied in my chest where I was like, wait a minute, like I didn't realize that not was even tied. And now the thing is, I'm tying in Latin America in particular for me, this has a special place because I feel like there's a there's just a kind of ethos of connection with other people and relationships in the value of slowing down.

We Americans do not always appreciate that like there and probably other places in the world as well appreciate the value of slowness and deliberateness. That trip for me was kind of transformational because it got me hooked on that. And it got me hooked on, Emil, like goals that are more difficult to quantify but so much more impactful on on who you are and on your life.

Michael:

Just quick side note, I'm so glad that you mentioned that you really learned Spanish when you were in down in Peru and say holy crap six weeks in Spain and you learn Spanish, like know how embarrassing for me?

Chad:

No, not at all. I mean, I was doing a little bit there. But I'd taken one semester in college and I spoke German in college. So I kind of had one foreign language that helped when you learn the second one is a little bit easier. But right, I hasn't really say that I speak Spanish because it's like, up and down. And I was very fluent then sure. And since then we went Ecuador, and I got better. And it just, I still have my gringo accent. And I still,

Michael:

Of course, of course.

Chad:

But I have a Spanish teacher at home who can who can correct me luckily.

Michael:

Perfect. It's funny, because I had a bit of a similar smack upside the head to you in that I have a good friend of mine who's really become more of a mentor. And he's a young gun like me. And he's like growing, growing, growing, growing as fast as he can and recommend doing the same thing. And he's like, 1000 units. That's where I'm at. And then I have another very close friend who's 66. So he's quite a bit older in his career. And he's like, dude, like, is this in line with your life plan and life goals? I was like, I didn't even think to ask that question when I started, because all he could see was right in front of my face, like grow, grow, grow, this is what I can do now this what I can do now. And I'm hitting this running after this unit count in this cash flow count, not even thinking about what is this mean for my life?

I think it's so important to take a step back, even when you're just beginning even if you do have the ability to grow, grow, grow. But stop and ask yourself for every single question is this aligned with my life plan and goals.

Chad:

It’s also the pace. One thing I wrote about in the article that I didn't mention here, just that we didn't talk about is the pace at which you grow, you know, it took you 30 years to get 1000 units versus taking you five years to get 1000 units. Those are two different like scenarios, because you probably have to have a different relationship with debt, a different relationship with leverage different relationship with just speed and pace. There's nothing wrong with growing but even if your ambition is growing is like how are you doing? Are you doing in a way that I compared to like climbing a mountain, like if you want to climb Mount Everest, my wife and I tried to do this one time we were in a canyon, like climbing a canyon and South America going down and I was like, you know, oh, we've got this. We're like hiking all the time. And I went fast all the way back up. And I almost passed out like because I went way too fast. And I you know, didn't have enough water and dehydration.

And I compare that the same thing. If you were a professional mountain climber, you wouldn't just go straight to the top of Mount Everest like you would go up climatized little bit, come back down, go up a little bit more climatized. And I think that's a more reasonable approach to business as well, it but it requires something that very few of us, myself included, have a hard time with his patience. He gotta be patient, and be willing to just plug along, hike slowly. That's so difficult. It is For me.

Michael:

It is so difficult, especially when you have the means and you think you have the ability or the bandwidth or what have you. You're like, Oh, it's right here. It's so easy. I'm, I'm already doing this. So what's another project? What's one more project with one more project, it becomes very easy. Again. Yeah, Emil is laughing.

Emil:

Ask Michael how he knows!

Michael:

It's really scary. And it kind of can overwhelm you. And I talked about this on prior episodes. But I left my nine to five engineering job last August in 2019. And that first week that I didn't have a job, I was the busiest I've ever been in my entire life. And it's because I was taking on project after project after project thinking I could handle it. And it just it Yeah, it really consumes you.

And so I have very hardly adapted since then that I think smaller is better. And I love Love, love that you talked about the debt snowball. I think that often hits people upside the head pretty quickly. And like Oh, you mean I don't have to go buy 15, 20, 30 units, I can just focus on the 6,7,8,9 I have and pay those off and get the same result. I think it's pretty eye opening.

Emil:

In the article. There's this image that you have at the top of the article called the fulfillment curve and it shows like fulfillment going up is you have survival comfort, small luxuries and at the top you have like a star saying enough. And then it starts to come down and says clutter complexity and hassle. I think for a lot of people who invest in real estate who, by their nature are super frugal and don't even like like spending money. Yeah, you can grow, you can expand things, but most likely, we're all just gonna be like chipmunks storing more money in the bank.

Chad:

Yeah, I gotta give credit for that. And I actually got permission to use that in the book I wrote retire early with real estate from Binky Robin, your money or your life, probably my favorite financial books, people haven't read that it's kind of an old school book, this, they've got a new version A few years ago, the concept of that enough, like, it's kind of like patience, you know, it's one of the typical things to get with money. And the filmmaker you're mentioning, if you think about the free first $100 you earn right out of college, or right out of high school or something like that. $100 will buy you like tons of pizza, it'll buy you like, you know, a little bit of value food, it can get you some clothes,

Michael:

Numerous beers,

Chad:

Yeah, you're gonna get a lot of satisfaction out of that person. $100, right. But if you fast forward that and you keep going up more and more, you're going to get to a point, this is difficult to find that point. But there's a point where every extra dollar you get is going to mean, you're gonna have to work a little bit longer, you're going to have to buy extra, you're going to be buying more stuff is going to complicate your life, you're going to get boats, you're going to get cars, you're going to end, now that you have this fancy car, you're going to be worried about somebody running by it one day with a key and like scratching your fancy car. And there's just it comes with worry, it comes with anxiety.

Some of the philosophers like Henry David Thoreau, who I really admire, like the transcendentalist. And Emerson, if you look at some of them, and the stoics, and the Roman stoics, they were about being happy with what you have, and finding the place, that's enough for you. And very often, they would say, like money and wealth is an obstacle like to being happy being fulfilled, that you actually feel like you have enough. And that's another thing I've just admired in my own travels, like you meet some people who you stay with, and their guest house or whatever, with a lot less money than you, but you talk to them and see how much joy they have and see how generous they are. You don't need a lot of money to do that. And when you think about the people you really admire in your life, the most generous and who are the most happy and bring the most joy to your life? You know, there's a disconnect. It has nothing to do with money.

Again, not something I'm perfect with. But it's at least challenged me to think about, like, where does money fit into that relationship by Why do I need money, I need money to take care of the necessities, I need money to make this comfortable. Like I want us to live in a house that's warm, and I want us to live in a place that's safe. So of course, but when you get beyond that, when you start getting the biggest house and you start getting five houses, when you start to live in and you start getting the nicest cars, there's no doubt there's some baggage that goes along with those that I think at least from my own life makes me even less happy.

Michael:

I think you touched on something previously that our circle back to in that when you put goals and ambitions around experiences, rather than material things or dollar amounts. I think it's lasting longer as I think the way you said it. And I totally agree. I also think that is kind of a good thought experiment and exercise you should write down you know what it is that you want to do for a year, if you could walk away from your job for your What do you want to do, and then figure out how much that costs. And I think people will be shocked to recognize and realize, well, a lot of the money that they're earning is going away to taxes anyhow. So if you're earning money through passive income, you don't need as much as you're currently making. And it might not cost as much as you think it is to live and do whatever it is that you're looking to do for a year or two years or what have you. So that's something that I'm gonna have to sit down and do as well, because I think it is pretty eye opening.

Chad:

When you have free time. Like it totally changes your relationship with money as well. Just think about one specific example. Let's say you had the next three months completely free, you could do whatever you wanted to do. And you really didn't have an agenda on where you wanted to travel. Like let's say post COVID, we can actually travel, I'm just itching to do you know, there are deals every day where you can get a flight for 200 bucks to someplace that should cost 1500 bucks to fly to. And if you just like to say you spin a wheel said I'm just gonna go wherever the $200 flight is.

Michael:

Airport roulette.

Chad:

Yeah, like, you can just say, I'm just going like, bingo, I'm going to Singapore, I'm going to you know, wherever it is, because that's the kind of thing you can do. And you have flexibility of time. And most people do their budgets based on this busy work lifestyle where they're working 5060 hours a week, they have two weeks of vacation per year, they have to go in those specific two weeks, and they have to fly the certain times.

Man, when you give yourself a year, a year and a half to do whatever you want to do, the cost of things totally changes. Because if it costs a lot of money to go there, all right, I'll just wait for how does take my time, or I'll just go to a different place or I'll get there a different way. And it's a totally different mindset. And that's kind of the retirement lifestyle that people think about. But when you build that into your early life as well, and you take many retirements and you just slow things down, you might not need as much money as you really thought you did before.

Michael:

I was posting on Twitter the other day having conversation back and forth to somebody about I was curious to know how much money people spent having a job. So the work the clothes, the coffee, the meals, the transportation back and forth and someone goes I'm sure someone already did this. And so of course somebody had and it was like several $1,000 a year. So you subtract that out. You take out the tax. I mean, it really starts to become more manageable I think then then a lot of people realize.

Emil:

I think, for me, I've bookmarked this article, I know myself, I forget this message often. And it's so important. It's something I want to like, come back to yearly, if not quarterly, to just like reinforce that mentality, or else again, I think if you're a competitive if you're a type A, it's really, really easy to lose this message. And it's so so damn important.

Chad:

I have to go back and read it myself. Like, everything I write, I like I am the number one like receiver of this message. It's like my better self sitting on one shoulder like talking over here. So this is like the stoic chat writing this thing talking to the like, the chat is like, you know, gluttony over here, eating all this food and traveling really fast and buying all these properties. I'm there as well. And I think it comes back, Emil, too like, what you pointed out like is how you set your ambitions. I think it's great to be ambitious. I think that's what part of what makes entrepreneurship so compelling is that we see things out there that bother us, and we go out and solve it like this. I think that's amazing.

And I admire entrepreneurship. And I am like, through and through in my DNA, I am an entrepreneur, I love it. I think it's awesome. I've just been trying to figure out like, number one, it's like, let's find some balance, because there's other things in life, and you need to take some naps, and you need to enjoy your family. That's part one. But then Part two is like, Where can you channel that ambition in different ways. And the most intriguing thing for me lately has been like social entrepreneurship. There's a Nobel Peace Prize winner called Muhammad Yunus from Bangladesh, who won the Nobel Peace Prize for doing micro lending businesses in Bangladesh, and a spread kind of around the world as the Grameen Bank, and people are very familiar with micro lending now.

But he even broader talks about how entrepreneurs once you've made it financially, or maybe even gotten a little bit of a nest egg, why not turn your energy and your entrepreneur entrepreneurial effort towards social problems and other things that you could solve with a businesslike solution, but then you do it in a way that maybe doesn't make you any profit at all, or, you know, you're not doing it to make money. And so I'm really intrigued by that.

I've been doing it locally with a nonprofit trying to build an alternative transportation network in our communities, and not just cars, but bikes and walking and people work, you know, moving about who don't have cars, I don't want to use cars. That's kind of my little experiment locally. But there's also other interests, like affordable housing and health care. I mean, you just we can all we can make a list of like problems in our society, that if we if we had more smart, financially independent entrepreneurs working on them, man, like, how much better could we be? And I think I think that's something in our kind of circle of real estate investor, podcast and financial independence community kind of people that we can kind of get around that they have all these smart people that we know, thinking about that, and having the ambition to free up our time so that we can go change the world together. I think that would be just a pretty cool ambition in the big picture.

Emil:

Love that.

Michael:

Yeah, that's awesome. Well, Chad, always such a pleasure to have you on man. Thanks so much for taking the time.

Chad:

Yeah, you as well. You guys have fun on this podcast. You talked about good topics, and good stuff.

Michael:

We try.

Emil:

We try.

Michael:

Awesome. We'll Chad, if folks have more questions would like to reach out to you. We'd like to get a hold of your books, what's the best way for someone to get in touch?

Chad:

A couple different places. I know you'll have the BiggerPockets link to that article on there. I checked on that article. Every once in a while it's been become pretty popular on there, one of my more popular articles, so I can leave a comment there. And then I also wrote a book for BiggerPockets called retire early with real estate, which you can check out and it's kind of that article, even bigger, like the whole book is kind of built around that concept. And it gets into house hacking, and it gets into debt snowballs, and it gets into what you do after you achieve kind of your number for financial independence. How do you build some resiliency, so backup plans using entrepreneurship and other things.

So the book is definitely something I would recommend to kind of get started. I have a podcast as well, that's kind of centered at coachcarson.com, The Real Estate and Financial Independence Podcast. And if people would like to add another one in addition to this podcast to their podcast list that would be honored to have you over there.

Michael:

Fantastic. Thanks again, man. And I hope to do it again soon.

Chad:

Thank you, Michael. Thanks, Emil, great talking to you.

Michael:

Likewise.

All right, everybody. That was our episode. Thanks so much for listening. A big, big, big thank you to Chad Carson, as always super gracious with his time really fun guest to have on the show. If you haven't checked out his website, I highly recommend you do it. And if you haven't checked out his books or blog posts that he's made, I can also highly recommend them. So thanks so much for listening and happy investing.

Showdown of The Century (Round 6): Investing in Big Cities vs Small Towns Jan 25, 2021

In this episode, Tom and Emil battle it out in the hotly debated question of whether to invest in a big city or in a small town.

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Transcript

Michael:

Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider

Emil:

and Emil Shour

Michael:

And today we're gonna be having another showdown episode, we're gonna be doing big city versus small town, which do we like better for our remote real estate investing. So let's get into it.

Real quick before we get into it, I ate pizza for dinner last night, and it was really hot when I came out of the oven, and I just burned the roof of my mouth. Is that ever happened to you guys where it's just like so raw?

Tom:

Definitely. I'm very risk averse. When it comes to heating food. I just played safe my microwave. I programmed it to not go for over 30 seconds and if it's something that takes five minutes, I just stand by plugging in 30 seconds and then it's just safer that way. Mouth pain is terrible, like teeth. tooth pain, anyways, yes, that sucks when you burn your mouth.

Michael:

I'm just an adult baby like, you don't break your mouth.

So for those of you who don't know, or who have never listened to a showdown episode, what we're gonna do is we're gonna debate big city versus small town. And then we're going to swap sides. And so the person who took small town is going to have big city and vice versa. So we get to hear the CO hosts pro and con argument for both big city and small town so we get the full viewpoint and vantage point for how they think about these things. And I can see them both frivolously I don't know if that's the right word writing down notes. copiously taking notes.

Tom;

I'm not doing it for those frivolously.

Michael:

Frivolously!

Alright, so Emil, are you taking big city or small town first?

Emil:

I am going to take big city. And when we talk about big city here, before we get into it, let's define that for audience. What are we defining as a big city? Are we talking a Los Angeles and New York, a Chicago? Are we talking secondary cities, tertiary cities?

Michael:

I'd say secondary and tertiary cities.

Tom:

I'd say big cities, let's say the 10 biggest cities in the United States. So like, I'd say, Atlanta, Orlando, Houston, Dallas, New York, LA, those ones, what do you guys think? I mean, I'm just kind of shooting from the cuff here work. But the little cities got to be little, little cities. You know, I think the middle middle ground is off the table.

Michael:

I don't want to have ever heard of the cities that you're talking about.

Tom:

Indianapolis, you're not in this debate.

Emil:

So we're not going to go into like which city in particular, but just in general, in general, like big population cities. So the top 10 are New York, Los Angeles, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego. That's interesting, Dallas and San Jose. So that's the top 10 markets. And then we'll cover the other end of the spectrum where you're just talking about like, you know, a small town in Michigan or something, for example, right?

Michael:

Yeah, yeah, perfect.

Emil:

So I'll take a large city to start perfect, Tom, you're on small town.

Tom:

Beautiful.

Michael:

And Emil I want to give you the floor first. So tell us why you are such a big fan of big cities.

Emil:

I'm not a big fan of big cities, but I'm gonna pretend to be for this show.

Michael:

So for the debate for the debate.

Emil:

To me, there's three that really stand out. So those three are population, rent growth and appreciation potential. So in bigger cities, you have a lot of people, meaning you have a lot of tenants, which is good. As a residential real estate investor, I want to know my tenant pool is large, that's a good thing. For me, that means I have a lot of tenants. Good to know. The second one I mentioned is rent growth. So typically, in larger cities, you know, Los Angeles in New York, some of those top 10, we mentioned, you're just going to see much higher rents than you would in a small town.

And I don't know if we've covered it on the podcast before, but the lower your rent is on a monthly basis, the way I like to look at it is you have a smaller margin of error. So sometimes you will see like a 50 or $60,000, home that rents for five 600 bucks. And they're like, Oh my god, the cash flow. And the numbers look amazing. But what they don't realize is one big expense can really wipe you out in terms of cash flow for the year, because a roof costs what a roof costs, have it fixed. And so when your rent is low, yes, it could look good. If everything goes right all year, your yield will look great. But in reality, you'll have those big costs come up and they'll crush your cash flow.

So in larger markets, your rent is higher and your rent growth is typically higher as well, because populations big It's a place where there's a lot of demand, a lot of people live there. So rent growth, you typically can see go higher.

And the third one is appreciation potential. So those larger cities, that's a lot of times when there's a bull market, that's where you're seeing a lot of the appreciation happening like meaningful appreciation, right? You buy a property that's worth $500,000 in it goes up 10% now you just made 50 k in equity, let's just say same 10% on a $75,000 home, you only went up seven grand right?

So just your equity, growth potential through appreciation is just going to be much lower. So to me, those are the three things that really attract investors to big cities.

Michael:

Does any of that thought process thesis change? Because of COVID?

Emil:

I don't know. I mean, yes, it does, like I live in Los Angeles. And I know that rents have actually declined, especially in multifamily, because a lot of people have either left the city to go to the suburbs or moving out of state or whatever it is. So I know rent growth and multifamily has gone down population. I mean, that's what's affecting it right. There's just less demand for housing gear. So that's driving rent wrote down, but on the flip side, right now, appreciation is skyrocketing in California, because rates are so low. And this isn't for multifamily, right multifamily is based on how the acid is performing. So if you have lower rents, the cap rate is going to be higher, which means you're gonna have a lower price when you want to sell it. But coupled with that low interest rates, so it hasn't really affect like even multifamily values have gone up as well, it's kind of been negated by low interest rates.

So on one end, it's hurt cash flow. But on the other end, you know, I've heard that a lot of La multifamily like their net worth is skyrocketed because of all this appreciation.

Michael:

Good to know Tom, your rebuttal?

Tom:

Three letters, two words, baby ROI, cash flow, when you go to that small town to buy, well, first of all, small town, just a great way to live, you know, slower paced living. But let's get back to the discussion, I digress. So your returns traditionally are going to be significantly higher on a cash flow basis. In this smaller towns, if you look at just the ratio of the rent to the price of the home, it's going to be higher, there's going to be higher returns.

Now true. There's some downside of typically, there are smaller economies. But if you're looking to get in and looking at these returns as a gross yield, as cap rate, smaller towns are gonna find higher returns. And the reason for that, I think a big reason for that is there's just less competition when you go into these big cities like the Phoenix is and the Dallas's there are these huge institutions that have these fancy calculators that are buying houses all the time, when you go to these small towns, there's not that competition. So you as an investor, being a hard working smart person that you are, you can go evaluate houses and not have old Wall Street breathing down your neck, make it offers right over your back. So in less competition, higher return. And the reason why I think this trend is only going to continue to be a better opportunity to invest in these smaller cities is this concept that we learned of working remotely?

Now, I think this was a terribly unfortunate pandemic, obviously, you know, what is it over 400,000 people passed away in working remotely that has this has caused, I think it has shed light on the ability of the workforce to manage working remotely. And in turn, what I think this is going to lead to is more people more permanently working remotely.

And what that means is, if I'm living here in the San Francisco Bay Area paying XYZ for rent or on a mortgage, why wouldn't I want to go move to a small town have that same whatever Silicon Valley job, but have the cost structure of living in this small town. So I think the demand within these smaller towns has a lot of opportunity with this growing remote workforce. So by buying in these smaller towns now, man, you're taking advantage of these lower prices that you have in these smaller towns with the potential influx of people moving in. So again, three letters, two words, ROI, cash flow, living remote.

Michael:

So to sum that up, is that like being a small fish in a big pond going now to a big fish in a little pond?

Tom:

Yatse yatse. I love the lake analogy. I love the lake analogy. That's right,

Michael:

Perfect.

Tom:

So yeah, generally speaking in these smaller towns, you're gonna find better returns, you're gonna find ratio of the rents to be pretty darn good relative to the price of the house compared to these big city slicker return numbers and the price versus the rent. So and I think a big reason for that is less competition,

Michael:

So I asked Emil a challenging question with regard to COVID and big cities. Tom, you're in the hot seat, bring it with these remote workers leaving big cities.

Tom:

It's a big city word you just used surmised.

Michael:

One because their job was there require them to be there physically, but also because the amenities that big cities offer? Do you really think that the demand is going to continue for the folks that lived in the big city and like the big city amenities are truly going to move to the small towns?

Tom:

You know, I think what really drives demand Michael is happiness. And I think the what makes people happy, I think is evolving. I don't think what makes me happy today, who knows what's gonna make me happy and five years from now, and just my personal experience in living through this,

Michael:

don't tell your kid that

Tom:

No, no, hold on, hold on. In my personal experience of this year of working from home, it should makes me happy to like take little breaks to go pick up little Charlie, give me a hug. And here I'm trying to talk a little bit mainly jibberish not there yet still working on it. And that's really happy You know, so if I can have a better working remotely, sure I don't have that cool wine bar or whatever they do in the big city. But I can have my you know, little restaurant that I go to. And I like that it's good. I know people have been to who are live in small towns or they're awesome. I'm super pro small town. I actually have a good friend who lived over in this area, who was area called Diablo had this big awesome house and he decided, yeah, I'm gonna move I don't need to live here. And he just up and uprooted and moved to a smaller town and it's happening be before our before eyes. ROI, cash-flow.

Michael:

Okay, ROI. Cash Flow. All right.

Tom:

And Happiness, that's the third argument. Happiness.

Michael:

Happiness. Yeah. Cool. All right, Emil, what do you have to say to Tommy Boy over here,

Emil:

You stole my thunder with the will that demand go down post COVID. And I think that's a big one. I mean, I think a lot of people can be misled to believe like, Oh, this place now we're just gonna have so much demand. And it's gonna have demand for years to come because people are moving. Now, I personally believe that people don't change that much. I think when we're in our post COVID world, things are gonna go back to normal more than people think they will. And so I see a lot of people returning back to cities, like there's a reason people have lived in cities and enjoy cities for a very, very long time.

That being said, I see more companies doing hybrid, right, you're in the office a couple times a week, meaning you're not gonna want to live an hour, hour and a half away from where your work still, even if you're only commuting couple times a week, I think demand will go down. So it's easy to be like, Oh, this new place is super hot right now. And it's just a small window of population change. And the other one ROI, again, it's super easy to fool yourself into returns in Excel, right? Doing a little percentage based on rent. When in reality again, when rent is low, the cost to repair a toilet the cost to repair a roof, same amount, whether you're investing in somewhere like Los Angeles or rural Missouri, maybe the labor is cheaper, but the parts are the same.

Michael:

I think for me, it always comes back to kind of the chicken or the egg argument. I have the answer to that question. The chicken came first.

Emil:

Yeah, you're you're done. Okay.

Tom:

I mean, just think about it. The chicken came first.

Michael:

It's a no brainer.

Tom:

I was thinking about this the other day at dinner is definitely the chicken so

Michael:

It's only the chicken that's on my plate right now. You know, are the cities cool because of the people and the amenities that are there? Or is it the jobs that bring the people that then bring the amenities?

Emil:

I think it's both.

Michael:

No it's an either or .

Emil:

No, I will not play your black and white game theory here.

Michael:

Option C.

Emil:

No, I play by my own rules. Sorry.

Michael:

Nice nice Allay-oop.

Michael:

All right. Good rebuttal.

Tom:

I like it. I totally agree with your you know, a middle road it's not you know, sprinting to one direction but…

Michael:

It's a showdown Tom, we're not talking about all the roads.

Tom:

Okay, right back to showdown. Good.

Michael;

Come on. Don't give in so easily. All right. Tom, I want to give you first at bats here. You are now pro big city and Emil, you are going to be now pro small town. So fight!

Tom:

Emil, You hillbilly. Just kidding. Okay.

All right. So big city. So a meal opened up with some great points about a larger, more dynamic economy. And with that larger economy and more people, you have more options. And I'm going to dig into this options theme a little bit for my my point here. So one of them is you have more contractors and vendors available. Specifically, the key one we talked about so much as a remote real estate investing podcast as your property manager, you're going to a small town, there's probably one, maybe two vendors out there who can service you and if you happen to be in a city where that property manager is not good. You are pretty much sol, right?

As a remote investor, you rely so much and within a big city. If you have a property manager that isn't up to snuff. Good news. There's probably five other property managers out there that you can talk to try out super important to having that optionality of property managers to not to be loop tied. hogtied tongue tied. What's that?

Michael:

Hog tied

Tom:

One of those right? Yeah, to just one property manager in the small city, which you are almost guaranteed is going to happen if you're in a very little town like that, very much related is the contractors to do the work. So if you're looking up on Yelp, plumbers, if you look in some little town in Atlanta, like Missouri versus St. Louis, there's going to be a ton more plumbers in St. Louis, and they're gonna be more competitive, you're gonna get better opportunities to find quality and value with more people. That's just a function of competition and volumes. And lastly, equally importantly, there's a lot more renters.

So you can expect and I'm kind of just talking from intuition. If you have a lot more renters, you're gonna have a lot less they can see just because there's more demand to move in versus a smaller town where, you know, there could be some seasonality there could be some a lot tied to very specific parts of the country. To me, perhaps it's an oil economy and oil industry is dipping. Like, does that mean your house is dipping? We invest in real estate to diversify our investments not to lock into specific economies. That's why you want that broad economy and lastly, is the volume of transaction. So, you know, one of the downsides of investing in real estate in general is this concept of liquidity. And liquidity is can be solved by high volume or it's helped by a high volume of transactions.

And in a small town where there's not that many transactions and the media not a lot of debate man for buying. You could get hogtied again, you're going to hog tight all over the place to get your foot staggered into by if you need to sell for whatever reason, in a larger city, you're much more likely if you have to sell quickly, you're much more likely to get it to what the market value is versus a small town where there's not that many buyers man you got to get lucky and time that out.

So big city short, the ROI I think on paper is definitely gonna be higher out the gates in a smaller city but for these reasons, I think you have some opportunities within the operational costs as well as the vacancy and you know, getting into the actual crunch in the numbers of executing, done!

Michael:

Great points. Tom, I got to ask was that, you know, small town in Missouri a pop shot at me because you know that I've invested in a in a smaller town in Missouri.

Tom:

I should have said a small town in Alaska.

Michael:

No question. Yeah.

Tom:

Or a small town in Alaska. Michael's got units all over the place. So easy for him to…

Michael:

Easy pickins,

Tom:

Easy. pickins now. Nice. Yeah, it came to me. Right?

Michael:

Yeah. All right. All right. All right. Good points Emil? Small town.

Emil:

I'm gonna try not to repeat too much of what Tom said. So I really just have two things here. I know, Tom mentioned competition. But that is a huge one. The fact that you're, you know, in certain places, you're not competing against people with endless money, right? Like, if you're going to a smaller town, like these big hedge funds that scooped up a lot of single family homes and stuff. They're not playing there.

You also just have a less sophisticated investors, right? So I think you can get better deals in general, if you're a savvy investor in smaller towns.

The other one, you know, there's appreciation that we talked about in bigger markets, but you also don't have that boom and bust like you do in bigger markets. So while California has these big swings and cycles where it goes up a bunch, you know, home, I like to think of Michael Zuber when I talk about this, because he invested in Fresno, California, he had a home that he bought for like $100,000, I think in like 2006 and 2008, it went up to like 220, he sold it, and then like a year or two later, it's gone back down to $75,000. Same home, right, just like losing tons of value, you have the potential to lose a lot of equity. And that, you know, makes it harder to sleep at night.

During recessions, obviously, places across the country get hit. But you don't have that as large of these swings and drops as you do in these big markets. So I mean, that's just another pro to talk about with with smaller cities. It's a little bit steadier growth, but it's also not boom and bust. And that's all I got to say about that.

Michael:

Right on. Tom, what's your Tom sandwich? response to what I had to say for himself?

Tom:

I'm going to end this on your reference about our guy, Michael Zuber, I think it's a good way to close out the debate is to know your market, whichever one you pick big or small. Let's see I'm supposed to be aggressive right now.

Emil:

No, that's that's the right answer.

Tom:

Okay. Okay, good.

Emil:

We're playing sides here. But like, yeah, it's to the value of our audience. That is really what matters, right? Is that like, you pick a market you learn in you get good at you network there, like whether you go big city or small city? That's the real takeaway.

Tom:

Yeah.

Michael:

But there has to be a right answer. I mean,

Emil:

Of course, there's there's got to be a right because there's, there's not people doing really well in big cities, and people also doing really well in small cities, you got to choose…

Michael:

It depends is never a good answer.

Tom:

Yes, yes.

Michael:

Yes, no, but that's such a great point. I mean, you both made really, really great points for the pros and cons of the big city and the small town. And I think you hit the nail on the head by saying, you'd have to learn it, because there's all kinds of people under the sun and with different investment theses, and different goals and different starting points. So there's something out there for everyone. You just need to go learn and find what it is that suits your needs and meet your goals. And then go do that.

Tom:

And be eyes wide open to the upside. And the downside. There isn't like a city called the money tree that like everyone just picks Moneyville. It's you know, you have to be strategic and eyes wide open on what like what your risks are with that and apply your strategy to that.

Emil:

Let's repeat that. Again. There is no such thing as a perfect market. So a lot of people are like, Where do I invest, searching for that perfect, perfect market? Obviously think about what you're going for what are the pros and cons but honestly, there's no such thing as a perfect market.

Michael:

I always joke with folks that the deal of a lifetime only comes around once a week. Similar things to markets, there will always be a better market that I'm willing to bet the farm on, so don't feel like you have to go find the absolute best tip top one, because that's a vicious cycle. And you'll always be able to convince yourself that there's a better market somewhere else. So find one that works for you and then go hammer away at it.

Tom:

What size market? are you guys looking at for your next investment in your portfolio? Are you analyzing anything you notice a specific city names, but you can say?

Michael:

Let me see, let me look up the population.

Emil:

I think I've mentioned it. I invest primarily in St. Louis now. And what's interesting about St. Louis, St. Louis is weird where it has St. Louis city and St. Louis County are separate entities. So if you look up the population of St. Louis, it's like 300,000, which is like number 63, or something in the country. But if you look at the MSA of St. Louis, which includes the county and everything, it's like 2.1 million or something. So it's like top 20. So that's an interesting one.

Michael:

So the market that I'm looking at investing in has about 220,000 people living so not big, but..

Tom:

Is that the MSA or is that the broader MSA or when we say MSA, it's like a group of cities that kind of make metro area what is MSA stands for?

Emil:

Its Metropolitan Statistical Area. It's usually a much larger area than just the actual like city of St. Louis or Birmingham or whatever, includes more of like counties, and then like potentially neighboring cities that just make up the larger MSA.

Michael:

I think that's just the city. Just the city itself.

Tom:

I’ve traditionally invested in big large cities, but I think they might go to like mid size might have ridden the big bull, now I'm gonna ride the medium sized calf. I think it's good. A stepbrothers reference.

Michael:

Yeah, so good.

Tom:

So I think that's what I'm evaluating right now. A couple of middle sized cities in Alabama, South Carolina, Southeast sunbelt. I did evaluations on.

Michael:

I'll share just a couple of quick anecdotes with folks. So, Tom, you're mentioning that I invested in Alaska. So I and I own property in Ketchikan, Alaska, which a lot of people have probably never heard of, it's somewhere where all the Alaskan cruises stop. It's tourism driven. There's some other industry there, but it's definitely a tourism centric, area, city, town, borough, whatever you want to call it. Technically, it is a bureau. And that's been actually my best performing property that I owned to date. And part of that was understanding what drives that economy. I mean, I just googled the population of Ketchikan and it's like 8300 people. So I mean, that's like, tiny, that's a blip on the radar. But that swells in the summer with all of the workers that are coming in for the seasonal type stuff.

That, of course, hasn't happened this year. But it's interesting, I haven't had any kind of gap in vacancy, or intendancy, throughout the entire period of COVID. Knock on wood, this, I've been super lucky. So you have these kind of interesting dynamics and looking to really get a handle on and understand what's driving that local economy and that local market, and any seasonality to it is really, really important.

I've also invested in that small town in the Midwest in Missouri town, like you were mentioning. And I just go with a population that is like 6000. I think the reason is so low is because there's a huge military installation there a big military base, and that's not being counted here. I think military bases like 15 or 20,000 people that live there are near base, so…

Tom:

and then you're also in Los Angeles as well. Right? So just like it's Mr. extremes.

Michael:

That's right. That's right. So there's so many different ways to piece this together. no right or wrong just right and wrong for each individual.

That was a really gentlemanly, clean showdown, guys, thanks for keeping it all above the belt, good, clean punches, and great points made around by all.

That's our episode, everybody. So thanks so much for listening. If you liked the episode, even if you didn't like the episode, feel free to leave us a rating or review. Whatever it is, you listen to your podcast. We really appreciate them and they are a big help for us. If you want to hear about something in particular, feel free to leave us a comment and let us know what you'd like to learn more about for an episode. We look forward to seeing you on the next one and happy investing.

Tom:

Happy Investing

Not Ready to Buy a Property Yet? Here’s What You Should Do In The Meantime Jan 23, 2021

Not in a buy cycle?

In this episode, we talk about what investors can do in the meantime to prepare for when they are ready to invest.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this weekend wisdom, we got a fun topic, it's what you can do as remote real estate investor, if you're not ready to buy, or not in an acquisition cycle, or just getting ready, all the different activities you can do to build the muscles to execute well, when it's time to buy. Alright, let's do it.

All right, so this weekend wisdom is made for people who want to be remote real estate investor, or perhaps they are in remote real estate investor, and they are looking for things to do to help level up when they are just not ready to buy. Or perhaps they don't have the funds to buy something along those lines. So I've got a couple of ideas. But I think I'm going to make it more fun by just putting Emil on the spot. It looks like he's not necessarily listening.

Alright Emil, what are some things that people who want to invest but perhaps are not ready to grab funds or whatever reason? How can they build muscles to be a good remote real estate investor without actually buying a property?

Emil:

I would say so I'm kind of going through this myself on a little temporary pause. I am trying to just network with other people who invest where I invest, either through Facebook groups, BiggerPockets, forums, Roofstock Academy, wherever it is just meeting other people who invest where I invest early in my investing career, I had this very scarcity mindset about real estate investing, like why would anyone want to share information with other investors, like we're all competing against one another. But really, so many investors are so giving and willing to like, talk with other investors, because there's not many of us out there. So when you find another investor, especially if you're a remote investor, it's like, you know, that's your community, that's a tribe people love sharing information and just like talking to each other and getting best practices and stuff.

So like, for me, I've been trying to meet people who are local in St. Louis, talking to different property managers, different agents, just people who are local there who can help me, I don't know, get a better label and learn the market, find deals when I'm ready to find deals. So at this point, that's what I'm kind of focusing on.

Tom:

Love it. It's such a good one. And I think the logical fallacy that there's only you know, so many properties out there, and I need a box, everybody out is just such a logical fallacy. Like there's, there's literally millions of houses out there. And it's a great reason to connect and share. And I mean, I guess there could be situations, right, where you're making the property, you're making an offer on it, and somebody you know, is actively buying in that same area, like then it's reasonable to use a little bit of caution on very specific deals. But generally speaking, that's that's a fallacy. I think that I had as well getting into it thinking that, you know, it's a zero sum game.

Michael:

It could truly be a win win. I think, if you're thinking about that, and not willing to share information at a high level, like Tom you said, there are some things that of course, you want to keep your cards close to your vest, but at a high level, like if that's what you're thinking, then you're probably doing it wrong.

Tom:

All right, Michael, things you can do. As an investor, perhaps you're not ready to buy right now, or you're not in the buying cycle.

Michael:

Yeah, so similar to Emil. I'm kind of a great case study, because I'm not in a buy cycle. Right now. I am gearing up to be in a buy cycle. So right now, my wife and I sat down two weeks ago and are really honing in our finances and our spending and our savings rate, making sure that we are just storing up a bunch of dry powder. I'm also going through several refinances right now getting some equity out in the form of cash and just looking to hold on to that for a little bit. One so I can wrap up this project I've got working on and to just so I can have some more dry powder in the keg to deploy when I am ultimately ready to jump back into that buy cycle. So getting lean and mean and getting things in reserve.

Emil:

You hold dry powder in a keg? That's a dangerous man.

Michael:

That's not where you're supposed to hold right? Where do you hold your dry powder?

Emil:

On the floor? I don't know.

Michael:

But then there there's powder everywhere.

Emil:

In a savings account?

Tom:

On the shelf. Yes.

Michael:

I'm talking about dry powder in a pirate sense of the word. By the way, you know what the pirates favorite letter is?

Emil:

ARRR!

Michael:

No, that'd be the sea!

Tom:

Oh, Have you guys heard the Wellerman song remake? Ah, the Wellerman is just stuck in my head. It's like a pirate song and it was like a tick tock thing. Okay, here's your fun fact for the weekend wisdom. The wellerman is the person the ship that would deliver pirates their like goods. So like their tea and rum and stuff. And then the Tucker is the person from the whaling ship that had to clean the tongue anyways, sorry, that was it. So the Wellerman Search it up on YouTube while or when you guys will get it stuck in your head, catchy pirate song that was important.

Michael:

I added that I just love just continuing down this rabbit hole, how you're like, oh, delivering their goods like T and ROM as if that's the only thing that pirates consume. Like, no, they don't eat bread or cheese or meat just exclusively tea and rum,

Tom:

Listen to the Wellman song and you'll get it. Okay.

Michael:

Okay. I definitely will. So yeah, that has been my my wife's focus for the last several months here getting this probably over the finish line and getting lean and mean to be able to move forward easily. Some other things just that I think folks can do above and beyond, those two things are just starting to really learn their market and hone in what their buybox criteria look like. So if you are just starting to invest and not feeling like you're ready, yet, there's a number of things you can do. But first and foremost, go get educated, whatever that looks like. So whether that's joining the Roofstock Academy, or having someone hold your hand along the way, who has invested before getting very specific on your criteria, what you're expecting of your investments, and then learning about the different areas, different markets throughout the country, or the world, potentially, that will be able to give you those type of returns or meet those criteria, is what you should be spending the most of your time doing, because that's time very well spent.

Tom:

Awesome. I'll close this out here. So a couple of points that I was going to add on some of the existing stuff on learning the market super great. So pick a couple of markets that you think are you're interested in, I wouldn't have too many, just because what I'm gonna suggest you do is subscribe on there's a lot of online applications that you can get track, like sales as they're coming across like set boundaries in like similar to your buy box. So like set like the price range. And so you can just see every sold home and every new listing that comes up in that market. That's what we mean by knowing your market is like having a real pulse on what the transactions going on going in and going out are.

So a lot of places where you can track that Roofstock is one of them, where you can follow properties on the education stuff. Roofstock is a great spot. There's a lot of good online education Roofstock Academy is great, it's risk free, it's a paid program, but it's full money back if you're not happy or satisfied, whatever. So that'll be my one quick plug for Roofstock Academy, coaching and 50 hours of online yada yada all that good stuff on the education side is to get nerdy with a pro forma.

So someone that I was working with, with an academy, he took the initiative to basically just like you take apart a car is to took apart the pro forma for analyzing properties. So this is the calculator in Excel that you use to get IRR that you use to get cap rate. When he did it, he basically deconstructed it and then rebuilt it by himself. And I think that's such a good exercise ultimately knowing like, what are the levers on your return, I wouldn't say it's a hard requirement of being able to do that. But I think it's a good use of time, especially if you're not necessarily buying but you want to build those muscles up is to really know that particular model.

And the other one is to start talking to not just other investors in the market, but started talking to property managers, perhaps get their input on specific neighborhoods, I myself am a little bit of an introvert. So doing that, like takes a little bit of effort to do that. But every time I'm going to do it, it's like a muscle it's, you know, taking a lift of a bench press in the gym or something to build those muscles get a little uncomfortable, talk to property managers, something as simple as, Hey, my name is Tom, I'm an investor and I'm interested in this area. What are your thoughts on this address that I'm evaluating? And you can give my address or what do you think of this little neighborhood? Are there any neighborhoods that you think are particularly opportunistic or that are not opportunistic? So build those muscles, talk to those people talk to a lender, you don't have to do you know, find out who At what point are you going to have enough money to make an acquisition? If that's your holding point, right? Like how much of a downpayment Do you need, like getting all that information is going to make it a lot more clear. If you don't have a clear destination, it's hard to get there. Those are my brain word vomit of things that you can do that is going to put you in a good position when it's time to buy.

Awesome. Well thanks, everybody for listening and happy investing!

Emil:

Happy investing

Michael:

Happy investing.

How We’re Using Refi’s and HELOC’s To Grow Our Portfolios Jan 20, 2021

In this episode Tom and Emil share their experience with the Refis an HELOCs they are currently processing.

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Transcripts

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. My name is Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider

Emil:

and Emil Shour.

Michael:

And today we're gonna be talking about loans, how to get them trials and tribulations upon getting them and things you can do to expedite the process along the way. So let's jump into it.

Alright guys, so Tom, I'm curious now for a quick update from you, how is your insurance restructuring coming along?

Tom:

So I had the call with Nick, who is a an academy member and also an insurance broker expert. And I am we had a great call, and I'm sending him my current policies right now. hopefully get that done today. And then he's going to come back with game planning some options. So it's making progress, albeit not at work speed, but I'm ahead of where I was when we recorded our last episode on my 2020 failings. So making progress.

Michael:

Okay, good to hear. I will follow up with you on the next episode and see where you're at next.

Tom:

Love this. Thanks. Thanks for being my accountability buddy, Michael,

Michael:

That's what I do. That's what I do. Is he looking at every single one of your policies, or just only a handful?

Tom:

He's looking at a handful of them. He's looking at like six of them. So well, I don't know. We'll take a look. I'll keep you updated.

Michael:

All right, guys, I know that we are all in the midst of some form of loan product. And so we're going to be talking about some of the different products that are out there some of different products that we've utilized in the past, but a meal, I want to start with you since I know that you're in the midst of a cash out refinance, which is something that a lot of investors utilize along the way. So can you walk us back to why you wanted to get this? What was the kind of point and then what the results have been thus far, and what kind of ping us some questions along the way?

Tom:

And you're a good person to go first, because you held us up and recording because you had some stuff to do while we were waiting on the line for you related to your refi.

Michael:

So we're gonna blast you at the hotseat.

Emil:

Yeah, that's right, this is very pertinent, because they basically just asked me for my firstborn child so we can get into it. Alright, so this is the second property ever bought property in Indianapolis, we bought it for 115,000, back in 2017. And right now, with interest rates being so low and inventory being so low and prices going up a bunch because people are owner occupants are driving prices up, because everyone wants to get in a home. Now, the value of this property grew, I thought to about 140,000, or 150,000. So my plan was I could probably cash out our original investment down payment, closing costs, all that stuff was around 25 K.

And I figured if values have risen to 140, 150K, I can probably pull out around 20,000 bucks, and it won't change my payment every month all that much. Because when I got the property, it was a 4.6% rate. And now at the refi, it's going to be a 3.1. So point and a half drop will offset a lot of what would be, you know, if I cashed out at the same rate, I'd be paying a lot more each month. But with that one and a half percent rate drop, my cash flow doesn't really change, my monthly payment goes up like 15 bucks or something 10, 15 bucks, and I get to pull this cash out.

So we got the appraisal back last week. And to our great surprise, usually the painful surprise, this was a good surprise, it appraised for 157,000. So we're actually gonna be able to pull out our entire original investment of 25,000 bucks. So we'll be in this property for $0. And our monthly payment i think is going to go up like 25, 30 bucks in total.

Tom:

You know what, I think that is Emil. I think that's cool. You wanna know why I think it's cool?

Emil:

Why?

Tom:

BRRRRRRR BRRRR

It's actually not like a traditional verb I cut he basically like effectively kind of did a burger, just being able to take all your cash out with the refinances. So it's not a full BRRRR. It's like a BRRR. Like you just Yeah, well, you probably didn't do a big renovation.

Emil:

I didn't know renovation, I was texting Michael, we were chatting on slack. And I coined a new phrase for this. It's called burger. And so what that stands for big GRP. So one is by the first key is get lucky and have the Fed drop rates. The second key is get more luck with low inventory and high demand. So prices go up. Yeah, the R is refi. And then the P is this probably won't repeat, we probably won't be able to do this lucky sequence of events because we just got lucky we didn't do anything we didn't we didn't force value and force appreciation we didn’t do anything special. It's just a nice sequence of events that sometimes when you're in the game, and the environment changes, you can take advantage of that. That's all happened here.

Tom:

BGRP. So that's sticky. I like that.

Emil:

Very, very sticky. It doesn't quite roll off the tongue.

Michael:

Rolls off the tongue so nicely. Fluid, you know, BGRP. So I have to ask though, I mean, I mean, it's we always joke on the show that you're a pessimistic person and I'm an optimist. Do you think that you made your own luck? Or do you really think this was just dumb luck? You threw darts at a board ended up in Indianapolis ended up with a, you know a great property? Or do you want to give yourself a little bit of credit and say, yeah, you know what I did some research, I did some legwork. This was a very calculated decision,

Emil:

I would say more luck than anything else, I'm not going to pretend like I saw this coming. And that's just me being really honest, I think you can often delude yourself into saying, Oh, I did all this research and blah, blah, blah. And sometimes, you know, maybe when Detroit or Cleveland in the past, you know, in 2008, when they had meteoric falls, I'm sure there were tons of people who were looking in those markets and saying, I bet Detroit or Cleveland could be on pace for great things, and then unpredictable things happen. I know, we all like to give ourselves a lot of credit and stuff. But I think a lot of stuff comes down to luck in my eyes.

Tom:

Yeah, I think that's true. But you also like need to be at the table to like to be lucky like that. Exactly. Like, if you're not if you're not gonna..

Emil:

You need to be in the game playing in the game.

Tom:

That's right. So circling back on the finance aspect of this, this is something that I think about when I refinance, especially when I refinance pretty quickly from the original origination of the loan. So your example, so you said you bought in 2019, or 2018?

Emil:

2017

Tom:

So you've made a bunch of loan payments, or a better way to put it as your renter has helped you make a bunch of loan payments. And with it being an amortized loan, the majority of those loan payments aren't cutting into the principal at all. It's just you're just basically, you know, paying that interest piece, I love to hear your guys's thoughts like in refinancing so quickly, it's like, you know, you don't bring the total loan basis down that much, just because those initial payments, so much of it is interest heavy, do you think that makes it like a better time to refinance versus just because you no longer into your mortgage, the more you're going to be able to cut into that hang down that principle total. And I'm just digging a little bit in the conversation and thinking about, I mean, I think we all like the concept of refinancing. But to play devil's advocate, so when you when you're refinancing, you're basically going back to square one, if you're doing another 30 year amortized loan, where you're only paying off interest for you know, are primarily interest for the first several years.

So I know that Michael probably has some a good rebuttal where he's gonna say, I disagree with you, Thomas, I'm happy to hear it. But just to be devil's advocate, you know, with these loans and the way that they're amortize those initial payments, you're just paying principal. And once you get over that extreme, you're just paying interest. And once you get over that, then you're actually cutting into the principal and by refinancing so quickly, you're never really cutting into the principal. So when you take out your mortgage for 30 year amortized, your first several years, so since 2017, your mortgage payments have primarily been going to just paying off interests. And over time of that 30 year loan, more of those payments are going to go towards the actual principles, but by refinancing so early on, you're never really cutting into the actual principal. And you know, to be honest, I refinanced stuff pretty quickly, either there's a pop in appreciation, or I was able to get it a little bit of a discount or whatnot. But my argument for this discussion is, are we throwing money just by only paying these loan interests before refinancing right away and not really cutting into the principal at all? Does that make sense?

Emil:

Yeah, no, I get your question to me, because my primary objective right now is to grow my portfolio. I'm not concerned with paying off anything I don't, I don't want to be free and clear on anything. For me right now to be able to pull out $25,000, right, only have my payment changed by 30 bucks a month and be able to go use that to buy something that I don't know, adds 100 $200 cash flow, whatever it is, it's a no brainer in terms of and then I get to have more properties in which I could potentially do what I'm doing right now with right like instead of one property that gets the appreciating you do a cash out refi. You take it and make it two properties, right, and you snowball a lot of that initial equity.

Tom:

Got it. So just a paraphrase. Even though the principal isn't getting cut down, because we've refinanced really early on in the mortgage. It's more valuable at this point of your life to just Hey, I want to scale this as quickly as possible, less concerned about getting as much of that loan paid down.

Emil:

It's like his net worth or cashflow, more important I get is that kind of like?

Tom:

Sure, yeah. Yeah.

Emil:

For me, I'd rather take that equity and create more cash flow rather than pay down and have things free and clear, grow my net worth faster, things like that.

Tom:

I dig it.

Michael:

I tend to agree. I don't have a big looming rebuttal for you, Tom. It's not something that I look at super closely. And in fact, actually, I have several mortgages that are interest only because I'm doing some rehab stuff. And so that's like the epitome of what you're talking about is you're literally just paying for the right to have access to the money, you're not changing the principal balance whatsoever. And so doing a quick refinance, when you will see where you have potentially see a dramatic drop in the amount of interest that you pay, I think it'd be a really good thing to do.

And I know a lot of people that are in your like 20 or 25 or 30 year mortgage, and they're thinking about refinancing, and I think that the Question you're posing is much more applicable in that situation where they are so close to getting their home free and clear. Versus do they want to reset the clock, but take advantage of a better rate, there's a lot of things to consider there. And so at that point, you're just so aggressively beating down the principal versus someone in yours, you know, one through 5, 6, 7 even is it making a massive, massive dent on their principal, but something that I personally like to do, and I know, I've chatted with Emil about it in the past is on higher interest rate properties, or on primary residences, I'll actually make extra principal payments, either 50 bucks a month, or 100 bucks a month, something that I would, I'll never notice, thankfully, but that seems over time to make a pretty significant impact that over time, even in that short run, after one to three years of paying a loan down can have a pretty significant impact on the principal. And so make that refi even more exciting, so to speak.

Tom:

I like it good little little sidetrack of thinking about the amortization aspect of these interests and timing on a refinance. And it makes a ton where you're super late, you know, your year 20 into a 30 year when so much of your payments is going towards beating down the principal, anyways, just wanted to sidetrack us a little bit on that aspect, cuz it's something to think about, you know, on how much of your payment is going towards principal versus interest.

Michael:

Absolutely. And I think if anybody hasn't looked at an amortization table, or amortization schedule for their particular loans, they definitely should, because it's really eye opening, seeing how much is going to principal and how much is going towards interest. I think people are often really pissed when they like, if you add up the total amount of interest paid over the life of the loan, it ends up being like, I don't know, 170% of the original loan amount to begin with, and people stand, it's like, yeah, that's how loans work. So it's really important to really go into it eyes wide open, understand what you're paying, and for how long.

Tom:

Yeah, and just to kind of beat over the head of the topic of the amortization. Basically, when you have a 30 year loan, your payments in the beginning of that loan, it's broken up between that payment, some of it is going towards paying down the principal, and some of it is going down paying towards interest. And with amortized loan in the beginning, the early years of paying that loan, the majority of your payment is just going towards the interest and not the principal. So just a concept to understand.

Michael:

Okay, so I just pulled up an amortization table that I built for the Roofstock Academy, we have that as part of our academy playbook. And so for example, $192,000 mortgage at four and a quarter percent interest amortized over 30 years, the payment on that is $944.52. And so the payment is going to be consistent month over month for the entire life of the loan. But what changes Tom, like you're mentioning is the amount that goes to principal and the amount that goes towards interest. So in that first month, you make your payment, you have a principal payment amount of $264.52. And interest is $680, for an ending loan balance of 191,735 and 48 cents.

So we can see that the interest portion of the payment totally eclipses the principal payment. So year over a year, so in year one, we will have made a total payment of $11,334.30. And that stays consistent again, throughout the life of the loan, because your monthly payment never changes, the yearly principal that we've paid down on this particular mortgage is $3,236.86. And the amount of interest we've paid is $8,097.43. So again, a massive massive portion going to interest less so going to principal, versus as we get down into year five, again, we've still made a total payment of 11,334, because our monthly payment hasn't changed. But now we've paid 30 $835 in principle and only 7500 in interest. So as we slide down the time continuum, that scale shifts heavier weighted towards the principal side and lesser so on the interest side.

Tom:

So it's kind of mind boggling to learn, like the way that amortization work because I always thought like, okay, you make a payment of of your mortgage, and it's it's always split evenly between your principal and your interest. But nope. Yeah, it changes over time.

Michael:

Economics is crazy. It's definitely in favor of lenders, that's for sure.

Tom:

Yeah. Let's get back to Emil. Some of the friction that you have been dealing with in your refinancing, what are some some takeaways, some gentle frictions and thoughts on, managing anything you could done differently? Go ahead.

Emil:

Yeah. So I joked earlier that they're asking for our firstborn. And what I mean by that is they just asked for so many documents, right? And it's funny every time I refi or get a new loan, it seems like it's never standard. It's always something a little different. And if you're doing a cash out refi versus just buying the property that's a little different. The biggest tip I have I would say is like keep a folder with as many of these documents as you can write, like, all your prior tax returns, all of your leases, all of your evidence of insurance on the property, and then anything that comes up that a new lender needs throw that in the same folder.

So for example, they asked me for the certification of our trust, because we hold these properties in our trust, the lender is asking for like that first page, that certification of the trust is what it's called, it's I've never been asked that before. And so I had to go, like find that and scan it or whatever. But now I'm going to keep it in that folder for any time someone in the future asked about that. And I have like, one central place that I can keep these documents.

There's certain things like every lender is going to ask you for two months of statements for all of your checking and savings accounts, and your pay stubs. So those are things you're probably not going to regularly update every month. So those are probably something new you go get when you submit an application or whatever. But there's a lot of things that are standard that you can just keep in a folder, and it'll just make it so much easier to collect and wrangle all these files and documents you need to send the lender.

Michael:

What else? Do you have anything Top of Mind of other documents that people should expect to have on hand that you've been asked for? In this particular refi?

Tom:

Like, is that a question you're asking when you have an answer in the back of your head of some additional ones?

Michael:

No, no, no, I'm just curious.

Tom:

I just get I sometimes ask questions that I like have an answer for

Michael:

To set myself up to spike it?

Tom:

Yeah, just set up yourself.

Michael:

The Michael Jordan of podcasting questions,

Tom:

but Michael Albaum.

Emil:

This one was a little different in that this is the only property I have with an HOA. So that was a new one where I had to go back and dig up like proof of Hoa. There's also this funny side story of I hadn't paid my Hoa in a year and a half. If I had $1. For every time a bill got sent to the property I own and not not to me, man…

Michael:

You have $5

Emil:

I'd have $5. But I paid way more in fines. Let me tell you. So

Tom:

That's miserable.

Emil:

And there's nothing you can do. It's not like guys, you had the wrong, this is recorded. Why wasn't it changed? The buck stops with you. So you got to take care of these things you can't expect? I don't

Michael:

So are you saying that as a result of this? refi? You found out you hadn't paid your Hoa in a year and a half?

Emil:

Yes, sir.

Michael:

How was it being paid before you've owned this property for you know, almost four years.

Emil:

What happened was I've changed property managers in that time. And my last property manager was terrible. Sometimes you just forget that things need to be transferred or whatever. The thing is, is that there's so many bills you forget when one you're like, wait, have I paid my Hoa bill? You know, there's like Hoas…

Tom:

How did you manage? So did you end up just having the property manager reach out to the HOA? Are you doing that on your own? Or how did you know?

Emil:

I got a letter from an attorney saying there's a lien on my property until I pay my Hoa. So in the middle of a refi. No less. So that was fun.

Tom:

Oooogh

Michael:

It's so interesting how attorneys can find your proper mailing address immediately, but.

Emil:

Exactly. Yeah, it's hilarious. Yeah. I at least told them what happened. And then they removed like their attorneys fee, which was like 100 bucks, which was at least nice. But still, it's

Michael:

So you have a year and a half worth of HOA dues. Plus late fees, I'm sure.

Emil:

Yeah, exactly. More or less don’t buy properties with an Hoa is just a general.

Michael:

You know, Counter point. I don't think we can make that blanket statement.

Emil:

I know I just personally now dealing with an HOA if there's two properties you're looking at, and one doesn't have an HOA. The non Hoa is our choice.

Michael:

Yeah! HOAs 99% of the time a real pain in the butt to deal with.

Emil:

I know, look at this property is appreciated. It's got an HOA it's obviously been good. Like, that could be part of why it's appreciated in this area, right? Like the the community takes care of their properties and whatever. So

Michael:

Totally.

Tom:

Don't bite the hand that feeds you.

Emil:

Yeah, totally. I'm just bitter right now. I'm a little salty right now, because I got fine.

Tom:

Michael is asking what other documents are asking for. And I think that is emblematic of the document request process where instead of just asking for one time of the documents you need, it's like an ongoing run of like, every two or three days asking for a different document. It's like, Hey, you know, I'm excited to get you this information that you need that we both are excited about closing this loan, just send me an email, just just send me what you need. And I will respond back, I get it that sometimes, you know, something may come up where it will end up asking for another document.

But I feel like most the times, it's just a very slow trickle of like, okay, send me your, you know, IRA or 401k or bank account or checking, okay, now send me your insurance on these other properties. Okay, now, it's like, let's just do let's do one request. Let's do it one time, but I mean, whatever, not a big deal. The other kind of grinds my gears in this process, the website of the loan application. So a lot of these companies, they have one website for the loan application, and then one for actually managing the loan. So you set up this email account this for whatever, uploading documents or whatever, and then the loan closes, and you go back to that same website to do anything and it's like now That's just like a special purpose website for this company even though it's the same company as managing the loan they make you go to a different website let's let's get this all integrated Come on Come on everybody like we're originating loans and managing the loans let's do it in one spot.

So anyways that's the other grinds my gears you know, basically one storefront for originating so and I think most websites are like this you go to I'm not gonna say specific companies but even though it's the same company, originating it the other website for actually managing it, let's, let's get this all integrated.

Emil:

You know, the first point you mentioned Doc's, like, all throughout the process, it's like you get, they ask you for a ton in the beginning. And then it's like your closing week, and they ask you for a ton. It's like, Ah, there's never anything in the middle. It's always in the beginning. And always at the end. It's so funny. It's always the same. It always works like that

Tom:

In a marketing language. It's a drip campaign of asking.

Emil:

This is like, all up front, and then all on the back.

Michael:

Tidal wave.

Emil:

Yeah, exactly.

Michael:

I was gonna say real quick anecdote for kind of two stories relating to document request ridiculousness. So I bought my primary like two and a half years ago, and I got approved for the loan without going through the underwriting process and like, Oh, hey, we need this k one, which for anyone who doesn't know k one, it is basically a membership as part of an LLC form that you report on your tax return so the LLC performs a tax return and then gives all its members a K one so I bought some stock like $100 worth of stock in his company several years ago. And for whatever reason this company issues k one

Tom:

Bitcoin, it's doing pretty well now it's, uh, you know,

Michael:

I wish I wish, but so like, I don't know, on the K one, it shows like your membership ownership, percentage, and mine was like point 00000074 to have whatever like $100 for the stock. I got, like a $2 dividend. And like, Oh, we need this k one. Are you kidding me? Like I got a paper copy of it. And I sent it to my CPA years ago, because it was from two years ago, tax return. And now I don't like I don't have it, like, Oh, well, we need it's like, Are you kidding me? So my CPA, who's a partner at the firm is like, this is not materially important. This is like a $2 distribution. Like, I don't understand what the problem is. And they're like, Oh, yeah, okay. Okay. All right.

And then, literally, like you saying, a meal a week before we close they go, we need a letter from your employer saying that you can work remote. I was like, I'm literally on my way out the door to getting married in Costa Rica. You can go figure out how to get that because you're not going to get it in the next two days. When we settle too close, like, Oh, we need it. We need it. Like maybe I'll just come down to your office. I'm like, dude, I work for a multinational company, headquartered, like on the east coast. Like, that's just that's not happening. Sorry. So you should have asked for, like, months ago when you were doing this and like, okay, we'll get it figured out like, great. Do that. See ya.

It's like, unbelievable. So I think the lesson takeaway for me is like, push back, like they don't have the right to just delay and delay and delay like, we have some power as borrowers. And just yeah, I think just don't take flak from people be like, Hey, this is your fault. You need to go figure it out. Now. Don't make your lack of planning my problem.

Emil:

That's right. Yeah. Especially when they ask you for that downpayment. You just say, No, I'm good.

Michael:

I'll pass. I'm good.

Emil:

You guys got this?

Michael:

All right, Tom, I want to shift over and ask you a couple of questions. So I know that you're in the process of doing a HELOC. But you know, any final thoughts before I take you out of Limelight?

Emil:

No, no, I'm done. Take my mic away.

Michael:

Okay. So Tom, you're in the process of getting what's called a HELOC. And for anyone who's not familiar, maybe you could walk us through what that is and why you decided to utilize that as opposed to a Neil's cash out refinance.

Tom:

Yes. So HELOC is a home equity line of credit. And we've talked about on the show a little bit. And basically what it is, is it is a line of credit that you're getting. That is the difference between your loan amount and the up to a certain percentage of the value of the property. So for just a really simple example, let's say your house is worth $100,000 and you have a $50,000 loan, you can get a HELOC. Most of them go up to 80%. I've seen up to 90% that would be worth in this example of a $100,000 home with a $50,000 primary, this would be a $30,000 HELOC, so that's a rough the way the mathematics works. So I have this once this closes and I'm actually signing, I think tomorrow to close the HELOC then I will get basically it's almost looks like a checking account where this money is available for me to take out and spend on whatever the heck I want to there's no like rules on what I can or can't spend the HELOC money on and there is 10 years in which I can draw on this money or take it out. And then I believe it's another 20 years that I have to pay back on it. So that is the HELOC it is pretty much the same process as you would go through as a refinance where they'll do some sort of an appraisal on the property to determine what the value is so they determine how big of a keylock you can get you there is title involved. So this gets put into a second position behind like the primary mortgage there is you sign with a notary when you close to me All official.

Michael:

So the process sounds pretty similar to like a traditional cash out refinance or traditional refinance. So yeah. Why did you opt to go for the HELOC versus a cash out refi.

Tom:

I went for the HELOC? Well, this is on my primary. There's some benefits to it. One of it is you don't pay anything if you're not using, but you have that credit available. So I actually did all of this in 2020. I mean, just the fruits of having super low interest rates. So I did it initially did a refinance, I didn't take any cash out. So I kept a pretty healthy loan to value ratio, a lower loan to value ratio and instead of doing a cash out refinance for all of that equity that I had in the home, I am capturing that through the HELOC. And as I said before, the benefit of HELOC is I don't have to pay anything on the on it when I'm not using it. It's just there as like an available credit card at a super super low rate and the amount that you can take out. Depending on how much equity on your house can be super high. Like I know this one company, you can get a HELOC up to $200,000. And I can spend that on whatever I want. If I want to go buy some down payments, buy some property depending on how comfortable I am with debt and all that good stuff. Or if I want to do a personal remodel or stuff like that. It's whatever I however I want to spend that money I can.

Michael:

Right on. And so process wise one isn't really any easier than the other it sounds like it's similar. What I will say that with both he locks and cash out refinances.

Tom:

Oftentimes they won't even require a full appraisal. Like if you're buying a new property and buying it with a loan, they're going almost always going to require an appraiser to be on site and do that rigmarole but with key locks as well as refinances. Oftentimes, they're fine just doing a desktop appraisal. And what that is, is an appraiser just from their home looking at comps and not needing to go and do a full inspection. So it can be a little bit cheaper and faster on the on the appraisal side.

But it's the same process of like document requesting. And one of the issues that came up this time since you know we did this in pretty tight coordination where we refinanced our house then get the HELOC right after and when we refinance our house, the original lender didn't clear title completely. So there's some still some stuff that they're doing. So in the process of pulling this HELOC, they're like, hey, there's still a lien on your property. So it was probably a week and me going back and forth with the original lender and the company that's doing the HELOC and the title title company that's helping the HELOC where I'm like doing phone bridges between the new company like and what it needed to happen is they needed to notarize a document the original lender that had the original loan, you know, had to notarize a document saying we do not have this lien position anymore, blah, blah, blah. And and I probably started this process in November and it's getting close to finish and it's hard with a lot of investors are super type A and like move fast. And you know what, alright, what's next, what's next and just to be moving in this sort of slow motion it's like having a big chalkboard and some nails constantly dripping through but…

Michael:

Fast as molasses.

Tom:

As fast as molasses that's right.

Emil:

I’m smiling and shaking my head because I just got an email telling me the same thing on this cash out the last title company, whatever hadn't cleared it when we bought it in 2017 So…

Tom:

You know, though, I think the important thing to put in a context is this is kind of a moat, you know, this is a moat of the business that for a lot of people you know, it's not worth this kind of work and not that this is a lot of work it's just kind of the hands of a bunch of institutions. But I like to think of it as a moat like this type of investing strategy. There are a lot of benefits to it all the stuff we talked about with cash flow appreciation being able to you know, do things with debt and tax advantages and a reason why everyone and their mother doesn't do this is because there's this little bit of overhead that you have to deal with and a little bit of a know how and on what's available and getting through it. So something that keeps me whatever optimistic and like totally worth it is this is a little bit of a moat as in like not everybody wants to go through this process and I'm okay doing that to get the fruits of real estate investing that like that fruit taste.

Michael:

The fruit to the castle, the fruits of the castle.

Emil:

Yeah, you're right. It's a hassle and that's the silver lining is that probably scare some people away.

Michael:

Okay, guys got anything else tidbits, additional tips, tricks to make people's lives easier and grease the skids for getting their loans done.

Emil:

You had a good one that you posted on Twitter the other day about how you kind of organize files and folders. I think that'd probably be a good little message to end this episode on.

Michael:

Yeah, that's a super great point, Emil. So actually, for everybody listening check out last Saturday's weekend wisdom. We actually recorded an episode talking about specifically folder structures and how we structure them to be as most efficient as possible when doing refinances or purchasing or anything lending related, or even just end of your tax planning. Having all of those documents accessible at your fingertips makes your life much easier.

Thanks so much for listening, everybody that was our episode. If you liked it, feel free to leave us a rating or review wherever it is you listen to your podcasts, they are really, really helpful for us. So we'd love and appreciate the support and shout outs, always looking for more content. So if you have an idea for an episode that you'd like to hear, leave us a comment, and we'll talk to it. We'll see you on the next one. And happy investing.

Emil:

Happy investing.

Tom:

Happy investing.

Simple and Effective Organizational Tips For Real Estate Investors Jan 16, 2021

In this short episode, Tom and Michael share their file organization strategies to ensure pain-free access to all the documents you might need as an investor.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. Join with me today is,

Michael:

Michael Albaum.

Tom:

On this episode, we're going to be talking about the folder structure we use to organize documents. So a very pragmatic and practical weekend wisdom. All right, let's do it.

As I mentioned, this is a more practical episode of weakened wisdom. And this content is brought to you by Roofstock Academy. This is directly out of some of the coaching session conversations that we have some of the templates that we have, we're organizing documents. So this is a great kind of sneak peek behind the veil of some of the content and type of coaching stuff that we do within Roofstock Academy.

Excellent. So whenever I buy a new property, this is the folder structure that I like to use within each property, a folder for tracking or having ready on hand the purchase and sale agreement, the tax bills that come in any marketing collateral, like photos that was perhaps collected during the inspection that I can have on hand to share with my local property manager from the transaction, a copy of the lease and historical leases, the closing statement, the insurance documents, as well as the loan documents and the property management agreement. So a bit of a mouthful. So Michael, any thoughts or other comments on here?

Michael:

Yeah, totally. So I think that's a really great way to organize things. So what I do, and I just pulled up my one of my folders, and I'll kind of give everybody listening, a walkthrough of what that looks like. So because I purchased mostly inside of LLCs. And I'll often form a new LLC for property purchases, I'll have all of the LLC documents. So first off, on my desktop, I have something called real estate. And then inside of real estate, I have all the LLC folders. And then within the LLC folder, I have the formation docs for that LLC. So the operating agreement, the articles of incorporation, Articles of Organization, all that all the formation documents, then I'll have property specific information that I can drill down to in property folders inside of the LLC folder.

And so like you, I have the closing statement, all of the marketing materials for that particular property, all the due diligence materials for that particular property, and I'll call that property docks. And then I break mine down into, I have additional folders where I'll have that year, and then insurance and that year and taxes. Because those things aren't static, they're not constantly evolving, but on an on between year to year there, they can be changing. And so I know that if I have to go pull my most recent property insurance Doc, I'll go to 2020 property insurance. And then I can also track it from 2020 2021 to 2022 and see what's been changing and can kind of compare and contrast those quotes. And then also have folders.

I have one right now that I'm working on a refinance. And so I have a refinance folder. So all of the things that I need to refinance that property are going into that folder. So bank statements, income statements, tax returns, all that kind of stuff goes there. And then if it doesn't work out with this particular lender, if I go to refinance with another one, I've got most of the stuff I need there, I'll just have to update bank statements and brokerage account statements, all that kind of stuff. So that's kind of how I have mine broken down. And then I'll put things in multiple places. I was just joking with my wife the other day, I'm a bit of a hoarder. I'll admit that

Tom:

Digital hoarder

Michael:

Physical and digital hoarder, yeah, by all means.

Tom:

So you need some Marie Kondo in your life, does it bring you joy?

Michael:

Well, we just spent like, all weekend, this past weekend, getting rid of stuff. And that was a pretty liberating feeling. So I've tried to do that digitally as well. But so I'll put things in multiple places. Because I know if I can't find it, I can just go to a couple different folders and find it. So like, I have another folder that I titled taxes. And again, I'll put the year so for my 2020 taxes, I had a folder where all of the things I knew were going to be part of my tax return or needed for my tax return, I'll put there like property tax statements like insurance documents that show how much premium was paid. And so all kind of double dip and put things in a number of different places for myself. But I think that was a really long and drawn out explanation.

Tom:

No it was great.

Michael:

I have those same documents on hand that you do the leases and the invoices for that property, essentially, any document associated with that property will be at least in that property folder, and it might be in a subfolder in and of its own.

Tom:

Yeah, you know, and if you don't want to get you have like a million different folders. Another way to organize this just to make sure that you have all the documents because sometimes it could be kind of silly having a folder with just one document in it is to have a spreadsheet and then a checklist verifying that those documents are in sort of the the single folder. So a couple of other documents that we left out that we could include is that you have a warranty a home warranty, you are going to want that easily accessible for, you know, hopefully you don't need it. But if you do need it, other ones is major work that was performed perhaps an invoice that's going to be helpful come tax time. And you know if perhaps something, let's say you have work done on a water heater, and then a month later, there's some issue with the water heater, right? So that that kind of gives you some ammunition of going back to the company that did the work saying like, Hey, I just paid for this. Why am I you know, why is it not working? So having that stuff it pays it pays to not be a digital hoarder, but be digitally organized. Being a digital hoarder just makes it take longer.

Michael:

Yes, it really does. It really does. And something that I've done I know I've talked about in other episodes is I've got a master Excel spreadsheet with every property that I own inside of every LLC. So I'll have the LLC name at the top, and then the properties in that LLC. And just all of the expenses that I pay personally, are logged in that sheet. And so I've got a record of them on the property Doc, if somebody needs to see that I've got a record for myself to know that I have to give this to my CPA at the end of the year. And then I also have a record showing kind of globally, what that picture looks like, how much did I if somebody said, Hey, Michael, how much you spend on insurance in 2020, I could spend about three minutes and tell you just totaling up from all the different LLCs how much I spent.

So that level of organization is helpful for me, I find that to be really useful. Not everybody will and everybody can, I would encourage everyone to develop their own system, because not everybody learns the same, not everybody works the same. So figure out what works for you. Maybe that's QuickBooks, maybe that's paper documents, you know, a filing system that works for you. So play around with some different stuff. But I would definitely say develop really good habits at the onset, when you've got one or two or three properties because those systems are going to be you're going to rely on them a lot more as soon as you start to scale. Because it does become a little bit more cumbersome if you haven't developed something from the onset.

Tom:

And a lot of these templates is a great benefit in Roofstock Academy, and that we have a lot of these kind of pre baked templates for, for this type of stuff, the spreadsheets and, and all of that great stuff. Go ahead Pierre, you were saying…

Pierre:

The photographer and the music producer in me just couldn't help but notice that you guys didn't talk about backing up your files.

Michael:

Oh, dude, that's so good. All right. So Pierre, you bring up a great point about backing up your files. So I used to work for a property insurance company and we had this like killer IT department and the IT guy was a good buddy of mine. And so all my stuff was always backed up on my work computer. And I didn't really worry about it too much my personal computer, well, I had him build me a personal computer and I was backing up all my stuff, I got my computer stolen like a year and a half ago, and come to find out that my stuff wasn't backed up as well or as robustly as I thought it was. So that was like, I don't know, eight or nine years worth of like stuff and files and organization that I had to redo the vast majority of some of it, I was able to recover but a lot of it wasn't and I like I was in tears for a while. And that was a really big bummer. I would say to put it lightly to the to the PG version. So backup your stuff, whether you use, you know, an external hard drive or something to the cloud, figure out something, but be really, really, really consistent and know how to find it and know that it's backing up and have it backup at some regular interval that's not a year. So whether that's daily or weekly, or hourly, or whatever works, but because having your stuff evaporate really sucks.

Pierre:

So the common practice in photography or other media work is that your files are backed up in two places. And your personal computer is not in place. That's liable to crash at any point and you can lose all of your stuff on there. Your files need to be in two separate places, maybe two separate physical locations or on the cloud and on a hard drive somewhere.

Michael:

That's so good. That's super good.

Tom:

Yeah, so many great relatively inexpensive cloud based storage stuff and external hard drive hard drives are cool but it's like another like thing you know?

Michael:

Yeah. And it's it's like another computer like if it drops or breaks or gets wet. Like get your up a paddle, up a paddle without a creek. creek without a paddle.

Tom:

Doesn't bring me joy. Well, the cloud brings me joy, but teach their own.

Michael:

Yeah. Great. Great point Pierre.

Tom:

Awesome, guys. Well, I hope you got some value out of today's weekend wisdom on talking about folder structure. Anyways, thanks for listening. If you enjoyed the episode, please rate us please check out rootstock Academy, all that good stuff. All right. Happy investing.

Michael:

Happy investing.

An Asset Manager’s Take On Real Estate (And Lessons Learned Over The Last 15 Years) Jan 13, 2021

In this episode, we interview Roofstock's Director of Asset Management, Caroline Parker, about her diverse career path and the what she has learned about real estate along the way.

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. I'm joined in this interview with,

Michael:

Michael Albaum.

Tom:

On this episode, we have Caroline Parker, who is the director of asset management Roofstock. And with Carolina, we're gonna be talking about asset management. What is it, we're also going to spend quite a bit of time going through Caroline's history and her all the different jobs that she's had super interesting working at student housing, working at big asset management companies working at John Burns. So let's get into it. Caroline Parker, welcome to the show. Thank you so much for joining us.

Caroline:

Nice to be here. Thanks for having me.

Tom:

So we before we get into the meat of discussion, let's go ahead and talk about your background. We've had john burns on the episode on the show before we've you know, touched on some other places in your history. So why don't you take us back from the beginning?

Caroline

Okay, great. Well, I have a bit of a unique background. I started in banking for four and a half years in Charlotte, North Carolina. I was an analyst in the investment banking division at Wachovia when it became insolvent. Then I worked through the merger with Wells Fargo, and eventually made my foray into real estate by joining Greystar Real Estate partners at their headquarters in Charleston, South Carolina, they're already became an asset manager and REO portfolio, and eventually moved into a unique role where I got to support the C suite, helping them with projects and being their ears and eyes of the organization and getting to participate in the things like investment committee and executive.

Tom:

So that was the heat of everything. Right, right in 2009, as a Wachovia got purchased, am I going back in time and thinking of that correctly?

Caroline:

Yeah. Yeah. The big downturn, so it was a crazy time to be in banking analyst, so I got to watch everything feel relatively less impacted in some of my work senior colleagues.

Tom:

Awesome. Cool. So you merge into this new position supporting the C suite?

Caroline:

Yeah. So that's where I really got to learn the housing industry. From a very high level strategic standpoint, I really understand, you know, the different facets of real estate or multifamily world from development and acquisitions to property manage. And so it was a really amazing experience. And I fell in love with, with rental and investment in the housing industry from that point on. So from there, I moved out to California for personal reasons. And I thought, well, how am I going to combine my experience from with greystar Real Estate partners and banking, I thought, Hey, I'll go into multifamily capital.

So from there, I was helping underwrite loans, multi, like from Fannie and Freddie to on balance sheet loans. And I really learned how to pick out outliers, how to ask critical questions about you know, asset performance, but what I really wanted to know and what's really driving those numbers, you know, how to, how do you really ask critical questions? And how do you really ascertain what is a good investment and what not. So from there, I knew that I needed to go back to the owner operator side.

So I decided to join the Irvine company and their apartments division, and I joined their new asset management team, they hired a whole new team of people to come in and really dive into their database and kind of change the way that division with making decisions truly using data collectively across all the cross functional silos and the division. So that was a really exciting experience where I really got my arms around operation, and how do those decisions each individual decision made on site? How does it really change the financial performance of the asset? So we started from the ground up and really analyzing data quality, putting in controls, and then from there creating new tools so that our counterparts can help make district strategic decision.

Michael:

That is so great.

Tom:

To paraphrase a little is you within that multifamily team, you basically were looking at all the data coming in from operations, analyzing that data and going back to them saying like, Hey, we're spending most of our money on XYZ, we should be doing this because it's is that it's sort of a rough synthesis of that role or filling in whatever gaps or whatever place I'm missing,

Caroline:

I would say it absolutely includes looking at where we're spending the money most frequently, but also a strategic decision that happened on site from pricing. You were helping create an in house proprietary pricing model akin to other multifamily operators are using but but based on the airline model, where you're constantly analyzing supply and demand. The unique aspect to the Irvine company is they have a highly concentrated high quality portfolio. So to use an out of the box solution would be cannibalistic. And you would incrementally like drive prices up or down depending upon you know what your competitors are in your market which are all your property.

So we were building one in house for example, or we were helping team make strategic decisions on allowing people to stay longer and their leave for asking them to move out early? Or maybe how can we make a turn more efficient so that we minimize the number of days that the property or the unit is vacant, things like that anything that can impact financial performance, which is everything we were getting under the hood on and having an opinion.

Michael:

Awesome. So as a multifamily guy myself, I'm curious to know, what were some of the biggest drivers of the financial performance that you were seeing?

Caroline:

I would say by and large, occupancy is the biggest driver of financial performance, you could raise your rent all day long. But if it takes you a home, but to to get a new tenant, then you essentially washed any returns that you would have gained from the incremental increase. So we were always scrutinizing How can we save a day here? How can we save a day there? Is it marketing a property before it's actually vacant and ready to be leased? Or is it using different channels? Is that targeting different people? You know, we're always just looking for ways to get that incremental dig occupancy, just one extra day of revenue.

Michael:

Yeah, makes total sense. As a total aside, the last company I worked for was a commercial property insurance we used to insure the Irvine company.

Caroline:

Oh, cool. And so I visited tons of their campuses up in the northern California area, and I was always blown away. It's like a resort. Like all their properties, like resort style living,

Caroline:

They are really beautiful. And Irvine company is very unique in the way that they care desperately about the aesthetic properties,

Tom:

Probably funny you in a position thinking of like, wow, how do we optimize the financials, when we're building a four seasons that you can just nod you don't have to? Okay, so you worked at the Irvine company, building those muscles and optimizing, you know, financial properties. What's next after the Irvine company?

Caroline:

Then after the Irvine company, I did join john Byrne's real estate consulting, I got to work very closely with john. And it was an amazing opportunity to get a macroeconomic perspective of the housing industry and all the different players and what keeps them up at night. So, you know, coming from being an asset manager, the Irvine company that's very in the weeds on day to day operations and execution, how that drives financial performance to going to like a very, very high level overview of, you know, demographic shifts and supply and demand. And, you know, where are people building? Where's their shortage? And how much can we get what technologies positioned to disrupt the industry. So it was fascinating. And frankly, that was where I got, you know, my first in depth look at single family rentals is a new asset class.

Tom:

So what a different experience from kind of being in the weeds to going way up top did your experience of being in the weeds, like help out from looking at this macro view? And I'd love to hear about it kind of changed your opinion on stuff? And if it did, and it just generally.

Caroline:

I absolutely think though, I think that, you know, real estate, in general, as an industry or a sector probably is one of the laggards of adopting technology. And that probably due to a lot of different reasons, but one of it being that, you know, there are a lot of individual investors, and anybody can do it. But one thing that I really took away that I didn't have a full appreciation for was housing, and so driven by demographics moreso, than the economic cycle. And I don't think people really talk about that enough. People are always going to need housing, and our population is consistently and constantly growing. The big things that are changing is, you know, what are the biggest cohorts within the population that are driving demand? And what do they want?

Michael:

Interesting.

Tom:

Can you give any, like specific examples, I'd love to kind of take that a level a layer in?

Caroline:

Well, for example, a lot of millennials, people like to talk about a millennial, you know, they're kind of turning old values upside down, maybe they decided that they don't want to earn home anymore, because they don't want the responsibility. Or maybe they just can't afford it. Because frankly, affordability has never been higher, more difficult. So now there's this whole new demographic that's out there, and they want our single family rental home. And you know, maybe they want space, maybe in their, you know, young professional years, they're choosing to live in an urban environment, and they're prioritizing lifestyle. But as they grow into different life stages, they're deciding that, you know, maybe I need more space, or maybe I'm ready to have a family.

Of course, there's the timing of those life choices can change. And a lot of times it's driven by, you know, financial factors and their ability to afford a family or pay off student loans. But all of these decisions are unique to people's age. But yeah, so all of these decisions that each cohort making, it's very much unique to their age group. So even thinking about generations in terms of millennials, which is often you know, 20, 30 years segments, it's more ideal to think about them, smaller cohorts, they all behave differently

Tom:

Within these different kind of roles that you've worked in. Are you following pretty closely on like, where younger demographics are moving? I'd love to just get, this kind of rubber hits the road with regards to kind of execution?

Caroline:

I don't know. Yeah, yeah. I don't think very broadly. But I would say in general, there is a trend to go to these more lifestyle oriented things. Cities, they're not necessarily the mega cities like New York or San Francisco, which people still go to because the professional opportunities are very superior. But a lot of people are seeking opportunities to live in mid sized cities that have more quality of life and maybe access to more activities. You know, we're outdoorsy type of places.

Michael:

Tom's trying to pump you for information, Carolina, figure out where you should invest next.

Tom:

Exactly. So working with John Burns, what's after that step in step in a career?

Caroline:

So I went back into the owner operator side of the world, which tends to be my passion. And I joined a student housing company called the Nelson partners. So there, I really got into a subset of rental housing specific to students. And so their primary strategy was buying properties that would house students all across the country. So they had properties that would have, you know, four or five apartments to you know, mega skyscrapers in the heart of, you know, Austin, Texas, on YouTube campus. So it was the common denominator really, when we want to lease to students, and the big sell there is that you can get a higher premium on your rental rates per unit, if you're leasing by the bed student. So that was really where they were targeted.

Michael:

Interesting.

Tom:

Got it. Wow, in so these were all just big, yeah, much larger properties only, like bigger cities, or like Austin or I don't know…

Caroline:

Every university or college is to, you know, like a micro market. So each college or university has their own supply, demand constraints, and also their own culture of, you know, what does students want, you know, what typically happens, they live on campus for two years, and they move off campus, I mean, every university is different. So we would really analyze each opportunity that came up very closely. And specifically to that to that University.

Tom:

Were you guys doing land development or acquiring existing buildings.

Caroline:

So often we be developing land or acquiring existing properties. And some of them are a trophy asset, meaning, you know, they were the beautiful skyscraper with an infinity pool on the roof, to, you know, something that was more modest, with a much smaller number of units.

Michael:

So without getting too deep into the weeds on the student housing side of things, I would be curious to know if someone was interested in getting involved with student housing as their investment thesis or strategy. What one or two pieces of advice would you give to them or things to look out for things to be aware of before jumping into that pool?

Caroline:

That's a great question. Student Housing can be very rewarding, and it is different than a regular apartment or rental house. So one thing that you just really need to understand is the local market, when do students typically secure their housing for the next year, how walkable is the university campus? What are the expectations there? And do they want to furnished you know, do they want to unfurnished but making sure that you are aligned with a timing of when students typically move in and move out and can work really, really well for because you can line up things very easily and have like a one hit every year and just know that everything's taken care of. But you can also get a premium for this effort. And if you leave by the bed, rather than like a traditional apartment, then you really got a lot of upside.

Michael:

Great to know,

Tom:

Within student housing is there much like engagement with the University at all with like marketing, I'd be curious to know that type of relationship,

Caroline:

There can be sometimes the universities will partner intentionally with third parties to provide student housing because they don't want to, but they know that there's a need. So there's that aspect. But also, you can often partner with the student affairs for the housing department on campus and give them your information. And a lot of times they'll help direct students to your property whenever there's a need or class. So that always happens. So yeah, there's a lot of opportunity to create synergies with universities, and usually they're very receptive.

Tom:

Interested in working with student housing versus not I would intuitively think that student housing has maybe a little bit of a higher R&M costs, I don't know just getting lived in a little bit harder than a regular house, I'd love your thoughts on that on a modeling out, looking at costs, and repairs, and maintenance and all that good stuff.

Caroline:

That's a good point definitely can be true, you typically wait for paint, and you just plan on painting every time there's a change. But one benefit is that if everybody's moving out at the same time, you can bring in some third party vendors and get everything taken care of at one time, you can get some economies of scale there. You can also charge back a lot. I think usually students know when they've trashed something that they're probably not getting their deposit back. So that helps a little.

Michael:

All I'm thinking about during this whole conversation is that movie Animal House. That's what I keep replaying over and over. And I remember Yeah, being a student having huge security deposits to put down for just this reason. That's really interesting.

Caroline:

Yeah, for marketing purposes, you can really easily get a student in by giving them a free pizza and getting them to sign a lease or in a traditional apartment. You could give them whole month free or something?

Michael:

Right, right, right. That's so good, tacos for everybody.

Caroline:

Bring a taco truck!

Tom:

Another question I have related to student housing that maybe a little bit like out there left field. So if a student is in the student housing is not being a good resident, would it be common practice or normal to like, reach out to I don't know, like parents or something, or

Michael:

Johnny is misbehaving.

Tom:

I had a similar experience where and I don't know, maybe it's like playing music too loud or something. And like these, like the apartment owners, like reached out to my parents, it was terrible. Jersey, am I getting picked on? Or is that like, more of a common practice?

Caroline:

That's a great question. I'm sure every manager handles that differently. But I imagine that you put fines on something and the parents inappropriately might get involved. If there are too many infractions.

Michael:

Get the parents involved.

Tom:

It's great if the parents can get the parents involved. Excellent, Caroline. So anything else on your experience, before we move on after working in student housing?

Caroline:

I would just say that, in general, there's always a talk about big data and how we think data. And I feel like the industry has really gotten to the point where we really weren't meaningfully using this robust information at our fingertips to drive financial performance. So I would say that would be a theme that has kind of developed over the course of my career.

Tom:

Yeah, you know, over the last 10 years or so a lot has been done with regards to technology to support this kind of information and decision making, has that like been meaningfully impactful? And how you've seen technology evolve and being able to utilize it in these different roles?

Caroline:

Absolutely. I do think that, but prior to the robust use of data to make decisions, you know, asset managers who are interested in the financial performance of the property would heavily rely on their property management counterparts and ask them questions about different things that may be happening on site. And a lot of times are reliant on the qualitative feedback that you get, or one time anecdotes to explain a, you know, a financial abnormality.

But now, I feel like with the access to the data, this has made the team more collaborative and stronger, because now we're able to create tools and provide more insight and together, use this information as if it was the playbook and come up with a strategy and really ask, you know, consultative questions of each other. What is happening here? And how can we change it? And what do we want to measure? And is that meaningful? And you can also use that to, you know, help coach and train your onsite team and drive incentive.

Tom:

That's awesome. Turning it from an art into a science getting data driven. Very cool.

Michael:

Caroline, you mentioned working with your property management counterpart. So I would love if you could give us a breakdown of the differences high level and then maybe nitty gritty to about what's a property manager versus an asset manager?

Caroline:

That's a great question. And a lot of times, the lines are blurred. So the way I think about it is property management is the team that's often on site, they're responsible for the day to day execution of managing a rental investment property. So they would do things like you know, be on top of property maintenance, collect rent, lease the house, and you know, interact with the residents on a day to day basis, whereas an asset manager is really focused on financial performance of this investment property. So they're really identifying ways to add value on a regular basis and could be, you know, driving rental rates, looking at opportunities, upgrade the unit for additional rent prop, timing, when to sell, or refinance. But really, they're just leveraging their insights and best practices, they have the ability to see a portfolio of assets and really pick out outliers and benchmark against each other and look for opportunities to improve the portfolio as a whole.

Michael:

Interesting. So in the single family space, kind of on the retail side, do you think that property managers were more of an asset management hat oftentimes?

Caroline:

I would say in the single family rental world, a lot of times, the mom and pop owner and the handful of properties and they're relying on a property manager, the property manager will often be a source for giving them guidance on how much they can charge for rent, you know, where to put their money when it comes to turning the unit? are they putting more money into the floors? Are they returning the houses? So I do you think that the property manager in that world would wear a hat, but I would also suggest that the owner do their own diligence and really ask them challenging questions and make sure that together, they're making the best decision.

Michael:

Awesome. And so if we dug deeper, a little bit on that, what questions would you say, are going to be pertinent for owners to ask if their property managers kind of in that department since they've got to be their own asset managers, quote, unquote?

Caroline:

Right. I wouldn't just be very active in asking about how they're marketing healthy. You can get a new resident and you know, do they have vendors lined up between residents so that the house is ready for somebody to move in as quickly as possible, just being on top of it. And knowing that you're thinking about these types of things, it's really important, especially to with vendors, if you're hiring a third party to come in and do repairs, or paint, you know, getting more than one bid. So those are probably the biggest ways that you can stay on top and making sure that you're just making the best decision and getting the most money out of your property.

Michael:

I love it.

Tom:

This ties right along with just how important the process of vetting your property manager is, you know, when you guys would open up new markets and any of these other companies, was there a process of that you guys did all in house property management? I'm curious, or did you think that existing property managers?

Caroline:

Well, over the place that I worked at either an in house property management team, but the role between the asset manager and the property manager, I really think it's intended to be a check and balance. So we always try to come at it from an angle where, you know, we were hiring our property management team. And granted, we were more collaborative, because we both worked for the same company. But we always tried to take that stance of you know, what if we were just hiring a third party manager, what would be effective? So we would very much hold him accountable to performing.

Michael:

So in thinking about a lot of folks that are using Roofstock, a lot of retail buyers, people that are scaling and building their portfolio, Is there like a good ballpark measure for when somebody could actually go hire an asset manager as opposed to being their own?

Caroline

That's a great question. I don't know.

Michael:

I'm just curious, because, you know, people are constantly looking at scaling. And we have this $100,000 passive playbook as part of the Academy. And I think it kind of catches people off guard when they realize I've got to own 51 single family homes at roughly $100,000 each, that cash flow 175 bucks a month to hit 100 grand a year in passive income. Yeah, I don't have time to manage 51 managers or keep tabs on that. So it just thinking about scaling, knowing that this asset manager is available. I wondering if there's a market for it on the for the kind of retail owner operator?

Caroline:

I mean, I think it's a great question. And certainly, if you own 51 properties, or whatever the magic number is, it would be very time consuming. So depending upon what you are doing the day to day basis. At some point you would want to hire somebody even if it was an institutional asset manager, but you would need somebody to help you oversee the performance of all of this investment.

Tom:

So a common question from a lot of investors is looking at duplexes versus single family. I think with your experience, you've probably had some some great insight on both the cost side as well as the revenue opportunity side on either opportunity. I'd love to hear you spiel on, you know, comparing those two different types of types of investments.

Caroline:

Great question. You strike my great question. I would say they are slightly different plays. I think duplexes immediately probably crash flow more easily because you've got more rental revenue with one purchase, while single family rentals probably have greater potential for appreciation than duplexes. So it's really about, you know, what is your immediate goal? Are you looking to cash flow very quickly, are you hearing the long term game and looking to really get the upside on the sell. And really, you can find properties that check both boxes. But I do think there are some synergies with having a duplex because they're often mirror images of themselves. And then when you have less risk of a tenant vacating you still have some passive income. So it really depends on the unique property and the market you're in. But I do think that there's could be some fundamental differences.

Tom:

Excellent. So continuing on the kind of path of career. So after student housing, welcome to Roofstock. Is that right?

Caroline:

Yeah, to be here, I love it.

Tom:

Tell me about what you know, focusing on and projects here at Roofstock.

Caroline:

Great. Well, I just joined the Roofstock asset management team. I'm a part of the Investment Services Division. So we are really focused on helping our institutional partners manage and place their capital into the single family rental market. So oftentimes, these institutional players are buying hundreds of homes at a time and we we are looking at them from a financial performance standpoint. So we're helping them make strategic decisions, determine, you know, renovation scope, and execute that and then also lease that and make sure that their assets are performing to their expectation. So I'm immediately helping with streamlining and automating some of our reporting. And so that'll be very dynamic and real time and allows our investors to be actionable and make strategic decisions in real time. That's the goal of our team. Really exciting place to be.

Michael:

That's so cool. I'm curious, Caroline. So these institutions that are buying hundreds of homes at a time? are they buying them from other institutions? Or are they buying them from 100 individual sellers?

Caroline:

Well, every institution strategy is different, and every market is different. So it really depends on what's available for purchase in that market. And Roofstock has several ways of sourcing investment properties. So sometimes that will be from other institutions that are selling a few homes at a time. And so that's a big win to get a few and get some economies of scale there. Otherwise, we could be looking at MLS data are also some of the homes that are listed in the Roofstock market place. And then finally, there are some single family home developers who are looking to sell a large number of homes at one time, that is a great opportunity for institutional investors.

Michael:

So you could have 100 transactions running simultaneously from 100. Different sellers.

Caroline:

Yeah, that's wild, it's crazy.

Tom:

On some of the new land development stuff is that like build to rent type communities?

Caroline:

These are built around communities, and they're very highly coveted by institutional investors.

Tom:

I would imagine, as an asset manager, like what a place to kind of put in whatever kind of knowledge we have of optimizing the portfolio. At the time, the very first nail is going in, I don't know where I'm going with that, it's just like, sounds like so opportunistic, you know, in thinking about how to optimize the portfolio. And that like at the at the very, very start of the build.

Caroline:

it is great, because a lot of times the single family home builders, if they're building the home for someone for an individual to purchase, they'll make that house a lot nicer. Or they'll put in really trendy finishes and things to really entice a premium from, you know, a normal person who's going out to buy their next house. Whereas if an investor comes in, and they pay me to take these 20 homes that are all contiguous, and because I know they're gonna be rental properties, you know, I might choose different flooring or different things that are, you know, more conducive for the wear and tear of a rental property, so that you can minimize your maintenance expense.

Tom:

Yeah, durability.

Michael:

For those that might not be familiar, what is a build to rent?

Caroline:

A build to rent is a home that is specifically built from the ground up and with the intention of being original property. So that's how I think of it. It's a very new construction. And a lot of times the advantages are the homes are very close together, which makes it easier to manage them. But also because they have similar for print, it also makes economies of scale in terms of, you know, making sure that you have all the supplies you need, and that you understand the nuances that the home and what to expect in terms of risk.

Michael:

And is this a new concept? Or is this kind of been around for a while?

Caroline:

It's relatively new, I would say also is the single family rental industry or the asset class, for

Michael:

Sure. And I just curious what your outlook is, if you know about the appreciation potential of those built to rent properties, kind of as an on an individual basis.

Caroline:

I'm very bullish on housing in general, I think from like the sheer macro economic drivers of supply and demand, our population is growing quickly. And particularly when you look at the life stages and cohorts of age, within the population, there's a significant amount of demand to have a home. So assuming that you know that you're choosing your market really well, I feel like it's a win. So I do think that a lot of times the build to rent communities are either part of a master planned community. So they're well positioned to be highly desirable, whether you want to keep them as rental properties or eventually sell them off. You know, I think there'll be high demand there, but also a lot of times they're infill. So a developer could come and find, you know, a smaller tract of land and put several homes on it. And then they're in amazing locations. So a lot of times the strategy around ultra rent can be slightly different. But more often than not, it's a great opportunity to invest and see a lot of appreciation.

Michael:

Interesting. Very cool.

Tom:

I guess one more question. on the technology side, I'm always kind of curious about like, kind of the evolution like I assume that, you know, it began in Excel and perhaps still, like a vast majority of is done in Excel, is there any plans within reflect to build any, like custom software to help, I don't know, make it more efficient, or I'd love to hear I don't know if there's any kind of cool tech stuff kind of on the pipeline related to this.

Caroline:

Roofstock really innovative and have the really, really highly talented team of engineers. So I do think that we are out there and trying different ideas. And the ones that stick, you know, I think, will ultimately help create a very robust API platform that'll be very proprietary. And the way that we assemble this information that we've we've gathered from different technologies, so be it from, you know, technology into physical home, and how thing is to streamline maintenance, or, you know, or the way that we're assembling different factors across different markets, you know, pricing and things like that. I do think that we are really well positioned to make that very robust and dynamic for our clients.

Tom:

You mentioned technology in the home, are you bullish on what said like IoT like Internet of Things of like within rental home, because I mean, there's some significant upfront costs in implementing something like that, you know, remote locking systems and water checks. And because that any analysis on that?

Caroline:

I will say that the single family rental industry has an advantage over traditional multifamily in a way that, you know, we're all learning the best way to manage a home of single family home, which is quite different than multifamily buildings. So I do think that the potential to experiment and adopt new technology is slightly easier because we are baked into a legacy way of doing things. And also because there's a need. So a lot of different operators, including ourselves are experimenting with a lot of technology that's coming on the market. And of course, there is an investment and buying the technology and then implementing it and then testing it out. And figuring out didn't actually create a fading. So not a lot of that is happening right now. And a lot of people are sharing their best practices and learning from each other. So I do think over time that the synergies and the value from using technology on the home will continue to be accretive.

Tom:

Yeah. And as we get more data on it, for sure, to make those decisions. Awesome. Carolyn, anything else before we finish up today?

Caroline:

No, I think that it's a wonderful place and super happy to be a part of this talented team. So anytime you guys have questions, feel free to reach out.

Michael:

Awesome.

Tom:

Awesome. Well, thank you so much for jumping on.

Michael:

Thank you so much.

Caroline:

Thank you.

Tom:

Thanks again to Caroline for joining us today. If you liked this episode, like the podcast, we always appreciate it if you like and subscribe, wherever you're listening to podcasts. And as always, happy investing.

Michael:

Happy investing.

This Is What You Should Be Aware of When Investing With Family Jan 11, 2021

Investing with family can be complicated.

In this episode, discuss things you should take into account when investing with family and some of the agreement structures that are common for this.

---

Michael:

Hey everybody. Welcome to another episode of the remote real estate investor. My name is Michael Albaum and today I'm joined by,

Tom:

Tom Schneider

Emil:

and Emil Shour.

Michael:

And today we're going to be talking about partnering with family to do real estate deals, this can often be a hotly contested and debated topic. So I'm curious to get everybody's insights. Alright, let's get into it.

Alright guys, family, money, sex, drugs, rock and roll, all the cool things, all the fun things we want to talk about in the show. Have you ever done a deal with a family member? Tom?

Tom:

I have not I've approached family member but I think my family is generally a little bit risk averse and doing this kind of work. And that's okay. I you know, I've heard horror stories of friends doing stuff with family members were friends that it's gone south, but I personally have not done so. I'm going to be sniping in some some questions and maybe throwing some pessimism shade. But I've heard of people being successful. But anyways, long answer No. Short answer long. No.

Michael:

So when you say that your family is risk averse, does that imply that real estate investing is super risky?

Tom:

I think that it's fear of the unknown. Michael, if you're not familiar with it, it's can make you concerned that…

Emil:

It is a very common consensus.

Tom:

For sure. We'll have to kind of drill into some of that on another episode, but not risk averse. But just yeah, fear of the unknown. That's where I'd say my lot my family, I think a lot of people like a lot of them, like get it and want to do it. But man that going from zero to one is a pretty big move. That hasn't happened.

Emil:

Yeah, everyone has heard that horror story too, right? Like, oh, I had a friend who bought real estate and it became a crack house. And then it's like, okay, we're gonna pull the one. Everyone's heard that story. And so I think that's where the scariness of real estate is coming from, right?

Michael:

No one ever says like, Oh, yeah, I had a friend into real estate and worked out really well. So I want to do it now, too.

Tom:

Yeah, I mean, I think with a lot of people, it's fear of like, looking like a dummy, you know, and like throwing money away. And I think anytime you're quote, unquote, like making moves, like there's some risk for that. And a way to think a lot of people is just turn into a turtle and just do nothing.

Michael:

I like turtles,

Tom:

Nice throwback, cultural reference.

Michael:

It's interesting. Like, I would argue more people invest in the stock market, via retirement accounts, or via taxable accounts than invest in real estate. And so it's almost become normalized to say, like, oh, man, the stock market went down. So I lost a bunch of money today. And I was like, Oh, yeah, like that happens. That sucks. Versus in real estate, I think because there are less people doing it, it's probably talked about less. And so people are getting less exposure to it. And so they don't want to be that one person that looks bad, who went and lost money in real estate versus all their friends, family, whatever other acquaintances are losing money in the stock market, no one thinks twice about it because it's been normalized.

Tom:

Yeah. It's like what weighs heavier like the aversion for loss? Or the what's the opposite of aversion?

Michael:

Wanting? Desire?

Tom:

Desire, there we go, versus the seeking gain seeking. Yeah, aversion is a very strong force.

Michael:

I think loss aversion is stronger than gain. I think we did a book club at the Roofstock Academy, where we were talking about negotiation and that kind of thing. And people's loss aversion is a stronger driving factor in their decision making than ability to win and gain.

Tom:

I think it's not just loss aversion, but like aversion to looking like a dummy. You know, like, you don't want to be that person that the family talks about, like, oh, Tom, you know, he put all his chips on XYZ and lost it all.

Michael:

We told him it was silly.

Tom:

Yeah, it was silly. But anyways, no, so have not done deals with my family. I think I'm the only one in my family network that has drank the kool aid the sweet, sweet kool aid of real estate.

Michael:

Okay, Emil, what about yourself? Are your lips sticky with kool aid? Or have you gotten other people to, to enjoy with you?

Tom:

Do you share her kool aid?

Emil:

I don't. I don't like germs. I have spoken to family and I have family who is interested and ready, but I haven't found anything where it makes sense. And I haven't needed to include anyone yet. So I've had the conversation. Have some family members who are interested for when the right deal comes along where we need some extra capital they're interested in you know, I've set up some terms with them like we've gotten all the groundwork done like what they're interested in, how I think I would want to structure it. So had a lot of that conversation just haven't pulled the trigger because we haven't found any things investment sure

Tom:

Question for a meal or in moving forward with this. If you had to say the kind of the push the impetus is it more you looking for another capital partner or is it more Your family or friend wanting to participate in, in the kool aid of real estate investing,

Emil:

I think it's more so me requiring capital. And obviously, I'm going to offer them attractive terms better than some of the other invest… like, my family who I'm talking about here. They have other investments that they do on like the lending side. So they'll do, it's not like hard money lending, but it's this company that issues loans to people who have a harder time getting lending, so the interest rates higher. So they usually get like, I don't know, six 7% annual return.

So I'm thinking, you know, how can I offer a, an even more attractive return so that they'll want to invest with me if I need that money versus going and putting it with this other company? So they have some experience investing in real estate notes? Yeah, direct real estate, but with me, it would be like a note where I would pay them back, I don't know, maybe in 12 months, or whatever, depending on the type of project we take on.

Michael:

So that would be a debt structure as opposed to an equity structure,

Emil:

Correct? Yeah, right now, it's only been talks for a debt structure and not like a JV type partnership.

Michael:

Okay. And out of curiosity, why is that for you?

Emil:

Um, for me, it's probably just my control freak nature, I would rather just be the one in the driver's seat and not having to really answer to anybody and really make my own decisions, rather than, you know, you include people and they get a right to make those decisions, too. And that's not what I'm looking for with my real estate investing. So if it requires me to grow more slowly, because whatever, I'm the only person in the driver's seat, that's fine. But there's people who are interested in just the debt side of it and don't want to do any of like dealing with real estate or the operations or whatever.

Michael:

So is there a way to structure it where they have an equity position, but can still maintain that positivity?

Emil:

I'm sure there is. I approached it from a debt structure, they were cool with it. And that I think, works for both sides. So I didn't even you know, think about exploring kind of other avenues.

Michael:

Yeah, makes sense. And for people listening, that are sports fans, that might not know what the term JV means in real estate, what is JV?

Emil:

So that's a joint venture, that's where multiple people are pooling their money together multiple names on title multiple names on the LLC, or whatever it is holding this property. So they own the property as well, versus this would just be me owning it, I have like a note with them a debt obligation to them.

Tom:

And continuing to do the just the definition game before going back too far. Equity versus debt. So debt would be just someone who's just acting as a bank, they're not they're not on title, they're not you know, in a JV, it's just straight borrowing money from that person, where equity be equity is actually participating in the upside of the of the real estate. So debt would be like a confirmed amount on what you're paying back, you know, to that person, you're borrowing from where equity, it could be variable, there's risk, you know, perhaps the person who's loaning money loses money, if they're, you know, structured in an equity way, versus debt. It's just a flat percentage, or however that is structured. And there are pieces I should, we're missing in my explanation there, guys?

Michael:

No, I think that's great. But just to kind of bring it all home is If so, Tom, if we're in a debt structure, partnership, and I'm going and buying the deal, I might borrow $100,000 from you, and I'm going to pay you back X percent or X, you know, dollar amount monthly, based on your preferred return whatever you're trying to achieve as the bank. versus if I were to go into a LLC, I sell that property for 200. Grand, I just pay you back what's outstanding of that note of 100 grand versus if a meal and I were partners were Equity Partners. And I bought that same property for 100 grand and we were 50% partners, went up to 100 grand Emil would share in that profit as well versus you, Tom, as the as the debt partner would not.

Tom:

Why you gotta leave me out like that? All right Mike, your experience, partnerships, family friends, yeah,

Michael:

So I've done a bunch of stuff. My very first deal was a debt partnership with my family, they loaned me the money to purchase that first property. And that was worked out great at the time, interest rates were so low, I mean, interest rates are still so low, so they're able to get a better return than having their money sitting in the bank. It's a very safe investment with me, because they know where I live if I were to default, and it's secured by the property. So there's really very little risk involved for them. They didn't have to do the true traditional underwriting that a lender would traditionally do on somebody to determine, okay, is this person a reasonable borrower, because they knew me and stuff. So that was a really, really great win for both sides.

Tom:

How long? You don't mind what what were the what was the length of terms of the debt?

Michael:

Yeah, so the term was interest only for five years, because I borrowed more than 20% to help me get into the deal. Because I was just coming out of college, I didn't have a ton of cash. So the mortgage payment, the fully amortized mortgage payment would have made the property negative cash flow. So my dad helped me do is he's like, Okay, well, what if we just do interest only that significantly reduces your monthly payment amount, and then this property will cash flow. At the end of that five year period. Hopefully the rent will have increased So that way you, you'll be able to support a full mortgage payment.

So that's happened, I've opted to continue with the interest only route just because the cash flow is really killer and the appreciation is quite rapid. And so instead of paying it down, I have a better use for that cash flow elsewhere. At the end of the lifecycle of that property, whenever I ultimately sell it, or at the end of the next five year term, I'll either go to a fully amortized payment with principal and interest. Or if I sell the property, the loan balance has remained unchanged over time.

I mean, it's an expensive way to have access to capital. But it was the only way that made sense for me. And it was the only way I could get into the deal. So I said, Okay, it makes sense. Let's do it. And it worked out really, really well.

Tom:

Opportunistic.

Michael:

Yeah.

Emil:

When you structure this, do you put your family on title? Like, how do you kind of is it just like you have a contract? And it's just you making payments? Like, how do they get in on it so that they feel secure? And everything? I'm curious for my own?

Michael:

Yeah, so it can it can be one of two ways. So one way is just to have a promissory note that everybody signs and says, okay, yes, Michael Albaum is on the hook for this dollars. And it's, I mean, it's a contract. So if I don't make a payment, there's a late fee. And if I don't make the payment after the late fee, then they probably can get foreclosed on. And depending on how you want to structure it with your partner, or the family member or friend is they can actually have take a first deed of trust on the property and record that as them being the lien holder.

So if things go south with the relationship, and you just decide to not pay them, they actually have they can take title to the property quite easily. And so then you have to have them as a mortgagee on the insurance and on title and all that kind of good stuff.

It can go a number of two ways. The promissory note is definitely the more informal way to do it. While it's still formal, it just is less eyes on it, I guess you could say it makes it a little bit easier. versus doing the recording is is a little bit more hands on. That was one deal I did and then I partnered with my brothers, we bought four duplexes out in the Midwest. And so I bought two and they each bought one and we formed a multi member LLC. And so we kind of pooled our money together, we talked about a couple different ways to structure it. And the reason we did that is to get a killer deal on these four duplexes, because basically, we bought a mini portfolio, they were all bank owned foreclosures. And so we said, okay, we'll buy all four of these from you, bank, give us a killer deal. And they did. So in order to do that, we had to form this multi member, we didn't have this multi member LLC, boom, it was much easier to do, because now it was just a single transaction as opposed to, okay, my older brother buying his one, my younger brother buying his one and me buying my two. So that was a really great winner as well.

And now what we decided to do is share the expense load, because the properties had slightly different property tax rates, for whatever reason, even though the purchase price was all the same, we knew that they were going to have slightly different expenses from one month to the other. So what we did is we said, Hey, you know what, let's just pool the expenses across all of us. I'm a 50%. Owner, my two brothers are 25% owners. So it's almost like a co op in that regard. So if you know, my elder brother had a really bad month, this month, we all share in that loss versus if it's smooth sailing across the board for everybody. Everybody comes out ahead.

Tom:

I got a question for you, Michael, I love the way this is working out. We're just kind of go into these use case, because I wrote a bunch of questions ahead of time. So the amount of work that it takes to operate and do the acquisitions and all of that, how did you guys determine that upfront? And is the person who's doing more of the work getting compensated? How do you structure that?

Michael:

Great question. So typically, in that type of arrangement, if these weren't my brothers, I would have asked for, what's the word?

Emil:

Acquisition promote?

Michael:

Yeah, kind of like a promote, which is basically just the work involved for putting the deal together. And so it's family. So I was like, yo, whatever, you know, we don't need that, I'm happy to do it. And I was actually already in the area for other reasons, anyhow, like looking at another deal for my family. So it worked out quite well. But so for the management of the manager, because there's definitely a lot of ongoing work, paying the property taxes, paying the insurance dealing with the manager dealing with the home warranty, companies setting all that stuff up. So we decided to do a management fee that the LLC would pay the manager which I happen to be, but I had to participate in that payment as well. So I was paying 50% of my own management fee to manage the manager and kind of do all this stuff on a monthly basis. So he said that up until automatically every month from the rent, I got paid a management fee to deal with all that deal with the taxes, accounting taxes at the end of the year, all that kind of good stuff.

But so I think it's really important to outline all of that in whatever kind of partnership agreement someone's utilizing. We utilize a multi member LLC structure. So we just had an operating agreement, that outline Okay, who is responsible for what these were the duties, roles and responsibilities of each person? And it was very cut and dry. And it worked out really, really well.

Tom:

On the acquisition side was it I assume, since you liked the taste of that Kool Aid so much, who was driving the acquisition process?

Michael:

I was, so I was out there looking at another deal for our family and and happened to come across these other properties. And I said, Hey, well, you know, while now here, I may as well look at other stuff because my family always loved doing things for multiple reasons. So we were already invested. As a family out in this other property, and so I said, Oh, these are these look interesting. And I was making contacts with property managers and agents anyhow. So I came across these and say, yeah, this, this sounds awesome. So put it all together and brought it back to my brothers. And I said, Hey, you guys want you on in?

Tom:

That's awesome. And so you said your family was already doing stuff out there anyways, I mean, just kind of curious digging into the life of Michael, was this deal done, like before you were involved, or the other stuff that was going on out there?

Michael:

No. So it was simultaneously. So we were in the process of purchasing a commercial property out there in the Midwest. And so my dad sent me out because I was being physically constructed. And so my dad was like, hey, go check it out. Because that's what I used to do for a living is look at buildings and fire protection, and all that kind of stuff. So he was out there looking at the building and setting up our kind of footprint out there setting up the team meeting with property managers, meeting with agents, just kind of getting a lay of the land, so to speak.

And so got in touch with this other residential agent, and hit it off. And after interviewing, several decided this was the one to utilize. And she showed me some great properties. It was interesting, she actually double ended the deal. She had the listings from the bank, which again, they were bank owned foreclosures. So anytime this bank foreclosed on properties, they gave it to this agent. And so she said, Hey, I got these four properties. And it worked out really, really well. And then she stayed on as the manager as well. So I always talk about that in the academy, anytime you can utilize a agent who is also a manager, I think it's a big win, because they're very tied into the sales and acquisition side of the market, as well as the rental side. And an agent gets paid based on commission based on when they transact. And if they take off, you never see them again, you know, tough luck versus an agent, you're kind of hitching your wagon to their horse, so to speak. And so you know, you're in it together. So if they sell you a lemon, they've got a manager, lemon.

Tom:

Got it cool. Any other examples, or you want to walk through it?

Michael:

Yeah, so I've. So that was, let's say, we covered debt structure. So I did an equity partnership with a family member, they provided the capital, I provided the deal, and the management and the rehab and all that kind of good stuff. And so we're in the process of selling one of those properties right now. And they get to collect all of their money back plus, hopefully about a 50% return on their money for just providing the money to do the deal. So that's been well knock on wood will be once it finally sells a great win for everybody. And then another property that we bought together, they'll just get to collect cash flow, and literally have to do nothing for it and gets participate in the upside as well for when that property ultimately does appreciate. And we do sell it at some point down the road.

So I've done both debt structure and equity structure, they both have their place, they both can be great. On the debt side, it's great, because everybody's making money, the lender is making money day one. So if that's something that they need to do great if they have capital laying around, but they're not sure what to do with it, or how to invest it or maybe not interested in learning how to invest in real estate, but want to participate in the upside that real estate offers, the equity structure can be a really great way to go. And it's nice, because then you don't have that debt burden looming over your head as an owner operator. So especially for rehab stuff, which is a lot of what I'm doing right now, the equity structure makes way more sense, because the properties just aren't cash flowing, because they're being rehabbed. So to not have that looming, it's really nice.

Tom:

Michael, I'd love to hear what are some of the different terms or I guess, common terms that you've either seen or used, both on the debt side? And on the equity side? And specifically those terms? You know, how long are these typically structured for? And on the equity side? What How is that typically broken up? I’d love your…

Michael:

Yes, so I've been super fortunate in that I've got very caring, loving, flexible family. So anywhere from three to 6% on the debt side, in terms of interest rate, which is traditionally better than what you're going to get sometimes can be better than what you get at a bank, both in terms of being the borrower, and then also in terms of being like in terms of parking your money there. So for the person doing the lending, there's no way they're getting three to 6% by having their money in the bank. And as a borrower, there might not be any way I'm getting three to 6% depending on the asset and timing of the loan. So it can be a really great way to go again, kind of a win win.

And then on the debt side, I've just done 50/50 partnerships where people plug in, they pay for the acquisition, and most or all of the rehab, I take care of everything else. And then we just split everything down the middle 5050. And that's worked pretty well for me in the past. So it all kind of depends on each person's individual situation and what their individual goals are. If like Emil, you were mentioning, you're borrowing from family that's doing hard money lending, they have an opportunity to make, you know, 567 percent so you might have to offer more attractive terms versus the person that just has their money sitting in the bank because they're scared of the stock market and they don't know real estate, you know, they might be thrilled with a two and a half, three 4% returns, that's way more than make it in the bond market. And then as far as as structuring, they typically just do fixed 30 year financing and Basically locks in payments to that family member for a long time.

And of course, because we're family, we try to be flexible. And we all understand that there's money involved. And that can often complicate things, but we all talked about, look, if anybody feels like they're getting taken advantage of, or things aren't working out, let's talk about readjusting this. Because if interest rates go up to 15%, and somebody can get 15% by just parking their money in the bank, well, yeah, there's gonna need to be some conversations had to adjust that. So that's the nice thing about doing this with family is that you can be flexible, you're not beholden to the Fannie Freddie rules, you know, this is so much less regulation and eyes on it. It's just whatever is gonna work for everybody involved in the deal.

Tom:

Have you ever had a deal go sideways, or had some like major issues, I'd be curious to learn about experience in conflict management, but just like you're doing this partnership with somebody and things are going poorly, some one recommendations and to maybe some case studies or experience in managing when there's issues.

Michael:

Yeah, so might not be the best example. But this most recent deal that I worked on with a family member, where I was at 50%, equity partner, they put up the cash to do the deal. There was a contractor that we had involved to just was not working out well at all, he had all the right answers for all the questions, and then turned out to be a total slime bag. I mean, on the verge of criminal, so it did not go well, needless to say, but he was who we were planning on utilizing for a lot of the rehab on the building when we bought it. And so I was running point, giving updates to the family member that financed the deal. And I had to come and say, Hey, you know, this didn't work out. This isn't go as planned, we were supposed to have everything turned around in six months for X dollars. Well, that didn't happen.

So I basically fronted all of the additional costs to get it right. Because the way it worked out is that we just we didn't get the rehab done. And so things were slowing, and the building was eating money. And the rehab wasn't getting done until we weren't generating additional revenue. And then property tax payments, hit insurance payments hit so everything happened at the worst possible time. And so I, you know, I could have gone back and said, Hey, I need more money. But I made a commitment to my partner. And I basically said, Okay, I'm going to eat all this cost all the additional costs and fund the rest of the rehab that you thought you had funded already. So to make it right. And so that was a really big punch in the gut to just not have things go well, but being honest and transparent was by far the best way to go. And my partner was very flexible. They understood that, okay, this is real estate, they understand construction, things are always more expensive and take longer. But this was just one of those instances where things went really sideways, and you're playing with other people's money. So that to me has a much bigger weight on my shoulders than if it's my own money. So I said, Hey, I'm going to go make this right, I'm going to do right by this partner and suck it up and deal with it.

Tom:

I love it. I think it's kind of a general takeaway in these like communications is so important, open, honest, constructive, real time. And you might have mentioned this in a previous episode, but I love the Four Agreements by Don Miguel Ruiz, and it's the the four agreements are, be impeccable with your word. Don't take anything personally. Don't make assumptions and do your best I think, as a general credo for life, and then also partnership is a good way to go with. Go ahead, Emil, I see you jumping in.

Emil:

Yeah, one other takeaway I thought might lay your your thoughts here is like if you're doing this, either have some of your own money set aside, or raise a little bit more as a buffer in case things do go sideways, you don't have to go back and make I guess what's called like a capital call, right? Like projects going extra, you don't want to go back to your investor and say, Hey, we need more money makes you look bad, it makes it likely that you're not gonna less likely that you'll do a future business with this person again. So like just having some money set aside in case some things do go sideways, whether it's your own, whether it's the money you get from them, just having a little bit of buffer for things that do happen like this.

Michael:

There is such a difference for somebody, if I go to you and the owner and say, Hey, Emil, I need $30,000 to do this project. Really great, cool. 30 grand, here you go. And then I come back to you a few months later and go actually I'm able to project perform really well. Here's five grand back, you're like, Oh, awesome. Michael crushed it.

As opposed to Hey, Emil, any 15 grand to do this, oh, three months later, by the way, Hey, man, I need another 10 grand to get this done. And you're like, what? So at the end of the day, it's still 25 grand out of your pocket, but to under promise and over deliver as opposed to doing it the other way around? is I think so huge. So that's for sure been, like my biggest takeaway is things will go wrong. They will go sideways more than you think. And it'll be more expensive and take longer than you anticipate. So just be ready for that, especially with construction. It's just one of those things. So with partners, you want to be over deliver.

Tom:

One more question for me, and I'd love I know, Pierre is looking into doing some stuff with family members as well. I'd love to hear some, you know, give him a chance to have some self serving questions. But my last question is related to initial kind of prenup or contract that you have. What aspects Do you think it's really important to get into writing upon making either a debt structure or an equity You know, just to specify make it super clear upfront, I'd love to hear your input on that, in that that prenup, but you know, I'm saying…

Michael:

Yeah, yeah, just like, like an operating agreement, essentially, if it's a form LLC, or how you're going to operate things if it's not an LLC, so I think it's super important to just have everybody understand what the expectation is around their dollars, whether they're putting money in or they're expecting money out, how long is this money expected to be tied up? And how do you see decisions get made? Is it majority number of people who vote is it whoever put in the most money that gets to control the decision making is it whoever is the manager who may have put no money in so understanding the roles and responsibilities and duties of every person, I think is really important. And having an understanding of who's responsible for what and how power is distributed, so to speak, is really, really critical, because unmet expectation is really what leads to friction in relationships.

And so if you talk about all the expectations, again, for time and for money, and for roles and responsibilities, that tends to alleviate a lot of things down the road. Now, of course, you're not gonna be able to think of everything, you're not gonna be able to anticipate every situation. So planning for the worst, but hoping for the best with whatever you're aware of is great. And then talking to other people that have done partnerships, because that's a blind spot, like that was a huge blind spot for me was not anticipating the property taxes? And what if the contractor doesn't work out? And what if this goes longer than expected? So now that's less of a blind spot for me still working on it on a regular basis. But if I had talked to somebody that had done this exact thing a little bit more in detail, probably would have worked out better?

Tom:

Nice. Yeah. Pierre, do you have any self serving questions you want to ask?

Pierre:

We're just talking about this yesterday, trying to figure out a payment structure, what’s a fair payment structure that he could pay me for the time that I put into what we're doing, we still haven't come to a conclusion yet. But we want to make sure we have some sort of contract so that no one's feeling… I mean, my brother is very generous. So he doesn't want to feel like he's using me. But at the same time, I feel a little bad, because I don't think I'm bringing massive value, if you hired a asset manager, they'd be a lot better at doing what I'm doing. for him. I'm just like bumbling around trying to figure this stuff out with him. And so Asset Management do like one to 2% of monthly income. And so if there's only one property, and I'm only working on one property, that's pretty low for me doing but then at the same time, I'm not bringing that much value compared to what a real asset manager would be bringing in, like Tom says, short story long, I don't know what the heck we're doing.

Michael:

So you can do it a couple of different ways you can do an asset management fee. And you're right 1% of one property is not a big deal. But 1% of five properties is starts it gets pretty sizable. So you get to grow together as a team in that you get to build your reputation and experience level on that one property. And you're right, if you're not bringing much value, why should you be getting paid this, you know, a whole lot of money. And so you have to think of it too, from not necessarily his perspective, because he is your brother and his family he loves, you know, that kind of good stuff. But as an owner perspective, right?

Why would an owner be paying someone 567, whatever is a sizable amount of dollars, when there's not a whole lot of value being brought to them. So you can do an asset management fee. And then you can also do like sweat equity, because you're putting the deal together and doing all the legwork. So and participate in the upside. So maybe you know, 5, 10, 15%, whatever of the upside, when the property sells or gets refinanced above and beyond the profit you get taken advantage of. And so you're putting in all of this effort and value into the deal, not seeing a whole lot of return today. But when your brother sees a lot of return, that's when you that'll manifest itself.

And so I actually just remembered, this reminded me, that's what we did with that duplex deal I do with my brothers, I didn't charge them anything on the front end. But when they go and sell the property, I get X percent of the sale price as my feet for putting the deal together. So they're obviously winning, because they're now selling those properties. And so then I get to participate in that upside as well. But so it's kind of a win win. Again, it kind of hitches my cart to their horse, so to speak, and if they don't sell well, then Okay, then I don't get it anything.

But at some point down the road, I would anticipate them to sell these properties. And if not, that's okay, too. That's great. We all got a big win. So think about doing something like that as well and chat about it with your brother.

Tom:

Yeah, you know, it'd be an interesting way that I've seen here and it's kind of similar to Michael Zoomers model is if you're doing it when you sell like maybe your brother gets the first 10% of profit. And then you guys split after that. There's a lot of flexibility in the way that these can be structured. But I'd say on the acquisition side, like right now, it's so valuable the value that you're getting, getting and going through this exercise and kind of building that confidence that there's it's pretty awesome. It's important.

Pierre:

That's kind of how I feel about it is that I'm very thankful to be participating in this with him. It's I'm learning at time so that when it's my turn to do a deal, it's not going to be my first. So another thing we're talking about is just you scratch my back, I'll scratch yours when I go into a deal, he's going to help me the same, you know, we're just going to be working together when I do my next acquisition. So yeah, this is helpful. I'll hash this out with him.

Michael:

Yeah, yeah. And you can think about, you know, you can do a percentage, you know, 1%, or 2%, whatever asset management fee, or you could do a flat dollar amounts, the nice thing about the percentage that it grows over time as the rent grows, but if, again, if it's just one deal, you could just say, Okay, let's do whatever a flat fee, we're comfortable with this. Yeah, just another thing to think about, and take around.

Tom:

This is what I without giving recommendations, this is what I would recommend, I would recommend, like a very small percentage of the acquisition price as sort of like a finding fee and like doing that work, because that is like some pretty significant work, like maybe a half of 1%. So that would that if you're buying $100,000 house, that's 500 bucks, you know, not and then I think and then at the exit, I would book ended, I would do something on the front end, and then from something at the very end, and that way you're not…

Pierre:

and no fee monthly?

Tom:

No, no fees monthly, just so it's, you know, so keeping the operating costs low. And maybe, you know, if he's planning to hold it indefinitely, maybe some like option for you be able to pay him to get equity, if you want to in like five years, you know, at a predefined amount. I mean, what's so fun with these deals is it's very much a white canvas in the way that you structure them, my recommendation would be the book ends with an option to get some possible equity on the inside.

Pierre:

I think that makes a lot of sense. Because once you own the place, then there's going to be long periods of time where nothing is happening. And I'm not going to need to be doing a ton of work until we're going to be in the market to buy another place. Yeah, so it doesn't make sense for him to be paying me unless we're actively working.

Michael:

There will be active work going on, especially at the beginning with dealing with the property manager and getting the system set up and dealing with the accounting side of things. So there will definitely be stuff. But I think Tom said I think the vast majority is the legwork done on the front end getting to the acquisition point.

Pierre:

Yeah. The other thing is that we see this kind of as a partnership, and he's not making money right now. Why should I be making money right now when he's the one putting up the capital? I don't feel right taking money right now, because you're not making money right now. Let's get a deal and contract before we think about putting money but it'd be nice to know what the money is going to do when it's time for it.

Tom:

Yeah bookended and give yourself an option to get on the equity. I think for the work on the acquisition side, I think it's reasonable to take a you know, whatever a finder fee or whatever, when so when I was doing acquisitions for one of these rates, you know, that's our bonuses would be on, you know, acquisitions. And do you want to get really creative you could do some sort of bonus on how quote unquote good of a buyer it is, but I don't think you need to get that creative. It's like a family member. Just something simple and right, you know, simple and fair. So..

Pierre:

Sure. Thanks guys.

Tom:

Exciting stuff Pierre. Exciting stuff.

Michael:

Totally. Very exciting.

Alrighty, everybody, that was our episode for today. Thanks so much for listening hope that was valuable for people that are thinking about partnerships or that are in partnerships and how to structure maybe restructure them. If you liked the episode, feel free to give us a rating and review wherever it is you listen, your podcast has really helped us out quite a bit. We look forward to seeing the next one. Happy investing.

Emil:

Happy investing.

How to Instill the Investor Mindset In Your Children Jan 09, 2021

In this episode, Tom and Michael share about their very first investments and some fun tips on how to get your children thinking about investing at a young age.

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Michael:

Greetings, and welcome to another episode of the remote real estate investor weekend wisdom edition. I'm Michael album and today I'm joined by

Tom:

Tom Schneider.

Michael:

And today we're gonna be talking about our first investments ever. And some things to think about talking with young people with kids about how to get started in investing, and how we were able to dip our toes into the world of investing and arrive where we are today. So let's get into it.

Alright, Tom, so I am very curious to hear from you. How did you get your start with investing in general doesn't have to be specific to real estate. I know your story. You got started after college with real estate. But is that where your story begins?

Tom:

So my initial foray into any type of investment, it was a grandma kind of a deal. So grandma set up a brokerage account. I'm not like a trust fund baby, but definitely super generous of grandma to set to buy some shares of stock way back in the day. So when I was cash, it might have been like, first grade, I think for like birthdays. She just bought like a share of Disney or something that she thought that I would like, and it was…

Michael:

Yeah.

Tom:

…so fun. Again, not wildly high amounts. But I remember my grandma buying me Disney and then like second or third grade, periodically pulling up the newspaper. For those who don't know what it is just getting it to looking at like the stock section. And then like, looking to that stock or something and just seeing it move. It was really eye opening of Oh, wow, I just made whatever, a half a percent. And I didn't have to do anything. I think it was some early of passive income and investing so

Michael:

And so is that what you eventually sold for the downpayment on your current house?

Tom:

I did not know it wasn't from the down payment on my turn. But are you ready for a choosy beggar comment?

Michael:

Absolutely.

Tom:

Okay, so this is the like, choosy beggar comment. I am like, you know, again, so grateful, like what a cool thing to do for a kid, but she didn't reinvest the dividends. So like, when I like ever got old enough to check on the account, there's just a bunch of the money, like whenever there was a dividend or like, it would just sit in cash. So it's like,

Michael:

Thanks a lot Grandma.

Tom:

No, no, no, choosy a beggar choosing beggar. But it was a good lesson that I mean, what it did little math exercise for to go back and Okay, if this had just been reinvested as a within to the stock instead of just taking the dividends into their cash position. Anyways, I'm derailing and, and being a choosy beggar, but it No, I'm not a choosy beggar. But anyways, Okay, done talking to them, and word vomit.

Michael:

What a great point to make. Because if that, I don't want to go so far as to call it a mistake. But if you hadn't learned that lesson, at that point in time, you may have never known like, Oh, this is a thing I should be doing, or this is good or bad. So I think that's great. And probably one of the most inexpensive lessons you could learn. And so I you know, hat off to your grandma for teaching you two lessons for the price of one.

Tom:

Yeah. And to bring this back to real estate investing. A great example of this is okay, you collect your rent from your property. And unless you're in a position where you're living off of that money, which I assume a lot of people are not, is to be long term greedy, and save that money that you're getting from your rent collected and roll it into buying a new property. reinvest the dividends, man reinvest the dividends? All right, Michael. Good. Go ahead. What was your initial entry into any type of investing?

Michael:

Yeah, so very similar story for my 12th birthday. My dad got me a couple of shares of GMC stock. And so yeah, I mean, almost exactly similar to you, I would check the newspaper and look and see what the sticker price the ticket price was doing with it go up, but go down and chatting with my dad having conversations with him about Okay, what is this mean? And what is a stock? And how does it work at a very high level, because, you know, I'm only 12 years old, I didn't have the kind of comprehension that Robert Kiyosaki had when he was a youngster. And he writes about in his book, to really understand the financial world with all about the comings and goings of the stock market and real estate and all that kind of good stuff.

So very high level, a stock going up is good stock going down as bad. And you can buy more of this. And so throughout my childhood, I would often receive gifts of, you know, two shares, three shares of stock, Disney, kind of the the big companies that, you know, kind of blew up, we think about a blue chip company. And that was great, except you really got an understanding of Okay, well, I can take money that I earned either from a job or allowance or what have you invest it, and hopefully walk away at some point down the road with more money than I put into it.

And so that delayed gratification was instilled in me at a fairly young age and my dad had this awesome quote, you remember those like claw machines we could put in a quarter and you whatever you played it with the client to get the stuffed animal or the toy. My dad said it to my younger brother who asked to play one of these claw machines, dad can I have a quarter to go play this. And he says, Well, do you want to be the kid that plays the claw machine? Or do you want to be the kid that own stock in the claw machine making company? Oh my god, like, it's like, so simple and seemingly kind of trivial telling that to a kid. But when you can start thinking about it in that capacity, that really changes, you know, your trajectory and the way that you think about money and about investing as a whole.

So I just love that story. And we always joke about it in my family. Because Yeah, it's just it's it's a shift in the mindset from consumer to investor.

Tom:

Do you want to get clawed or be the claw?

Michael:

Or be the… Yeah, be the claw. I always think about Liar, Liar. The Claw! Yeah, that was kind of my first story. And I've since been investing pretty much that whole time, as well. So I never never looked back of it.

Tom:

Love it.

Michael:

Awesome. Real quick. Last thing I'll ask you, before we go, Tom, is Is there anything that you plan on teaching your son in his early days about investing? How do you plan to have those conversations or share with him some of the knowledge that you've acquired over the years?

Tom:

I gotta make sure I tone it down, like, like,

Michael:

Charlie, we're talking about cash on cash return?

Tom:

Oh, yeah. Huge fan of some of the online like learning stuff has gotten so good, like, Khan Academy is, I remember when it first came out, and like where it's at now. I really enjoy it. And I think it'd be something fun that we do together by way that I interact with my son as he basically just do stuff that I like to do with him and just see, well, there are a lot of things that he likes but he's a one year old. So you know, his his English is pretty limited. But you know, his financial literacy is… I think we probably do all throw a bunch of stuff at them. Maybe give them some, some some stock. Look, have them look it up, I'm sure to be like, fun, like getting a position to get them a property or something to like, follow. But I mean, that's way down the road. No, at some point, yes.

Michael:

One of the guys anyways, Brandon Turner over at bigger pockets, the day his daughter was born, bought her bought a property and put it on an 18 year note so that by the time she was 18, she would have this free and clear property that she could decide what to do with either take over managing it or sell it to go to college or what have you. So I always thought that was an interesting idea.

Something else that someone told me was that the day that their children are born, they open up a credit card in their name, and they're just coasting around it so that way they get to start building credit by the time they're 16 1820 whatever, they have an established line of credit or credit history rather, which I thought was very interesting.

Tom:

That's great advice. I remember in high school getting a good gas card and that helped me so much get credit I mean, just having some silly little gas card like established an initial line and it made everything down the line so much easier to do because there was just some proof and what's interesting about real estate the longer that it and maybe it's just situational now that I have like kid but it's like so much about it is past that is like thought around like passed down inheritance and like talking about building wealth like oftentimes it's a it's kind of a family team effort from generation to generation. Both on the education as well as assets side.

Michael:

Totally.

Alrighty everybody that was our episode. Thanks so much for listening. If you enjoyed it, please please please give us a rating and review whatever it is listen to your podcasts. Those help us out big time. We look forward to seeing on the next one.

Tom:

Happy investing.

How to Get Proactive With Your Tax Strategy to Save The Most Money Jan 02, 2021

The New Year is here! Set yourself up right from the start with this quick nugget of wisdom on your tax strategy.

---

Transcript

Tom

Greetings, and welcome to The Remote Real Estate Investor. On this weekend wisdom, we're going to be talking about the new year and getting your taxes in order. This is going to be a brief episode on the importance of finding your CPA. All right, let's do it.

Welcome. Alright, so this is a weekend wisdom. We're talking about taxes, it's the beginning of the new year. And it's not too early to start getting yourself in order to have a successful tax season. Michael, why don't you lead us off with a few pointers?

Michael:

Yeah, so I think a lot of people treat tax as a reactive thing. And towards the end of the year, they're like, oh, man, I gotta get all of my stuff in order to get to my tax professional, when really, it should be the opposite approach. And it should be proactive. And we should be saying, Oh, it's the beginning of the year, awesome, I get to strategize with my tax professional about how I'm going to save so much in tax this year. So I think a couple things to do is first and foremost, if you don't have someone that you're working with as a tax professional is find one. And I would say that they should be well versed in real estate, either owning real estate themselves are having a lot of clients that own real estate, because that means that they're going to be up to date on what the local local tax law with the most up to date, tax law and tax code says, I would also say kind of have a plan for what you're thinking about doing both in terms of acquisitions and any sales or any rehabs and talk to them about that. Tom, you always say that you like to overshare. Same thing with your tax person, make sure that they're well aware of what's in your head for the year. And we just recorded an episode a little bit ago about goals. And so be talking to them about what your goals are and what your plan might look like.

Tom:

That's great. Yeah. And to those of you who like to use it, is it QuickBooks? Or what's the do it yourself?

Michael:

Yeah, that's not like…

Tom:

I'm sure there are people that have success using that. But from my personal experience, it's worth paying the money and getting a professional, you know, we all understand there's benefits, tax benefits of investing in real estate, the deductions, the deferrals…

Michael:

The depreciation…

Tom:

The triple D's, squeeze as much juice as you can out of that fruit. And we recommend paying for a professional who has experience.

Michael:

But Tom, I don't own any rental real estate yet. Do I need to go get a CPA?

Tom:

I think probably not. Probably not. I think I think that would be a good use case. This is not investing advice. This is not legal advice. Like if I'm talking to my sisters, and they and they they have a little bit less complicated taxes, I'd say yeah, does that make sense. But as it gets more complicated, you can use it, I was just having an interesting discussion with my tax advisor recently about building a little home office and how I can use some of that for deduction, like those costs. So anyways, there's just you want to squeeze as much juice as you can out of that fruit. So I recommend it.

Michael:

Awesome.

Emil:

Only point I’ll add, on as you kind of hear things about bonus depreciation are these things that are new to you, I always send those to my accountant and ask them about it. Because sometimes you do something, get super excited about it, it may not apply to your situation, or it does, there's something you may need to do to be able to take advantage of that, right. So like, when I stumble on new things, or I hear someone talking about how like, I don't know, if I structure things in a certain way in an LLC, that gives me this tax advantage. Or if I go full time real estate professional, all these different things, send it to your CPA, ask them about it. They should be knowledgeable on all these things and can help you based on your situation tell you if you can take advantage of them. And if you're not eligible now, what can you do? What can you change to actually be able to take advantage of those things?

Michael:

Yeah, I think that's great. I mean, I always joke with my CPA, I'll call him up and be like, hey, I've been reading and listening to podcasts again, he's like, Okay, here we go. So I think that's a great tip. And they'll they'll tell you, Hey, this is applicable to you, or it's not, I mean, what's really nice is if a CPA is really on the ball, and they can reach out and say, Hey, this is how I would structure this, right. And they're coming to you with the ideas as opposed to you going to them, but they're also people, they're also busy. They have lots of clients. And so I think you should take it upon yourself to be proactive in that department. You don't have to be a professional, you don't have to be an expert, but understanding the basics and what is available to real estate investors i think is super helpful. And then bringing that up to your CPA because maybe they forget, and so that's a bummer if you miss out on some great opportunities because they're humans.

Emil:

Yeah, absolutely.

Michael:

Sweet, short and sweet.

Tom:

Thank you everybody for listening to podcasts. If you enjoy this podcast, please subscribe, give us a rating. We appreciate that. All right. Happy investing.

Michael:

Happy investing.

Emil:

See you later.

How Did We Do On Our 2020 Investing Goals? A Year In Review Dec 28, 2020

Emil:

Hey everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour. And I'm joined by my lovely co hosts,

Tom:

Tom Schneider,

Michael:

and Michael album.

Emil:

And today we're going to be talking about year end review. So we're going to look back at the 2020 goals we set for our real estate businesses at the beginning of the year. We're going to analyze what did we achieve from that we're also going to look at how did we pivot? You know, things change throughout the year? How did we pivot? What else did we do in our businesses, and then also look into 2021. And our goal here is to help you guys you know, as you're thinking through your strategy, hopefully help you guys come up with what that can look like and set some lofty goals. So let's hop in this episode.

Alright guys, so we're gonna be talking 2020 goals, what did we achieve? How did we pivot? What else do we do? And then looking in the future for what do we have set up for ourselves for 2021 goals? And I think the way we decided to structure this episode is we're gonna do hotseat. Normally, on episodes, we kind of talk about a topic and we go round robin in a circle. I think this one, each of us will sit in the hot seat, go through these kind of three parts of the questions. And then we'll move on to the next person in the hot seat. So any volunteers who wants to go first?

Michael:

Let's put let's put grill marks on Tom.

Emil:

Let's do it, dude.

Tom:

Let's do it! Sssssssssssssss sizzle.

Emil:

Tom Schneider.

Michael:

Hey, yeah. Okay, Tom, what was your goal starting 2020, or goals de parentheses around the “s”.

Tom:

I knew that 2020 was going to be a slower year on that side of my business. So wife delivered first baby in November of 2019 had a pretty massive house project, adding a bathroom on. So going into it, I knew it was sort of maintenance time, just maintain and possibly do some acquisitions near the end of q4, it was a definitely a quieter year, with the new rates that are available for financing. I was hoping to do a little bit more within the end of the year by possibly for refinancing some of the properties, I need to do a little bit of work on my insurance. I didn't get to some of those different items, but it's just like a weirdly busy time in my life with new baby in big projects on the homestead. So all in all, a pretty quiet year on the investing front. But you know, throughout all this, the portfolio performed. It just kept moving on not a lot of growth within it. But it was a known slow year within my personal portfolio.

Michael:

Have you done any refinances on the investment stuff? Or on your personal

Tom:

I did some refinancing not in 2020. And I actually I did do refinancing on my personal so you're right Michael, not a total do nothing kind of a year so did quite a bit, I had a key lock on my personal closed it out to refinance, finished the refinance and reopen the HELOC. So sort of a refresh on that side of my finances, which is all kind of tied together, which and it's a there's a huge queue, there's a huge line of people doing refinancing. So it took them honestly way longer than I was expecting to and like a little bit more work than I was expecting to. So I guess you're right, Michael, it wasn't a total do nothing. It was moving some of the personal finance stuff around and hopefully be set up for a big 2021.

Michael:

And so on the investment side of refinancing, let's get personal here. Why didn't you refinance any of the investment properties with rates being as low as they are?

Tom:

Well, I view as being a little bit too conservative. Usually banks don't want you doing like too many transactions or like new refinances at the same time. And the most important one that I had to get done was related to my personal so I don't I'm not going to be too hard on myself just because I had the other stuff going on. But where I definitely could have done more was redoing my property insurance that I have. That's something that's been on my list to do that I just kind of keep putting on the backburner, and it's okay. And that it's not something that you know, you necessarily need to lose sleep over and doing right away and re optimizing your property insurance that you have. But something definitely I don't want to put off too much longer. But that was something I you know, looking back on 2020 is like darn I should have just gotten that done because it's those things once you set it, you forget it what happened to me the mistake that I made is I was using this insurance broker and they had terrible communications with my lender.

So I paid to like re up my insurance. My insurance didn't do the proper like notification to my lender. And then my lender went and bought insurance for me. And then my property insurance company that I bought that originally they sent me back the money that I paid for them for the insurance like this is just totally me just kind of dropping the ball a little bit. I mean, I didn't Double pay for insurance, but I'm definitely paying way more than I should right now with some crummy insurance that my lender bought me. So this is my, like, bad Tom, I'm making myself accountable by throwing it out there, go fix my insurance. And Nick, who's a member of the Academy, who is also has some expertise in insurance, I owe you a call, we got a we got to connect?

Michael:

Well, I don't think you should be too harsh on yourself. But you feel like you didn't do a whole lot in the investment side of the refinances. There's only so many hours in a day, and everyone's got priorities. And if I had to guess I would say that the refinancing of the loan on your primary is probably more impactful than refinancing on those investment properties. And, you know, I don't see rates going anywhere in the next couple months, the near immediate future. So you could probably get to those in 2021 if you wanted to, anyhow,

Tom:

Yeah. You know, and the rates aren't that bad. I mean, the ones that I have that I was looking at redoing their low 4% I mean, I guess I could get to from what I hear like sub three, which makes it worth it. Mm hmm. Think probably 2020 at least read refine.

Emil:

Come on. This is this is the hot seat. We got to grill Tom here? Yeah. Why do you think you didn't get all this stuff done that you'd want to do? I know, I know. life gets in the way. But what do you think like in 2021? What can you do differently to like, make sure those things get done?

Tom:

I just I need to just not be lazy about I think I got a little lazy about it. Yeah, the hard thing about grilling me is I'll just like put my hand on the grill and precedent. Yeah.

Michael:

I love it. I love it.

Tom:

Give it to me. No, I think acquisition stuff I think turned back on and 2021. But the falling short, is definitely just getting some of the insurance stuff because right now, I'm probably paying like a couple extra 100 or 200 bucks a month, but it's just lighting money on fire like stupid, stupid, Tom. And another coverage I need. Okay. Take it easy talk don't grow too hard. No.

Emil:

Michael’s like, it’s Okay. Grill him,

Tom:

So all in all, kind of a boring year, but I didn't take care of the important boring stuff. And you know what, but you did or did not take care of the employee? Didn't I mean, enough, you know, but I didn't take care of the playing a little bit of offense on the insurance side. But that's why they make tomorrow, so.

Michael:

yeah, I mean, the good thing about insurance is that you don't have to restructure the entire portfolio. Yeah, you can just go redo that one. And that's like, like an hour's worth of work.

Tom:

Yeah. You know, honestly, like, I think, dude, this is going somewhere, this is going somewhere, something that that whole communication breakdown between the insurance company and the lender, kind of like made me I don't know if nervous is the right word. But there's like, just concerns of me of like, you know, making sure that that doesn't happen again, not that it was like a huge deal, but I don't know it. Do you have any thoughts on that? You guys on changing your insurance kind of mid flight and making sure you're not double paying? And

Michael:

Did you crack some skulls? Because of that? I mean, it sounds like I mean, obviously, the buck stops with you as the owner. But it sounds like the ball was dropped at multiple stages as well.

Tom:

I didn't crack skulls, I didn't crack skulls, and maybe I just need to be like a little bit more of like, a ballbuster. But you know, skull cracker. Michael, what would you do with your advice right now?

Michael:

Oh, I would cancel that insurance today. Yeah, I would go get on the phone with an insurance Rep. Either somebody I knew or Nick from the Academy, talk to somebody and just go place new insurance because that's totally unacceptable, and frustrating, right? The lender doesn't really care how much it costs you. They're covering their behind because they've got the loan. But so you know what you need for your insurance, you can send an existing declaration page of a policy that you'd like to an agent, you know, wherever that property is, I just get it done and cancel the other one.

Tom:

Just do it. Okay, screw it, I'm going to do that in 2020. This episode is honestly bearing some fruit. And I think the other thing that's kind of a mental block for me is knowing that I don't have to get onto a phone tree to talk to the mortgage company and like, okay, just light an hour of my time on fire. I'm working my way through the phone tree and in talking to who I need to from the mortgage company to let them know like, Hey, I have a new, any thoughts to…

Michael:

Your insurance person should do it,

Tom:

They'll do it all?

Michael:

All you need is the contact for that insurance company that they've placed for you. And you can call and cancel and then show proof of your binder that your new policy is bound.

Tom:

Will the lender then send me like whatever escrow that they have? Yeah. So we'll get a check from them.

Michael:

They should Okay,

Emil:

I just did this. I don't know if the lender will but like your insurance company, right. So let's say you're halfway through your policy costs $500 a year, whatever, just use easy math. If you're halfway through, they'll send you a check for that 250 prorated and that's left. That's I'll talk about it when I'm in the hot seat, but I've just recently did this and that's what's been going on for me. I get it from the insurance company and prorated amount.

Tom:

Ooh, I'm gonna take care of this. Hopefully by the time this is published,

Emil:

Do it. We still got time in 2020.

Tom:

Yeah, right I really am like super juiced about this. Okay, good. Yeah, I'm gonna take care of it.

Michael:

I guess Tom, you can send me all nice commission checks directly to us. 10% fee, easy,

Tom:

Perfect.

Emil:

So So what's what's lined up for 2021? You're gonna get that done in 2020. So what do you think is lined up for 2021

Tom:

I think I want to add kind of get back on the two units. One, two, I'm going to have this this big HELOC available…

Emil:

Make it specific which one, one or two?

Tom:

Two. Yeah, making it to…

Michael:

You heard it from the horse's mouth everybody.

Tom:

Yeah, going to 2.

Michael:

This time next year, we're going to look back and see if Tom has his two units.

Tom:

Two units and two refinances. That's what I’ll do.

Michael:

Whoo. All right.

Tom:

If I am refinancing though, I can pull a little money out. Okay. Three. All right, And HELOC? Okay, that's it. That's it. That's 2021 three units and 2 refinances.

Emil:

Solid.

Tom:

Awesome, and it feels good putting it out there.

Emil:

And now it's no it's like real public. It's not just like you shared it with a friend like it's it lives on the internet now. So

Michael:

Right, this is recorded, dude. All right, man.

Tom:

Yep.

Pierre:

Do you want to do one of those little equity challenges Tom? where you give me like $1,000. And if you don't get it done you don’t get it back?

Michael:

That's so good. Yeah, Pierre will be your escrow account. If I ask.

Pierre:

Yeah, there you go.

Michael:

And Tom tells you like, wait, Pierre, I need that 1000 ago by the third unit. So I need that in the down payment.

Tom:

I like it. All right. I feel good, guys.

Michael:

If you feel good. We feel good.

Tom:

Good. Good. Good. Good. Anything else in the hotseat, or are we ready to mix it up?

Michael:

Let's mix it up. Starting to stink out there.

Tom:

All right.

Michael:

It’s like burning flesh.

Tom:

Michael,

Michael:

Let's do it.

Tom;

You’re in the hot seat.

Michael:

Is it gas or charcoal?

Tom:

It is oil baby.

Emil:

He's falling around on fire and running around.

Tom:

Alright, 2020 What did you What did you want to get to? What do you What did you want to get done?

Michael:

Oh, man. So 2020 I had really high hopes Wait, dude, I'm like losing track of the days and years here. So okay, so 2020 started off crazy. I had two fires in my in a commercial mixed use building that I'm redeveloping converting commercial space and residential space that happened in the end of 2019. And so I was really hopeful and optimistic that that project was going to get done here in 2020, because we started it in late late, late 2018, early 2019. And so that's just been going on dragging, dragging, dragging. So the problem was that, because of these fires, I had to go work with a public adjuster to get the insurance to pay what they owed. And that just just been drugged out, like unbelievably long. And so I had to pause work on the building because they had to do investigations, and the whole building was affected. So we couldn't disturb any of the evidence and the whole building. So it's just a whole frickin mess. So by 2020 got massively derailed. In that sense of the word.

Good news. on another project I had, I had a kind of contingent loan refinance, I was able to pull cash out for rehab I did. And they were going to give me draws for the refinance cash as those units got leased up. And so we got all four of those units leased up. So I was able to grab all that cash out from a refinance I did, which was very exciting. Then I also wanted to add a few more units to the portfolio, but kind of like Tom, I was just so busy kind of putting out other fires kind of pun intended, so to speak, that there just wasn't a whole lot on the acquisition side. So it was just kind of managing the ongoing stuff. And so I wanted to finish up a couple other rehabs that I was able to get done in 2020. So that's super exciting. Of course, they took longer and were more expensive than anyone anticipated, but dealt with a crooked contractor and had to fire some people and hire some people. So 2020 was a whirlwind to say the least,

Emil:

I'm surprised we've all talked on the podcast and off the podcast. I'm surprised that part of your 2020 was to add units, given how much stuff you already had going on. That is shocking to me that you…

Michael:

Yeah, well. So I mean, part of it was to because I had this great vision for how on the rails things were going to be operating. And then that immediately got debunked and it was like Ozzy Osbourne's Crazy Train. And I was like, Oh, well, like we got to pump the brakes here a little bit. I got to focus on what's going on, restructure some things, get some things reined in. And so that was able to get a lot of that done, which was super exciting. But still a long way off on that big project. But wrapping up, have put the bow on several others, which is very exciting.

Emil:

I don't even think you've mentioned your international project and all that either.

Tom;

Oh, yeah, I totally spaced on that. So last year, my wife and I were traveling for the better part of the year. And then in the beginning of 2020. We're also traveling, and then came home in like April because a COVID. So we are working on we made it a 2020 goal to get our Portuguese permanent resident status. And so that's via an investment in Portugal. So we purchased an investment property in Portugal in 2020, which is very exciting. And then we're in the process of flipping an investment property in Portugal as well. And so that'll happen in 2021 as the borders reopen in Europe, and people are traveling more because it's tough to sell a kind of high end unit without folks traveling there. So that'll likely be in the q2 or beginning of q3 and 2021. But yeah, so we were able to get all paperwork signed in and submitted to the Portuguese government, which is super exciting. So now we're just waiting on confirmation that they have everything they need. And then we can of course, pay more fees and taxes to the government, and hopefully get our status and then we'll need to travel to Portugal at some point 2021 to do some paperwork.

Emil:

Hot Dang. So pretty slow year for you is what you're saying overall?

Michael:

Yeah, pretty typical. I hope 2021 is more exciting.

Emil:

What do you think was the obviously a lot of stuff happen? What do you think were a couple, or just maybe the top learning for you that you want to take in the 2021.

Michael:

I think one of the biggest takeaways for me is how amazing public adjusters can be when it comes to dealing with insurance claims. Because I came from the industry, I used to work for a really reputable property insurance company in the commercial sector. And so I never had experience in public adjusters that wasn't something that I was ever exposed to, because it was never a thing that we dealt with in our business. So I haven't been on the other side. Now the user side, the insurance side, that was a real eye opener and about how powerless we as the little people can feel going up against these massive insurance companies. And so just knowing that there is help available, there are people and professionals out there that can be your voice that can help you and really go toe to toe with the insurance company on your behalf. And so I think a big takeaway is to reach out and get help sooner than you think you might need it. Because this whole process could have been expedited a little bit.

I mean, the process itself takes a while. But I kind of waited a long time to do it, because I didn't think it was going to go south. But it did, it went really south. The other takeaway that I have is that, you know, I was managing this whole process from Nicaragua, and Costa Rica, when it first happened. And so I mean, this whole remote investing thing, you can do it in the States, you can do it outside the states, a phone connection, internet connection is really all you need. Because what's the difference? If you're in the states versus somewhere, not in the States, timezone is the biggest difference. So if you're comfortable with the remote thing, I think the possibilities are limitless. Another big takeaway I have is don't spread yourself too thin. And it's one of those things that you're not going to realize that you're spread too thin until you are and so don't try to bite off more than you can chew because it's really attractive or sexy or exciting, even though it might be all of those things. Because it I mean, I definitely like my mental health took a big hit in 2020, just from juggling all this stuff. And so I had a lot of sleepless nights and stressed moments from man, how am I gonna make this come together? And how am I gonna make sure I get this project done. So just don't bite off more than you can chew. And always, always, always overestimate the time and cost of projects because they always go over both in terms of time and budget.

Tom:

How about 2021? Sorry, a meal, we're adding one more, how about looking forward to 2021?

Michael:

2021, I am highly confident we're going to get that big redevelopment project wrapped up and finished, I'm also going to be selling a property that I was looking to sell in 2020. But that didn't come to fruition. So we're gonna be lowering the price a little bit, getting it back on the market. And then I'm going to be tying up two refinances that I have just started now one is a commercial refinance on a triplex. And then another is a refinance conventional refinance on an investment condo that I own that I was kicking the idea around of selling, but I'm able to take out a bunch of cash and get the interest rate significantly lower. So I'm toying with a couple different ideas. But that's what I've got lined up for. For 2021. Oh, and then I also am doing a loan modification on a commercial portfolio loan I have that's two properties. I went and got a competitive bid to have it refinance elsewhere, and then went back the original lender and said, Hey, can you beat this? And they said, Yeah, sure. So

Tom:

Oh, nice.

Michael:

I'm really excited about that

Emil:

Awesome, man. So no new acquisition plans for you more. So just like getting everything,

Michael:

I take that back. So I've got a couple of cash partners that want to get into the real estate space that have reached out to me and asked if I would help him do a couple of deals. So I'll be either 50% or a minority partner looking to secure a deal and then get it rehabbed or refinance and kind of be running point on that for some folks are international and some folks who don't have any investing experience so they want a helping hand in how to do it. So it's almost like a syndication but not really just because folks have approached me and said, Hey, take my money. Can you do real estate for me? And I said, Yeah, sure. So we'll probably add, I don't know anywhere between 10 to 15 units in in 2021 using OPM.

Emil:

Nice. What is OPM?

Michael:

Other people's money?

Emil:

Just in case Yeah,

Michael:

yeah, no, it's great question. Ah, yeah, that's what's that's what's on tap guys.

Emil:

I'm looking forward to you having a calmer 2021 and getting things done.

Michael:

Dude. Makes, makes two of us makes to us. Thank you.

Emil:

I get stressed out just hearing about all the stuff you're doing

Michael;

Well, like Tom said, it's kind of nice to put it out there it's almost like a therapy session you guys can invoice me, bill my insurance.

Emil:

Yep. I'm gonna bill you for you know, listening to all that and carrying the brunt of it.

Michael:

Laden you with all my…

Emil:

Exactly.

Michael:

All right, Emil, ready to step up to the plate.

Emil:

Let’s do it baby.

Michael:

All right, sizzle sizzle 2020 in the rearview mirror. What did it look like from the beginning? and What did it look like at the end?

Emil:

Yes. So my goal was really simple. I think I mentioned it early on, when we started the podcast, my goal is to buy two properties in 2021 or 2020. on that front, we ended up buying one property. You know, it's funny, I think these acquisition goals, they're kind of like this double edged sword where you're like, Alright, I want to buy x properties. But it's like, you should never just buy properties to hit a number. It should be like, if you find the right things, buy them. Right. So that was kind of the case for us. We found one property we liked. We made offers on a bunch of others, but haven't closed anything else that we've liked. I actually just submitted an offer on a 12 unit on Friday that I was really excited about, but we lost on that one. So that was a bummer. But I just I wrote down some of the other things we got done.

So we bought this property. It was a small multifamily triplex. So that was one of my goals was to buy multifamily this year. So we bought that tribe.

Michael:

Welcome to the dark side.

Emil:

Ah, yeah, well, we'll see if, if I'm here to stay, but we're testing it.

Tom:

You're dipping your toe!

Emil:

Exactly. Toe dipping. I knew that buying two properties, just saving money was going to be tough. So at the beginning of the year, in an attempt to put some money back in our pockets, to buy some multifamily to test that out and to consolidate because we were in just several markets. And I you know, I think I've expressed that I'm not a huge fan of that strategy anymore. I'm trying to consolidate over time and really focus on like one market. So I end up selling a rental property we own in Memphis basically broke even on that when you factor in cash flow and turn costs and all that stuff to sell it but put some money back in our pocket to be able to go out and try to hit that two new properties goal, refight our primary twice because at the beginning of the year rates dropped a good amount and we're like, Oh, sweet, we got to do it dropped our payment a couple 100 bucks. And then like two months ago, they dropped sub 3% and it lowered you know, our monthly payment, a couple $100.

More so to revise in one year, which is interesting. We did a cash out refi on our single family home in Jacksonville, which I think I've talked about that one on an episode ended up appraising for way less but because it lowered the rate, put some cash in our pocket, nothing huge. I think it was like 6000 bucks, but the payment didn't change at all because the rate lowered so I was like, Okay, why not, I just started the process of doing a cashout refi on our Indianapolis single family that one I'm pretty confident has appreciated enough where we'll get 80 to 90% of our original investment out and the rate has dropped enough where I think our monthly payment changes 510 bucks a month. So it's like a total no brainer with rates being as low as they are I end up getting new insurance on the st louis and the Indianapolis single family and just because like Tom I think in doing these episodes with insurance and Michael having the background that he does in insurance just realizing that I was under covered and paying too much so we end up getting more coverage the the rates actually ended up seeing the same but we just got much better coverage. So feeling much better about those properties. And then I had an umbrella policy on one of our properties and cancelled that and got a new umbrella policy for the entire portfolio in our primary and it wasn't much more than what I was paying for the original umbrella so…

Michael:

And did you add your auto on that?

Emil:

I did not add auto it made it jump a lot huh for me personally and like doubled the cost hopefully I'm not kicking myself in the years.

Michael:

right right

Emil:

Don't put it out there Michael, you insurance whatever.

Michael:

Hey, man, we're grilling up grilled Emil sandwiches here man.

Emil:

Michael the insurance. Do you have everything in your life insured you're just you're just setting yourself up?

Michael:

Man you have to you have to. It's funny coming from the pessimist, the self proclaimed pessimist you should be the one that's insuring everything.

Emil:

We don't have enough time on this episode. To go through my silly logic of why I do it but you know what? Why don’t you go insure that mustache okay?

Michael:

There's not enough coverage in the world to insure this mustache man!

Emil:

Sir, your mustache is not full enough for us to offer you coverage.

Michael:

I need what's called gap coverage to fill in. God insurance jokes.

Emil:

Yes, I'm probably still under insured on some things. I probably should have rolled the autos in but like, just with, I don't know, our insurance costs went up. So I was like, ah, even more. No thanks,

Michael:

Baby steps you got to ease into it.

Emil:

Exactly. So you sound like my brother was like, you know, the autos are what really matters. That's the biggest thing that people usually use the umbrella for fun fact.

Michael:

Whatever. It costs too much like

Emil:

Thank you moving on. So that was the 2020 recap.

Michael:

When you started the year. Remind us were you targeting a single family. are you targeting as one multifamily?

Emil:

No, my goal was to target All multifamily. So probably in the three to four unit range, I was actually looking to do originally I was looking to do like a bur on those. So buy all cash, fix it up, go refi later, and put in find properties that made sense in a hot market like this, I think, especially in a rise, you know, in a market like we have right now just just couldn't find one that made sense for me. And so found a triplex where I think there's still value add and a couple of the units have market, the rent is way under market, and they don't need that much to get to market. So try that instead, we'll see how that goes.

Michael:

I think you also did something here in q4 of 2012, that you didn't mention with regard to that 12 unit and getting yourself lined up to make a move next year. Right?

Emil:

Yeah, so with that 12 unit, I had to basically scramble and like create what's called a personal financial statement, which is what a commercial lender wants to see. So when you do conventional that, you know, it's more like just your income. And what personal financial statement is like literally your entire net worth all the assets, you own all the liabilities. So that was a little bit of a new process. I didn't have all that at the ready, and I had to just go aggregate it from everywhere. Now I'm approved for a commercial loan. So now we can start looking at properties that are five plus units and you know, have a we have a pre qual letter. And so like we're much stronger on making offers on those types of properties moving forward. So, you know, before I was looking at just two to four units, and now it's like, I don't know, I might might go five plus, we might do something commercial in 2021.

Tom:

That's awesome. you've gotten that back in. Yeah, even though you didn't get it like it's,

Emil:

It was cool to finally like, obviously, we didn't win on it, but at least to like make an offer on one go get the process going with the lender to be pre approved there. So just at least now we're set up to do more of those offers in 2021 if we want to.

Michael:

And so what does 2021 hold for you?

Emil:

2021, two properties. Again, that's the main goal. I definitely want it to be multifamily. I don't know if it's going to be small multifamily that two to four unit range or five plus, I think it's just if we find a good deal, whatever makes sense. Makes sense. Right?

Michael:

Awesome.

Emil:

I like to to for a lot right now, just because you still get conventional financing and 30 year interest rates are so low to get that locked in for 30 years just is like sounds amazing. But again, if an awesome deal comes across and it's five plus, I'm not going to do that either.

Michael:

Right on is that it is at the end of the list for 2021.

Emil:

There's another goal I have for myself that's like the the big one for me. Usually every year I feel like real estate is the big ones talk about that other one right now. It's secret, and we'll talk about that maybe at a later date. Awesome. That's that's a big focus for me. But I still want to keep some activity going with the real estate portfolio. So two properties.

Michael:

Awesome. If I can borrow both yours for a minute, I have a question. Speaking of 30 year fixed rates, so I have this investment condo, I'm trying to figure out what to do with I can either I'm thinking about selling it just kicking the idea on selling it, I could also refinance in rate only, and drop it from a four and a half to a three and a quarter, which would save me about 230 bucks a month, or I could do a cash out refinance and get about 100 grand out. And that rate would be three and three quarters 3.75 my payment would go up from where it is right now. Like 250 bucks.

Tom:

100 K, that's what should be taken out.

Michael:

Yeah.

Tom:

You got a plan for that, to park that 100 K?

Michael:

Vegas man. First on red. Yeah, I do have a plan for that 100 K, I mean, I'm going to use it to wrap up that development project. And so I think I'm leaning that way. I mean, a half a percent spread on 100 K, over a 30 year fixed like, almost seems like a no brainer and to get sub fours on that. But also like three and a quarter is pretty amazing, as well.

Emil:

What is your cash flow? Does your cash flow become negative on that property? With the cash out refi?

Michael:

Right now? It's like 50 bucks a month.

Emil:

So would go negative?

Michael:

It would go negative? Yeah, there we go negative. But it'd be negative today. But I think you know, in the next 2,3,4 years rents, I'm assuming are going to go up they climb steadily since I've owned that property.

Tom:

If you were to take out the extra 100,000, what would that put your loan to value at?

Michael:

That'd be 75. Yep. And there's no and I asked the lender, there's no additional break in interest rate if I went lower LTV, like if I took 70 or 65 it's still that same three and three quarters.

Tom:

Yeah, if you're in a position to like take a little bit more risks that seems like really cheap capital to close out that other project. So right I would say that's probably like the less conservative route but it could be opportunistic by kind of like what you're describing.

Michael:

Yeah.

Emil:

And you know, my opinion I'm very bought in on Michael Zuber is don't create alligators don't create anything negative cash flow. I know even though you would be able to like put it towards something that will probably make up for it, right? The negative cash flow somewhere else. The idea of having a property where you're basically putting money in it all the time. Just it does sound terrible. And it's like I love that as a rule of thumb, just like don't think Don't break this rule. So I wouldn't I would try to find the cash somewhere else. You know, you mentioned that six unit you're trying to sell like, Can you just I don't know, try to bring the price to a place where it's that could sell faster and that'll get you the money or something, I would try to go something else. And just refi it, lower your payment. This is a California property, so to like have cashflow on that property? And obviously, the equity is awesome. I don't know. That's, that's my take personally.

Tom:

Yeah, I mean, or the, you know, option C's just to sell it. You take all the that's right there. I obviously have a bunch of equity in it if you wanted to close a deal, right? And you didn't want an alligator? Right? I don't one of the two extremes, either refi 100,000 out or just sell it and unless you're gonna be living in it.

Michael:

Right, right, right. I need a place to live in, which I won't be or option D is just take less cash out. So it doesn't go negative.

Emil:

Yeah. That's not a bad idea, either.

Michael:

All right. Well, I have to keep y'all posted on what I end up doing good insight, tips. Thank you both.

Emil:

Awesome. Cool. This is fun. I'm glad we got to do this.

Michael;

This is a lot of fun.

Tom:

Yeah. And I'm inspired. I'm definitely going to be the next time. We record every week. The next recording, hopefully, we'll have my insurance stuff.

Michael:

Hopefully?! That's not a plan!

Tom:

You're right. I will right.

Emil:

That's right, our next episodes…

Michael:

Use power words.

Emil:

We're starting the next episode, we're gonna we're gonna follow up and see if you did it.

Michael:

We're gonna bring out the grill again.

Tom:

Excellent.

Emil:

The reason I think we did this episode. Yes, it's fun to talk about what we're all doing. But hopefully, it just inspires you guys. Hopefully you get some ideas in, you know, as you're forming your 2021 goals, it inspires you in some way, shape, or form.

Michael:

And I think something else to kind of piggyback off what you said, Emil, is that stuff doesn't always go according to plan. And so don't get disheartened. Yeah, don't feel as hard or beat yourself up. If things don't go according to your plan. I mean, there's a lot of things going on that are often outside of your control. So make a plan, try to stick to it as best you can. But also be gentle with yourself and understanding that, yeah, it doesn't always go smooth. And so be able to be flexible and pivot and kind of bend be the willow not the with some more sturdy tree that breaks in the wind, Be the willow not the twig, 2020 takeaway.

Emil:

And one other thing is, you know, we all set like pretty simple goals, right? Like, buy x properties, close x projects, whatever it is. And I think if you just set that high level goal, your mind will start thinking about, alright, how do I get there, right? Like, I didn't have sell a property, or refi, or any of those things in my goals, it was just buy two properties. And so by necessity throughout the year, I was like, Well, I'm not gonna really get this cash to be able to buy those properties. So you just started thinking of different ways and things you have to do to get to that goal. So I guess the point there is, I think it's okay to just just have a top level goal instead of a bunch of like, smaller things. And like you said, be adaptable, and those, you'll figure those things out throughout the year.

Michael:

All right. Um, just quick counterpoint to that, I would say the more specific you can get, oftentimes, the better. I like the acronym smart for goal setting, because you can measure yourself and it should be attainable. And I think it helps put parameters around the goal. Oftentimes, when you have a lofty goal or a non parameter Set goal, it's tough. I find it personally tougher to accomplish different strokes for different folks. But I find putting parameters and timeframes and measurements around it helped me accomplish it.

Emil:

But you take you take that bigger one, and always break it down in a small like, let's say your goal, whatever was like by 10 units, right? Yeah, for this year, would you break that down into a bunch of the sub things you're going to need to do? Or will you just say that and then kind of figure it out as needed. as the year progresses,

Michael;

I try to break it down into smaller bite sized pieces.

Emil:

Alright, well, with that, hope you all have an awesome end to 2020 I know a lot of us are probably looking forward to put in 2020 in the books. And I don't know about you guys. I'm very, very optimistic about 2021. We have some good news. It feels like there's a light at the end of the tunnel. So hope you all have an awesome new year. Big, big things lined up for everybody. Listen in 2021 you know, we started this show in in 2020. I really want to thank you guys all for the support this year and the feedback and the support and you guys listening…

Michael:

Big time!

Emil:

in a week. So with that, we'll check you out in the new year and happy investing.

Michael:

Happy investing.

Tom:

Happy investing

Do You Know About These Two Powerful Accountability Hacks? Dec 26, 2020

In this short episode Tom and Michael share two effective strategies to help keep you accountable to your goals.

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Transcript

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined as usual by

Tom:

Tom Schneider. And today we're gonna be talking about accountability and how to hold yourself accountable. So let's jump into it.

Michael:

All right, Tom, New Years just around the corner, everybody loves making new year's resolutions. How do you hold yourself accountable?

Tom:

Well, Michael, it's specific on what I'm trying to hold myself accountable. I like the idea of escrow challenges. And now I'm not talking about real estate escrow, I'm talking about taking some funds that I have, that I respect and want to keep and giving them to a trusted friend and telling them Hey, friend, if I don't do this, by then I want you to donate to this to something I don't want to be donated to like something I don't agree with at all. I read about this, there's a couple of apps that do this, but you could just do this with a friend.

Michael:

Oh, that’s so good.

Tom:

Let's say like, I really support killer whales, or like whales, you know, and then they would have to donate it to like a whale hunting company. That doen’t doesn't work. And I might rework this a little bit I might workshop this a little.

Michael:

I just love like, you would go on to like whale killer like whale hunting company dot com and let's see, like, what's, what's their what's their nonprofit numbers, counted on my taxes.

Tom:

Lowering the whale population. It’s big plankton that runs that company.

Michael:

It’s Plankton from SpongeBob. It's No, but I totally know what you mean. Like, if you Yeah, if you really like dark chocolate, and then you would donate to a milk chocolate company.

Tom:

That's right. That's right.

Michael:

That that's a that's a really, that's a really good incentive. I see like it almost as doubly incentivizing yourself, because there's that loss aversion where you're losing money. And then there's also that I'm donating to now actively a cause that I don't believe in or to a company that I disagree with. So I think that's double ending it. That's a really good tactic.

Tom:

I guess an easier way I could have just gave an example is not the whale hunting company. Maybe like there's like something political you don't agree with, like you have money that's donating to that cause like, right, I don't want you know, you want to be able to protect that. So that's going to give you some ripe incentive to not do that. So anyways, that's my…

Michael:

I love that. Is there anything in particular that you're working on holding yourself accountable to right now?

Tom:

I think like a lot of people like, you know, trying to get fit being quarantine pudgy bodies, like, you know…

Michael:

The quarantine 15.

Tom:

Exactly, yeah, so I have a good friend from high school who sees he's holding some money from me right now. And I need to go get rid of that quarantine 15.

Michael:

Right on. I love that.

Tom:

Yeah, What about you Michael?

Michael:

I am a big fan of the accountabilibuddy. And so I developed an accountability buddy partner. And so we have a weekly standing meeting. And if one of us doesn't show up, we'll do 110 bucks. And so we text each other what we're gonna do for that week, and then when we circle back the following week, we see if we got it done, and there's really no consequence for not getting it done, but maybe there should be, but I really like this, this escrowing idea, I think it's not me saying you have to adopt, yeah, my own life, because that's really good.

Tom:

I like your understanding of it. And that, you know, yeah, there's the version, you know, aspect of it, plus the good of you actually doing it, it's like you're hitting on all cylinders of motivation. I think another thing that's similar to both of these is putting it down on paper. So I do a monthly not a journal, but like, I have this template every month that I fill out just on some private Google site, I do a little review on what I want to get done this month, what got done last month, it's almost like if people have done stand up meetings before where you're touching on, okay, you know, what's, what got done, what got in the way, what's going to get done this upcoming week, it's that same exercise but doing it for yourself. And I find that a monthly cadence is a good way to do it. I've actually, I was looking at it, I have all the records from back and I started doing this in 2010. So I have a decade of every month, it's it's really funny to look at because I mean, you change as a person over 10 years, and then you get a little little diary of yourself and some other stuff that I put in within that template not only kind of the goal stuff, but I put a little gratitude stuff and said okay, like what I'm thankful about, you know, myself for like my family, all that kind of good stuff. It's, it's honestly a good exercise to do. And it's entertaining to look back over time. And I found that Google Sites is a good platform to do it just because you don't have to worry about them going out of business, their platform, you know, is is there. And then you have this almost like a time box. That's not a time box. What's it called?

Michael:

Time Capsule?

Tom:

That's a word Yep. of yourself. So again, my the way that I structured is what I want to do this month. How did I do against things last month, and then some general kind of like thoughts that I'm things I'm thankful for and a little bit touchy feely. But I think that stuff is important for being a 360 human.

Michael:

Yeah, I call clocks time boxes.

Tom:

Yeah, yes. Something else I've done in the past, which I really like journaling, too. So that really when you said that that hits strikes a chord with me that something else is actually giving yourself a reward for doing completing a task or a goal. They think so often, a lot of us are running so hard and like, we set a goal for ourselves, and then we accomplish the goal like Okay, great, what's next, especially the people that like, are super high achievers out there. And so we have to stop and enjoy the win. And I think when you teach yourself almost like Pavlov's dog to enjoy, and you get a reward for doing something that that makes doing the thing, oftentimes a lot more enjoyable. And I know it is for those around me in my personal life. So like when you get a property acquisition done or sell a property or get a property rehab, like celebrate without with those in your life. Enjoy, kind of enjoy that plateau a little bit before you start the next portion of the climb.

Tom:

Fantastic. We have a special treat amongst us our podcasts here every I think like 20, 20,000 we all do a celebratory shot so got to celebrate the wins. Man, it's life is tough. Challenges are tough. You got to really appreciate when things are rolling,

In this short episode Tom and Michael share to fun ways to help you stay accountable to your goals.

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Transcript

Michael:

Yeah, break it up into many milestones, it becomes so much more easier and a lot more enjoyable. Well, that was our episode, everybody. Thanks so much for listening. Feel free to leave us a rating and review whatever it is listen your podcast. We'd also love if people could share in the comment section, what things they use to keep themselves and those around them accountable. And we look forward to see you on the next one.

Tom:

Happy investing.

Showdown of the Century (Round 5) Buying a Primary Residence vs. an Investment Property Dec 21, 2020

In this episode Tom and Michael go head to head yet again with a hot debate on what is best; buying your primary or an investment property first.

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Transcript

Emil:

Hey everybody welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co hosts,

Tom:

Tom Schneider.

Michael:

and Michael Albaum.

Emil:

And on today's episode, we're gonn a be doing another showdown of the century talking about buying your first rental property before you have your primary residence or buying your primary residence before you buy a rental property. So Tom and Michael are going to be going head to head and I'm going to be officiating this one. So let's take out the gloves and start the show down.

Michael:

Tom, did you drink your um cheat juice this morning? aka coffee?

Tom:

I did I did. We were talking about this yesterday. The espresso nap.

Michael:

Oh boy. So did you espresso nap before we record this?

Tom:

I did an espresso sleep. I what I did is like, I put the espresso in time release capsules. So I could you know start my sleep early. And then it dissolved at around you know four o'clock I got a solid 45 minutes asleep. I just watched elf pretty recently so I got a solid 45 minutes of sleep eating the the four main food groups. There's sugar bear,

Michael:

candy corn, candy canes,

Emil:

Maple syrup. Is it the last one? Yeah, we've all watched elf way too many times. Clearly.

Tom:

There's like, within movies, there's like funny quotes that just like stick with you that are like not like super obvious. Yeah, my favorite elf quote is when elf is offering the spaghetti to like, what's his face? The dad and the dad's like, he's like, Oh, yeah, of course. Of course. We don't want that. Yes. My wife has an inside joke. Like when someone says like, No, I don't want that to go. Oh, yeah, of course. Of course.

Michael:

That's really good. That's really good. All right, enough of the friendly gestures, the friendly pleasantries. Let's get down to it. Tom.

Emil:

Why don’t you guys get your corners here.

Michael:

Weighing in at 150 pounds!

Emil:

All right. So, Tom, Which side are you taking? To start this round off,

Tom

I'm gonna start with the buying the house that you live in for

Michael:

Easy one, 1st round knockout.

Emil:

Alright, so Tom, you'll start this round, Michael gets the rebuttal and you get the final word. All right, I want you guys to meet in the middle touch gloves and fight.

Tom:

Okay, so within this battle, the reason that you should buy your house first, before you buy a rental property is a simple question of math, that's going to be my number one argument. And it's a simple number of math because you need to think about your investing in your life holistically. So there's money in money out when you are buying a house that you are going to be living in not only are you getting on the old appreciation train of buying a house that you're living in, but you are drastically decreasing your costs. So when you buy a house that you are going to be living in good news, you're not paying rent anymore, you're paying a mortgage. So those that fun that you're using to pay that mortgage, you would still need to be paying rent if you were to buy an investment property elsewhere.

So, huge difference that is a Crossing the Chasm if you will of no longer paying rent number two which is I think more straightforward is you are learning the ropes if you want to get into specifically remote investing, what better way to learn the mechanics of a transaction and lending and all that stuff by boots on the floor doing the transaction where you are going to be living? Right makes sense. So learning the that transaction process the financing process and lastly, is we do this investing as a way to you know, get to a point to financial freedom, we do it for ourselves and what better way to do it for yourself then to get into a place that you can call home especially in these times of being you know, in a pandemic you might want to do a house project can you do that if you're renting Nope, can't do that. You could do that but it's not ultimately now yours so pay yourself first you know that's how you buy buying a house that you're going to live in you are paying yourself first smoking mirrors, smoking mirrors, okay. Okay done.

Michael:

Well Tom, those are all really great points. I'm so glad that you brought up so many of them. And I just took kind of your first point I love the fact that you brought up paying a mortgage now instead of paying rent because there is no faster way to be unsure about how much your housing expense is going to be then with paying a mortgage and the utilities and the extra expenses you have with owning a home so if I'm renting a home for 1000 bucks I know month in and month out I'm paying 100 bucks a month the end Bodie Bodie.

Tom:

What!? That is not Bodie. Did you just through my dog under the bus?

Michael:

I through my dog under the bus>

Tom:

You’re dog is named Bodie too?!

Michael:

Yeah.

Tom:

Shut up.

Michael:

I’ve told you so many times?

Emil:

Way to pay attention Tom.

Michael:

but he's squeaking his toy right in the middle of my home run here,

Tom:

Smoking and Mirrors,

Michael:

Smoke and mirrors. That's right. So there is no better way to be uncertain about your monthly housing expense than by owning your own home. So up, we have a leak in the roof, that's $2,000 got to fix that up the stove broke, got to go get a new one that's in there. $600. So when you're renting, you know, month in and month out exactly how much your housing expense is going to run you. And I would argue that as you're saving up to start investing, that's one of the most important things is knowing what your savings rate is. Number two, we also talked so often about how and the investment property world you want your tenants to pay your mortgage? Well, that's true for the investment property that you buy, and then rent out, why can't that also not be true for your primary residence. So go buy an investment property first, and then let your tenants pay your mortgage on your primary. Thirdly, depending on where you live, this might be out of the question for you.

So Bay Area, California, Seattle, New York, the cost of housing is so expensive. And so if you take that down payment for what you would pay in downpayment and go elsewhere, you can potentially buy properties all cash, you could get into numerous investment properties. But I also think that in order to save up for your down payment for your primary, it's going to take a while. And so if you can go invest and build up cash flow, this cash flow train this cash flow snowball, by buying investment properties, first, your tenants will pay your mortgage and your tenants might even pay your down payment on your primary versus going the other way, it's going to take you a long time to save up for your next down payment if you go buy a primary until you can start investing in rental properties. So I love that you brought up appreciation, Tom, because you're absolutely right, go buy investment properties and have those puppies start appreciating all the while you're waiting to go buy your primary residence.

Tom:

Alright, so

we're going to come to an agreement on a point you made is I think house hacking is kind of the splitting the difference of this argument. And what house hacking is, if those are not familiar, that's buying a duplex living in one unit, renting out the other unit good point there,

Michael:

It doesn't even have to be a duplex. It's just something bigger than you need for yourself. So if you're one person, you could go buy a three bed house and rent out the other two bedrooms. You could buy a duplex triplex or quad or rent out the other unit. So it can be a really diverse approach doesn't need to be just a duplex. So just to clarify that.

Tom:

Yep. Like that. So okay, so that to your argument, you're making at me here. So one of them was related to unknown costs. So you're saying, you know, if there's a leak in the roof, great, you're spending money and there's unknown costs on buying your own house? Well, Michael, there's unknown costs are just as likely to occur on your rental property than they as they are on your property. But in fact, I would say you have more control of those unknown costs at your own personal house. So for example, if something say I don't know, some simple plumbing issue or something happens at your personal house, and then also happens at your rental house, you are guaranteed to have to pay pretty much top dollar at that rental property to get that fixed, where at your own house, you know, you kind of make an adventure of it, you know, oh, just cold water? No, it's good for your lymph nodes to get into cold water shower.

But on the rental property, you can't control that you're going to you're going to be paying to fix that. So I'd say those costs measures are you have a little more control of your own house, also on the cost factor. So I rented for a couple years and oh my goodness, did I get jammed on rent every year, I think it went up like 25% year over year, where if you're buying your own house, you're getting fixed costs. Sure, there are some issues that can happen with the plumbing, but then you get a really good health treatment where you get a cold water shower for a little bit as long as you don't want a cold water shower. But those costs are fixed versus if you're renting. And if that landlord wants to jam ya for 25% increase, you're just subject to that you just have to take it so I would say that you know your argument that around costs is you definitely have to pay whether things happening to your rental property and for your own personal house. You can make some cheap decisions around health and financial well being of accepting culture. Yeah, I think that's a I'm going to end on the cold shower.

Micheal:

Emil weigh in man, please.

Emil:

All right, there's a little bit of thunder left you know a little bit of juice to squeeze out of these two topics. I don't want to steal your guys's thunder and call everything you know what I mean. Yeah, just wait till the end.

Michael:

All right. Yes. All right.

Emil:

All right, guys. That was a very fierce round, a little bit less fierce than I've seen you guys in the past like sometimes I see you guys just just going straight for the jugular this time, you know, a little more civil.

Michael:

It’s the holidays, you know, you got to be

Tom:

I started the day with a cold shower. My endocrine system is doing awesome. You guys.

Emil:

Alright, well now that we're switching So Tom, you are taking buying your rental before you buy your primary but we'll let Michael go first. With buying a primary I want you guys to bring a little bit more fight. All right, like throw the haymakers Let's go guys give the people what they want. I'm raising my standard. Yeah, there you go, Tom stand up. It's game over. Let's go. All right. All right, Michael, when you're ready?

Michael:

Yeah. So it's kind of a no brainer you got to take care of number one first and that's you as an individual get your housing squared away first and foremost before even thinking about going in investing. I mean if you're gonna have your rent payment jacked up like Tom mentioned previously, how could you possibly be forecasting for the future with saving for future investment. So take care number one, get it locked up, get it squared away, first and foremost. Secondly, there is no better financing than owner occupant financing. So go buy a primary residence, let the appreciation train work its magic. And in a couple of years, you can either move out of that primary residence and convert it into a rental thereby creating a rental with owner occupant financing, or do a cash out refi or get a HELOC on that property. Again, with owner occupant financing and use that money to go start investing down the road, it becomes so much easier and so much cheaper when you have owner occupant cash to compete against peer investors for bidding on properties. So it's a no brainer. In my opinion, go buy your primary First, get it locked, ready in an appreciating market. And watch what happens. It'll blow your mind.

Tom:

Mike, you ready to take it?

Michael:

Let's just do it. I would love to see what you're going to try to drum up here.

Tom:

All right, Michael, it's time to September some real talk. Michael, I think you need to be long term greedy. You know, I think the short term greedy thing for you to do is Oh, I'd like a house the women that I own right now and to go buy a house, you know, and that might be great for current Michael. But future Michael is going to be so much better off for so many reasons of deploying the capital in building his real estate Empire, you have plenty of time to buy a house. In fact, you're going to be able to buy a better house in the future by making these smart, prudent, long term greedy decisions now of buying, you know, buying rental properties right now. And one of the reasons why it makes a lot of sense is your money can go so much further if you were to buy rental property, especially remotely. So where you're living at now, Michael, you weren't what you would be paying to buy a house, you could buy like three houses three rental properties, think of all that cash flow you can have your money just goes so much further versus in the market that you're living right now versus if you were to go and invest in one of these remote markets. So be long term greedy.

The other really value of this is being a person Michael, who likes to travel and stuff. You don't have to weigh yourself down with some house, you can deploy this capital, get it working for you, if you have it just sitting at your own house. It's not working. It's being slothful, you want to get this working for you invested, get it running. So you can go do some fun things. Oh, you want to go ride a motorcycle up and down Chile? Great. You can go do that. If you want to go to Spain, great. You could do that. It's out working so you can go be playing, right? So get your money working. Be young, be awesome. Go do fun stuff. And do that.

So my next little bit, I'm going to just put on my economist cap. I'm going to mess the countries up. But this is that I'm specifically talking about but I'm it's going to be directionally right. So within Europe, there's this inverse relationship between unemployment and homeownership. It's true. So countries like, again, I might nest the specific countries, but countries like the pigs countries like the Spain, Portugal, they have very high ownership, but also very high unemployment, versus certain Scandinavian countries like the Norway and Sweden, they have relatively low homeownership, but very high employment. And the reason for this insert inverse relationship is by not owning your home that you're living in, it gives you a lot more flexibility to move around to wherever the jobs are at.

So when you're done riding your motorcycle in Chile, you can go to wherever the jobs have, it gives you flexibility, but you know that key investment in housing, you're able to still participate and all that upside by deploying that capital in a good market that you can be remote investing. So in closing, you want to be long term greedy Michael, don't be shorted short term greedy, buy your house now and get your money working for you. Number two, take your money further, you're able to do a lot more by deploying it in investment properties. And number three, look at the European model be a Scandinavian country not a one of the pigs country that Portugal, Spain, I forgot the other ones, but be one of those ones where it's a high employment, you know, riding a motorcycle in Chile. Go ahead.

Michael:

Tom, I really love and appreciate those points you brought up first and foremost being long term greedy, I couldn't be more excited that the fact that you brought that up because what could be more long term greedy than living in a property for two out of five years and getting a capital gains exemption when you sell the property of 250,000 as an individual or 500,000, as a married couple. It totally personifies long term greedy. So thank you so much for bringing that up. And then secondly, get your money working for you. I also love the fact that you Mention this point, I'm getting an owner occupied key lock on my owner occupied property that I live in at two and a quarter percent. What better way to get your money working for you then appreciating in a California market and being able to take advantage of that owner occupant financing for the purchase and then owner occupied HELOCs. Amazing, amazing money again, really great point. Thank you for bringing that up for in support of owner occupant property first before investment property.

And then you mentioned taking your money further. What better way to utilize your money than using an FHA owner occupied financing loan where you only have to put down a much smaller percentage and 20% 20%. And on it so happier to 25% get out of town. If I can put down between two and a half to 5% on a primary residence, get into something get rid of paying rent, start building appreciation, building equity, getting HELOCs, getting owner occupant financing. It's just an all day when win win win you look at the math, so I would say you know thank you so much for proving my point, that owner occupant is the way to go.

Tom:

Yeah, yeah, yeah. All right Emil, come in here.

Emil:

Ding ding ding Guys, get back to your corners. That's what I'm talking about. That's how we throw some haymakers bring some emotion, leave it all in the ring, guys. Well done. My comments here you guys on the second round, basically got through some of the stuff I had written down, FHA loan was being the big one on the primary just to be able to get in with 5%. Down, I think the to step back from our debate here and talk about our own personal situations, all three of us, I think, bought a rental property before we bought a primary. I think just depending on where you live, it just makes more sense to do one or the other us being in expensive cities, looking elsewhere, buying a rental property, I think made sense. But I don't think there's anything wrong with buying a primary if you can afford it just like the Hilo cash out that you mentioned, Michael, especially if you're an appreciating market, and you use like an FHA loan to get in for 5%. And then your home appreciates a bunch. Like that is an awesome way, if you don't have a ton of cash up front to get into something stop paying, you know, quote, unquote wasting rent, you know, build some equity, and then in a couple years, if the market is good, you can actually pull some cash out and then go buy rental properties with it. But you know, I think there's something to be said about us all buying rental properties before we bought a primary. And the big one that stood out to me was you're using you know, if you think about it, the cash flow from your rental properties can go towards paying your own mortgage on your primary, right, you can use it to pay your mortgage, you can use it to just grow your portfolio, whatever it is. Yeah, I think solid points on on both sides.

Tom:

Yeah, I mean, I bought a rental before my primary. And I would do it again. And again, there's a great article on the New York times.com slash interactive slash 2014 slash up slots hash by slash rent slash calculator. If you just type buy or rent calculator, New York Times, it's a really cool calculator that they have that evaluates like, oh, should you buy or rent, basically, and it's very situational from person to person on where they live, it got to the point where me where I was just getting jammed at this apartment in the East Bay, just outside of San Francisco, where my rent was very close to what my mortgage would be. And you know, there was an initial kind of nut to pay with the downpayment. But after that, it was actually cheaper on a monthly basis to pay my mortgage versus my what the rent had gotten to and it wasn't like that when I first went in there was just as crazy increases in rent year after year.

So it just at that point is like, okay, you know, bite the bullet, I suppose that that was like super hardcore and discipline, I would just continue to rent and just continue to use that down payment and using my house on other rental properties. But there is something to be said, of, you know, having a place to live that your own that you can do fun projects on is is fun, it may not be the most long term greedy thing to do if you're really bullish on on building your investment. And this is a decision that you know, I have now like pretty regularly like, Oh, do I want to do some remodeling on the kitchen? Or do I want to add a couple of roofs or do something like that it's it's honestly kind of hard and making that decision. I mean, it's a very blessed to be able to have like decisions like that to be made, but it's kind of a constant pull and tug, tug and pull, push and pull, you know, how much am I spending on building this these rental folio, which I love and is really fun and has major long term benefits versus these current times doing projects on the house or whatnot. So it's a kind of a push and pull for me kind of related to this conversation of ongoing stuff, you know, that you want to do on your own house. So for my 10 cents it's different for everybody's situation,

Emil:

You guys view the primary as a hotly debated is your primary and investment?

Tom:

No.

Michael:

I would say pretty confidently for me that it's not I kind of I use Kiyosaki Rich Dad Poor Dad definition of asset versus liability, who puts money in your pocket, it's an asset. If it takes money out of your pocket. It's a liability. No point in getting any more complicated than that. Every month I pay money to live in this home. It's a liability. Every month I get money in my pocket from my cash flowing investment. It's an asset so you could expand that absolutely and say well Yeah, if I sold it down the road and I made money on the sale, well, maybe it would be an asset, but on a kind of snapshot month by month basis, it cost me money. So it's a liability.

Tom:

I like that. I mean, I would take Yeah, whatever the kind of harshest stances, you know, it's, yeah.

Emil:

I wanted to rent for a long time until my wife was pregnant. And we were both just like, to me buying a home is a emotional decision. And you do it because you want to not because you think it's gonna be this amazing investment. Hopefully, it turns out that way, but I try not to treat it as such. So yeah, for us, it was just like, the timing was right, we were in the place in our lives where we wanted to do it and and did it for nothing, besides wanting it not looking at it as an investment.

Tom:

Yes, pretty funny. the buying process of like owner occupied versus buying a rental where I feel like a rental, like I'm extremely disciplined, like, I have my performance, my max bid and all this stuff. And like now I'm out, get out of here, versus like when you get it home, and it's like,

Emil:

It's so emotional

Tom:

Wife and baby look at it like, oh, that's the one that's the right one.

Michael:

I took a semi different approach when we bought our primary. And so we were looking down in the Central Coast and everything became way more expensive than we anticipate. And I had a really tight budget just because I knew how much I wanted to pay on a monthly basis based on how much the rentals are bringing in. And so I thought, Okay, this is what we can afford. So we actually ended up buying a condo down here. And we analyze it as an investment because we knew if we were to move out, or when we were to move out. And when we started having kids that we were gonna turn it into an investment. So it totally makes sense as an investment property and cash flows as an investment property, which is super exciting.

But something else to be thinking about as you're looking at buying primary residences is the maintenance and exteriors additional stuff that just comes with owning a property when you're living in it versus being a rental and Tom, we were kind of talking about that in the showdown is Yeah, you're gonna have expenses that pop up that you're able to control a little bit less on your rentals and your primary. But if it's your primary, you're probably going to take a higher degree of like, you just want things looking a lot better, I would say in your primary because you're living there versus a rental. So there's a lot more pride of ownership, as they say. And so I find that people often dump a lot more money into their primary than they would into a rental of similar caliber.

And so with a condo is just kind of nice, I don't worry about exterior maintenance, roof, paint, any of that stuff, all I have to take care of is the inside of my place. And and it's good. So from a maintenance standpoint and a cost standpoint, aside from the HOA, I mean, the condo can be a decent way to go. So I would employ everybody to kind of think about that. And then also evaluate it as a rental for if you ever plan on converting it into one or at least that at that point, you have the option two if you'd like as opposed to being saddled with this huge mortgage payment that would never make sense as a rental. Now you're stuck.

Emil:

You don't pay to fix your roof on a condo?

Michael:

Every Hoa is a little bit different. But the condo pays in my particular case, they pay my water sewer trash, they pay all the exterior maintenance, which includes paint, landscaping, and roof and then just maintenance in the association itself. The Hoa the fee is way too high for what we're getting, because we don't have any real amenities. But my homeowners insurance is a little bit less. I don't have to worry about any of that stuff. So we just had our roof redone, like last week. And we didn't come out of pocket for that. Yep, it's nuts. It's nuts. But something to think about and consider as an option, because I didn't for a long time, but it's just especially in older homes. First time homebuyers are looking to get into you know, if there's a lot there, I think there's just a lot more than meets the eye. So make sure you go into it kind of eyes wide open.

Tom:

So Michael, are you aware of your condo if they have Hoa rules about renters if you were to move out and to rent that place out?

Michael:

Oh, yeah, we checked the CC&RS way before we purchased this thing, and they don't, which is the important thing. So they don't have any rental restrictions.

Tom:

Good, good, good.

Michael:

Well, okay, I think that like they have rental restrictions for short term rentals. So there has to be 30 days or longer. So when we Airbnb at our place, we had to have a 30 day minimum stay, which because we're doing this during COVID times that worked out just fine.

Emil:

Cool, nice job guys any other parting wisdom before we clock out of this episode.

Michael:

I would just say to everybody who's kind of on the fence considering between the two, just look at the numbers, like Tom was saying at the beginning of the episode and see what makes the most sense. But also understand that there's an opportunity cost it to whatever decision you make. So if you buy an investment property before you buy your primary, just look and understand how long it's going to take you to save up your down payment before your next either investment property or to your next primary. And conversely if you're going to go buy your primary before your investment property, go look and understand how long it's going to take you to save up for your down payment for that next investment property or for the first investment property for buying your primary first and understand that there's a cost and benefit to doing one versus the other. And I don't think there's one right or wrong universal for us. It seemed to be investment properties first owner occupant you know, primary residence after the fact but everybody's coming at it from a different place. So talk with whoever's in your life

Tom:

Love it just to reword it, you know, have a plan that everyone's situation is unique. But just kind of map out short term, long term, midterm middle term, middle term. Yeah.

Emil:

Did you guys actually plan that far ahead? Like for me, I kind of just like, let me get some rental properties. And then we'll kind of figure it out as you go along. Like, do you guys find that like, mid to long term planning is a helpful? And B, do you even stick to it? Like, do things just change so much in the journey that it's like, it's almost not even worth it,

Tom:

I enjoy the exercise of putting it down to paper, and then modifying it everybody's functions differently. But I think doing it at some sort of a high level, there's value to that, in that there's more of a Northstar. And like we talked before, with like Academy, you know, write it in pencil, have an idea doesn't need to be in pen or in stone. But in sort of providing yourself sort of a Northstar. There's a lot of value to that. And in the way that you're kind of managing the day to day to have that.

Michael:

I totally agree. I mean, for me, when I first started investing, I was just flailing around. And not having a plan makes it so easy to flail, but I was also single, I wasn't married. And so none of that was even part of the picture. I was just go go, go, go go. And then after the fact is like, Oh, I guess I should consider buying a primary, I guess that makes sense to do now, now that I'm getting married. So I think, again, if you have the resources, like the educational resource that goes into this podcast, you can just evaluate where you currently are, and then also talk to other people who have done it before you I didn't have that luxury. When I first started investing, I was kind of figuring it out. My dad now we're kind of figuring it out for ourselves. So didn't have many other people to lean on to talk to you about what that planning might look like or even how to strategize.

Emil:

Thank you everybody for tuning in to another episode of the real estate investor. I hope you guys enjoyed this one. If you do, we always like to ask that you leave us review. Let us know your thinking of the show. And if you do sometimes we'd like to just pick people at random and send them some cool stuff, like we've done on previous episodes. So wherever you listen your podcasts, leave us a rating and review we'd love that and we might pick you to get some cool swag. Alright guys, check out the next one. Happy investing.

Tom:

Happy investing.

Michael:

Happy investing.

What You Need to Know About That Money You’re Planning To Use As A Down Payment Dec 19, 2020

In this short episode Tom and Michael cover an important issue you need to consider if you recently transferred funds into your account for a down payment.

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Transcript

Tom:

Greetings, and welcome to the remote real estate investor. Today we're going to talk about financing, specifically eligibility of funds to be used for your down payment and be held in reserve.

Alright, let's do it. Michael, why don't you lead us on this little riff of today's weekend wisdom?

Michael:

Yeah. So it's, I think, a really important topic to touch on, because I think it catches a lot of people by surprise. And really what it is, is is called seasoning the funds. And that's not like seasoning your cast iron skillet or seasoning your food. It's, it's having the funds available in the account for long enough to satisfy the lender, such so that they understand that those are your funds. So I'll give you an example of this. I had a lender Tell me, Michael, your down payment needs to be in your account three months in advance of the loan funding. So there was a small inheritance that I received when a family member passed. And so that came in, and that's kind of what made me decide to buy this property that I was going to and the lender was like, Whoa, what's this big check deposit here, you can't use that as part of your down payment. And so I had to write a letter of explanation and explain what's going on and show them a death certificate and all this kind of poop law stuff. But so just be aware of that.

For a lot of lenders, I don't know if three months is like the Fannie Freddie conventional loan minimum requirement or the standard that set but that's what it was, for me with this particular lender was I had to have the funds for the entire down payment in the account sitting there three months prior to funding. And so if you're going to be using a keylock or some other form of funds that aren't in your account, right now, just you want to talk to a lender about how long you need to have the funds sitting there. And I don't know how it would work with like, a sale of stock portfolio or that kind of stuff, I think, because they look at all that when they underwrite. So my guess is that they would be okay. And I think what they told me in the past was, we need to see the amount going from your stock portfolio to your bank account. And you need to show us like the bill of sale, essentially, from the stock portfolio. And that number needs to match up exactly, so that I can prove that the money came from my own stocks and went to my own bank account.

Tom:

Yeah, that's a great rule of thumb, I think 90 days, and you'd be surprised how unique each bank and each lender is on these types of requirements, taken out many different loans, it seems like each one had their own kind of unique flavor on that amount of time. But I'd use that as a good baseline as if you know, you have funds that are you going to be used to be buying with debt is to get them in place, you know, a few months in advance of when you do the purchase just so when it comes with financing, it's no questions and smooth process.

Michael:

Yeah. And I think to just I would also ask the question in advance of like what you need to do, because, for me, in my instance, I was selling stock in order to buy a property. And if the property purchased didn't end up happening, or I was still kind of on the fence about it, I would have been pretty bummed that I had sold those stocks. So you want to make sure if you're going to be moving funds from one form of investment vehicle to another that causes a transaction or a taxable event or what have you. You just want to be very well aware and pretty committed to that because you have a taxable event and you sell stock and you're like crap, I'm not gonna buy the house anyhow, that's that can often be a bummer.

Tom:

Yeah, for sure. I know some banks will count stocks at some discount if they're still like being held as an equity and usually that would be not for the down payment, but for later reserves. So something to consider for your reserves, raising retirement accounts.

Michael:

Totally.

Tom:

Yeah, so this is a short episode, but our rule of thumb and advice for funds in your bank for lending is 90 days, but at the end of the day, it's really up to your lender. So I would recommend talking to your lender talking to multiple lenders doing that interview process early and asking them specifically that questions of seasoning funds in the bank so you make sure that you're right for them. All right, Michael any final touches

Michael:

Nah, I think we pretty well covered it. Season hard and season fast.

Tom:

Season season. Happy investing.

Michael:

Happy investing.

Going Beyond Cash Flow to Understand The Total Return of a Rental Property Dec 16, 2020

In this episode, our guest Chris Willard tells us about his total returns strategy and how he uses it to fuel the rapid growth stage of his investment career.

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Transcript

Michael:

Hey, everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum, and I am joined today by my co host, Tom Schneider. And we have a very special guest with us, Chris Willard. And he's going to be talking to us today about total returns and using that to scale his portfolio. So I won't take up any more time. Let's jump into it.

Before we get into it, we want to talk really briefly about a special offer that we have going on for the Roofstock Academy. And for those of you who might not be familiar, Roofstock Academy is your one stop shop education arm of Rootstock. It's comprised of one on one coaching, over 50 hours of on demand lectures, cashback incentives for closing on properties through Roofstock $2500 cash back to be specific, as well as private access into our online forums. So as you go to roofstockacademy.com into the checkout section, use coupon code SANTA2020 for $151 off a registration. Again, that's roofstockacademy.com. And coupon code is SANTA2020.

Tom:

And to make this even more of a no brainer, it is a lifetime satisfaction guarantee. Take the coaching, watch the lectures, if you're not happy, get a full refund. No expiration, you're not gonna find that anywhere else. And on the cashback aspect, if you do the math, right, the discount, taking a 151 off, that's gonna make it $1,098. And you're going to be getting $2500 in return. So you're actually making money with the program. So join risk free today. SANTA2020

Michael:

Awesome. Well, Chris, welcome to the show, man. super happy to have you here. Thanks for taking the time.

Chris:

Thanks, guys. Always fun talking to you both right on.

Michael:

So maybe you could give our listeners for those who are not familiar with your background, your story, a little bit of background on yourself. And then we'll jump into this thing about total return.

Chris:

Yeah, so I've been in real estate for going on about 10 or 12 years, several different capacities, but more recently on the single family rental side of it with Roofstock. I currently, you know, work as the head of sourcing, oversee a lot of our larger portfolio transactions through our platform, but through my life here at Roofstock. And prior at Waypoint with Tom been able to do a lot of investing on my own, which is pretty exciting.

Michael:

Awesome. Awesome. And I know that you kind of invest all over the country, is that right?

Chris:

Yeah, I don't have any specific markets that are interesting to me, deals are interesting to me. So I'm always pretty opportunistic, and happy to go into new markets when I find the right deal.

Michael:

Awesome.

Tom:

Chris, I'm gonna interrupt a little bit. So Chris and I are in a special Roofstock Club. So our CEO at Roofstock. Gary has been on the episode a couple of times, he was formerly the CEO of one of the very first publicly traded single family routes. And both Chris and myself used to work with Gary at this company. And when Gary and Gregor and those guys came up with the idea of Roofstock as a company, we shortly thereafter joined Gary on this adventure. So Chris, why don't you just talk real quickly about all the different stuff you did at that single family read as well. I think it'll give good context experience.

Chris:

Yeah, so at way point, and even prior to waypoint I was underwriting hundreds of homes a day, we were buying off the courthouse steps back in, oh, nine 2010, you know, when right at the downturn of the market, when everything was when the world was falling off, I had the opportunity to join the waypoint team. And as 2011 or so down in Southern California, we started growing the region, buying hundreds of homes quickly grew that over a couple years to several 1000 homes and really manage kind of all facets of acquisitions, they're all the way through from acquisitions to lease up, we obviously manage the properties there. And then kind of towards the tail end of my tenure there really oversaw a lot of the disposition efforts, so got involved with selling homes. And you know, Tom, to kind of your point, it's really funny, because, you know, when we started selling homes at waypoint, we did it like everyone else, you know, we vacated you know, move the tenant out, put the home on the MLS, we incurred all the fix up costs, the vacancy, the leakage, you know, and then we realized that about 30% of the time, or more than that investors were buying the homes and putting tenants back into them.

And so, you know, then we had the bright idea, well, why don't we just list the home with a tenant in place on the MLS? And, you know, there's just a lot of challenges that agents have to deal with in terms of, you know, not being able to show the homes, you know, the condition of the homes and obviously, there was no platform like Roofstock at that time, you know, I think is when you know, Gary Gregor and, and the others got the light bulb, and obviously, overnight, you know, rootstock was formed. So, you know, pretty exciting, you know, to come up through the industry like that and see all the different facets to where we are today. I think we were bootstrapping things pretty frequently back then. Now we leverage a lot of technology to scale up and grow our business,

Tom:

Both sides of the business I love that how just you know in running that route and trying to sell this realizing the inefficiencies of selling occupied. Alright, I digress. I'll let Michael go ahead and bring us back in.

Michael:

No, it's I mean, it's super interesting background. It's it's super cool to see and hear about it is kind of like this seemingly obvious only in hindsight of like, Well, yeah, duh, it's investments, we're buying it anyhow, why are we taking on all this extra expense and headache to move these people out to have different people just move back in. So…

Tom:

Totally! Leakage. That's a word we use.

Michael:

Got it.

Tom:

Preventing leakage.

Michael:

That's a great word.

Tom:

It's a great word. It’s alright. It's an okay word.

Michael:

Getting back on the rails here. So, Chris, I really want to chat and focus today about total return. And I think this is kind of this word, this concept that might be thrown around a lot that some people might not have a good grasp of, or a hard time defining and pinning down. So can you give us what your definition of a total return actually means?

Chris:

Yeah, I mean, the way I look at it, which might be a little bit different, but you know, it takes that idea of, you've got your cashflow investments, and you've got your appreciation investments, and it's a blend of both Now, now, total return doesn't necessarily mean that you're not going to have steady cash flow. And it doesn't mean that you not might not be able to catch, you know, market and an upswing and take on some appreciation. But you know, you get a little bit of both worlds there. When I try to target you know, investments, when I'm kind of putting my acquisition hat on and looking at acquiring homes, I always look at homes that have maybe have some upside on the rental side of things, maybe also have some upside in the market value of the home. So that's how I kind of look at it and categorize total return is takes a little bit from both the cash flow model as well as the appreciation model.

Michael:

Awesome. And do you factor when looking at acquisitions? Do you factor in like the tax benefits are the loan paid down into like, calculating a total return?

Chris:

My model? I don't necessarily look at the tax advantages of that too much. You know, for me, I'm really focused on what is my cash on cash return, that's where I focus a lot of my energy, I do have a great CPA, and he tells me and kind of writes the ship when, you know, may go down the wrong road from from a tax perspective. But for me, it's really looking at what is my cash flow, because that's going to be kind of my day to day, right? You know, my cash in and my cash out is going to get me from point A to point B, but then where I can capitalize on some of that upside, you know, that's really kind of the unknown, that's where the risk comes in. But that's also where the reward, you know, can be found.

Michael:

Absolutely. And so for those of our listeners who might not be familiar with some of the metrics we're tossing around here, can you define for people? What is cash on cash return? And what is cash flow?

Chris:

Yeah, so cash on cash return is really just comparing or analyzing the cash you put into the investment, whether it's, you know, your down payment, any capital expenditures, repairs, and maintenance, all cash going into the investment verse, you know, the cash that's coming out, really your profit at the end of the day from that investment, oftentimes, that does come from your monthly cash flows, the distributions you get from your your property manager, but also could be, you know, realized, as, you know, potential profit from an upswing in a market and, you know, equity and appreciation.

Michael:

Awesome. Yeah, I always like to make the analogy that your cash on cash return is just a measure of how hard your dollars are working for you.

Chris:

I like that. There you go.

Michael:

Dollars out over dollars in.

Tom:

So thinking about total return, Chris, I'd love having been in the space for you know, both professionally and personally, as your philosophy around what type of returns you're looking for changed much over time from x from beginning of time till now, and I'd love to hear about that evolution of your philosophy on that.

Chris:

Yeah, the short answer is yes. You know, I think when I first started getting into you know, investing, I was fairly focused on what that cap rate what that cash flow look like, made sure I had, you know, high cash flow properties. And what I realized, you know, the, the, the time that we had at Waypoint was very helpful, being able to spend private equity capital rather than my own to, to learn a lot of this and make some mistakes there. But, you know, really, what I learned is that sometimes there's some negative factors with those higher cash flow properties, they're typically going to be older investments, they typically will need you know, more work just given the age, sometimes they can be associated with a lower rent price point in a certain market, which could increase your turnover. Therefore increasing your vacancy costs, increasing your turn times and thus decreasing your cash flow.

So I would say that I probably started on the side of the fence when I started personally investing as a I'm going to be a little bit more cashflow driven to now really, I take a balanced approach. And I think as you probably build your own portfolio, you start to take more of a balanced approach naturally, I do like to invest in heavy cash flow properties, but I make sure that when I do so I'm looking at the major components of that home, what is the age of the roof, the age HVAC, the the water heater, electrical, plumbing systems, those are going to be my big ticket items outside of anything cosmetic, and if I can make sure that from that perspective, the home is bulletproof than I think I've pretty safe from you know, looking and taking the risk on some of those high cash flow properties.

But where I'm starting to and I look over the last, you know, five or six years in my investment strategy I start to see that, okay, the vintages of homes I'm buying today versus I was buying, you know, five, six years ago, are starting to become newer home values are also becoming more expensive. They're safer investments and, and while maybe on the surface, the cash flows or the returns are not as great as those high cash flow properties, high return properties over the long term, if you look at over the span of multiple years, and you consider all those external factors of reducing your vacancy, reducing your turn cost, as we talked about cash in cash out, you know, the more money I can keep to myself, rather than, you know, giving out then honestly, the newer, more expensive homes, the way my investment philosophy is transitioning is panning out to even higher returns.

Tom:

You can say something in a minute, Michael, I was just having a coaching session with a member of our sec Academy. And they were talking about having a hard time finding newer homes that cash flow well, right. Because if you're buying a house for $200,000, it's got to have a pretty reasonably high rent, if you're using debt on the property, and you're servicing that debt to still get a healthy cash flow. Two questions in this I mean, for what you're targeting right now in your portfolio? Like what, what is the relationship between the price and the rent, that you're able to find these newer homes? And if you could talk a little about markets that you're looking at? I think that would be interesting to hear.

Chris:

Yeah, I mean, you obviously hear the 1% rule, you know, quite a bit. And I think it's something in the back of my head I certainly look at but you know, as I've seen the transition across my philosophy of my own personal portfolio, you know, I'm starting to dip well below that, that 1%. You know, I even just recently purchased a home, you know, in South Carolina, where the cash flows weren't great. But I was stepping into quite a bit of equity upside, which was was the play, but the way I was able to mitigate and improve some of that lower cash flow or negative cash flow was I made the conscious decision of, you know, I'm going to manage this myself. So now I'm going to save 10% a month, and that's going to inject cash back into the rental. You know, I think there's other things that you can do by running maybe a competitive process around insurance rates, making sure that you are getting the most competitive rate out there. I often talk with a handful of insurance providers on every home, I purchase and make sure and this is not something I do just on the front end. But this is something I do consistently every every year, every couple years, I'll start looking at different insurance providers and see who has the best straight out there.

Michael:

You said something, Chris, that I just want to circle back and touch on is with the high cash flow properties. If you are in a lower rental tier, you might see the higher turnover cost, which means you have a higher vacancy, and then you might have higher repair and maintenance. So it can often be this kind of Domino ladder effect where one expense has a significant impact on all the others. And I think it's so important to highlight that for folks. I can't tell you how many turnkey provider proformas I've seen. They're like, Oh, we just rehab the property, zero maintenance and zero capex needed. And it's like, yeah, maybe for the first year. But if you're going to own this thing for 2,3,4,5,10 years, like we have to be factoring this stuff in so coming to the table with your eyes wide open, when you're buying some of those properties, I think is hyper hyper important.

Chris:

To that point like really is you're stepping into an investment, you need to understand how long am I expecting to hold this am I is this kind of a buy kind of set it and forget it type mentality where I'm going to have it for 15, 20 years, and it's just going to work itself out or what I've been able to do over the last couple years is I have a mentality of I'm always buying a home that I'm typically going to sell in the next one to two years. And I'm going to buy it in a market that is seeing higher appreciations. And they they have historically, that tells me that there might be a little bit of an upswing, and that way, I've been able to grow my portfolio and roll it I sell one I buy three. So one, I buy four. So one, I buy two, and then before you know it, it's a little bit of a domino effect. But kind of going back to Tom's point, you know, markets. Tom, I think you've centralized around a few markets, right. And I think you've got a few properties in Florida and a few properties in Atlanta, if I'm not mistaken.

Whereas I I've got two properties in Atlanta, I've got to spread out in Florida, but I've got a property in Kansas, you know, I just sold a property in Texas. Now I've got a property in South Carolina, I've owned in California, I've owned in Arizona, I own a couple in Detroit, I'm really all over and it kind of just for me. It's you know, where's the opportunity, you know, I'm less focused on building scale within a certain market. I do like Atlanta. I do like Florida. And when I see deals, I'm always happy to jump on them. But I think there's certain opportunities in other markets as well, that for me, at least my investment philosophy is, you know, I want to be less restricted around markets. I'm happy to work with third party property managers, if and where it makes sense. And most of my properties are, are being managed by a third party property manager, but it really just comes down to the opportunity and your investment style.

Tom:

I'm interested in how is the self management process going are you pretty far into that?

Chris:

So truth be told, see, it was about four years ago when I owned my first home. I was self managing it. And you know, for the first six months or so, or maybe as a couple years, it was fine, you know, the tenant was clean, rarely got a phone call from them. Then I joined Roofstock. And six months later, I bought my second property. And similar philosophy, I bought it as a new home, I think it was only two or three years old. And it had a tenant that was two months into a 36 month lease. And I said, Great, well, I'm pretty bulletproof on having to release this home, and there's not going to be a whole lot of repairs and maintenance are going to be needed. The home was just built. And I remember being at work. And I received two phone calls within 30 minutes of each other couldn't answer both because I was working and the HVAC went out on one home and the water heater went out on the was leaking on the other. And I made the decision right then and there that I am no longer self managing multiple properties. And, you know, now fast forward five years, I'm breaking that rule.

But again, like I'm breaking the rule, because, you know, with this property, the tenant has been in the home since 2015. It's 2020, they've got a strong track record, they always pay their rent on time, the home was built in 2007. So as I speak to those major components of the of the property, everything is still relatively new. And you know, the age of its useful life, there's still a lot of a lot of runway left. And so so far, I mean, it's been a month into a month and a half into it, it's going well, the tenant was very flexible.

Michael:

That's awesome. What are you doing all the leasing? I guess you didn't tend to do the lease up on that property.

Chris:

Yeah, what I liked about this lease is that it just automatically rolls to month a month. And so you know, my strategy with this home, which is why I was okay with it is she has a lease through February of 2022. And this was one of those homes that I was planning on selling at the end of that lease and holding for less than 24 months, Columbia, South Carolina has seen I think about five or 6% appreciation compared to the 2% historical average, you know, over the last 20 years. And so there's a bit of an upswing in the market, there's a lot of institutional demand for that area. Right now, I did speak with other realtors and property managers going, you know, when I was doing my own diligence, and they're seeing a lot of my folks moving into the market from out of state. So there's a lot of positive drivers in the market right now that are pointing to that appreciation. So but when you think about you know, releasing the home, that's not something that I plan on doing.

Now, I plan on selling it. I also didn't plan on releasing the home in Jacksonville, I bought four years ago, with a tenant that had a 36 month lease in it, the tenant ended up moving out my goal there was to try and sell it to the tenant, they had just got, you know, engaged or married. And I figured, well, you know, who not better to be a buyer than your tenant, but they ended up moving out. And that's when I did engage with the local property manager to do the turn and, and the releasing efforts. Unfortunately, I don't have time, you know, for that or want to do that from you know, 3000 miles away.

Michael:

Right. Right. Chris, I'm curious to get your thoughts on home warranties.

Chris:

Yes. So I actually had a conversation with an investor, you know, last year around this, who does home warranties on every single one of their investment properties that they own. Up until recently, it was not a strategy that I utilized, you know, but, you know, obviously, when I bought my primary residence in the bay, I did get a home warranty. And within the first, you know, six months, I did have, you know, some work that needed to be done on a couple of the major appliances. And that was a very, extremely easy process. And so, with these last two homes, you know, I did ask for home warranties, and it's something that I'm going to, you know, incorporate into my offers going forward. You know, the way I look at it is if an owner is selling to another owner occupant, it's pretty standard to have a home warranty into that contract. So we're it's not like we're asking for something that is out of the ordinary or is not standard in these agreements. So again, it doesn't hurt to ask and it that extra layer of protection with it can also keep down you know, as we talked about cash in and cash out, and also keep cash in your pocket.

Michael:

Totally my very first property that I ever purchased. I did the exact same thing as for a home warranty provided by the seller, they agreed to it. So the year comes up on my home warranty and my manager called me she says hey, do you want to renew it? I said How much is it? She's like 500 bucks. I'm like, ah, we've never used it. I don't know Like, I don't know, and she goes, it's up to you. And I said, You know what, screw it. Let's just do it. Let's spend the 500 to bite the bullet. The next day, the AC went out and I got a brand new AC and I was like, oh, such a good call. You know!

Chris:

I the exact same thing happened with my primary, which I forgot about until now that I it wasn't even the home warranty. I had a mailer come through the mail from the water company, saying Do you want extra insurance on your external water pipe? You know, the pipe going from the the main line from the house to the sewer? I was like, Okay, well, you know, this is what 100 bucks for the year, I own a 70 year old house, I don't think it's ever been replaced. You know, why not? Let's do it. And six months, you know, a year ago by I think it was about eight months, nine months go by and I completely forgot, I didn't even realize I did it. And then all of a sudden, our pipes start backing up, and we have a company come out and end up you know, having to spend $12,000 to replace that pipe. Well, three months later, and I got the renewal for this insurance that I paid for. And lo and behold, they accepted my reimbursement. So I got all of that covered through paying this, you know, extra $100 a month for $100 a year for insurance, something that you expect never to use, but if you have it…

Michael:

Use it!

Chris:

Exactly.

Michael:

I've never heard of that sewer lateral insurance.

Tom:

Yeah, that's incredible. I mean, one thing that concerns me and hopefully other investors with these warranties, and you know, more obscure insurances that when it comes time to collect, you know, okay, it's a battle like the the mattresses of being able to collect on that and, and hearing these winning, you know, stories from both you guys. I've never been a big Home Warranty guy, but I guess they're inspiring me.

Michael:

The devils in the details, man, like big company has to be reputable, because I've had horrible experiences with other home warranty companies where it's fight tooth and nail to get everything covered, when it's clear as day that it is covered. So do your research on the issuer in the company. But it's funny to talk because you know a little bit about my due fires. It's not it doesn't even have to be obscure, obscure, and obscure insurance have to fight tooth and nail to get it handled.

Tom:

So Chris, yeah, I love talking about your strategy is kind of a short term rental planning to hold it for the one to two year really kind of maximizing the return you can get on that immediate appreciation as well as the cash flow. I mean, did you always land on this kind of shorter term? And as you're doing this diaspora of converting one house into three, those three into another three? Are you concerned about the amount of overhead that it's going to take? And do you have like, Okay, this is what done looks like and getting to a certain number, just because I would imagine a point he gets untenable as you're multiplying this, this portfolio?

Chris:

Yeah, no, it's something we have been thinking about. And, you know, I've been leveraging the the 1031 exchange, you know, pretty well, you know, really, in the last four years, since joining Roofstock, I've gone from one home now to 10 homes, all through, you know, three different 1031 exchanges. Now, the challenges with that, you know, I've been able to really exhaust the conventional, you know, financing, you know, through an individual have 10 loans in my name, what I do need to do pretty quickly here is start having my wife make her first investment, and then doing the same thing, but to your question. And to the point is, the strategy for me was to grow my portfolio, while leveraging the least amount of capital from the onset. I made the investment into my very first home, and then I took that home sold, took the proceeds from that sale, bought four, and then one of those homes that I bought from that for I sold 18 months later. And so whenever I'm doing this 1031 exchange, I'm always looking, okay, where's the next sale, and then which is the next property, I can just put into the portfolio and kind of forget about it.

Now, those other properties that stay in your portfolio that you're not selling every couple years and maximizing the return there, you know, those are also good candidates, depending on where you are in a market cycle to potentially pull out some of that equity, do a refinance, and then use that capital to reinvest in and purchase other homes. So I think that the next strategy here is probably for one of two things to happen. And, you know, I've got some homes that have quite a bit of equity in them and could certainly look at refinancing those interest rates are extremely low right now. Pull out that capital, put it off to the side for a period of three to six months, and then allow my wife to start investing using that capital, and then she can start doing the same strategy, you know, where we start, you continue to roll these homes, where I'd like to get, you know, is that each of us have, you know, 10 in in our names 20 amongst the two of us to really maximize that that conventional loan, you know, 10 or 20 to a husband and wife requirement, but, you know, yeah, I mean, we've got a long term goal.

You know, ultimately we want to be able to retire and have a nest egg that we can pass on, you know, to our children and you know, College is a lot more expensive today then it was when we all went through it, and but we've got a goal of, you know, 50, 60, 70, 100 homes that we want to get to. And, you know, this is, you know, at least in the short term, this was a way that I identified that I could kickstart that and do it pretty rapidly without investing a ton of outside personal capital. You know, today, I've really only invested about $100,000 in been able to grow the portfolio from strictly cash flow, and proceeds from sales. So being able to take a small pool of capital like that, and just continue to let it roll. For me, that's been pretty neat to do.

Michael:

Good for you man, that's awesome for your properties that have a lot of equity. And, Chris, that you're talking about taking some cash out. Are you okay, if a property goes negative cash flow?

Chris:

Rnder the right circumstance? Yes. For instance, this one in South Carolina, I think right now it's modeled and if it performs perfectly, it's modeled out to have, you know, maybe a $200 return on the entire year. So it's very likely that that will be a negative cash flow property, because it's real estate and nothing goes away it's planned to.

Michael:

You mean the models aren't perfect?

Chris:

They call them proforma for a reason, right?

Michael:

Yeah.

Chris:

So yeah, I mean, under the right circumstance, yes. I'm okay with taking a negative cash flow on a property if I know that there's other drivers such as I'm stepping into $40,000 in equity day one. Yeah, sure. I'll take a slight loss on the first year in those situations, I'm fine with it.

Michael:

Sure. And then what about tapping into equity that's in a property, cashflow, positive, saddling that property with debt so that you're by design, making it cash flow negative to that and go do something with that cash? Is that something you'd be open to? Or a strategy believe in?

Michael:

Yeah, and that's where I think you've got to be able to forecast or have insights into what is the future look like with that? You know, with that market? What is the future look like with that property? Is that a property that I'm expecting to hold for 20, 30, 40, 50 years, then? Yeah, I mean, negative cash flow really doesn't mean a whole lot to me then right? You know, because that's a long term investment, not a short term play. So each investment is its own use case. But again, I'm opportunistic. So if I can pull equity out and use that to invest in other properties, and, you know, while this property may be negative cash flow, in aggregate with the property that I'm going to acquire, now, I'm in a positive situation. And now I've got two properties that are now growing equally on the equity side as well.

Tom:

Portfolio total return!

Chris:

Yeah.

Tom:

So I know, we love debt, debt is great. But I think it's kind of like the ocean and that you need to respect it. And at there is some point, you know, some kind of downturn, making sure you're not over your tips. Do you think about what the loan to value is of your portfolio? And just to redefine that real quick? That's the amount of total debt you have, of all your mortgages divided by the total value of all the homes together? Do you think about your portfolio LTV or loan to value? And is there any rules you have in keeping above a certain level?

Chris:

The way I think about it, Tom, it's Yes, I mean, in the back of my mind, I'm always thinking about my LTV. I'm always calculating, you know, what is my loan balance? What is today's BPO? And how much equity Do I have there? But the way that I look at and right, wrong or indifferent, you know, hedging against, you know, a potential, you know, recession is really understanding, okay, where is my rent today? First, where is my mortgage payment? You know, for me, if you look at the history of, you know, the single family rental, you know, industry, and if you look at rents, even going back through the last couple recessions, rents have never really dipped terribly low, rents have stayed pretty flat and consistent. And then as we come out of the recession, they continue to rise. So what I really plan for is that if I'm in a situation where I can drop my rent 20% and still be in a breakeven situation, to me, that's a very positive investment, you know, thinking about the worst case possible scenario from cash flows, and I just don't see a scenario looking at the historical data where, you know, we'll likely have to drop 20%.

You get through the holidays, and sure, you might have to cut rents five or 10%, just because it's a slow time of the season, but you come out of that strong and rents are continuing to grow. Some markets right now are seeing 15% rent growth, whereas other markets are continuing to see kind of single digit, you know, rent growth, what I've been able to do on my homes on renewals is what I look at is what is the market rent today for that home? What is the alternative for that tenant to move out of that home? What are their other options, and then let's factor in moving costs. And so maybe if the market rent on another home is going to be $1400, it's not advantageous for me to mark my home all the way up to $1400. Maybe I give the 10 a little bit of a discount, but I price it in an aggressive way that I factor in, what are their moving expenses, and then factor in what are their moving expenses plus their security deposit plus first month's rent and that's the amount of money that they're going to have to come out of pocket. So I take a very calculated approach there. But with that approach, I've been able to achieve six to 7% across the portfolio pretty consistently, while keeping tenants in place for three, four, or five plus years.

Michael:

That's awesome. That's so good to think about to like, and make it so blatantly obvious for the tenant. Because I think when tenants get that renewal of like, oh, the rents increased, their first thought is like, Oh, well screw the landlord, like I'm moving. And then they go look around, it's like, I can't really go anywhere, for anything better. So why bother? It makes a lot of sense.

Chris:

And if you think about it. And unless you have a huge family, or some great friends, they'll help you move, every time you do, you're likely spending upwards of $1,000. If you don't have a vehicle, and you're trying to do it yourself, you got to go rent the vehicle. If you're trying to hire a moving company, it even gets more expensive. So oftentimes, you know, investors may not be as clear to an investor that those are considerations and factors that should go into the equation. And that's just how I look at it.

Michael:

Yeah, makes sense. So Chris, it's funny, I had a pretty similar approach being opportunistic as far as markets are concerned, in my past life, I was working all over the country as a fire protection engineer was constantly looking at the different markets wherever I found myself for work. And it just got to a point for me where it's too overwhelming mentally and physically trying to keep track of this property manager managing this project. And this business filing due in this state, I utilize LLCs, for a lot of stuff, do you envision getting to a point at which the market just you're too spread too thin? And you're gonna look to consolidate or focus on a couple different markets? Or do you see this growth country wide? Kind of continuing for yourself?

Chris:

Yeah, it's a great question. I don't think I have a definitive answer yet. Yes, I think…

Michael:

You'll know, you'll get there.

Chris:

Exactly. It'll get to a point, you know, someday in the future, that, you know, I'll probably start to consolidate and it'll make more sense. My wife, and I always talk about, you know, her, you know, eventually managing all the properties when we're done having kids and she's done working. And, you know, that's what she does to kind of help support the family. But that's also when we have you know, 50 6070, potentially 100 properties. And you know, if even for her to do something like that, obviously becomes very taxing to have them all over the US, right. And so there will be a consolidation at one point in the future. But you know, where I am in my investment cycle, now, I'm in a growth mode, and I'm in a rapid growth mode and software, I can take advantage of growing my portfolio, increasing my equity that's ultimately going to get me closer to my long term goal.

Michael:

That's why I love real estate. I mean, you, myself and Tom all have vastly different strategies. And it's all right for all of us. Right? There's no right or wrong. There's no right or wrong for the individual. So this is killer man to wrap things up, gents.

Tom:

Yeah. This is great, Chris. Yeah, thank you so much for coming on. I think the first is gonna be a regular segment checking on especially because you, you always have so many irons in the fire. It's awesome to hear it, man.

Chris:

I told myself last year that I wasn't gonna make any moves this year. And then I did. Part of that was due to COVID. Now, I've told myself already, I'm not going to make any moves next year, but we'll see what 2021 has in store.

Tom:

Financing rates are just too great. You gotta you got to take advantage of it.

Chris:

I was just told the other day from a neighbor that he reified. He's got some investment properties here in the Bay Area, but he refinanced all of his investments up here at less than 2% on on a 30 year fix. So now it now it's now it's got me thinking,

Michael:

Who's his lender?

Chris:

It's actually a group that you showed sent to me a while back, I think Loan Depot.

Tom:

Yeah.

Chris:

Is who he's been working through. But yeah, he was quoted, or he's got these locked in at 1.99. Now, I don't know how many points he's paying. I'm sure he's paying a few points there. But he's thinking of it long term. So if I got to pay a couple $1,000 in points now, to lock these in for the next 30 years, then you know that that's something that works for him.

Tom:

The Loan Depot came up in we talked about Roofstock Academy a couple of times proud sponsor of the podcast. within it, we have a Slack channel, which is like a forum and there's this one called vendors or I think it might be lending. And somebody talked about, Hey, have you guys ever looked at loan depot? And I think like five members of all like refinance, but loan depot loans

Michael:

Yeah. Them and Network Capital, A bunch of them utilized them to.

Tom:

Amazing

Chris:

Yeah, we got to get him on here to be a sponsor.

Tom:
Right.

Michael:

That's a great idea, we send them so much business. We should be getting commissions or something.

Tom:

Yeah, wet the beak a little.

Michael:

Awesome. Well, Chris, thank you so much for hanging out with us. Really appreciate it, man. And we will definitely have to do this again soon.

Chris:

Thanks, guys. We'll catch you next time.

Tom:

Thanks, Chris.

Michael:

Alrighty, everybody, that was our episode a big big, big thank you to Chris. Thanks again for coming on the show, man. A lot. A lot of fun. We'll definitely have to have you back on again soon. If you liked this episode, feel free to leave us a rating or review wherever you listen, your podcast that was really helped us out. And as always, if there's anything in particular that you want to hear an episode about, leave us a note in the comment section. Thanks so much for listening. We look forward to see you on the next one. And happy investing.

Tom:

Happy investing.

3 Quick Tips On How To Effortlessly Boost Cash Flow Dec 12, 2020

Join us on this episode of weekend wisdom to learn about 3 easy ways to boost cash flow without having to do much.

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Transcript

Michael:

Everybody, welcome to another episode of The Real Estate Investor. I'm Michael Albaum and today I'm joined by

Tom:

Tom Schneider.

Michael:

And in today's weekend wisdom, we're going to be talking about different ways to increase the rental amount you're able to command on your properties. So let's get into it.

All right, Tom. So what are some of the ways that you've seen heard experienced, done about adding additional rental value to properties? All right,

Tom:

I'm pulling out a sword that has two edges on it. And that double edged sword is allowing pets dogs, I think one of the thing that's special about a single family home is it's you have a yard. So a way to increase the rent that you're collecting is to allow dogs and you know, charge for that have an extra or security deposit have an extra pet rent, a couple of other different ways of monetizing that amenity because a lot of times if you're renting, you're not able to do that. So that's a way that you can add your bottom line but as I said, the double edged sword. If you have new carpets, that may not be a great idea if you have just because anyone who is how to dog dogs do stuff that carpets that are that are bad. I have a dog Bodie that does bad things to carpet. So bad Bodie. Bad Bodie. Sorry, I just threw him under the bus. Sorry. Sorry, buddy.

Michael:

So do you, in your opinion, should pet rent, actually, you can charge a pet rent to up your monthly rental amount. And then you talked about a security deposit, which is really only helpful. I mean, if you're keeping the deposit, so would you make a pet security deposit non refundable?

Tom:

I would try to take it to the rent. So like if the tenant I think is going to be there for a long time. And I you know if they have a pet, and that makes them that much more happier and that much more likely to stay? Oftentimes, you know, carpets have a shelf life anyway. So like, depending on how old it is, I'm going to be replacing it anyways. So might as well capture that extra income with the pet rent rates, you know, give Bodies' friends a place to…

Michael:

A place to do naughty stuff.

Tom:

Yeah. What about yourself? What are your thoughts?

Michael:

And yeah, so I think pet rent is a great way to go. Especially because some in rentals don't allow pets. So it can be oftentimes a no brainer, especially in the single family space. I used to be a big advocate of non refundable pet deposit. And that way, I'm just getting that chunk of change and I'm keeping it for the inevitable damage is going to be caused is that…

Tom:

Hold on a second non refundable deposit, I heard you said that before? It's kind of like an oxymoron like isn't it a deposit like something you might be able to get back?

Michael:

That's a really good point, a non refundable fee for the pet, I guess we would call it.

Tom:

A fee!

Michael:

Yeah, like a pet. Yeah, for cleaning fee an upfront fee, though. And I was chatting with a property manager of mine and she was like I'm not a big fan of those because the tenant is now disincentivized let's say the pet does some damage. I was like, well screw it. I'm not getting my deposit back. Anyhow, what's the difference versus a deposit you're kind of hanging over someone's head, you're incentivizing encouraging them to clean up after their pet and return the place to as it was when they received it. So I definitely backed off from from that mindset quite a bit.

Tom:

Yeah, it's like it's almost when you pay that fee. It's like Alright, good news dog, you get to do whatever you want to do. I like that there is sort of like connection to it.

Michael:

Absolutely. Absolutely. All right. So shifting gears here What are your thoughts on appliance rentals or furnishing rentals?

Tom:

You know, I've purchased properties that came with appliances so like I was pretty agnostic to the way that it was structured and the ongoing lease I guess I could have been more aggressive and more strategic with my property managers oftentimes I’ll not have the appliance be mine and just have the new tenant set up their own I don't mind I mean it's it's I suppose it's extra opportunity to make some income but it's also extra overhead so that's it is my refrigerator in my XYZ I'm gonna be on the hook for going and doing all the ongoing maintenance versus if it's theirs, I mean it's a trade off but I understand the cost of the expenses better they understand them well then and understand the risk I'll do it but I don't so you know what the breakage rate so I mean that's my my opinion is is to simplify things. Have the tenant bring their their appliances.

Michael:

Bring their own stuff.

Tom:

Yeah.

Michael:

Yeah, that makes sense. I'm like you I bought I bought and properties that had appliances or that had even furnished properties. And so then I was able to advertise those as furnished rentals and get a little bit more return. And it wasn't like I paid anything more for them on the purchase. I was like yeah, whatever happens happens. And similar with appliances like if it comes with a washer and dryer, great well now I can advertise that either as comes with washer and dryer, or if I have a use for that elsewhere. I can say you can lease the washer and dryer, you know for additional whatever 15 bucks 10 to 20 bucks a month in rent. So that's that's kind of how I've played that in the past.

Tom:

Unrelated. But interesting. Have you ever looked into executive housing like month long rents?

Michael:

Yeah, I have a lot of markets. It makes a lot of sense. Yeah. I think it's just tough in that it's it's often a really limited pool of, of tenants. Sure. And especially in like today's day and age where no one's there, there's a lot less travel. I think that that market probably got decimated first. Yeah,

Tom:

I've got a friend, Mitch Davidson shout out who is into that game. He was telling me about it. It's such a good strategy.

Michael:

Okay, so the last thing I want to talk about is storage. Have you ever played around with experimented with renting out storage space?

Tom:

Little to none? When I say little, I mean, none. Little is an overstatement.

Michael:

A little is exaggerating.

Tom:

No I just use I mean, my my bread and butter is single family rentals. So I assume that works a lot better in commercial and larger multifamily. So I'll let you lead the way.

Michael:

Yeah, so just in in, even in smaller multifamily. I have a five unit in which it has two garages, and we rent those out for 40 bucks a month, each and it like it's just the easiest money I'm able to make. And so if there's extra storage space, even on a property, like a storage shed or something, you know, think about renting that out to folks or asking folks if they want storage space and what they pay for it, because you can make a pretty minor investment, a pretty nominal investment into some storage sheds that have locks on them and then rent that out to folks.

Tom:

Killer. I actually lied, I do have a little experience in in storage, at least parking out of college living in San Francisco at this unit that had two garages, I don't for whatever reason, at least did. And we were like checking on Craigslist, and it's like, Holy smokes, these garages rent for like 350 bucks. So we didn't tell our landlord we subletted one of the garages out and just had this income stream I just did it on my own just put it on Craigslist, found a guy he you know, whatever PayPal money send money over and so that is my little experience and it was fantastic review should rent garage space, if you can highly recommend it.

Michael:

That's perfect. That's perfect. Yeah, and same thing goes you know, for single family if you have a covered garage or something and you can incentivize folks within a in a colder climate, that can be a great way to and especially if your tenants don't have a car, you know, whatever, you could utilize things that are existing in on the property to rent out to somebody else depending on how this setup works and all that kind of good stuff. But I think always have your eyes peeled for for extra ways to add income to the property and juicy returns.

Tom:

Creative and gritty. If you haven't seen the mascot for the Philadelphia Flyers Mr. Gritty check it out. Bodie giving a shout out for Mr. gritty.

Michael:

Mr. Gritty. I'll definitely check that out.

Tom:

Yeah, that's that's the mindset you need.

Michael:

Whenever I hear Philadelphia mascot, I think it was Green Man from It's Always Sunny in Philadelphia. So good. So good.

Pierre:

Okay, completely ridiculous and funny side note, and probably a non sequitur but you have, pet rent, right?

Michael:

Yeah.

Pierre:

‘Cause pets do unsavory things to carpets. What about child deposits? I've seen I have seen children do some pretty reckless things to homes.

Michael:

Yeah, that's a really great point.

Tom:

It depends on what country you're operating and there might be countries as well but I think in the United States they have rules against you know, limiting people so

Michael:

People yeah, and all that stuff.

Pierre:

Yeah, completely joking.

Tom:

No, it's it's it's true.

Pierre:

You see kids spreading paint everywhere and you know, peanut butter and all the stuff.

Michael:

It's ridiculous. Awesome. Alright Tom ready to get out of here?

Tom:

Let's do it.

Michael

Well, thanks so much for listening everybody. That was our episode. Hope you enjoyed that we can wisdom. Please feel free to give us a rating and review wherever it is. You listen, your podcasts are super helpful for us. And as always, if you have a specific topic that you want to hear on an episode, leave us a comment and we'll get to it.

Tom:

We read this stuff! Happy investing.

Michael:

Yeah, we read that stuff!

7 Books You Need to Get Heading Into 2021 Dec 07, 2020

With the holidays upon us, we share our recommendations for 7 books that will make excellent holiday gifts.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On this episode, we're coming into holiday season and with holiday season, it's gift giving. So we're going to talk about on this episode, our favorite books that we have read to help us with our investing career. And we're gonna talk about why we like them some highlights over them. And this could be something you give to yourself or give to a friend. All right, let's do it. How is everybody doing today?

Michael:

Stuffed still from Turkey and pie.

Tom:

Nice. Lowkey he goes, just go to family stuff.

Michael:

Yeah, we just stay put. My wife and I we had a friend in town. We adopted a friend as part of our family. So had something at the house hung out. It was great,

Tom:

Nice, Emil?

Emil:

We had some family over in the backyard. It was windy and cold that night in Los Angeles, which is rare. So everyone was in cold turkey and mashed potatoes by the time we brought it to their table. But you know, it was good times.

Tom:

Yeah, Pierre?

Pierre:

So I just went down to visit family had Thanksgiving with my mom and my sister. And then you know, got out and hiked at Big Sur and had a grand old time.

Michael:

Nooiice.

Tom:

Nice, it was beautiful out.

Pierre:

It was gorgeous. Yeah, it was beautiful.

Michael:

Tom, would you get up to man?

Tom:

Oh, lowkey. Little mother in law, Thanksgiving dinner, very lucky. Usually with the holidays. I'm like, my parents are local. And my wife's parents were like bouncing from house to house. But to limit the exposure, we just did one house and it's kind of mellow, kind of mellow like that. But let's go ahead and jump right into it. So on today's episode, as we mentioned, it's going to be the books episode. So this could be used as a gift for yourself, for somebody who you think might get value out of it. But let's go and start with Michael. Michael, what is the book that you're bringing to the table to talk about first?

Michael:

The book that I'm gonna bring to the table talking about first is a classic. It's been talked about for years and years. And I think so many real estate investors have gotten so much value out of it. And that's Robert Kiyosaki Rich Dad, Poor Dad.

Tom:

Hmm.

Michael:

And so he's a pretty prevalent author. He's written numerous books, but this is the one that I kind of set me off on my path to real estate investing. And it's funny, I always say that it it kind of summarized what I had always known and kind of thought was true, but put it really nicely into a packaged sentence in Word format, because I'd always have these jumbled ideas in my head. And then I read this book, and I was like, Oh, yeah, like, that's what I've been trying to say, for all this time. And it's a super easy read. It's not complicated. It's more of a mindset book and a mindset shift book. And it's super straightforward, very easy read very simple, simple concepts.

But at its highest in its highest level, most basic level, it basically says buy assets don't buy liabilities, that's what it boils down to. And so if you can do that more times than not, you'll end up net positive, and that should be good. And so it doesn't talk about how to invest in real estate, it doesn't talk about the mechanics of what that looks like. It just talks at a high level, hey, these are some things that you should be thinking about, and different ways to be thinking about some of the things you probably already know. And so he tells the story from a child's perspective, and it was just super great read.

Tom:

I bet you so many people have had their real estate awakening, like to that book, like, wait a minute, like, I want assets. I think that's been such a common I don't know in disgust talking to other people that Rich Dad, Poor Dad is just such an eye opener, because I mean, it's really easy to have the fallacy of thinking of things that are really liabilities and thinking of them as assets. You know, I don't know, cars and stuff that just that's No, no, it's not I remember I read that I was listened to as an audiobook just at a college and they were talking about real estate was one really big piece of it and systems with the other. And so I'm like, Okay, I'm gonna build my career around systems and real estate and just like, you know, ran with it.

Michael:

And here you are, here I am. Yeah, it's like everybody's first. You know, they all talk about the shared experience. And yeah, like you said, so many people get started. I feel inferior. Have you guys read that book?

Pierre

I have. Yeah.

Emil:

What's funny is like every real estate investors Bible, I hadn't read it till like four months ago, because everyone's like, oh, rich, Dad, Poor dad's best. And it was good. I was happy I read it. I think if you've already gotten into real estate investing, it's like you said it kind of already distills why you got into it in the first place. Hundreds of people have regurgitated what has been said in it. So by the time you get if you haven't read in, you're already investing in real estate and you follow the real estate investors read blogs or whatever. You've already gotten most of those lessons. It's just getting it from the original source he's like the OG on a lot of this stuff that most real estate investors talk about. So glad I read it. Great book. More people should read it definitely changed a couple of things for me so glad I read it.

Tom:

Good point. Probably more of a beginner more entry.

Michael:

Yes.

Tom:

Maybe you have a friend who or partner or whatever sibling Why are you buying real estate on the other side of the country? Why are you both you know, like,

Michael:

Yes,

Tom:

Yeah if you already like the Kool Aid taste, you don't need to drink more kool aid for this stuff.

Michael:

That's right.

Emil

Yeah, There's more stuff in it than just real estate investing though I think like if you're in real estate investing, and let's say you have a full time job, he talks about business and the idea of paying yourself first and all these other concepts, which those were a little bit newer for me, like I've always heard pay yourself first, but he kind of actually frames it a different way than I had originally thought pay yourself first. I won't spoil it. But I think even if you're in real estate, there's like business lessons in there. There's other lessons that a lot of people can get stuff out of.

Michael:

Dig it.

Tom:

Emil, you're up next.

Emil:

Alright, so first book and keeping it real estate investing related. I got one rental at a time, which is by our good friend who has come on the show a couple times. Michael Zuber, it is also not a how to book but is the story of his journey. And I like that he's a working professional, which I think a lot of people listening to this show can relate. We're not very few of us, if any, you know, our full time real estate investors right now. We have a full time job. So balancing being a real estate investor and full time job and all those things. I think it was a really unique story.

I don't think you read a lot about those. You know, you hear more about someone who quit their job went into real estate full time flipping this and that, but he is a buy and hold investor hear about his 15 year journey through real estate and how he achieved financial freedom. I love it. Great book. I recommend it to a lot of people. And Michael's a really smart guy. So definitely recommend if you haven't read it, read it. If you have send it to a friend. It's one of my favorites.

Michael:

It was interesting, because we had him on the podcast, before I had had a chance to read his book, or you guys had had him on he was on and you guys interviewed him a while back. And then I picked up his book. And then we had him on the podcast. And I was like, Oh, I liked the book so much better after having heard him speak and just realizing that like, Yeah, he's just a guy. He's just a dude, like super cool guy super down to earth person. He's not this high and mighty, you know, you have to do this. You have like God, like, this is my story. It worked for me, maybe I can help you too. That's great.

So I think you hit the nail on the head of nail, it's very much mindset shift. And he kind of breaks it down into a little bit more granular of like, this is what I did kind of like on a step by step basis. And it's not so overwhelming. He really did eat the elephant one bite at a time. I think when we see or hear about real estate success stories always see is that person at the mountaintop, but we don't see all the blood, sweat and tears that they left on the way up getting there. And so he kind of talked about that a little bit, which I thought was really humanizing.

Emil:

Yeah, it's rare to read the full story. You know, a lot of times, it's like, you just see the guy or gal who has 200 doors. And it's like, How the heck did you get there? And this book, like really distills it all down, which is it's fun to read.

Tom:

Yeah. What I liked about his book, and him is he's like an open book. So like, I think real estate can oftentimes be guilty of putting terms and acronyms and making it sound more fancy. And like pretentious than it really is. I think, Michaels Zuber does a really good job in his book and just talking to him of being really practical and giving specific actionable stuff and saying, no, it's very doable. This is what I did XYZ, and not throwing a bunch of jargon and leaving parts out and talking about it. So as an open book, I think is the best way to describe him, as well as the book and talking through his experience in a very non hoity-toity or non…

Michael:

Just uses layman's terms.

Emil:

It's not intimidating.

Tom:

Yeah, exactly. Yeah. And he's just stripped that away. So great book Emil, front of the pod.

Michael:

The other thing that I like about that, before we move on is that a lot of people talk about how difficult it is to invest in California, or how hard it is to make the numbers work in California, but he did it. And so people could say like, Oh, yeah, he had a California salary. But you can take the same thing and scale it to any other part of the country. Right? If you're not investing in California, you don't need a California salary. So if you can go live in the Midwest and earn a Midwest salary, you can go invest in the Midwest and things scale, oftentimes geographically. So I think I don't know if that makes sense, or if that's material to us, but whatever.

Tom:

I dig it. All right Pierre.

Pierre

Sure. Yeah, I'll deviate from the whole real estate theme. And I'm going to recommend an old book here. I think this one's from 1946. And it's called Economics In One Lesson by Henry Hazlitt, not overly sophisticated not using jargon, it's very accessible. He systematically destroys 20 economic fallacies with cool calm logic and historical evidence to back it up. And the whole point of the book is to show how to feel good or do good economic policies that are meant for a specific interest group can often have adverse outcomes for the general public, hurting everybody. So it pushes back against these currents of economic thought, and showing how the inconsistency in the principles that they're derived from can cause some pretty destructive effects in practice.

So like each chapter, he just takes on one fallacy at a time and destroys it with simple language. And it's super easy to understand. And so really great entry point into reading economics. And it's fascinating to see how some of these fallacies that he was talking about back in the 1940s are still so prevalent today. And that are kind of the rallying cry of so many of the political movements today from both sides. So it's fascinating to see how on the nose this guy was back then and how relevant his arguments still Is today.

Michael:

What was one of the best fallacies see debunked.

Pierre:

So he starts with like the most simple ones, the broken windows fallacy, and its cousin the blessing of destruction, how different economic prosperity has come from war, and then the curse of machinery. How a lot of people are mistaken about how these labor saving devices are putting workers out of work and hurting society as a whole. He talks about like, who the tariffs actually help, and this drive for exports, and is it really beneficial. I won't dive into each of these arguments. So you can go and read it. It's a short book, it's only about 200 pages, or a little less than 200 pages, but parody prices, saving specific industries, how prices actually work, what government price fixing, does what rent control actually does, what minimum wage laws do the function of profits and inflation and stuff like that

Tom:

Two things I like, but I haven't read it. I'm adding it to my queue. But something that was written a long time ago, and still getting super high reviews, I just looked at the Goodreads. It's like the rotten tomatoes score of moving on, you guys have seen that for and it's like four plus, which I automatically like, and then also something about brevity being kind of short and concise.

Pierre:

Yeah. And the version that I have the forward is by Steve Forbes, and it's recommended by Nobel laureates like Frederick Hayek and his teacher listed on Nice's the pillars of Austrian economics and the Austrian economic business cycle, the main takeaway that I have from it is just thinking about how something that might look good for a specific group right now in the short run will almost always hurt the general interest in the long run. And once we implement these policies, it's super hard to undo them. So we get stuck with these policies that are delivering the exact opposite of what its stated purpose was.

So it's really good to be able to look in and say like, oh, there's a second, third, fourth order effect of this thing. And we should be very careful before quickly adopting something that sounds pretty nice and romantic. And if you want it for free, the Mises Institute gives it away for free. If you go to mises.org economics in one lesson, type that into your search bar, they'll mail you a free copy of the book, because it's that important.

Michael:

Nice.

Tom:

Nice, nice. Check it out. Awesome. The next one, I'm going to do just a comment on some of these books. So about a year ago, and a little over a year ago, and preparing for Roofstock Academy and building this product out I just went on a binge and I read like I went onto Goodreads and like read every top one, just put it in my audible account and pounded through one. And this one particularly I liked a ton it is the millionaire real estate investor by Gary Kelly. It was written back in 2005. And I would say this is kind of a beginner to like middle experience. I think even if you are do have a bunch of properties, I think it's a really good way to think about it.

It appeals to a lot of different like systems thinking so just kind of I had to use four different kind of descriptors of why I like this book. One of them is it speaks to hard and soft skills. So in the beginning, it talks about mindset and goals, which is so important. If you're doing this kind of longer journey of building wealth through real estate, it's important to have the right thought in the way that you're thinking about it. Otherwise, it's over time it's hard to sustain. The other is into the more technical skills into acquisitions and ownership and, and thinking kind of system mindedly. I think it does a great job of blending those two aspects which are both really important in real estate.

The other is it is like realistic and the way that it's set it up. As I said, building wealth through real estate, I can sometimes take time and it is not the hotel ballroom, we're going to make you rich and just follow these five steps. It's very pragmatic about this is not a get rich quick and lastly related to that is it includes at the end of it a ton of use cases of people who have had success and what their journey is so kind of similar to Michael Zubers book, talking about his detailed journey. This includes a bunch of use cases of people so excellent book millionaire real estate investor by Gary Keller. Yeah, have you guys read the millionaire real estate investor?

Michael:

I have but it's been a while. I don't have much colored

Emil:

I just picked it up. See that? I'm pointing to it here.

Tom:

Yeah, I can see the top book right there.

Pierre

I do recognize it there, yeah.

Emil:

I just picked it up a feeling it's been recommended enough. I'm like, Alright, I'll skim through it. Let's go.

Pierre

Let's go!

Tom:

Let's go. Highly recommended.

Emil:

Do you guys skim through books now? Like there's certain books where I'm like, I've gotten good at just skimming through books instead of just reading them cover to cover. Curious if you guys do that?

Pierre

It depends on the kind of book.

Emil:

Yeah, true. Business, real estate investing those kinds of books.

Tom:

Yeah,I do the audio version of skimming, which is speeding the speaker up to like 3x. And just like have a little bit of blood dripping out of my ears.

Michael:

Okay, for the first time this is what you are going to do.

Emil:

I listen to every podcast on 1.5 x. And if you go back down to one after listening to like a podcast for 20 minutes, it sounds like everyone's drunk or something. It's so funny.

Michael:

It's like if you've been speeding on the freeway driving 90 then you go back to 65 like man, this is a snail's pace.

Tom:

Yeah. All right, I got one more round of book reviews. or book recommendations this time may or may not be related to real estate. So, Mr. Michael Albaum lead us off.

Michael:

Yeah. So we started a book club at the Roofstock Academy that's been going on several months now. It's been a lot of fun. So we recently read How to Win Friends and Influence People by Dale Carnegie, which is a book that I read years ago. It's a classic book. I think it was written in the 20s 1920s. Pierre, correct me if I'm wrong.

Pierre:

Yeah. Originally published in 1936. Michael

Michael:

36 awesome thanks. Yeah.

Tom:

Gotta love books with staying power.

Pierre:

That's right.

Michael:

But uh, it's a book. And, Tom, I love that. You mentioned Gary Keller's book about soft skills and hard skills. This is a book all about soft skills. And it talks all about people skills. And that's something that's so rarely taught, and the hard skills you can learn anybody can really teach that to someone. But it's the soft skills that I think are a lot tougher to master. And so it talks about ways to be likable. And I mean, I think the title kind of sums it all up How to Win Friends and Influence People really nicely. And it's a book that you can reread over and over and over again, I intend to read it once a year, at least, as some good refresher and good tips and tricks. Just in your everyday life doesn't have to be specific to real estate investing doesn't have to be specific to business, but just in living your life as a human being. I think it offers some really great tips and nuanced ways to live a happier life and just, you know, be a more like person.

Tom:

Classic one plus one, I have kind of a funny story. I've got a funny story related to this book. So I got this book in college, and I was reading it and I play football in college. And I had left the book in the training room just on accident, like icing or doing something after and I left in the training room. And this guy who was kind of like a big scary defensive lineman had took it after I'd left and was like, he took it and he was like reading He's like, Oh, this is really this is great stuff from I'm like, Yeah, good. Take it. It's all yours, man. He was a super nice guy, Matt Moil, I hope your hope you're doing well out there. I haven't talked to you in a while. But anyways, I was an early evangelist and sharing this book with some big defensive linemen. But yeah, for all the stuff that Michael said just a classic I mean, kind of similar in a way that Rich Dad Poor Dad and kind of turn people on to that this book on to personal development and sharpening the saw and all that really important stuff that pays huge dividends. So great book,

Michael:

I think one of the best parts of it is that it's actionable like day one. It's easy to read, and you can just go practice the things that it's talking about, like, Oh, this works for me or Oh, this doesn't. It doesn't require you to spend money or invest in real estate or anything like that, to realize the fruits it has to offer.

Tom:

Alright, Emil. Got another book?

Emil:

All right, my next one, just given its end of the year, I think a lot of us are thinking 2021 goals. I don't know why Michaels laughing in the background, but I'm gonna keep it going anyway, you know, as we're thinking 2021 goals. I'm a huge believer that a lot of your goals and the things you want to achieve are just habits you need to create. I don't think they're just these like, giant monumental things that need to happen. A lot of the big stuff you see are the changes you see people make are just tiny habits they've formed in their lives just compounded over a long period of time. I think you could even say that about real estate investing a lot of different things. So the book I'm recommending is called Atomic Habits by James Clear, really practical guide on how to build good habits and break bad ones. It also has some cool tips, you know, we all have our vices, right? And he just gives you some like really practical tips on how do you make a vise feel less like a vise like, how do you do something good before you kind of indulgent advice, and I just think it has a lot of good practical tips, especially heading into the new year where people are planning their goals. So I'm probably gonna reread it heading into this month, myself.

Michael:

And Neil, what's a vice for you Just out of curiosity?

Emil:

Man, I don't really have any right now.

Michael:

But because you read the book,

Emil:

No, I can't believe I'm gonna admit this on the show. I haven't played video games in like a decade, and my brother in law got an Oculus, and I tried it out. Oh, man, it's unreal. so freaking fun. And so I couldn't help myself and I bought an Oculus. And that is going to be my vise. And so it's like, you know, what's, what's something productive you can do for 10-15 minutes before you spend some time playing Oculus. So it's got some some tips like that.

Michael:

I've played on Oculus and I found myself I was sweating after I got done. So it's kind of like a workout too.

Emil:

It can be there's games where you're like, doing a lot of movement and all that, which is what my wife was stoked about. So she's she's in on it too. That's gonna be my vice. That's my main one.

Michael:

Right on.

Emil:

I also eat a lot of sweets on the weekends. That's another vise

Michael:

Just on weekends.

Emil:

Yeah, I have a big sweet tooth and I just kind of limited to the weekend.

Michael:

You're a stronger man than I.

Emil:

Oreo fiend.

Tom:

Pierre, got one more for us?

Pierre:

Sure, you guys, read Sapiens by Yuval Noah Harari?

Michael:

Oh, it's so good.

Pierre:

It's super fun book I know is on the bestseller list. But if you haven't read that that's a fun interdisciplinary historical account of human history. tracking all the different domains of human society and development and all the way up into these complex societies that we live in today. So I think that's a really fun book. I think I've read it three times. So…

Michael:

That's a long one, too. Yeah,

Pierre:

Yeah. But it reads itself. I mean, that is both reads itself. And he has two more and following that…

Emil:

Homo Deus

Pierre

Homo Deus, and then 21 Lessons for the 21st Century. But I think Sapiens is definitely his best. The other one's are kind of more speculative and preachy.

Tom:

He's a big, month long, Silent Retreat, like meditation guy, he doesn't like yeah, four months, a year, every year, I think it is like two month ones at a time. He's getting those those ideas around sapiens, you know, thinking about it.

Pierre:

I love books of human history. I like like, oh, the last 13 years in human history. These are the theme of books that I read a lot like Guns, Germs and Steel and things like this that I find really fascinating. But what I really love about Harare is that he pulls from so many different you know, economics, religion, nutrition, culture, and warfare and politics and like you have this really thorough interdisciplinary scoop of history. So I think that's a really fun way to look at things, how they're all interconnected, and how they all feed into the world that we live in today.

Michael:

It was pretty eye opening when they were talking when he was talking about that, you know, domesticating animals Yeah. And how you know, the dogs came from wolves. And the reason that dogs are man's best friend is because all the ones that weren't man best friend, they just kill them. So they just got like, the best jeans like yeah, this was so good. Like, see ya. Eye opening.

Pierre

A pretty dumb side note, but I saw this meme. It's like a wolf looking at the fire and it says like, some food scraps next to the fire. What's the worst that can happen? It's like 10,000 years later, another picture. It's like a pug and a pink hat all dressed stupidly.

Michael:

So good.

Tom:

So good. I’ll closes out here. So I'll actually make it to just because I like that that Sapiens call, Eric Larson is an author who does like history like tracks some event like some major event, and then some like little subplots within that event. The most recent one that I read is called the splendid and the vile, and it's about Churchill's during the air raid the what's it called the German air raid during World War Two. Anyways, awesome, awesome book. He also does the Devil in the White City, which is really good as well.

But my real pick for this the last one is another kind of soft skills mindset. One, it's called the Four Agreements by Don Miguel Ruiz, and I'm going to summarize it real quick is it's a short book it is there's four kind of key things from it as ways to live your life one is, be impeccable with your word. Don't take don't take things personally. Don't make assumptions and always do your best I think, in all aspects of your life. If you could go by those four key you know, drivers, you're gonna be, you're gonna be in good shape

Pierre

I should have know you were a mystic, Tom.

Tom:

I am! I'm a Sufi mystic.

Pierre:

Yeah, no, that's a good book. He has another one called the Mastery of Love, which is also kind of a great little life lessons. Great little interpersonal life lessons.

Tom:

Yes. Cool, guys, any final thoughts on books, the episode, all that good stuff.

Michael:

I just think books can be such a great gift for people for I personally was never a big reader growing up, I would always have more fun goofing off. And then I started reading more about something I was passionate about real estate specifically, and, you know, kind of self growth, self improvement. I was like, oh, there's this whole world in books that didn't even know existed. So if you're not a big reader, to all the non big readers out there, you know, find something that you're passionate about, and try opening up a book. I think you might be pleasantly surprised.

Pierre:

And if that's hard for you hit the audiobook.

Michael:

Yeah, exactly.

Tom:

I joke that I can't read it, but I can listen really well.

Emil:

Something tells me our audience are readers.

Michael:

Voracious readers.

Emil:

If you're taking time out of your day to listen to podcasts like this. I think you you like learning and knowledge and I feel like we got a lot of readers.

Tom:

Blinkist is another interesting website. They take nonfiction primarily and they condense it down into like, 1 10-minute spiel worth of reading. So they have I think they have like PhD students like PhD people do these. They were they break down. They have tons and tons of titles and you pay an annual subscription. We're not getting any, any any profit from Blinkest or from any of these recommendations. But yes, it's worth checking out Blinkest. It's like Cliff Notes, but like for adults for nonfiction stuff, so Blinkest.

Michael:

Do they have that audio version as well?

Emil:

It's primarily ausio.

Tom:

But they do have a PDF versions as well.

Michael:

Sweet.

Pierre:

Oh, and also everyone out there. Hit us with your favorite books in the comments down below.

Tom:

Yes.

Pierre:

Let us hear what you guys are reading out there.

Tom:

Yes. Awesome, guys. Well, on that note, I think it's a good time to close it out. All right, Happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

Are the Holidays A Good Time to Buy A Property? Dec 05, 2020

With the holidays upon us, is it a good time to buy properties? In this short episode, we talk about a few benefits, risks and considerations about buying right now.

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Transcript

Michael:

Hey everybody welcome to another episode of The Real Estate Investor. My name is Michael Albaum and today I'm joined by my co hosts

Emil:

Emil Shour

Tom:

Tom Schneider

Pierre:

Pierre Carrillo

Michael:

And today we're gonna be tackling whether or not the holidays can present a good or bad time to buy real estate. So let's jump into it.

Michael:

So guys, we just passed Thanksgiving today reporting this the first of December about to approach the full fledge holiday season. is now a good time to buy. yea or nay everything in between. Emil, what are your thoughts?

Emil:

Hell, yeah. Right. now's a good time to buy. People or your competition, ie other buyers, sleeping, getting ready for the holidays. I think just overall you have less competition during this time of year. I think it's been proven through stats most you know you get the best deals December January timeframe typically. So I think if you're in a position to buy right now is a great time I am active. I mean, I think you should always be active but I think December January can be a great time to snag property.

Michael:

Right on. Tom?

Tom:

Tryptophane. Is that what's in turkey? and red wine?

Michael:

Yeah!

Tom:

Sluggish. Yeah, tastes like opportunity. But what I do is I get tryptophane free turkey and then I just hit the market. Getting the jump on everybody else. Yeah, get the jump on everyone. I would say it's, it is as good a day as any day to do buying. So you know, stick to your process, building your buy box analyzing properties. And I would try not to have too big of gotta buy now glasses or don't gotta buy now glasses. Just let the market speak. Let your work, speak and finding property. So I guess not a very specific answer. But it would be my honest answer is continue to your work and analyzing properties.

Michael:

Always let your spirit guide?

Tom:

Yeah, let you're conscious… you can do it.

Pierre:

For a little bit of balance here, what would be some of the risks about going into the market now finding a tenant in January? Is that something that we should be considering?

Michael:

Yeah, absolutely. I think finding a tenant is definitely tougher in the winter, in the vast majority of markets. And I would say talk to a property manager about what the stuffs look like, at this point in this time of the year, because they're going to have a better idea than anybody else. Because let's be real, there are leases that are expiring around this time of the year. There's only 12 months in a year. So there's always new lease expiring. So whether or not people are looking to move is a whole nother issue. But the opportunity, I think is absolutely there. But it's definitely market specific.

Tom:

Great point, Pierre. Two things that I would make on that point, is related to a lease, if you do end up buying and then getting a lease, I would recommend trying to make it like an 18 month lease so that the end of the lease is hitting an a more desirable time period of when people are moving in and out not to have a 12 month lease. So it just hits directly back into the winter, which is not ideal. The other aspect of buying in the winter is that you're buying in an area that deals with a lot of snow, perhaps you're buying in Pittsburgh, it transactions can be slow, just because doing inspections can sometimes not be practical, because the inspector can't get to the roof to inspect stuff. So there is some additional challenges that is presented during the winter. But don't let that get in your way of avoiding tryptophane and doing the hard work. So great point here.

Pierre:

And also more specific to this time in history, or you know, this specific moment that we are going through a new president coming in, a little bit of economic uncertainty, what are some considerations that we should be taking in mind moving into an acquisition now?

Michael:

I think to only kind of double down on Tom's point with the slowness of acquisitions, this time of year, people are taking vacation, people are doing all kinds of stuff. So just the whole process can be slow as molasses, in addition to the fact that we have all this economic uncertainty and interest rates are so low, so many people are doing the finances, but it just seems like the whole system is kind of log jammed with stuff, whether that's transactions, whether it's wi fi's or purchases. So just be aware that it might take longer, and especially with COVID, like Tom was saying with inspections and with appraisals, just stuff is taking longer. So I would just plan for that and kind of have that in the back of your mind. And think about maybe writing that into your purchase and sale agreement, giving yourself some extension timelines and extension windows, if needed. Because the process is just taking longer than expected.

Tom:

I think on the aspect of financial uncertainty, I would just make sure that you're not overextending yourself so that you have the proper reserves, the property is vacant for a little bit you have reserves to handle a month or two that if you're using financing, that that financing cost is not going to be too big of a burden on yourself. So I think just practicing good discipline around what your available buying power is. and kind of just generally speaking like I have, yeah, there's a little bit of there's some economic uncertainty, but I think that for the most part, the government does a good job of steering the ship where it needs to be steered if there are issues for better or worse here. You know, we are in to like some major economic issue that comes up and it could be a reasonably safe assumption that there's going to be some additional stimulus support.

Tom:

That was episode everybody. Thanks so much for listening. If you'd like this episode, feel free to give us a rating review and subscribe where it is a new podcast. We look forward to seeing on the next one and happy investing

Timeless Time Management Tips for Busy Professionals Getting Into Real Estate Nov 30, 2020

Investing in real estate remotely can be intimidating when you are juggling a full time job, family and the host of responsibilities life throws at you. In this episode we give you 4 tips to make sure you get everything done and stay on track.

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Transcript

Michael:

Hey everybody, and welcome to another episode of The Remote Real Estate Investor. My name is Michael Albaum and today I'm joined by my co hosts,

Tom:

Tom Schneider,

Emil:

and Emil Shour

Pierre:

and Pierre Carrillo

Michael:

And today we're going to be talking about time management, something that's really important for most people, but especially important for those of us that are investing at a distance remotely, we're gonna be talking about some really practical things you can implement into your daily routine as an investor to help you manage some time. So let's get into it. Alright, guys, so we all know that time…

Emil:

Hold on, hold on, hold on, we got a special guest on this episode, I feel like he deserves a very, very warm welcome and introduction to our listeners.

Michael:

Pierre?

Pierre:

Hey, what's up?

Michael:

Can you give our listeners a little bit of background on who you are you pepper in some really great commentary in some of the episodes. But now you're going to be a full fledged host on this episode. Who are you?

Pierre:

Yeah, I've been lurking in the corners since the beginning here, typing in when something's relevant. But yeah, I'm the producer on the show. And just starting out in the real estate game with my brother currently. So I don't speak much because I don't have much experience in this space. But I'm just learning from you guys. And excited to get in on this stuff.

Michael:

Right on, we're stoked to have you.

Tom:

Fantastic, and a great episode to jump in on time management being juggling, like 10 different jobs with the podcast and Academy and getting your real estate investing stuff going like, yeah, excited to have your input on this episode.

Pierre:

Well, thanks. I need some of it too, because I have a weekly meeting with my brother. And we're always like, how do we use our time to really move this project forward? Because it's easy to just get stuck? Oh, let's analyze properties. Let's dive into this. But I think this is really going to be helpful. I'm going to definitely link my brother to this episode afterwards.

Tom:

That's like the theme of the hosts is what is it self serving.

Pierre:

Self serving?

Tom:

Selfish like, bring on guests we want to learn from…

Pierre:

Get your free consultation.

Tom:

Exactly.

Michael:

Love it. Awesome. So as we all know, life is very time consuming. And especially for those of us that have a nine to five or that are working day jobs, and then piling on kids and family responsibilities, and then adding on this layer of real estate investing. And for those who who are just learning that can feel like it's really time consuming. So we're going to walk through some strategies today that a lot of us have used personally, and so we can add some commentary into how it's been going. what's worked well, what hasn't worked well. But so we're gonna break this down in a couple different chunks. So, Emil, do you want to kick us off with the first strategy that folks can use to help manage some of their time?

Emil:

Yeah, I'd love to. So I've actually tried a lot of the other things that we've outlined in our doc here that we're going to go over. But the thing that has really stood the test of time for me has been planning out my days in advance. And the biggest actual, like action item from that is putting things in my calendar. So I find that whatever I need to get done that day, if it makes its way onto my calendar, I have a much, much higher likelihood of getting it done, than if it's just kind of floating around on a to do list or floating around in my brain. So it's like some psychological thing where I've put on the calendar, I have this accountability to myself, it's sitting right in front of me that notification comes up.

So for me that's like, what I found to be one of the most helpful things and actually blocking things, setting aside a specific time to get them done. And getting them done. I think you can do there's a lot of stuff, I don't think it's just work, I think it can be, you know, in the context of real estate investing, if it's 30 minutes in your morning, right at 7:30am. Before you start work, whatever it is, to review properties or to read a real estate book, or a course you're in or whatever it is, whatever that action item for you is to keep progressing in your real estate investing, just blocking out that small chunk of time every day, I think is one of the best things I've found in terms of time management.

Michael:

So Emil, I've got a question for you because it's something that I know you and I have talked about in the past and I've been trying to get better at how far in advance do you set the time block? Or do you schedule your day? Is it a day before? Is it day of the week out?

Emil:

I used to be really good about like day before and I've slipped a little bit i think you know, as this is a bad excuse, but as more responsibility piles on I think it's like easier for those. It's just a habit I don't have anymore so I usually wake up I have my to do list. I'm like, What are the things I need to get done today? And then I'm usually just blocking them off throughout the day. But there's certain things and we're going to talk about it later than I've actually just become habits right like the first 30 minutes This is what I'm doing in the day. I don't even need a time block it. It's like those things that are happening every day become a habit versus a time block for me.

Tom:

Oh, do you set like recurring schedule? Or do you know when you're setting those time blocks any advice in the way that you're setting up?

Emil:

Yeah, so it's usually okay let's say I'm tackling things from my day, right? I need to whatever have some marketing campaign I need to get out the door that day. It's usually just like I'm blocking off Whatever chunk of time and I actually, I don't like to give myself gonna realistically take an hour, I'll just block off, usually try to block off 30 minutes, I've noticed that the longer the timeframe that that thing is blocked, you kind of just expand the time that it takes to get it done. So I like to keep things in like in small blocks, as well as one thing I found useful.

Michael:

Is that a humble brag for that you're really efficient.

Emil

No, a lot of times it goes over, but at least I'm like, it has a name. But like, whatever time you give yourself, you expand that fast. Yeah, whatever to just fill that time. There's plenty of times where I go past it. It's just I think more helpful to try to, I don't know, put less time than you think it'll take. And then if you need more, it's all good.

Michael:

Yeah, that makes total sense. All right, we move on. We want to tackle anything else.

Emil:

Yeah, that was it for me in terms of my biggest time management tool.

Michael:

Awesome. So moving on here, Pierre, you had this really killer name for what you're going to be talking to us about? You wanna jump in here?

Pierre:

Sure, yeah, I'm not going to be super innovative here. But it's just something that I find that works really well for me, and kind of every level of planning, say, like life goals or specific projects, but it's reverse chronology. It's where you identify what your end goal is going to look like, and then make a schedule working backwards from there. I feel like a lot of our strategies would overlap quite a bit. So I would use a meal strategy as well, to implement this reverse chronology. Say I have a project due by the end of the year, I know all the tasks that need to be done to make that project happen. So I'm going to plug in those time slots on my calendar to make sure that I have the time allocated properly to be able to achieve that goal by the end of the year.

Michael:

Awesome.

Tom:

Love it.

Michael:

And how incremental? Are you breaking down those tasks that have to do is it a quarterly monthly daily, hourly kind of a thing?

Pierre:

Dependent on the size of the project, but say, it's like a deliverable for the job here, I would break it into kind of manageable tasks like I like a meal, I get pretty distracted after about an hour of working on the same thing. So I would say kind of hour in less chunks. And with my job here, too, I got I wear a couple of different hats. So if I just spend too much time on one thing, I'll fall behind on another thing. So say time blocks of about an hour or less.

Michael:

Cool.

Tom:

It's great. I think so many times it can be intimidating if you're looking at a project. And it's it's almost as kind of like white paper, you know, I love that concept that you're talking about reverse chronology and sort of chunking it down into individual bits and having you know, clear deliverables on each stage of that. That's love it fantastic.

Emil:

This one hits home for me, because I actually now despise yearly goals I think they're just too long of a timeframe. And it's, for me, it's like quarterly. And that's it, right. Like, I think it's good to have what's that big picture goal, whatever it is, but like, unless it's in a shorter time block, I just don't think your mind can like, get to the next action item. And just like, Alright, here's this short window of time, here's what I need to get done here, the outputs I'm going to do, versus like a year, I think is just so much time. And I don't know, I personally, the max thing I'll go for is like a quarter at a time.

Pierre:

Totally. And there's this kind of psychological thing about getting small wins all the time. If you can just rack up a bunch of tiny wins, you can get momentum going. And that helps a lot.

Michael:

Totally,

Pierre:
That helps a lot with just feeling like not burnt out at the end.

Michael:

So Pierre, I got to put you in the hot seat here for just a second because I think you're the perfect test case for talking about reverse chronology. So you and your brother working towards investing in real estate, you have this big lofty goal. What if somebody doesn't know what action items they need to take to get to that end goal? How can they use reverse chronology to kind of set up times and action items? If they're not sure what that path looks like?

Pierre:

Sure. That's exactly where we're at right now. So we don't know exactly what's our next step. You know, we hear Michael Zuber when we had him on he was talking about just 15 minutes a day get to know your market. We’re like, what does that mean, get to know your market? like do I go just browse the MLS and just see what's available on that market? Is that getting to them your market? Do I get the newspaper from a particular market? Like what does that mean? So I think there's a lot of gray area in between now and the finished product. But the finished product is pretty clear we want to buy a house, at least the end goal is a definitive goal. And so we're thinking, Okay, we want to house by June next year. So how long does it take to close a property? Maybe I don't know how long you guys like 30, 30 days, 30 days to do that. Okay. And then so we're giving ourselves about two and a half months, about 10 weeks back from the point that we want to close that property. So if we want to close on June 1 around that time, we're going to subtract 10 weeks off of that and so that by that point, we should have a market chosen a pm selected, maybe some opportunities or some options for a lender kind of planned ahead. So right now it's just we don't know what to do. Maybe we'll call Michael at Roofstock Academy and get a coaching session.

Michael:

I think that's such a good point to bring up that. So often that path isn't crystal clear. We don't know all the steps, and especially for real estate investing, and especially for new real estate investors, what that looks like, and there's so many stumbling blocks, but I think like you and your brother are doing is taking one step at a time, all in the right direction, knowing that you're headed towards that end goal. It might be a little bit sideways, one day might be a little bit, you know, 45 degrees off the path, but still headed in that direction. And that's okay. Right? You don't have to know everything before getting started in order to get started, right.

Pierre:

Yeah, so we find tasks to do, but we're looking forward to maybe sit down with you, Mike, and just get a more clear, step by step where we're going

Michael:

Totally yeah. I'm really stoked for it. I think it's gonna be a lot of fun. Alright, so moving on. Tom, can you talk to us about some strategies, tips and tricks that you've used in the past?

Tom:

Yeah, so the theme that I'm going to talk about is make a system out of it. So there is a science around project management and task management. And there's a lot of tools out there. So using specific tools, some things that I like to do is I use Asana as sort of a day to day task management tool, and you can create templates. So if there's like types of tasks or projects, you can create a template and then clone it. So it's real estate related and analyzing, you know, a property or closing, you know, I have this checklists and things that I can use again, and again, there are no you don't have to everyone doesn't have to use the same tools, I think everybody is unique, and what makes them productive and getting things done. Like there's times where a pen and a paper and planning things out is really effective. For me, there's times where opening up a Google Sheet is really effective.

And sometimes in this exercise of going through and planning it, you may not necessarily use that like plan sheet again. But it feels like me, sometimes when I'm writing on paper or writing in Excel, like the process of writing it, it's like I'm writing on my brain in a way. And that kind of helps move things forward. Some other specific tools, I believe it's pomodoro is like a system where you work 20 minutes at a time, and then 20 minutes off, or something like that, and again to that theme that everybody's unique and the way that makes them most productive. So I think it's worth trying out a lot of different stuff, just like a meal mentioned, you know, some things have stuck, something hasn't. And it's worth the exercise of at least giving things a go.

On my desk at Roofstock, which I haven't been there a long time I miss it because we've been pandemic, I have this thing called the time timer, which was invented by like a kindergarten teacher who's either husband or wife was a consultant at McKinsey, this, you know, top consulting firm, and this consultant is like, wow, this is incredible as a way to manage time, it's like a reverse timer. So it's like, when you you spin this clock, it turns red. And as time passes, the red gets smaller and smaller. So it's like a reverse stopwatch if that makes sense. It has this red, big, huge visual thing. Anyways, I think they started using this time timer at like Stanford GSB. And like does other you know, kids consulting firms really cool tool time timer, they're like limiting yourself just to 20 minutes. It's this cool visual for meetings, it's super effective, too. I'm starting to digress a little bit. But the point is to look at some of these different tools out there and give them a shot and see what sticks for you. Not everything is for everyone. And honestly, it's totally reasonable that changes over time and what makes you most effective as systematizing, your process of prioritizing and working through projects and all of that good stuff, just don't be afraid to try stuff out on that front.

Emil:

I use to use the Pomodoro Technique religiously for like a year or two. If your job involves, I think a lot of like project or task completion and you don't have a ton of meetings. Fantastic, fantastic way to just like, get through a lot of different tasks and just work with rhythms. You know, it's really hard to spend two hours straight focus on something. But the Pomodoro Technique is like an awesome way to just stay in focus, give yourself a break in focus, give yourself a break. So I was a big fan of that one for a while.

Tom:

Yeah, the last kind of just two elements I wanted to mention is, is make it a ritual. So Michaels discussion is going to touch on a little bit more about aspects like this, but protect that time, the more that you do it, the more that turns into habit. And you might find that you stop using some system that works really well. And sometimes you stop for not a good reason. Like, perhaps for I don't know, whatever reason, like you just can't find your clock or whatever, and you don't use it. And then you realize a bunch of time passes. If you found it helpful, like go back and use it again. But you know, and don't be hard on yourself in the process. So make it a ritual, make it a habit systematize it,

Michael:

I think that's so great. And you can also gamify it too, and kind of that systematize it challenge against yourself, see how you do and keep logs of stuff, too. I found to be really helpful.

Pierre:

The program that my brother and I are using to organize our project is Trello

Emil:

Trello is awesome.

Michael:

Yeah, I like Trello, Trello is great.

Pierre:

It's pretty cool. It's like a series of tabs that you can organize your tasks in. And so you can have like hierarchies of different things that you're working on and comments and links and more When you finish this particular task, you can just drag it over to the complete tab. So let's

Michael:

Get that hit of dopamine. Yeah. Nice.

Tom:

Other ones is a monday.com is a project management software. Right. Trello. So I like Asana. Yeah, a lot of good ones out there,

Michael:

Right on. Were you going to say something?

Tom:

I was gonna say, go ahead, Michael.

Michael:

Awesome. So I gonna be talking about kind of the high level, how to put yourself in a position to be successful. So I think one of the biggest things here is, is first and foremost, determining when you're most productive, whether that's the morning and the night, midday after lunch before lunch. I think everybody has kind of a hot zone, so to speak of when they're most productive, and for each person figure that out, because it's not going to be the same for each of us. I'm curious to get your guys's hot zone. Tom, what are you most productive

Tom:

Early bird worm, not midnight oil guy, early bird worm for sure. I'll even like something about like getting up extra like, weirdly early gives me a little bit of adrenaline like but getting out of bed sucks. But like, once you're up, it's like, oh, man, like, let's do this, you know? Yeah, let's say I have something do like in the beginning of the day, I'm so much better suited to just Alright, I'll set an alarm for 4am go to bed relatively early, and then get up and do it versus just trying to grind. I mean, there's some situations where you'd like have to stay up and grind but a definitely more of an early bird worm. That's where my creative juices are flowing best.

Michael:

Okay, Pierre, what about yourself?

Pierre:

I like the morning before people start bugging me. I think like around 9-10 people start sending me requests for things. And so I like getting to work early to get a lot of those things that I need to focus on done before people bug me.

Michael:

Awesome. And Emil?

Emil:

I have like three spreads throughout the day that I've kind of realized are like my natural most focus, so nine to noon, three to five, and then like nine till 11pm.

Tom:

Multisport guy Nice.

Emil:

Yeah, I don't know. It's like, all the other times I kind of just try to block with like meeting or admin stuff, but for some reason, like those three points in time, or when I feel the most creative or like focus, so try to work, try to put things around those hours that require like, different focus or creativity.

Tom:

How about yourself, Michael?

Michael:

I'm kind of like Emil. So like 4am to 7am is really good. And then like 7pm to 10pm I find I can get a ton of stuff done. So kind of like me. I was mentioning and Pierre was mentioning those…

Emil:

You wake up at 4am?

Michael:

Occasionally, yeah, sometimes naturally

Tom:

Catch the surf man. That's when it's empty.

Michael:

It's when the tubes are curling man.

Emil:

Okay, surfing doesn't count, right? Sometimes I'm up at 5am to go surfing.

Pierre:

Yeah, I left out all of my other ambitions.

Michael:

I mean, I'll occasionally wake up at four and just crush you know, just do some deep work as they call it and just get a ton of stuff done because of everything you guys just mentioned. No one's disturbing you doing some kind of real estate stuff in Portugal. So that's also a good time to be in touch with people out there as well as on the east coast. Some contractors out there so sometimes I have to do sometimes it's just for fun. But it's kind of sick thoughts for fun waking up AT 4 am.

Tom:

I think there's like some adrenaline bit to it. I mean, I'm not like regularly But no, no, but I ride with you, man. I'm right there with I mean, getting getting out. getting out of bed sucks. But I think once you're like in flow, yes. In flow. Yeah. It's kind of a related question. Is there any type of tasks that just makes you cringe like you just hate doing it? Like so much?

Michael:

Recording podcasts?

Tom:

Oh, yeah, me too.

Pierre:

I have to say editing podcasts?

Michael:

The worst.

Tom:

Yeah, go first. I hate returning things. Like if you order something that's broken, and it's like, you need to return it. I like literally can't I probably have $200 worth of returns that I just couldn't be like, just like makes me mad. It says it's like boxes of things that either have like something broken when it arrived. And so as soon as I situation comes up, I might get some dread on me. So not a good returner of packages. It's my anti superhero power.

Emil:

Tom, what are your greatest weaknesses? I just can't return things. I seize up.

Pierre:

I feel you Tom.

Michael:

I don't know. Do you guys have anything that makes you… I’m just kind of thinking

Tom:

It’s hard being perfect, isn't it Michael?

Michael:

Yeah. It's

Emil:

emails, emails that have like, mountains and paragraphs of text. It's like, Nope, I do not want to write a sonnet back to you like,

Tom:

Yeah,

Emil:

Can we just have a five minute conversation? I don't want to write a book right now. That's I just kind of… like

Pierre:

Certain admin tasks. Oh, yeah. Just a little dry.

Michael:

Yeah, though. My last good Mother's Day my wife will attest to this but like filing like filing stuff like paperwo rk stuff because we can just get so much so much of this stuff is still snail mail that we get an old civil paperwork. So converting that to digital or just file like filing stuff. away. I've got papers on the on the windows. So right now and I Paris like really Michael? Really? We have fun like I got you filing cabinet specifically for this like, Ah, no, but it can't just live there.

Tom:

Yeah, it looks happy there.

Michael:

Right? It's getting some sunlight in the growing.

Tom:

Alright, let's get back to this.

Michael:

Alright, back on the rails here. Yeah. So another thing that I think can be really helpful that I've used in the past is removing distractions. And so so I used to work at home in my last job, it was half in the field half from home. And I would always have buddies asked me like, dude, like, how did you just not watch TV all day? Like, but just turn it off? I don't understand the question. So hiding things from yourself if you need to, whether that's the remote control, or passwords to stuff or just like things that distract you golf clubs, for you, Tom, you know, out of sight, out of mind kind of a thing. And then also identify, what's that

Tom:

Phones, man phones.

Michael:

Yeah, turning your phone off or on Do Not Disturb or just putting it away, can be super helpful. Because I think I'm guilty of it. If I see it buzz or light up, I'm tempted to look at it. And that's a huge distraction. So essentially, I was listening to this podcast, the BiggerPockets podcast the other day that came out. And they were talking about identifying what is and is not a distraction. And so people always saying like, oh, man, I like went on social media for an hour. And it was so distracting. And now that hour is gone. And that added up. But they were talking about in the episode as well. What were you planning to do in that time? Let me see your calendar. And so if you didn't have something planned for that hour, anyhow, is it technically a distraction. And the argument they were saying is no, because it didn't stop you from doing anything, it didn't prevent you from doing something. So look to identify what it is you're trying to accomplish. And then try to identify the distractions. And I think using time blocking can be a really good way to do that. Because then you'll actually have set times, but also be gentle with yourself. If you didn't have something planned, who cares? like whatever, go do it.

If it makes you happy, do it. And I think kind of giving in to those urges can help you not feel so distracted. I mean, if social media is your vice, you might constantly be thinking about it while you're trying to do other stuff while you're trying to focus on something else. And so if you need to go check social media for 1520 minutes, set time aside in your day to go do that, enjoy it and then go back to what you're doing. You can stop thinking about social media, you know, or whatever that vice is

Emil:

Social media is the devil.

Michael:

Social media is the devil

Tom:

Was that Netflix documentary?

Michael:

Yeah.

Emil:

The social dilemma associate. There I was very, very interesting documentary

Tom:

PhDs trying to mess.

Emil:

That is really what's going

Michael:

They were talking about on this podcast episode how the host was totally in disagreement with it. He said, because the movie missed an opportunity to tell us what we can do. And it's it's like, oh, it's your there's nothing you can do your sucker to social media. It's like, Yeah, but also not really like you can you can turn it off, there are tons of things you can do, you can time block it so you can go get that fix, and go spend your time doing it. And then you don't feel bad for having done it. I got the itch man,

Tom:

I got a fun tip for with related to social media, you can turn the color off of your phone. So it goes black and white. They call it moto or is their turn

Pierre

Monochromatic.

Tom:

Monochromatic. So it makes some of that, you know, sizzle in red Heller. Yeah, you don't have to look at it. And it makes it black and white. And I have my phone like that, too. If I feel I'm getting a little too stuck into it. I tried to see if a black and white.

Michael:

Yeah, nice. I think it's probably easier on your eyes to especially like in dark rooms. All those vivid colors can be really harsh.

Tom:

It's like social media methadone. Good.

Michael:

That's exactly what it is. And then so kind of moving on here talking about Tavella, there's no Popeye needs his spinach. So figuring out what your spinach is, you know what juices you up to help you get focused to help you do work. And so for me, a big drink of water in the morning is super helpful. I try not to drink coffee, it just makes me really jittery. But occasionally if I really need a big boost, I'll have a little bit of coffee, and then I'll feel it all day. So figure out what helps you get going or kind of get into that proper headspace. And then do that use that regularly. And it's interesting. Emil, you were talking about, you know, not being able to sit for a couple hours and do stuff and how so that pomodoro style was really helpful, you know, kind of 20 minutes on 20 minutes off. I'm so the exact opposite. I can sit for three, four or five hours and just like work and do and accomplish. And again, this is totally not a humble brag and says it needs to be my own horn. But.

Emil:

Uh huh.

Michael:

I think figuring out for each individual person what works best. what works best for you is super great.

Tom:

Toot toot.

Michael:

And so if you are someone that can sit for hours and do work, great, but don't mistake being at the computer and doing stuff with accomplishing stuff because you can be busy and not accomplish anything. So look to make sure that you're actually getting some traction. And that's something that a theme in the episode they talked about is that bigger pockets episode is traction versus distraction, so I won't spoil it for everybody. Any thoughts there before we move on team?

Tom:

Love the busy versus productive, be productive Don't be busy. And also the Popeye needs a spinach. I know for myself I sometimes a little bit of a snacker. So trying to get something reasonably healthy but if I know that I would ever work better with Cheez Its and it's really important for me to work really well. Maybe just have a little a couple of visits or I'm feeling special. I can add some walnuts or goji berries. I don't know. I'm just throwing some buzzwords out there. Anyways, so if you're a snacker like just yeah, know what your know what makes you tick.

Michael:

Have you ever had the Tabasco Cheezits?

Tom:

No, it sounds great.

Michael;

Oh, they're so good. They're so good. Alright, so moving on here. Just some other rules that I try to abide by. I'm curious what your guys's thoughts do not multitask. I'm going to come out and just say it's a fallacy. I think it's a really good way to do a bunch of stuff poorly. Not a fan of multitasking. If you can do it great. I'm not a believer in it. your guys's thoughts on multitasking,

Emil:

I'm with you, my wife. And I always have this argument. My wife's a nurse. And she's like, if I couldn't multitask, I could never do my job. And I say, you know, power to you. I am like one thing at a time, or else I just do them all terribly. So I think some people can do it. I just, I don't know, I don't know how doesn't, does not compute for me.

Tom:

You can see you're doing it. But what's probably happening is you're doing one thing, and then quickly switching it

Emil:

Switching. It's not multi, yes, it's switching. But I'm terrible at that even right, I need like singular focus. Personally.

Tom:

same

Michael:

Pierre, same for you?

Pierre:

I think you guys are right, and that it's switching a bunch of tasks, but it's keeping kind of a big picture of a lot of things you have going on, so you can switch efficiently between them. So I think that's kind of my version of multitasking, because I do like my position here is not one thing. So I do have to keep a bunch of tasks in my mind at the same time with my goal where I want to get you at the end of the day. But I think you guys are right in when the rubber meets the road. And I'm acting, I am only acting on one thing at a time.

Michael:

So it's like on an iPhone when you up, swipe and hold it to look at all the applications you have running and just grab the next one?

Pierre

iPhone what? We had this conversation Mike.

Michael:

I know, I know. You’re the green bubble when I text. So there's something else that I will be the first to admit I'm terrible at and that can be really helpful for time management is learning to say no, I There's something I've been trying to work on over the last couple of years, saying no can be one of the most empowering things you can do. And it can also be one of the most beneficial things you can do in your time management realm. And so there's a polite way to say no, and I think doing so can be really helpful and really open up your schedule. Because if you become the yes person that can often become cyclical and habitual. And people know Oh, great. I can go to Emil because he said yes, last time. So he's gonna say yes again. And you can be pretty quickly salad bagged with a lot of other people's stuff that isn't necessary for you to perform whatever it is, you need to.

Emil:

I am a huge, huge fan of saying no, I feel like I used to suck at this and would say yes to everything. I think there's a time in your life where it's good to say Yes, a lot. I think if you're early in your career Early in whatever you're doing, I think saying yes, and being like, super open and liberal with your time makes a lot of sense. I don't think saying no, when you're early makes sense. I think you'll you'll be at a deficit. But as you know, some things start to fall in place or whatever and you're growing. If you don't learn how to say no, you're just gonna be doing a lot of stuff that's unnecessary. And I think with time you start to learn that a lot of things aren't going to move the needle, it's just like the nature of the game there's, you know, the 80-20 rule, where 20% of what you do is going to make 80% of the results and so I think with time you just get better at that and it helps flex your no muscle to be like okay, is this really going to make a difference?

Michael:

So question for you Emil for the new people who are maybe just starting out their career How do they balance learning to say no with setting boundaries and line setting expectations because I could very easily see you're the yes person at the beginning. Everyone's like cool Emil is easy. And then all of a sudden five years down the road someone else used to be like no, like whoa, meals kind of a jerk all of a sudden.

Emil:

I don't think people perceive it that way. I think if you're polite about it and just say man I have these things going on I just I don't have the capacity for this right now. Thank you for keeping me in mind or whatever. I think there's there's a nice way to do it and not right like if people know you're not just like saying no so you can kick your feet up and do nothing. right it's I think people will respect it if you're polite about and you know, give a reason people always appreciate a reason even though you're not obligated to give one.

Pierre:

That's right saying no to something and saying yes to something else. So if you struggle saying no, just tell someone that you've said yes to something else already.

Michael:

Oh, Mic drop here. Exit stage left, episode over love that. Yeah,

Tom:

I’ll add a couple of more points. So I love the point that Emil said about you know, being a little bit younger maybe was Michael said but being younger in your career. Like there's something to be said for grinding super hard. My wife, one of her earlier job, she was at PwC for a couple of years. And she had a manager who would joke that Yeah, you know, if you're working 100 hours a week, it's like you're getting two years of experience. And just one year, I thought that was like a funny way to think about it kind of disgusting. But you know, but it's, it's, I think there's a time and a place in your career for gain that value.

The other thing, I think in that saying no, is really important. I would always put it into context into who is asking you to do someone? Is it someone who's kind of like constantly just trying to delegate all their work to somebody else? Who or is it someone who like, wow, this is someone I should, like, impress and be awesome with. So I think it's all contextual. And also, the type of work is this type of work that I'm going to be building some muscles that I can use later on in my career is this type of work that's going to make an impact to revenue or expenses and directly touch that kind of stuff. So it's all contextual. And I think what happens over time, as you get better to say, No, you get better at reading in between the lines of like, is this something that's valuable for the company? Is this valuable for me? Or is this just someone offloading some some random busy work? So I think that's all important to understand. And also, you'll just get better over time. And being able to read between the lines as stuff comes comes across.

Michael:

Yep, I think that's super great. points, Tom. And I think also segues nicely into the last thing I want to talk about, which is learning to delegate. And I think so many of us, especially in the real estate space, again, I am so guilty of this, but trying to do everything yourself, because no one can do it as good as you can. So if we're investing remotely, a lot of us will be relying on property managers. So being okay, letting go a little bit and saying, hey, I need you to do this. For me making phone calls, you know, delegating tasks, your time is better spent elsewhere. And I think a lot of people have a really hard time paying for services, or paying to have someone do something. But at the end of the day, if I can pay someone 20 bucks an hour to do something for me, and I can go make $100 an hour or $1,000 an hour doing something else, because that's what I'm better suited for. That's a really great use of my time and a really great use of my money. So a lot of people, again, have a really hard time doing that. But look at the actual cost, versus what your ability to earn is for that time.

Emil:

Very good point. It's why I don't mow my own lawn.

Tom:

Yeah, all the great resources out there for help extra stuff. So mowing,

Emil:

You know, family time, you know, it's just like, you start to, I don't know,

Tom:

yeah, there's a lot of good websites on helping to delegate or bringing in people to help out. So like Upwork is a good one, I had a great use case where I was at a friend's wedding, I was the best man, I had to write a best man speech. And I put together like, kind of like spilled my guts on a page, and then brought in a professional speech writer who actually wrote for cash flows that show drunk history. He was like, he was like a producer for that show. So he's like, super funny, like stand up comedian. And I best use the mice, I paid 100 bucks, and he basically took rearranged my like, gut spilling into a really well put together speech. And it like brought down the house, you know, using and what I want you guys to take away from that story is just test it, like create an account on either Upwork or one of these other platforms. Fiverr is another one, and you know, have some small tests, and then do it like, just bring someone in, it's, the more times you do it, like the better you're gonna get at it. And then you're going to bring down the house at a wedding. So it's worth doing.

Emil:

That's so smart. I never even thought about that. That's a really smart idea.

Michael:

The last tip I'm going to share on this is I got it from somewhere else, I can't take credit for it. But right for like two weeks just write down everything that you do during your day, task wise. And then look to see at the end of that two weeks, what could you pay someone to do? Did you hire a virtual assistant? Could you pay a TaskRabbit? Or someone on Upwork? Could you pay someone else to do some of these tasks, and essentially like to buy back some of your time. And I just thought that was really interesting exercise because I think so many of us do things that without even thinking about without even realizing what we're doing. And when we really stop and lay it all out, it can be pretty eye opening to see how we're spending our time.

Pierre:

It's a good accountability mechanism as well. Let's see how much you know, write down your bad stuff, too.

Tom:

So love that audit, do the audit exercise of your two weeks. All right, I'm gonna add in some final thoughts that I have here. One of them is Be sure to charge your battery like these systems that you run or these you know, it's all a little bit of extra work. And it's really important to know how full your balloon is because the worst thing you can do is continue to take on more stuff and you just end up doing like doing badly poorly. So charging your battery take time off. Like if you work at a job that has time off like know how much bandwidth you have no one you're you're gonna blow and just be open honest and constructive with everybody about when you need to charge that battery.

The other one is continued to evolve. It's not a one size fits all. And it's also not a one size all the time. I don't think I said that right but often too. Your systems and the way that you do things are going to evolve over time. So be okay with that. And what works for you now may not work for yourself in six months, but just continue to try new things out have that spirit of keeping the pistons going. And then lastly is to not be too hard on yourself, if you're, you know, not being super productive, or you're getting whatever lost in social media or you're just you're not where you want to be. There's this parable about getting hit by two arrows. So like, one of them is the first mistake. And the second one is just kind of shaming yourself for feeling really bad for not doing great. So get hit with the one arrow be okay with it, and then get back on the horse. So that's my Don't be too hard on yourself and pistons going. Yep, that's those are my final thoughts.

Michael:

Oh, love it, love it. I think that's just to echo what you said, Tom, being gentle with yourself, I for sure have beat myself up really good for decisions I've made, especially when it comes to real estate investing. And you know, either biting off more than you can chew or just making a poor decision rushing into making a decision. And so I think it's so important to pick yourself up, dust yourself off and realize that, okay, the decision has been made, it's time to move forward, there's not you can't change that unless you can well then go back and change it but just continually moving forward. And try not to dwell on the past, which is so much easier said than done. And I know that but I just a reminder to everybody listening it be gentle with yourself, this is a you will make mistakes, you will learn the hard way, I will promise you that. So just know that and kind of move forward from it. Emil and Pierre you want to take us home?

Emil:

My final thought, try to keep this stuff simple. Don't later on 12 of these things that we just mentioned, Pomodoro Technique, adding things to your calendar, blah, blah, blah, blah, blah. You're just like, I know people who do that. And they're often the least productive people I know. Because all they're doing is juggling tools and techniques and strategies and stuff, I would say try to just hone in on a couple things and just get good at those.

Pierre

Yeah, I'll echo that you can read a ton of books and just learn a ton of different methods for keeping track of time but then that's time being lost to if you haven't put any of it into action. So just choose one thing. Start with that. Get Started.

Michael:

Do you have any resources books that you'd recommend Pierre?

Pierre

No, don't read any books. Just do what we just said.

Michael:

Audio books only on your way to doing other stuff.

Emil:

I have one because I think the biggest thing here is making these things habits. It's called Atomic Habits by James Slear that was that was one of the best books I've read on forming habits.

Michael:

Awesome. Yeah, Tom give any book resource recommendations?

Tom:

Classic one, Seven Habits of Highly Effective People. Stephen Covey wrote it, it's a classic classic, it's talks about sharpening the saw, a lot of stuff we're talking about, but I love audiobooks when I'm like doing dishes and just like kind of thing and but not really. So that's in my regular queue of learning and doing better. So that's my that type of productivity hour is cleaning or dishes or whatever. Poppin an audiobook

Michael:

So is it almost like you're multitasking?

Tom:

Shut up Michael. Well, no. Those are that's a good thing to multitask with.

Michael:

You can walk and chew gum. Absolutely.

Tom:

Yeah. with you. I take back my shut up Michael.

Michael:

A book that I would recommend that people check out if you're interested in implementing some more of this stuff. We talked about his Miracle Mornings by Hal Elrod it's a really great book. I implemented a bunch of stuff and kind of fell off the wagon a little bit, especially with regard to waking up early, but I think there's a lot of really good useful tips tricks in there as well. Alrighty, well guys, this was a lot of fun. And hopeful that people got a lot of useful stuff out of this and know that everybody's human Everybody makes mistakes. So figure out what works best for you and then truly go look to implement it and not just for a day or a week or a month you know, really give it a college try. Give it your best. And it doesn't work move on because not everything will work for you.

Emil:

College try I didn't I don't know.

Michael:

Isn't that isn't that isn't the thing

Tom:

Its like a 20 saying like, like a 30 like “the good old…”

Michael:

Yeah. prohibition just around the corner give it a college try.

Emil:

A sincere effort or attempts at performing a difficult or seemingly impossible task.

Michael:

All right.

Emil:

I stand corrected. Continue, Michael.

Michael:

Awesome. For once. For what yeah, that's my one for the month guys.

Emil:

Check it off.

Michael:

That was our episode. Thank you everybody so much for hanging in there with us. Really appreciate it. If you'd like this episode, please feel free to give us a rating or review and subscribe wherever you listen your podcasts and we look forward to seeing you on the next one. Happy investing,

Tom:

Happy investing.

Emil:

Happy Investing,

Pierre

Happy time management.

Michael Zuber's Brilliant Strategy for Raising Private Capital Nov 28, 2020

In this episode of Weekend Wisdom, Michael Zuber shares his strategy for employing private capital. Catch Michael Zuber on YouTube at One Rental At a Time.

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Transcription

Tom:

Happy weekend, everybody. This is another episode of Weekend Wisdom on The Remote Real Estate Investor. On today's episode, we have author and thought leader Michael Zuber, he is the author of One Rental At A Time, he also has a podcast and a YouTube channel. Definitely worth checking them out. And today we talked to Michael about his methodology of raising private capital. I love it. I think it splits the risk and the upside, he does this thing called a 6-20. And I'm gonna let him explain. Michael, let’s hear it.

Michael:

Yeah, so one of the things that if you're a real estate investor that is often thought of is the holy grail is raising private money. Now, I believe raising private money needs to be done correctly, I think you need to give it the respect it needs. There are lots of checks and balances. And you must understand the process, the rules of the road, all of that. But the beauty of it is once you understand private money, and you have a track record, you can orchestrate a private money package that works for your lender, which is a friend or family member, and yourself. And I've done two things in my career. And where I raised millions of dollars back in 2010. Just to set this up, people were frightened, and I was paying 10% interest for the entire purchase price of property because lending or savings rate was less than 1%. Much like it is today. People were so scared, but I had documented my success back then. It wasn't YouTube. It was actually a blog, which I wish I kept, but I let it go.

But that blog allowed me to attract millions of dollars because I was documenting what we were doing buying. It was BRRRR before it was BRRRR, right? I'm sure Brandon Turner saw something I was doing because I was posting on bigger pockets all the time. And it became BRRRR right, buy a dump, fix it up, rented refi with, in my case, private money and do it again, which now he calls Burr. But now what I've done in the last couple of years is the market has changed. Real estate is sexy again, in 2010. Nobody wanted to touch it. But real estate sexy today. So what I found today is people aren't really interested in 10% interest, of course, they will take it. But they what they want is they want a piece of the action, right? They want part of the profit.

So what I've done is I've devised a six and 20 program where I again, borrow 100% of the purchase price. And now instead of paying 10% interest, I'm paying six annualized, right, so it's 100 grand is 500 bucks a month. But what I do is I give him 20% of the profit. So when I'm out of a property in 120, or 160 or 200 days, they not only get monthly checks, because I pay monthly like a mortgage payment, which is the 6% part. But they will get 20% of the audited return, which when you annualize everything I've done have the millions of dollars I borrowed, everybody's got an annualized return to date, an excess of 20%. And again, it's all secured, right, your first trustee, your name down insurance just in case it burns down, I invest all the capital repairing it. So my dollars are at risk first. It's extremely safe thing.

But the key to this program is I listen to the private money investors first. I didn't just create it, I went back to the people who lent me millions of dollars before and said, What do you want? And they're like, hey, that 10% was cool, but you cashed me out? Right? That was cool. I lasted but once you could get a loan you did because 6% is lower than 10. And I wish I was still getting 10 Well, like sorry, Yo, 10s Hi. I don't want to take 10 forever 10 times, but like, Well, we'd love to piece of the action. So I'm like, Okay, well, how do you feel about 20% because I'm doing all the work, I'm finding the deal. And they're like, cool. So I'm like, Great, well, let me give you 6% now because that's what I can get from banks. And I'll give you 20% of the upside, they're like Sign me up, let's let's do it. So the six and 20 was born and again borrow millions of dollars doing it.

Tom:

I love that model just in that you know the same value that you have with real estate because you're having the the ongoing cash flow, which is that 6% plus all the upside of the appreciation and all of that it's, it's beautiful, it's beneficial for you because you're coming in at 6% right away or anyone else that you know, using this similar type of a model. It's incredible, brilliant.

Michael:

I mean, I love to talk about it because of what the investor gets but I'm a nice guy, but I'm not not going to give the farm away. Right my investors annualized return is 20% My annualized return is over 80% right because all I bring in is a repair money in my monies in shorter and when we exit you know my return on repair money is often much bigger than the purchase because if I purchased it for 120 I might put in 30 or 35 so if i net 20 on the out and they get you know whatever that would be six plus the cash flow I mean yes they get great returns but let's be clear I'm winning also.

Tom:

Yeah,

Emil:

When you say exit is that usually cash out refi or was it sale? Oh, today's market would be a sale owner occupants are buying things hands over fist. So if they want to overpay I will let them

Tom:

Get out of the way. Yeah,

Michael:

Get out of the way. There you go.

Tom:

If you enjoy the episode, enjoyed the podcast, please subscribe and give us a rating and have a great rest today. Happy investing

Market Deep Dive: Denver CO w/ Tony Cline Nov 25, 2020

In this episode we dig into the Denver market with Tony Cline from Home Vault. homevault.com

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Transcription

Tom:

Greetings, and welcome to The Remote Real Estate Investor. My name is Tom Schneider. And today we have a special guest, Tony Cline, who is the chief expansion officer at home vault. And today we're going to be doing a market deep dive on the Denver market. And I'm joined with my co host,

Michael:

Michael Albaum.

Tom:

All right, Michael, let's get into it.

Theme song

Tom:

Tony, let's learn a little bit about yourself.

Tony

Yeah, so we came together, there's a few of us companies that came together. And we've been working on this for a while, that we've realized that the market is really changing. technology's changing, legislation is changing. And we started as a mastermind, trying to figure out, you know, how could we stay out in front of all of these changes as real estate investors or as a property management company and continue to provide good quality service to our clients and to our tenants? And it just turned into rather than just being a brain brainstorm, let's go ahead and let's actually create a company. So we've been working on that for about a year and a half. And we've rolled that out.

And it's really exciting to be able to see the things that we're doing to stay out in front of all of these changes, like the legislation and technology and market shifts and differences in what tenants are looking for now compared to what they were looking for in a property five years ago. That's a little bit of my professional background. My personal background is I'm an ultra marathoner and like to spend a lot of time up in the woods, running from something I guess.

Tom:

Denver is a great place that are a very, I guess, hardcore would be a place to be an ultra marathoner.

Tony:

Yeah, there's a lot of greats out here for sure.

Tom:

Gosh what was a that book, Born to Run. It was like talking about his Yeah,

Tony

Yeah. Scott Jurek is he's located out here. Now. He was from I think, Minnesota when he was in that book. But he's out here now and but up in Boulder.

Tom:

Awesome. And what did you do before before Home Vault?

Tony:

So before Humboldt, my company that I merged into the merger was started in 1978. And it was a company that was started in downtown Denver. And the gentleman who started it actually wanted to open a REMAX franchise in downtown Denver. And in 1978, the REMAX company said, we're not willing to open an office there, because there's not enough residential business to support an office. You know, obviously, Flash forward 40 years and, you know, the downtown Denver is booming. And there's a ton of people there, but I bought that business in 2000. And prior to that, I was in the technology business. So I had a company that focused on document and data management. And, and then in 2000, I switched over to being a full time real estate agent, property investor and property manager.

Tom:

Awesome. Fantastic. Let's go ahead and jump into it. So what I'd like to do at the start of these discussion is, so we have the anchor city of Denver, how would you describe some of the other sub markets within Denver? And you know, maybe a way to do this is to kind of think about is Denver as maybe a clock or ways to kind of like have think about sub markets within Denver?

Tony:

Yeah, sure. So Denver, there's actually the city and county of Denver, which is our state capitol, and from their you know, they're really like most big cities, there's no true dividing lines. When you're visually you know, legally obviously there is but when you're looking at it, just one big metropolitan area so if you were to look at that, you know, Denver kind of goes up north into like Thornton in North Glen Broomfield. If it goes off to the east, you've got Aurora, Greenwood Valley, and then South you've got down into Parker, Colorado Springs in Colorado Springs used to be its own metropolitan area. And now in between there Castle Rock is filling in there's just, well, Colorado Springs is still kind of its own unique identity. What used to be open space is now filling in. And then if you go west from Denver, you've got cities like Arvada and Golden, Lakewood, wheat Ridge, there's a lot of different sub markets with different property types.

Tom:

As a property management company, where do you guys see the majority of your inventory? Where are a lot of the investors in these little sub markets? Do you guys manage a lot? And do you see trends and other you know, sub markets where there's a little bit more traction right now?

Tony:

Yeah. So obviously, you know, the market has changed drastically. In in, I would think just about everywhere. What tenants are looking for, what they're moving to we we started our company in downtown Denver, and so a lot of the inventory that we've had was in that marketplace in in the early 2000s. man that was a great investment market, you could buy a property, you could sit on it for six months, you could do a little updating on it, and then turn around and in six months pull cash out to buy another one. And so, you know, at one point in time, our company we had 27 units from 15th and Larimer to 17th. In Larimer, it was a great market to continue to invest in. And then of course, we all know what happened in 2008 to 2010. That market kind of suffered, and it came back. And they're building a ton of apartment buildings in from January 1 of 2010. Through today, there have been over 25,000 new apartment units built within a one mile radius of where our office used to be at 15th. and Blake, so it's a huge booming market.

Unfortunately, COVID has taken what used to be a destination market in downtown Denver, and really turned it on its head, I mean, all the reasons you would go downtown, the sporting events, the theater, the nightlife, all of that is really sort of been shut down. And all the reasons that you don't want to live in a big city, the reminders of COVID the notes in the elevator, the making sure that you're checking your guests in and out, you know, restricting guest parking, all of these things, has had an impact. So what's interesting about that, is that while downtown Denver used to be a really big destination market, what's happening now is people are leaving those investments as tenants and moving into that next ring out. And so an area like Highlands is really popular as it's become almost as expensive or more expensive than being right in the heart of the city, then you go a little bit further, and there's area over by like Sloan's lake and a little further west. So as you start to go out from the city, those markets become a little bit more affordable as an investor to get into. But because everybody's looking in those markets, it becomes really competitive market and difficult to find a true good investment that you would want to keep for cash flow purposes.

Michael:

And Tony, we were talking a little bit before the show, I used to live out in Colorado and the South East mid kind of mid central Colorado. And Denver was an awesome city. This was like a decade ago, I lived out there and Denver was an awesome city then. And I was there a couple years ago and couldn't even recognize the city, there's been so much change. So can you walk our listeners through a little bit about what's been changing, and kind of what's going on in that in that market?

Tony:

Sure. So to go back a little ways, which I'll just touch on, we had a great railroad system that came through Denver, and there was some reasons why it wound up coming through Denver. And we won't get into that. But we got lucky when they decided to do that. And so we have a very historic Union Station in downtown Denver. And that became the transportation hub. And so we've got really good light rail that takes you out east, out west, north and south. And that sort of opened up people being able to move out into the suburbs and still work in the city. And so what's happened is, as the city has grown, we've gotten a better transportation system, we've got I 25, that runs through the heart of the city, north and south, we've got I 70 that goes east and west. So it's really a good area to live, if you don't want to live right next to your work. And that kind of expands the possibilities of pay. You can live anywhere and and work just about anywhere. And of course we all know that. Even with that the speed of change of what's required to live work ratio. And distance has been dramatically changed over those last year.

Michael:

Yeah, that's really great insight. And then what about companies that are coming or going from Denver, as a market? Has there been much influx of new companies or companies moving in and headquarters there?

Yeah. So we used to have, he used to be back in a couple of decades ago, we were big into oil and gas. And then of course that played itself through its cycle. And then we became a big tech city. And so we've got a lot of tech companies that are here. We've got some banking companies that are here. The interesting thing is we've got a lot of companies that are an employees that actually are from the west coast that seems to be migrating in California, whether politically or financially has become not the right place for those companies to be headquartered anymore. And so we're seeing, you know, more and more moving to Colorado so we still are primarily a tech city.

Tom:

I live just kind of in the suburbs of San Francisco and man, I've got a laundry list of friends that they're either going to Denver, they're going to Austin it's just this mass, that kind of Central migration.

Tony:

Yeah.

Tom:

How would any any like going to curious kind of specific companies you can think of? I know I think Adobe might have a big or any like, you know, like major of those companies kind of specific ones that have to get quarters.

Tony:

Yeah, so we've got DaVita which is downtown, which is not necessarily tech I think they're more dialysis right yeah, yeah Alice's they've got it. They've really come into the city. unexpanded This may be the case everywhere. I don't know. But Amazon has a big presence here. Now they're building their warehouses and they've got, you know, I wouldn't call it a headquarters, they've definitely got a ton of office space that they have here plus their warehouse spaces. Yeah. But as far as like any major players, you know, I don't know that we're really bringing any of the major players in if we are I just don't know who they are. But just a lot of smaller tech companies that are moving here. It's a it's a good place to be in that industry.

Michael:

Well, not in the tech genre, but isn't Coors headquartered there in Colorado as well.

Tony:

That's interesting. Actually. Coors Brewing was started in Golden and I actually run by that brewery quite a bit. And they have been sold to Molson. So now it is Molson Coors,

Michael:

Canadian.

Tony:

I'm pretty sure. Yeah, they're in Miller Coors. And then they were sold to I don't know, it's not it was Molson. Maybe it was Miller. But anyway, they're no longer actually headquartered here. And so interesting was used to promote their beers with Rocky Mountain spring water rights, and we use that promotion anymore. So interesting out of the Rockies.

Michael:

Interesting. Oh, man. Well, it's it's a good thing. You run by that. That plan. You got a Carbo load while you're running right?

Tom:

Replenish, yeah.

Tony:

Yeah.

Tom:

Kind of related to economy and industry. Talk a little bit about the school's major universities. I know, Denver, I can, you know, top my head. DU and gonna hear about that to the education sector?

Tony:

Yeah, so actually, right out in Golden, right, kind of by the Coors Brewing. You know, golden was a great historic city for us, locally, and they have the Colorado School of Mines, which is a great school. We've got d u, as you had mentioned, we have the Metropolitan MSU there is the CU Boulder, cu Denver campus. And then just about an hour north of us in Fort Collins, there's the Colorado State University, and then they're up in Greeley, we've got the school up there as well. So there's a quite a few universities here.

Tom:

It's great. Yeah, Colorado School of Mines, like my brother in law went to school there fantastic engineering school. Yeah. And we touched on this a little bit, let's talk a little bit about transportation in the area. So you know, major high highway system crossing through, you talked a little about light rail, any other kind of commentary on the just kind of general transportation systems within the Denver market.

Tony:

But I think one of the key components is the light rail, and just how well they've thought that out. Now, of course, with some of the pandemic, it's caused ridership to go down quite a bit. And so they're cutting back on some of the routes and that sort of thing. But just having the infrastructure there, the city and the surrounding cities actually did a really good job coming together and planning out the entire Metro district and the transportation. So light rail is big here, we've got the airport that was moved out into the eastern plains, so that it could be away from the cities and avoid the noise pollution. And then they continue to build new cities around to the airport. So we'll eventually have to deal with those issues again, but you know, DIA Denver International Airport is a major transportation hub. So we've got the light rail actually connect right from you can get off a plane, you know, land from anywhere, get off a plane, take the light rail, right into Union Station from Union Station, you can be almost anywhere in the metropolitan area.

Tom:

You know, something I noticed in the Bay Area is we have our light rail system, the BART system and something I know some investors look at is as the BART is expanding to new stations looking to invest in those type of areas. Do you guys have similar types of dynamics where the light rail is continuing to grow? Or does it cover the footprint pretty well, of the lot of the properties that you guys manage in Denver?

Tony:

It does actually and transportation oriented development or TODs, that's what they talk about. And typically they look at having something within a one mile radius of a light rail stop does increase the value of the property, both for when you're trying to sell it, and also the rentability of the property. This is a side note, but I'm a commissioner for the Arvada urban renewal authority. And we work on 25 year project plans. And I've been doing that as a volunteer for about 13 years. And we study the development and the layout of cities and how to build residential next to these light rail stations so that we can provide workforce housing and make sure that people who need that transportation have access to it and as a real estate investor, it's great to invest near those because they are more in demand. And then as a tenant, you know, if you have that and you have the need or the desire to no longer have a car you can get anywhere in the city from being next to one of those light rail stations.

Tom:

That's fantastic and just kind of thinking about random side note. I love City and Regional plans. Gotta get super interesting that is a minor I like really like playing SimCity as a kid probably, you know, something, if I'm looking at the map of the light rail, what stations would you say, you know, are more common for investors to invest in? And basically, this is the idea for this is for listeners, if they were to pull up the map, like, which areas are the majority of you know, our investment opportunities? You see?

Tony:

It's a good question, I think that that's probably not the best place to start, I think what you would want to do is start and figure out what type of investment you want to make, we all know that there's different types of investments that you can make, you can make investments based off of cash flow, you know, something that's not going to appreciate, but it's providing great cash flow, something that you're sort of rolling the dice on, it's almost paying the bills, or it's paying the bills by time you throw in your HOA, and your taxes and any rehab you have to do, but you're banking on appreciation, and we all know that those are a little bit more risky. But in Denver, the appreciation over the last five years has just gone crazy. I mean, I I kicked myself and for sell, I sold one of my properties in like 2016. And it's almost doubled in price since then, you know, we we were trying to do some things financially to where we wanted to move the money around. And, you know, you always hear investors look back and say, Wow, if I just would have held that, you know, look what it'd be worth now

Michael:

I would be on a beach somewhere?

Tony:

Yeah, yeah, that's the truth. You can look back and see, but so I would start with that and look at what kind of investment you want to make? And then do you want to be the person that's managing it? Do you want to hire a manager and be hands off? Are you looking for a single family home? Are you looking where then you're responsible for the roofs and the gutters and the sewer lines? Or are you looking for something that's in a condo building, or Hoa, or a lot of the external stuff is taken care of for you, but you're counting on the HOA to manage it properly, and spend the money that you're paying them monthly? So I really think it looks, it makes more sense to focus on the type of investment, and then your budget. And then once you've narrowed that down, pick a location, and then from that location, look to see how close you can get to a light rail station.

Michael:

And kind of in that same vein, Tony, can you give kind of a 30,000 foot breakdown of if someone is looking for a cash flow investment or or more of an appreciation play? Where should they look, you know, north, maybe some neighborhoods or some directions from the city center?

Tony:

Yeah, so obviously, we've talked a lot about downtown Denver. And that's, you know, I've got a lot of experience with that market in particular, and downtown Denver has historically continued to appreciate through the years, you know, we've had our ups and downs, just, you know, with the economic issues that we had in the late 2000s. But that area, if you're investing in there, you're probably not cash flowing. Like it's not a great market, you go and drop a bunch of cash, but you're looking at market appreciation.

Green Valley Ranch out east more by the airport, one of these newer neighborhoods that they're building, that's a good neighborhood to invest in. If you're looking for more for cash flow out in Aurora, there's a lot I know a gentleman who owns multiple multiple properties out there. And the he accepts section eight, and he's actually getting, you know, above market rents, because he's buying in an area that is a little bit more of a rougher area. And so he's going in and putting money into it, and he's renting those out accepting section eight. And so that's been a great investment strategy for him. And and we try to we have discussions about whether or not it makes sense to accept the section eight because there's pluses and minuses with it. And he's completely sold on on that. If you're looking for something more on the single family homes that's outside of downtown Denver, and you're looking for appreciation we've already mentioned Highland, so the Highland area just to the west of downtown. And then as you head out towards Arvada, Arvada has a couple of great light rail stations, and their homes are a little bit less expensive than what you might find in other areas. And then Thorton is a good area as well to try to buy something that cash flows for you.

Michael:

Fantastic. And let's just take the last city you mentioned, you know, some market Thorton Can you give, of course, very generically speaking, high level idea of what a three, two single family home you would expect to sell for and what it might rent for.

Tony:

Yeah, so that's, again on those on to buy something like that to get into a home in Thorton. You know, three to 350 is going to be your entry level to be able to get into it and as an investor and unfortunately, that the challenge is if you're looking in that market, in that price range, you're going to see a lot of competition, because that's sort of like the affordable investment entry level in Denver. Right? In for that three to

Tom:

Is it pretty competitive amongst homeowners versus investors as well.

Tony:

It is.

Tom:

Great for appreciation more more buyers to the table. How about you mentioned Green Valley Ranch and I confirm that it is it's Green Valley Ranch kind of near its east kind of near a little bit south of the airport. How about price point? Is that a similar price point in rent or

Tony:

It is, but they're the properties are newer than what you would typically be able to purchase? If you were to purchase up in Thornton.

Michael:

And then those three twos at that three to 350 price point, what would you expect rents to be? Again, just ballparking average?

Tony:

If you are looking at the typical? Three, two, you're probably at about 2500.

Michael:

Okay, awesome.

Tom:

Related to so you had mentioned before somebody would work with before as a pretty big section eight strategy in Aurora and likes it anything notable about the section eight within Denver as in? Are they a little bit? I don't know. Because Because it's pretty different from each municipality to on how they manage. And in any kind of general feedback of, of working with section eight in Denver versus perhaps other areas are curious to hear your feedback.

Tony:

Yeah. So within the last couple of years, we've source of income has been a protected class. So you're no longer able to discriminate. People use discrimination as it's a negative word. And in in most cases, in fair housing, it is a negative word. But there still, there is legal discrimination. For example, before they legalized marijuana, and they went to the medical marijuana, what we found was in a lot of the properties, we were managing people that worked in that industry would also decide that they should, you know, regrow it at home as well, entrepreneurs. Yes. And so we did not accept applications from anybody in the medical marijuana industry. And that was not a moral judgment. It was just as simply we've we've run into too many issues with people turning the basement or even we had a high rise luxury loft a penthouse floor with, you know, glass on two sides, totally open, and they decided that they would tap directly into the building power and bypass the electrical panel. And then they hung a sprinkler system about two feet from where they bypassed any shut off and dropped a drip system. So, so we decided that we would eliminate those people from our tenant pool. And sort of similar tongue in cheek, we won't rent to any attorneys either, because they like to take your lease and give it back to you totally redlined. And so position with that is we will rent to them. But they they get to accept the lease as written.

Michael:

So real quick side story. I used to work in Home Depot when I was in high school, and I get people coming in all the times like, Where are your lights, like go out 27 Oh, and by the way, potting soil is on aisle nine and systems on aisle 27. It's like we cant skip the whole song and dance. I know why we're all here.

Tony:

Yeah. But to tie that back to the section eight conversation, they made it illegal to discriminate based on source of income. And so it's been a big shift for landlords and property managers here who have traditionally stayed away from that. And now they have to accept section eight. And, and to be honest with you, what we've seen is the biggest problem with section eight is not necessarily the tenant, it's the red tape and the bureaucracy, and all of the additional requirements and using the lease, that is not your lease that you came up with, that your attorney came up with, that you created over time. You know, it's it's being forced to enter into an agreement and use documentation that you don't necessarily agree with. And so once you decide that you're okay with rolling the dice and getting involved with that, then on a one off basis, it's not too bad. The issue continues to be where they'll send you one disbursement. And if you own five properties, you get to disseminate how which funds go to which properties and if somebody short pays, or if they adjust somebodies whatever it's called the rental amount that they're getting their voucher. If they adjust their voucher, you don't necessarily get noticed. And so you have to figure out, okay, who was short. And so, again, it's not necessarily that you have a problem with the tenants that move in there in this area, that that you have a problem with the government and some of the bureaucracy that goes along with that.

Tom:

Yeah, leads to some little bit of accounting, counting overhead. On a sort of related note, you know, a question a lot of people ask is landlord friendly laws rent control? Where does Denver set with some of those concepts?

Tony

If you would have asked me three years ago, I would have said, you know, it's the Wild West like we we could we were very landlord friendly. And not to the point where it was abusive but landlords were able to to operate a business here. And it's over the last three years, it has completely turned up on its head, we used to be able to give a three day notice for a pay or quit. So you know, it's your three day, notice when somebody has not yet paid the rent. Now, they extended that to 10 days, they wanted to do 14, then that's been extended to 30 days, because of COVID. I went and fought down at the city Capitol fought the legislation that they were trying to make it so that you could not charge tenants late fees, except for $20 or 3% of the rent, whichever was less. And so if you're going to invest in Denver, you either really need to know the laws very well or hire a property management company. And I'm not trying to, you know, put a plug in for us, obviously, I think you should hire us. But even if you don't, you should hire somebody if you're going to try to manage this from afar, because the legislation in Colorado has, has really changed the game. In in real estate investing out here, it doesn't mean it's not still a great market. And you can't find good opportunities, but it used to just be a lot easier.

Tom:

And probably kind of a moving target with us, as COVID evolves to and some of that vision.

Tony:

Yep.

Michael:

So speaking of COVID, out in the Bay Area, San Francisco, we've seen prices, both on the rental side of things come down and on the sales side come down and now operators, especially in the multifamily space are giving out freebies incentives. What are you seeing in kind of a downtown corridor in Denver? Is it similar is our prices go up? They dropped? What do you see in there?

Tony:

Yeah, so it's very similar to what you're describing out there. The the issue with Denver is that they did just build all of these brand new luxury apartments. And a lot of the the housing stock were initially those really cool funky converted lofts that had the exposed brick, wood beam, timber, you know, ceilings, and the parking was sort of an afterthought. So they dug in these sloped driveways that go down into a sloped garage. And, and people put up with that, because at that time, it was really cool. And you know, the walls in the bedrooms didn't go all the way to the ceiling. And it was just funky and cool and was edgy.

And you know, over the last 10 years or so the interests of the tenants have changed. And so what you see is a lot of the tenants that are moving in there, they're okay with living in smaller spaces. So they've built these units with smaller spaces, but they give you a ton of amenities. So there's, you know, the dog washing station bike repair station, the 24 hour concierge that the Mimosa Mondays, I mean just crazy stuff. And so you've got this issue with the older housing stock in in downtown trying to compete with the demands of the newer offerings from these apartment buildings. And it doesn't mean that there aren't some really cool condos and Lofts, and that are still attracting a lot of interest. But the challenge is, if you've got 10 properties in downtown, and you only have eight tenants that want to move in there, it's become really competitive. And so prices are dropping on rents in downtown and just even getting people to want to move into that environment with COVID going on, I think what it's doing is it's going to open up some really great investment opportunities, depending on how long COVID sticks around and how far rents drop.

But on the sales side in downtown, we're still seeing a strong sales market. And actually what's happening as people are moving out of downtown, they're moving into the surrounding suburbs. And so rent in the suburbs are actually going up because of this, where it's just a shift. So it's not the I kind of equate what's happening with COVID to dumping a five gallon bucket into a bathtub, like our market is going to absorb that five gallons of water. But it's just going to shake things up a bit. And so we'll we'll see a balancing out where people will start coming back to the city once the city's able to open back up.

Tom:

I think I've noticed a similar trend in that the higher rents have really been punished a little bit more, especially for workers that have more optionality with working from home like one of our mountain destinations, Taho prices have gone way up. But you know, in the heart of San Francisco, they've dropped but in the suburbs, they continue to go up. It's you know, people who I think probably at the lower price range, I bet there's probably been more demand like you've seen, especially for single family houses for people who are looking for a little more space and getting out of an apartment complex. I mean, it's really interesting dynamics at play. I love your analogy of that dropping a five gallon bucket into a bathtub. Well, yeah, we'll shake it up a little bit, but ultimately, the buckets going to the bottom of the bathtub.

Michael:

I'm curious Tony to know what you're seeing in the market in terms of Of how hard it is for sales. Because I think a lot of people when COVID first hit, were like, this is gonna be awesome, gonna pick up tons of cheap property, it's going to be great. But I think kind of nationally, we're seeing that things are still continued to be red hot. Now people that are moving out of apartments are looking to buy single family homes. So what are you seeing in the single family market out there?

Tony:

Yeah, we're seeing the same thing out here, the the opportunity to pick up a bunch of great deals simply because COVID hit didn't materialize, there's still a big demand, I think, as real estate agents, they've had to learn how to adapt to be able to sell property. And you know, I think as a seller, having people come in and out of your home without being pre qualified. And, you know, I think there's still some hesitation of that. But once you've decided to sell your home, you do what it takes to sell your home. And so, you know, there was this initial period where the governor shut us down and said that we couldn't do in person showings and things like that. But we're past that now. It may be coming back, we've been given some warnings, I guess, over those last week that if we don't get things under control, that we may wind up going back to being totally shut down.

But it's the same thing. I think, in anything, people experience crisis fatigue, and so they can only be scared and wound up for so long before, they just have to start getting back to some sort of normalcy. And that's what we're seeing in the real estate industry is it paused for a brief second, and then we're back on track and sales continue to remain strong sales prices remain strong. And we're not getting the crazy, you know, 20 and 30. Multiple offer scenarios on every property like we were at one point a year or two ago. But there's still a strong demand.

Michael:

I think that's super important to take note of for all of our listeners, we're recording this mid November. And depending on when you're listening to this, to keep that in mind, if you are going to be going into that market. That sounds like you're not going to be picking up properties offering 20% less than asking it, it sounds like things are still quite strong out there.

Tony:

So I want to circle back around on that you talked about if people are coming to this market to invest, one of the things that I've talked a lot about some of the negatives of what's going on in downtown Denver, you know what's going on in our marketplace. But you know, those are, I still think temporary, Denver continues to be a fantastic place to live. And as you guys have already talked about people are moving here from other cities. And so it's not that people are leaving from here, it's just that the getting the great deal is is getting harder to find. The good deals are still available all over the place. The great deals are hard to find. And so, you know, we live really close to the mountains, you can be skiing, there's great lakes, there's great weather, you know, there's great entertainment, we have, I think seven professional sports teams. Like there's just a ton of stuff to do here. So it continues to be a great destination. It's just the investment environment has changed slightly and you just need to, to be able to adapt to be able to find the good deals here.

Tom:

Michael, do you have any other questions you want to ask?

Michael:

Now? I think I'm all tapped out. All right, Tony.

Tom:

I'm going to end it with one final question. So you have two meals to get in Denver. I want to know what the restaurant is and what you're ordering. And the first category of meal is this is this is fancy date night, you know, something something special. And the second one is like oh man, I'm really hungry. I need something quick. I need something, you know, a greasy or whatever. So let me hear your input on the two restaurants and meals are good.

Tony:

Okay. I love the closing questions. Okay. So the first one is there's a good restaurant downtown, I think it's probably a chain, but there's Ocean Prime is in downtown Denver is half of like 15th and market maybe. And that's a great upscale place. And the reason I like it is not only can you get a great meal there, but then you're right in the heart of everything to continue your evening with any other sort of entertainment that you'd want. The next meal that I will have to go with is there's a Mexican restaurant called de Corazon in downtown Denver. It's just a little family run Mexican restaurant, and they have just really good food. So those would be my two choices.

Tom:

Love it. Awesome, Tony. Well, thank you so much for coming on with us today and for all the insights in the Denver market.

Tony:

Absolutely. Thanks for having me.

Tom:

Thanks, everybody for listening. If you enjoy the remote real estate investor, please like us. Subscribe. All that good stuff. Give us give us a rating and happy investing.

Michael:

Happy investing.

Market Deep Dive: Houston TX w/ Susan Davenport Nov 18, 2020

In this episode, Tom Speaks with Susan Davenport, the Chief Economic Officer for the Greater Houston Partnership, about the economic, educational and cultural aspects of the City of Houston.

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Transcription

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On today's episode, we have Susan Davenport, who is the Chief Economic Officer for the Greater Houston Partnership. And on this episode, we're going to deep dive into Houston, talk about points of interest, talk about the economy, and all that good stuff. All right, let's do it.

Theme Song

Tom:

Before we get going and talking about Houston, Susan, why don't you tell us a little bit about yourself, as well as the Greater Houston partnership?

Susan:

Yeah, wonderful. Well, thank you again, Tom, for having me this afternoon. Again, my name is Susan Davenport. I'm the chief Economic Development Officer for the Greater Houston Partnership. And we are the region's lead business organization. We serve a 12 County Greater Houston region that represents our membership base represents more than 1000 businesses and institutions throughout Greater Houston in that regional effort. Our members, the member companies that are part of our organization account for about one fifth of Houston's workforce.

So we have many large corporations as well as small and medium sized enterprises as well. So we have three areas of focus. One is to promote economic development and trade. The second is to advocate for effective public policy. And then the third is that we convene regional businesses and Houstonians on key issues affecting our region. Now, the Greater Houston partnership is an organization that has its roots and founding actually from 1840. We were the Houston Chamber of Commerce, was founded again in 1840. And then in 1989, there was a merger with what was founded following the Chamber's initiation in 1840, there was the World Trade Center of Houston and international leadership entity in regard to international business and trade, and then the Economic Development Council of Houston.

And so all three of those entities in 1989, joined under one umbrella organization, the Greater Houston partnership, and that's very indicative of the type of activity you see within our organization, again, having about 1000 member businesses and institutions that speaks to our chamber side, right. And our chamber roots, my team, which does economic development, and international investment and trade that harkens back to both the Economic Development Council as well as the World Trade Center activities. And really from an international standpoint, the Greater Houston partnership is really the the region's front door for international investment and trade, and work in connection with the city and other entities throughout the region that undertake pieces of that both from the transportation side airports, ports, a movement of goods and services, all of those things, exporting would would fall under a network of entities. But we really are the largest business organization. And so we have access to all of those entities within our region.

Tom:

Very cool. Very cool. So just kind of curious, like is a lot of the day to day like working with companies that are like looking to move into Houston or existing companies that are in that I'd love yeah.

Susan:

Yeah, my favorite question. We talk a lot about economic development. It's a multi faceted, a scope of work, as you can imagine. But we really look at new business recruitment. And we look at that globally. And I want to spend a little time to talk about global in just a moment. But we really are do global outreach, we do new business recruitment, we also work extensively with our regional businesses on the ground, focusing especially on our members, obviously, but really are working on behalf of the entire business community. And so entities could say business retention, and perhaps expansion opportunities there.

And then from the startup ecosystem, economic gardening, whatever it is term that you'd like to say new business starts, we look at small and medium sized enterprises, and we have a strategy and economic development that really embraces six target industry sectors. And so when we are looking at the startup world, we're focusing a good bit on these target sectors and what they're going to bring to our regional economy in the forms of diversification of that they're heavily laden into, or heavily weighted into next generation technologies that we believe will bring great opportunity to these incredible existing ecosystems of business clusters that we have here in Houston that we are so fortunate to have and have had for generations oftentimes. And so looking at that innovation play, they're very closely aligned with where we see the future of Houston growing and that's a whole area that I want to talk about, but innovation and technology and how fast it's growing and all of our interest and results to date in that area.

Tom:

Very cool. I know traditionally, having thought about the economy in Houston, I think a lot of people probably think of energy, think of gas, thinking of oil, but like over the last, I don't know, decade or so, or maybe even longer, it's been really diversifying. Do you mind speaking to a little bit in the way maybe specific industries? And if there's any specific companies in the ways that people should think about the overarching economy in Houston?

Susan:

Yeah, I'll give you some quick facts as we set this up. So we are the fourth largest US city right Houston is is quite a large city, our Metro population again, those nine counties actually make up the Metropolitan Statistical Area. Our organization oversees 12, because three other counties asked to be part of our territory. But our numbers and figures typically evolve around those nine counties, which is the official MSA there's a population now of 7.1 million people. And so again, this is quite a huge region. We again have about 3 million jobs within this region and that's up about 15% from 2010 to 2020.

I'll speak to COVID and a little bit more in a few minutes. But again, that's that's kind of where we are today. We were really the fastest growing Metro by rate of population growth among the 10 most populous us metros from 2010 to 2018 we talk about constantly as again what I mentioned to you on this international piece Greater Houston or Houston is America's most diverse city and one in four Houstonians are foreign born, we speak 145 languages, here we have a third of our population growth is made up of immigrants from 2010 to 2019. We truly are a diverse and international city. And you see it exemplified in absolutely everything we do and who we are, food culture celebrations, we have 90 roughly 85 to 90 foreign consulates here. That's the third largest consular core in the United States, we have not one but two international airports. And we're one of only just a few cities that have two international airports.

And then we really have this talent base in our institutions of higher education. And again, just our international flavor goes through all of these different things.

So I say all of that to kind of set up who we are, as far as our industry sectors, I'll say a quick minute about talent, we call it the currency of economic development, your talent base is really the strength of what you're able to undertake. And that's, I always highlight that because it's really the underpinning of what we have here. But we have 360,000 educated millennials here, we have the youngest major Metro and median age about 34.6. There are 235,000 people employed in the technology sector, and 700,000 or so corporate professionals. When you get down to the base of our educational system, we really got 40 institutions of higher education in this broad region.

Tom:

Wow. Yeah.

Susan:

20 of those are two year and 20 of those are four year, but they collectively enroll about 444,000 students. So when I say we're a young region, we really are a young region, and we have three tier one universities here, Rice, University of Houston, and Texas a&m, also, affiliates with Houston it's sees itself as part of our region. And it's building more and more infrastructure directly in the city, while a campus major campus is about 80 miles from Houston, maybe from downtown, I guess.

Again, the industry sectors really have mirrored what we talk about a lot in our target sectors. And so traditional energy, you know, you mentioned immediately people that we are the energy capital of the world, undoubtedly, that is something that we're incredibly proud of. But we are also now even diversifying that base into what's the energy 2.0. Back to that technology I spoke about, you really have now this growing cluster of energy renewables clean tech, tech, digital technology that will fuel energy for its next iteration in many ways. But we see it as a whole continuum. We're not giving up that traditional energy, the world is not giving that up. We know that we're seeing diversification and how they deliver and what they're delivering. We're seeing added things on carbon capture, hydrogen, solar, wind, you name it, and then this digitization of energy and all components of this, we're really seeing a lot of our companies undertake those efforts. You know, there were research and development organizations for energy tucked into all of our major companies in different places.

What we tried to do with our technology play, bring them out. And we found a four mile corridor that goes through the middle of Houston called the innovation corridor. And we have our major energy companies all taking part in a common building, I call it called the Ion. It's in the middle of that it's called the district innovation district 16 acres right in the middle of the four miles, the four miles all being connected by a metro train. So you can hop on and off that connects the Texas Medical Center, Rice University, some of the university's research and development that Ion this building that they're putting 100 million dollars into, it will be finished the end of first quarter, it will be a place where all of the innovation efforts come together and connect in ways that will then bring this entire region together.

I'm talking NASA talking about the Medical Center. I'm talking about fortune 500 headquarters and research divisions for major energy companies, startup development organizations, you name it, this is the hub of innovation so that people can easily get it when they drop in to Greater Houston, there's a place for them to figure it out.

Tom:

It's fantastic. I mean, so much to unpack there. I think, you know, I I love your point about kind of the nucleus that it all is these education centers and being such a young, educated population, just really great tailwinds. And a perfect transition to my next line of questions related to Houston, you talked about it makes me think of the Raleigh Research Triangle, talking about the different pockets within Houston, so I think that's a great place to start this super tech forward kind of almost think tank, a little mini city. When you think about Houston and the different pockets and regions, how would you categorize other parts? Or suburbs or little towns within it? It could be more kind of older industry, more workforce housing, more technology, more education? or How would you describe some of the different pockets within Houston?

Susan:

Oh, well, there's so many, but I think some that many will recognize The Woodlands, you know, the northern part of our region, having a lot of headquarters and offices, as well as our downtown having those as well. But you've seen The Woodlands have some infrastructure there, some of our energy companies, major energy companies with campuses up there as well, you see the west side, what we call the energy corridor, and you see, energy companies of all types have been down some of the western side of Greater Houston, you see, kind of South Park, between Houston and Galveston I 45. You'll see obviously, NASA and some of the major parts of the infrastructure there. And the communities there that surrounded have been a big, big part of that. There's talent all up and down that area, right? Obviously Galveston and the coast and the coastal area, and the many assets that they bring to the region, I think they're really vast.

And then it's interesting, we look at the Texas Medical Center, which is again, in the kind of center focus, as I just mentioned, of this four mile innovation corridor, but people live again, in all of these communities that surround these areas. So there's multiple pockets of medical companies in different parts of the city. And I think one of the things we recognize is that we need to and I say us, we're working to really better articulate all the different pieces of this vast region. I think that's a piece of work we have to do. And you will see us do more and more in 2021. Because Houston is again, there's a lot of interest. And there's a lot of discussion ongoing now. And I think having that ability to articulate what you're asking which businesses in which part of town but then again, how that clear four mile area can bring together people as they they need to find some common kind of source of the innovation and the next iteration of our industry.

And again, when I say our industry, those six target sectors are big and broad, I say and they are aerospace and aviation commercial. We have been the home of Johnson Space Center. And we have this incredible one of the largest engineering talent bases in the country. And that's due in no small part to them, as well as our energy sector. But you'll see aerospace and aviation, you'll see the life science and the Industry and Energy 2.0 as I spoke about. Digital Tech has actually been a sector as we've been fortunate over the last 24 months to bring in, you know, Google office and Microsoft in a big way. And AWS is here now and those those folks weren't all here and 24 months ago, you know, these are, these are activities that are really coming to play now. So digital Tech has been an area headquarters. And we are seeing even a lot of us headquarters of international based companies really want to put their us office in Houston. And for obvious reasons, we're so international already there such connectivity, that makes perfect sense. So we see a lot of that.

And then advanced manufacturing. And this is one of the biggest manufacturing bases in the country, if not the world, and really that port, and all of the activity that is generated here, exporting and manufacturing, it's just, it's a huge part of who we are. We make things here make things and we, we like doing that. And we've got the talent to do it. They do it well.

Tom:

Love it. Love it. You had alluded to it a little bit about airports. Let's talk a little bit more about just kind of general transportation within Houston, anything related to, you know, touch on the airports? Is there any type of kind of like light rail? Or how do people get around in Houston?

Susan:

Yeah, it's still I think, you know, by car, we have Metro, and we do have a four mile train track, there's been some initiatives to expand that, obviously. And so some work will be done in those areas. And you'll see a lot of those initiatives kind of guarding the region as we work on that being such a big area. Now, of course, you're seeing some trends about post COVID, you know, people working in and out, but I think we're still committed, you know, obviously, looking at all the trends and watching that. But that innovation corridor, again, bringing people to some common spots will continue to start, you know, continuing our electronic work as we've been doing so successfully, actually. I'm a little bit surprised about that.

Tom:

That's a great natural transition. I mean, obviously, with like restaurants and stuff, it's probably very difficult with COVID. But generally speaking, how do you think the economic climate in Houston as has been weathering the storm thus far?

Susan:

Yeah, well, I can speak to it from a couple of places, and I'll pull out a little data for you. But you know, there's, obviously we've had some job loss. And back to what you were saying there's a natural group of small businesses that have been hurt. In addition to that, we were already seeing a little downclimb in energy. And so there was, there was some job shed shedding going on a COVID amplified a lot of that. And so it really accelerated some trends. But we lost, you know, in that immediate COVID moment, what in March, we saw probably 350,000 jobs lost. But we've already brought back about 150 of those. But net net, we're still working on about 200,000 jobs, and continuing to see each month some different pieces of that. And so we will finish the year, again, we think about 200,000 jobs that were down, it's about 4.2%, fewer than we started with that compares with about a 5.1% loss for the nation, and about a 4.1% loss for the state. So we're kind of in the middle there, we predict we're using some predictions from the periban group and they project next year will probably gain about 77,000 jobs about a two and a half percent job growth. And the US job growth is forecast about 2.6 or about 33 point 7 million jobs and Texas job growth predicted again by pyramid at about a two and a half percent increase in Texas.

So you know, I think we're kind of in the middle of that pack. That does tell us that we have further and diversified that economy because we remember and many Texans and Houstonians remember oil ups and downs over the years, it in years past it would be a much even deeper situation. And so I think that has shown us that we've diversified some we need to diversify more. And I would say again, not because we're shying away from our industry, but because we have such deep assets to grow these sectors and so much to give I think from an output side, it's such a rich place to do things like life sciences and and other types of manufacturing. And really looking at all of these pieces.

Houston's just quite fortunate to have the asset base that it has the students international peace, all of it. So so we're very committed to that. If you want to get into month by month, we can go into that.

Tom:

Let’s do it!

Susan:

So in September, we added about 24,000 jobs. And again, that just brought the recovered jobs from April to about 142,600. Since COVID. began right since April, the deep cuts in March and April that we saw immediately. And so but again, we're still about 200,000 jobs short of where we were pre March, April, initial COVID moments I called them, but that put us you know, just shy of 3 million jobs back to what I said so So again, we had 3.2 million, probably this time last year or back in February even so that's the Delta that we're working from>

We'll see how 21 goes, I feel like we're well positioned. But we have to do our work just like everyone, right? This is a day to day economic development. And I have a team of 15 people right now and soon to be 17. And we get up every day. And we think about this. And we lead a team of regional chambers and organizations, probably in the smaller regions that surround us, we probably have 55 to 60, economic development specialists and executives, we live about 40 different organizations, and we meet monthly, we are connected, we are talking and working as closely in unison as we can. And I think that's the great part of our strength, right, we all are kind of getting very closely aligned and seeing what we need to do and what we want to do and how those two things kind of come together creating jobs and creating that future economy we all want to see.

Tom:

It's great. And plus two on the job count just within your own org itself saying going from 15 to 17. I'm curious within the data that you have this is more just personal interest. Do you guys have like go granular with the growth in seeing what sectors the growth or recovering faster?

Susan:

Yeah, I can try on September's and then I can pull all the different. So September gains, just using that as an example were concentrated in a couple of different sectors. Many of them they believe were tied to the students returning from summer break. So remember the timeframe we were talking about? So local education, school districts had about plus 19,000 jobs. Okay, so they're coming back online, right restaurants and bars at about 5,800 increased, right? state education, colleges and universities had about 4800 education services, select private schools, Test Prep tutoring, that was another 3,200. And then there were fabricated metal product manufacturing, which showed a gain of about 2,300. We were kind of looking at that when trying to kind of put that into context. And it may have just been considering drilling activity had decreased. You know, we were just trying to see is that when could that be, you know what it could be tied to and we didn't really know now, there were losses in other places that we had to look at. So but we typify as other services, we have about 5,400 jobs that were lost in other so just across an array, health care and social assistance were about 3,400, down financial lost about 2400 hosts wholesale trade about 2,200. And then arts and recreation about 1,700. Again, looking at probably effects of what we were still seeing and you know, different timing on monies that were coming down from shoring up, some of the businesses could have potentially affected these.

But you know, all the gains again, and all the plus and minus we're, you know, just shy of 3 million jobs. So for the region, you know.

Tom:

Got a couple more questions. Well, while I have you today, I'd love for you to speak to sort of the culture of Houston. What makes Houston Houston as far as I don't know, just thinking about culture, wise things to do all that good stuff. And I bet it's extra fun being such a melting pot.

Susan:

It really is. I have to say Houston is if people can think of one thing it is truly global. And that just gives it this kind of sophisticated, but very multi dimensional culture, right? We love food we love all kinds of, and we have some of the best in the world, right? Because all of these people live here. So it's I think we quantified our restaurants, right? So 10,600 restaurants, 650 bars, but here's the kicker they represent 70 different countries cuisine. So dining is a part of everything that we do. We're among the country's most visited and diverse cultural centers for the Houston museum department. I don't know how many people know the incredible art and and all of the different museums. Millions of dollars have just been even added to that again, we have world renowned Performing Arts in theater, dance, music, ballet, and we love that right? It's a really coveted part of what we do. And you know, we are a major league sports town. This is Houston. And so you know, all of our sports teams, from soccer, to basketball to football, baseball, we're in it all the way and you know, these are some ardent fans and so all the franchises are very important to us here.

And then I think what people don't know and this is probably the most misunderstood thing about Houston and again, you're going to see see and hear a whole lot more about this in 2021 but we are among the country's greenest cities and people would go Houston? You know we don't think of Houston like that. But they have been quietly putting in this infrastructure over the past probably decade. I've hundred miles of bikeways here 580 parks developed parks here and 170 open spaces. I would say our largest Park is called Memorial Park. It is twice the size of Central Park in New York, and they have just put millions of dollars into new green space the golf course. It'll be one of the most incredible public golf courses in the nation. Botanical Gardens, you name it, it's all there. So people are outdoorsy, sports minded, and they're International. And they just that's what makes Houston Houston I think.

Tom:

I was in I was in Houston last year for a wedding up in the woodlands or like Lake conroe. And I was blown away just somehow it kind of beautiful and green and lovely as I highly recommend it. So this leads to a good good visiting Houston question. This will be my last one, then I'll let you cover anything else that we we may have failed to touch on. All right. So you get two meals in Houston. One of them is your fancy meal. You're getting dressed up and your other one is Oh, man, I need something kind of greasy kind of built, you know, yummy like that. So all right. What's your fancy meal? At what restaurant you getting it at? And then what's your down home meal?

Susan:

There are literally too many. I will tell you chefs, we've worked a lot. And you'll different restaurants. But you probably know Chris shepherd.

Tom:

Yeah. name drop away.

Susan:

Yeah. Yeah. So from his kind of notoriety as a chef, obviously, and many others, the restaurant scene is highly acclaimed. And so literally, they really have such a diverse group that I try a different one all the time. Like, it's just interesting to me. And unfortunately for me, I've never not enjoy. Like, and I do go back. That's just the kind of place it is. But you can really find every kind of food and it's just it's incredible. Yeah.

Tom:

Any shoutouts for a hole in the wall. Not the famous chef. Oh, man, I need something to fill me up. Any thoughts?

Susan:

Oh, wow. It depends on like..

Tom:

Tacos. Whatever you like.

Susan:

Oh, no, that's that's always good. There's really a million that are fantastic. And then we've got some chefs that are true interior Mexican food. There's just really good ones. But you can find some awfully good tacos here. Breakfast tacos, lunch, dinner, you name it there. They're all fantastic.

Tom:

All right. Any final thoughts on Houston's want to share with the audience? Before we close out today?

Susan:

I think we've realized here the Greater Houston partnership, the incredible trajectory that the development of the innovation ecosystem has been on. And again, it was developed as part of our strategic direction several years ago, and intended to diversify the economy. But most importantly, feed the economy. And again, those sectors that have been here, there was a reason to make sure that they had the talent and the capabilities from a technology standpoint to move into the next generation. And we're always looking ahead right positioning this city. And so I think how much Houston has changed would surprise people. I don't think we've lost any of the great assets that made the city what it was. I moved here in the 90s and was gone for many years to grad school and to other places and hits. I've been back 24 months, and it's just an incredible city even more so than when I was here before I think and I really encourage people to look at it and see the differentiations in how it's progressed forward. And that's incumbent on us to get that message out. You're gonna hear it loud and clear in 2021 with a new brand and image to match who the city is now.

Tom:

Love it. Susan, thank you so much for taking the time to join us.

Susan:

Sure. My pleasure. Thanks for having me.

Tom:

Susan, thank you so much again for jumping on and thank you everybody for listening to the Remote Real Estate Investor. If you enjoyed this episode, enjoyed the podcast, people we’d love it if you would subscribe and give us a review. All right. Happy investing.

The Showdown of The Century (Round 4): Minimize Vacancy vs Maximize Rent Growth Nov 16, 2020

In this episode, we bring back the showdown! Tom and Michael debate whether you should maximize rent growth or minimize vacancy.

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Transcript

Emil:

Hey everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and my co hosts are,

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And in today's episode, we're going to be doing an old school style showdown episode. And today's showdown topic is going to be rent growth versus vacancy.

Emil:

All right, before we get into this episode, guys, we mentioned that we were doing a little giveaway to help us get over 100 reviews and we are now at 103. So thank you everyone who answered the call there and left us a review. We're going to choose two people at random here. And if you guys just reach out to us, we'll get you some some goodies. So first winner, drumroll please. First winner, Big Red 13 Thank you big red 13 for an awesome review. And let's see here. Our second winner is going to be drumroll again please.

Tom:

Papa, papa, papa. Boom.

Emil:

All right. And our second winner is Bobby tonsils. Bobby tonsils. Thank you for an awesome review as well. So if you guys just want to reach out to us, I'm at eshour@roofstock.com, Michael is malbaum@rootstock.com and then Tom is just tom@roofstock.com . Just reach out to us. Let us know we call your name. Since these are kind of like usernames, we don't know your first and last name. So just reach out to us. And we'll use the honor system. And we'll send you some goodies. Thank you guys so much. So let's hop into this episode. Alright guys, so today's showdown is going to be rent growth versus vacancy. And this is a good one because I think it is well debated. And there's good points to be had on both sides.

Michael:

But there's better points to be had on my side. So let's go That's right. Well,

Emil:

what is your side? Michael? What's that? Are you taking on this showdown?

Michael:

I'll take the stance of rent growth because I think that's the more difficult position and I want to be a gentleman and give these your position to Tom to start.

Tom:

A lready handicapping himself already sowing the seeds of defeat. I'm gonna reap a lot of failure harvest, okay, go ahead.

Michael:

Good thing I studied Agricultural Engineering. I'm the best harvester in this group.

Tom:

Oh, yeah.

Michael:

That's like such a tough comeback. Like, Oh, yeah. Yeah.

Emil:

So Tom, you're taking the side then of vacancy?

Tom:

I'll start with vacancy. And then in tradition of the showdown, we'll switch it up.

Emil:

By vacancy, we mean, making sure are trying the best you can to not incur a vacancy. Right.

Michael:

Yeah, I guess that's good. Clarify.

Tom:

Yeah, well, let's clarify the bait first. Yeah, they can see versus rent growth.

Emil:

Yeah, like, We're not saying we want vacancy, we want to not have vacancy. So the question is, do we do all we can to keep the tenant in place, and maybe not charge higher rent, lease renewal, or we always go in for rent growth. So who wants to kick us off?

Tom:

Well, in format, right, one side starts the other robots, and then the initial side gets to go again, Michael, why don't you lead us off, just cuz I feel like, you know, there could be some upfront bias on both sides. So sure, go ahead, lead the way. And then you'll then we'll change the order next time around.

Michael:

I appreciate you baiting me now. So that's great…

Tom:

Gentlemanly move, just trying to…

Michael:

Humble brag. So I think it's so important to maximize rent growth, and really prioritize that over vacancy for a couple of reasons. One is when it comes to property performance, if we're maximizing rent growth, that's gonna have an immediate impact on the property's performance. And, as a lot of our listeners know, I'm a big fan of multifamily investments, I own a lot of multifamily investments. And so, minor incremental rent increases on a property on a per unit basis can have really profound impacts on the noi of a property and the ultimate value of a property.

So let's just walk through a quick mathematical example, if I can increase rents $15 a month on a 10 unit building, so that's $15 a month across 10 units at $150 a month in additional noi, if I multiply that number, then by 12, that's 1800 over the year, if that building is valued at a 5% cap rate, I'm going to divide the increase in noi by the cap rate to get my additional value added to the building. So when I take 1800 divided by point O five that's $36,000 in value I've just added to my building by increasing rents $15 a month per unit. Now that's mind boggling when you think about that and the power to do that is also mind boggling.

So when we Think about rent growth, it's in addition to having a profound impact, potentially profound impact on the value of the property. I think it's also important to just be reasonable and fair with your tenants. And so if you can increase your rents incrementally year over year, as opposed to keeping them stagnant and then having to hit tenants with a massive rent hike down the road, I think you're treating tenants a bit more fairly. And I think a lot of people expect minor increases, as they do with just average inflation, the cost of living the cost of goods and services costs more year over year. So of course, why wouldn't the rent keep up with that year over year? Mike, drop exit stage left? Tom, you have the floor?

Tom:

All right. You know, before I like to talk about stuff, just quickly, defining our terms, right. So this is a debate about do you want to be penny wise, pound foolish and what I mean by that, if you are 100%, about rent growth, you're going to be pound foolish, you know, you may try to increase and jam on your tenants an extra 10 bucks, 15 bucks, 50 bucks a year. But ultimately, you're the one that's going to get jammed, because that tenants going to be like, No, thank you, you are jamming me, I'm gonna move somewhere else. Like, it's, it's stress. I don't if you guys ever rented in a place and every year, your landlord jamming you 25% I got out of there as quickly as I can. So that's the Pennywise great, you're earning an extra 10 bucks, you know, hundred and 20 bucks a year awesome pound foolish, you're going to run into vacancy, you're going to have people get leave, you're going to have people basically have the house open, where you calculate how much it costs to do a turn, versus those incremental increases in income that you're getting by raising the rent, the math speaks for it self, you're going to want to be have that occupancy, the weight of the costs that you have on a turn greatly, greatly are going to exceed those marginal benefits that you're going to get by raising the rents a little bit.

And also, if you have a good tenant that is paying on time and keeps the house in great shape, what a great way to mess up your investment by just continuing just poking them with needles with little increases in dollar rent, you know, do you want to be a needle poker, I don't think you want to be a needle poker I think you want to be an effective investor who is making sound decisions. And being Penny dumb, pound smart by really thinking having the big picture and making it work.

Michael:

I love that you use this analogy of poking holes in the tenants because I want to come back to something that you've said over the years and that's being long term greedy. And as your expenses increase year over year, your property taxes might go up incrementally the cost of goods and services is likely to go up incrementally, your returns are now getting those same pin holes poked in them poke, poke, poke the return, poke, poke, poke your return, and you're going to start bleeding. And there's a phraseology out there death by 1000 cuts. And so how do you reconcile with yourself or with the potential return that you keep your rent stagnant while you then have to eat those additional costs year over year?

Tom:

You as a savvy investor, you know, there are ways that you can look for more competitive rates. Because a lot of those costs me one of the beauties about real estate investing is you get these fixed costs, right, you lock in a lot of things, you fixed financing rates, taxes may move a little bit. But if you're proactive about them, you can make a case to the county and keeping those nice and low. So win win situation, you manage a few of those costs that might move a little bit of time. And you manages the expenses that related around terms by not incurring them by keeping your tenants in the house by keeping that vacancy number low.

I mean, every investor needs to look at the balance sheet of their property. And what's going to come up quickly come to the conclusion that you know, there's two ways to make money as in business as an investor. In any case, minimize your expenses, maximize your gains, and sometimes there's a little bit of trade off and in this question related to keeping your vacancy low or increasing your rent growth, it's a pretty simple equation, keeping your vacancy low you're gonna win.

Michael:

Yeah, I agree. The equation is pretty simple, but $36,000 in additional equity is a pretty amazing. Emil care to step in here?

Emil:

All right, guys. Yeah, you guys are starting to throw haymakers. So I'm gonna step in here.

Michael:

It’s a bloodbath.

Emil:

Yeah, it's there's there's blood everywhere. You guys both bring up good points. Michael, just to clarify your example there, increase in value that will typically be seen only on a commercial property. So in our case, talking about housing, that's a five plus unit building, right? If I own a single family up to a four unit building, increasing the noi doesn't really have an effect on the value of the building because it's not valued on cap rate is valued on sales comp,

Michael:

Well if you sell it to an investor, but when if someone comes in to buy that building the bank with a mortgage, the bank is likely going to still make them get an appraisal and the appraisal is going to be based on comps.

Emil:

Yeah, that's a good point. If you are able to raise the rent you are making it a more attractive investment for another investor right? So if you're selling it Yes, as an investment, you're right. It will be attractive even if it's not valued on cap rate. So good point there. And then Tom Really good points in turn costs, right? Like anytime you have a vacancy, those are one of the biggest of the like times where you have the biggest expenses or you can write, especially if the tenant has been there for a while, there's been a lot of deferred maintenance. I know personally, like whenever I've had a turn, that's when I have the biggest R&M costs. So and that's not even account

Tom:

Plus no income. What's your sorry, I just took it right out of your mouth. I saw it in your mouth. I took it right out.

Emil:

Come on, man.

Tom:

Go ahead.

Emil:

You're in your corner Tom. Is the referee speaking? The bell has rung. You guys both bring up various solid points. One thing I have this one property manager who every time the lease comes Do they have these three levels of rent increase, right, so they'll have like, aggressive, normal, and then do nothing. And so aggressive is like, Hey, we're gonna raise rent X amount. To get right up to market, the standard one, which I always go for is like a smaller increase. But what they say is that if the tenant looks like they're going to leave, because of the rent increase, they'll work with them to basically either keep rent the same, or maybe only increase it half of what they were going to do or something. So it's basically they're going to propose it and be flexible, obviously not going to say it up front. But when push comes to shove, they're going to be flexible with the tenant, versus instead of just saying no, this is the rent, increase, take it or leave it, that kind of deal. So I've always actually appreciated that what we're doing these consistent rent increases, but they're small, and we're willing to work with the tenant. So we don't have a vacancy. So let's switch roles. Tom, you're going to take the rent growth side. And Michael, you're going to take the reducing vacancy side. And hopefully let's let's not try to touch on anything that the other has already said. So better rack our brains for four cases. Michael, you started last one, Tom, kick it off.

Michael:

Let's touch gloves, Tom.

Emil:

Ding, ding.

Tom:

All right. You guys feel that? It’s the winds of change. Historically real estate, as an investment, at least in the single family space has been limited to sales comparables. But it's a really flawed system for a variety of reasons. It's why commercial uses return base. And I think the winds of change is single family rental is going to go in that direction too. Just because the value of an investment, it shouldn't have to be with some arbitrary value of what the home's next to it is. It's it's what are you getting on that return? Right. So I think that over the next five to 10 years, there's going to be a dramatic shift in the way that valuations are done with single family rentals and being able to get debt based on what kind of returns you're getting. Because you know what, this is an investment and you know what the value of an investment is what kind of returns you're getting. So in the ability to increase the value of your home by continuing to push up that rent, it's really impactful and just playing defense and not necessarily pushing it up, you're leaving money on the table.

And I think this is going to be the shift that's going to be happening over the next several years with single family rentals, and the ability to get that in the same way that you're able to do with commercial stuff kind of a little bit repetitive, I'm going to say this is a Gandhi quote, Be the change that you want to see and the kind of change that I love to see his rent increases. So to that point I was talking about earlier, generally speaking, it's pretty fixed costs. So you know, say I am getting a return on a property like a cash on cash, like whatever 10% or something when those rent, when that rent increases, Ooh, baby, that's just like going directly to my net operating income. So be the change that you want to see. And that change that you want to see is rent growth and more annual increase in the rent that you're collecting.

I think also to not really piggyback but there's a couple of other values in increasing the rent. By doing it, you are creating general market pressure that other landlords are going to see. And it creates sort of a wave effect, or that's not the right word to use wave effect. But it has a bit of a compounding effect in that when you increase your rent, it creates a market comp for every other landlord to continue to tweak up just a little bit. And over time, you are helping that market rent increase by increasing your rent just a little bit. Now I'm not saying you want to necessarily jam it up, and it should be reasonable. But by sitting back, you're letting the market rent as a whole stay stable when you could be contributing to comps that is going to raise pretty much all market rents. So are you a market leader? Are you a market follower? I don't know. saw me someone pulled my mic. Oh, my mic.

Emil:

All right. All right.

Tom:

Those are all really great points. And clearly, you're going to be the Pioneer with the arrows in your back. The first one's always are. I never want to be the first one to do something in a market because there's a high degree of failure that can occur. So, you know, I think that's a really interesting point you make about being the comps are typically based on numerous I think are based on numerous indicators, not just a sole or single operator owner. And so I don't know if we can say that one, your rental being higher than the others is going to increase and raise up some of these other rents. And I just think that they can see is the fastest way to kill your returns on a property. And so like you were mentioning, if you are juicing your returns by increasing the rent, and your fixed expenses stay fixed, that the return is only to increase, if we have a month of vacancy, I mean, that could just decimate an entire year's worth of cash flow.

And to make an extra hundred hundred and 20 150 bucks annually, the risk reward is the risk is a full year's worth of cash flow and the reward is an extra couple hundred bucks maybe just doesn't seem worth it to me. And then, as you mentioned previously, this is when you have to take care of all your turn costs. So not only are you losing out on all of the income, but now you're forced to reckon with all of the repairs and maintenance issues that are needed. In order to get a new tenant in place, you're also going to be slapped with a new tenant placement fee. If your property manager charges one, you're also going to have to pay for any utilities that are associated with that property while it's vacant. So I think a lot of people don't really tally up all of the totals associated with losing a tenant and placing a new one. And I just think the the risk reward scale tips very heavily and very rapidly in favor of keeping a tenant in place even at a slightly lower than market rents.

Emil:

Tom, you get final rebuttal.

Tom:

You know what Michael? I agree. Wait, hold on, come on. Come on, Tom, get your face on get your game face on.

Michael:

Get this guy some coffee.

Tom:

Yeah, you're you're either making plays Michael or you're getting played? Right? Way. All right, Tom. Okay, we're not talking about Armageddon. We are not talking about raising the rent, you know, over the market rate, we're talking about just slow, steady, incremental, I think being reasonable with your tenants. But what I'm advocating with increasing market rate is not, you know, throwing a hail mary and increasing it to the tippy top of the market, I'm talking about just incremental steady increase in rent. And over time, if you make these steady, reasonable things, you know, increases, not only are you going to see your returns increase, you're going to increase the value, not only the immediate income, but also the value of your property, as we talked about the winds of change, thinking about the value of a home on a valuation basis, which, you know, I'd say, to be honest, isn't really the status quo now, but I think over time, it's going to be going that direction.

But my final point is, it's not about these huge rent changes, it's about just being putting a little thinking about it. And subtly making continuing to make those improvements over time, and not getting so below under market and just kind of keeping up with the times right with what the rent growth is. If you can increase the rent less than the cost of move, you should know what those values are, and you know, have an open discussion with your property manager about what they think. And really, that's the best way to go about is to have an open mind. But Michael’s here old, don't ever change the rent strategy. Now you're just leaving money on the table. I wouldn't want to leave money on the table, would you?

Michael:

I'm going to speak on behalf of all renters because I was one for a very long time and we make impulsive emotional decisions. If you raise the rent on me out, you just solidified a way to lose every single one of your tenants every single year. Congratulations.

Tom:

You sound like a renter I don't want, good news. I just put in built in laundry, you don't get it now.

Emil:

Back to your corners back to your corners. Gentlemen, a great show, please cut me I don't really have anything that I think we hit the pros and cons of each. I want to dive deeper with a couple questions. follow up questions for you guys. What about when you buy a property that already has tenants in place? And they're like, a couple hundred dollars under market rent? What do you do there?

Tom:

First off, that's such as a great way to find deals or properties that have undervalued rent. I love that as a strategy. And to answer the question, I don't think first you're honoring the lease, it's their, their lease that they have, I would gameplan it with my property manager, I would first get an assessment of the house and of the tenant and if they have a long track record of paying on time and the property is still getting like reasonable returns, I know that I have a big pop in rent growth at some point in time, I wouldn't see necessarily see a reason to move it like immediately. I mean, there could be some states like California where you you know there's rent control and there's nothing you can do about it but even in an area if it doesn't have rent control if the property is continuing to operate well, you know, as they're paying their rent and isn't really bad repairs and maintenance. I'm okay just floating on that lesser cash flow, knowing that there's this big pop at the point at which the tenancy ends.

Michael:

I think it's a super great point, Tom. And I would say it depends too, on how you bought it. And so if you're buying it, and it's performing well, like Tom says, great, if versus if you're buying on pro forma. So let's say the rents at 1000 bucks and investment only makes sense that you can get 1200 bucks for the property and market rents call it 13. So you think it's very realistic to be able to achieve that 1200? Well, are you forced to move it to 1200 in order to make the returns work? Or is it okay at 1000. And you can wait until like Tom mentioned, the lease ends, and then we can bump it to 12 or 13. So it depends on how you bought it, I would argue that you should be buying it based on today's performance and recognizing future value add opportunities, like raising the rent.

Tom:

I'm nodding my head over here a great point, I think in evaluating it and buying it, you shouldn't put on pink rosy glasses, you should just assume that for whatever reason, the 10s are gonna be there for a little bit, and just have the Yeah, today's rates in the way that you're evaluating it and knowing that there's some pop on the other side.

Michael:

And also, if you keep the current tenant in place, or tenants in place, and you're getting some cash flow, you can start to build up your reserve for when you ultimately do raise the rents if that tenant or tenants ultimately leave. So you can align your pockets a little bit, so to speak, for that inevitable expense for that vacancy expense, and all those other expenses that we talked about in the episode.

Emil:

Awesome. I like that I bring this up. Because I mentioned on a previous episode, I'm in contract for a three unit building. And it's definitely way under market rent on two of the three units. And I'm going back and forth on this personally, right? There's there's one tenant who their lease comes up in February, there's another one who's month to month, and I'm asking myself, Well, should I get it to market rent right now? Or do maybe something a little bit lower, wait till there's like a natural vacancy. It's still cashflows at the current rent, but obviously, I want to get it to market but I'm also trying to buy other properties, I wouldn't want to have a turn that is expensive right now. So it's like, Do I go buy more property and kind of just sit and wait on this one a little bit to raise rent, and have turns, or do I just do it now? So some of them I'm debating myself

Michael:

Something to think about that I've used in the past as a stair step increase, where there are $200 at our market rent, you raise it $25 every other month, until you're in line with where you need to be keeping them month to month, so they can leave at any time, you can raise rent anytime, but you kind of talk about that or you know, $50 a month or whatever it is, but just in a way to ramp up into it. So it's not such a drastic increase. Because I think there's there's a pretty sure fire way that most of your tenants are going to hate you because you're the new owner jacking up the rent now, like Tom was mentioning, and so if you can just tell them, Hey, this is how this is going to work this, you know, this is why we're doing it and just have that open dialogue with your tenants. I think that makes that a much easier pill to swallow.

Tom:

We are in a super weird time, like in the middle of a pandemic. So, you know, I'm not going out of my way to jamming any tenants on on rent, like if they have a place that they can live in. So I think that fits into an a broader discussion at least, which is like specific to now like a human being human about it. Like it's my last little tidbit.

Emil:

100%

Michael:

No, it's such a good PSA.

Emil:

Yeah, absolutely. That's another part of it, right? Like one of the tenants has a daughter. So it's a family there. And it's like, okay, we can bring the rent out. But a lot of people are going through some tough times right now. And it's like, again, property cash flows, can we do some, you know, solid by the tenant and wait till things kind of just get better as a country and do it then?

Tom:

I think it's a misnomer that as an investor, you need to like jam everything.

Emil:

Yeah, one last thing to say here. I think this is where your property manager is so good to lean on. They've done this a million times, right? Like they know, how much can we raise it? What are some good tactics to potentially keep them but raise it. And so like just having the conversation with the leasing agent, whoever your property management team to like talk this through and figure out what's a good strategy. Any other tips you guys kind of have in terms of when you decide to raise rent versus keep things that steady?

Tom:

My tip would be to know what market rent is. So you know, you may change it, you may not. But you should know what that value is kind of in the same way that you know what the, the value of the home is, you should know what the value of the rent the market rent is, it may not necessarily be actionable. But just to kind of know where you sit is an important value. Even if it's not the current round, knowing what that market rent is, I would say to know that at any point in time.

Michael:

Absolutely. And also if you are going to be raising the rent, if you can raise it and you're okay with being a little bit under market rent, that can be a really great way to go to because if folks are going to move they're likely going to look to move in the same neighborhood. And if all the properties are more expensive than where they currently are, well that's a really great reason to stay put. So again, just being aware of what's going on in the market. What the markets commanding.

Tom:

My last tidbit is had calls with respect khadem II with with members talking about properties being vacant, it's like well, your rents probably too high. You know, like it's a pretty simple equation with if your property's not getting rented and it's a safe capital property. Take a look at what your rent is that look at market rent, look at how your property can be hairs and work with your property manager and you use one where it may make sense to adjust the rent just because as Michael was alluding to earlier, like vacancy kills like as an investor you it's hard to make money if you're not have any income coming in the door and paying off all those costs that the drums beat every month, mortgage payment taxes, all that stuff. So really thinking long and hard if you do have vacancy, changing the rent to lower it.

Emil:

And even the inverse right like let's say you list it and day one you have like 100 applicants or something that probably means you're on our market, right? So it's it's the same vein and the inverse, maybe you're under where you should be. If you're just getting flooded when you first listed.

Michael:

Something I'm worked in through right now is I've got this multifamily building I just process a finishing rehab and we're getting units online slowly but surely getting them listed and they're sitting for a little bit longer than I would like and so knowing Okay, well this is how much I spent. This is how much we projected we could get for and rents. Do we lower that and take a lesser rent or is it just kind of a weird time in the universe right now we just rent is taking a little bit longer units are taking a little bit longer to get leased up knowing where that balancing act is is so tough, because you definitely don't want to take you know, a real haircut on your rent after you just spent a ton of money on rehabs. It's a balancing act for sure.

Emil:

Guys, this is probably a good spot for us then this one. Thank you guys again for bringing everything to the table leaving no punch on thrown on thrown is that a word? I don't know. We say a lot of things that were like is that word is that a phrase? That's kind of just like our mo on the show.

Michael:

just own it. Just say it like it's a word.

Emil:

Just make up words and don't even correct yourself. Alright guys, well debated episode. Hopefully our listeners got a ton of value. And we will check you guys out on the next episode. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Michael Zuber's Advice for New Investors In Today's Market Nov 14, 2020

In this short episode, Michael Zuber shares his advice for new investors in todays changing market.

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Transcript

Emil:

Hey everyone welcome back for another weekend wisdom episode of The Remote Real Estate Investor. My name is Emil Shour. And in today's weekend wisdom, we're talking with Michael Zuber again, who if you guys have been listening to the show for a while, you're probably familiar with him. But if not, he is the author of a book called One Rental At A Time. He also has a YouTube channel by the same name, putting out daily videos. It's one of my favorite books, one of my favorite YouTube channels, highly recommend both of them for both new inexperienced investors. So if you guys enjoy this one.

And so for this episode, we asked Michael, given the current market and economic environment, what are some tips he has for new investors? So let's hear Michael's answer to that question here.

Michael:

So when I would tell a new investor in today's market, you have to be very careful. What I would tell folks today is you need to really understand where your market is going not where it's at. So this is what I mean by that. So is your market going to grow or shrink in the next 12 to 24 months? I think without question, there are some markets San Francisco being the most obvious is going to shrink. New York City going to shrink any market that is very vertical and has very shoe box and is freaking unaffordable, is going to lose add on top of that high taxes like New York and California recipe for disaster. That said, there are some markets that are the complete opposite, they are going to win, they are going to attract people.

And once you get to do in this market, when you really understand that is you can invest ahead of that. Now most people when I say this, they think Texas, I would tell you Texas has already had the time in the sun, I think somewhere else, right? There were so many other markets that are going to get net population growth. And here's the wrinkle and why I don't think Texas is great. I just think it's already been chosen. What you need to find is a market that wasn't ready, what market didn't have new development, what market are all these people moving into, and there hasn't been a new housing construction of size for a decade.

That is when existing home sales explode higher. That is when rent explodes higher. That's how we can have a national appreciation of 15%. That was reported in September, I have never seen national appreciation of 15% in a month, there are just some markets that weren't ready for the flood of people from high tax areas like California in New York. And if you can invest in one of those markets, man, you are going to have a good couple of years run. But if you're in a hot market that's going to lose people, man, there are people in San Francisco that are just flat out going to lose their properties. And they're going to start with apartments, right rents in San Francisco are down 30% already, if you bought an apartment in San Francisco in the last two years, you are done. You're giving that back to the bank, just how cap rates and groceries, just how it all works. Your equity is gone. You're underwater that you're technically in default.

So there are cities that are going to lose. So if you're investing in one of the ones that's going to be net migration out, might want to sell certainly don't want to buy. But I would tell folks there are going to be they're going to be generational wealth created in the next couple of years. If you can invest in front of the cycle of population growth that's coming. It's going to be massive in my opinion.

Emil:

All right, thanks again to Michael Zuber for hopping on the weekend wisdom to share a little nugget there. And as always, we'll catch you on the next one. Happy investing

A Certified Financial Planner’s 3 Tips On How to Invest Without Getting a Bank Loan Nov 11, 2020

In this episode, Michael and Tom speak with Zac Breverman about how to start investing and ways to get capital without taking a bank loan.

Zachary.Breverman@duncannewman.com

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Transcript

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by Tom Schneider and a very special guest, Zac Breverman. I'm gonna let Zac introduce himself today, but we're going to be talking about all things financial advisor related and how we as real estate investors can use some of the tips, tricks and resources, Zack is going to be sharing with us as rocket fuel for our investing. Let's get into it.

Theme song

Michael:

Alright, so Zac Breverman, you are a financial advisor and certified financial planner, the executive vice president with Duncan Newman and Associates. Welcome to the show, man. So happy to have you.

Zac:

Thank you. I'm really excited to be here.

Michael:

And just so everybody knows, Zac, you and I go way back, we went to high school together, we went to Cal Poly together, we were roommates at Cal Poly. And for some reason I've known some you were still friends to this day.

Zac:

I mean, you really locked me in here, and I couldn't help it. But just stick around. And it's been amazing to watch your journey throughout your real estate investing career that you've really paved the way for,

Michael:

Right on. Thanks so much, man. So today, I would love it. Obviously, I know your story in your background, we're gonna be talking about Certified Financial Planning stuff, financial advisor type stuff, but we'd love for you to share with our listeners a little bit of background on you, and how you got into the CFP game. And then also a little bit about your investing background, because I know that you're also a real estate investor.

Zac:

Yeah, definitely. So I've been a financial advisor for about nine years now. And really, it was one of those things where right after college, I was looking around at different career paths. And I noticed that in the financial advisor world, there were a couple things I really loved about it first part, obviously being able to work with clients and help them accomplish these goals. And I know it kind of sounds cheesy, but it is pretty incredible. To see people start to invest and kind of see those dreams turn into realities over time, no different than in real estate, right. So I really gravitated towards that. Not to mention, I do just love the investment side of it. I really love getting involved in picking mutual funds, or ETFs, or stocks or bonds for that matter and working with clients to figure out a portfolio and a game plan for them.

So I've been doing this for about, like I said 9-10 years now, during that period of time, I realized diversification is important in our in our portfolios that we manage for clients. And then I was looking at myself and how I manage my own portfolios. And I quickly realized that there's one big asset class that I thought was important to add to my portfolio. And so going back to 2015, I bought my first investment property, I say, give you an idea of where I live. I live out in Los Angeles in California, of course, and I found a property out in Texas outside of Houston, that turned out to be a really solid investment and own it to this day, and it's continuing to cashflow well and we've been continuing to look for opportunities from there.

More recently, I actually moved and was able to convert my previous primary residence to a rental. And so that's been a really fun adventure as I've not only turned it into a rental and started getting some nice income from it. But the fun part for me was it was local, and so I could actually manage it. So I was the one boots on the ground, found the renter setup the all of the processes it took to make sure collecting payments and making sure that if there's anything wrong at the property, I could fix it. And so it's been a really fun adventure to not only have an investment property out of state, but also have one local that I could actually manage.

Michael:

That’s so killer. And so you're drinking the kool aid to which I love your CFP and you're doing real estate investing?

Zac:

Absolutely. I think everyone needs that diversification. And so it became really important component to me. And I fell in love with that, quite frankly, that's awesome.

Tom:

I’m curious. How did you find that property in Texas? You know, back in 2015? Are you talking to moneybags Albaum here for some advice on investing, but yeah, just curious.

Michael:

You should have been using Roofstock.

Zac:

Yeah, that's true. I should have I quite frankly, it was one of those things where, actually, Michael, I don't even know if you had real estate at that time.

Michael:

I did.

Zac:

You did. Okay. Yeah, I didn’t remember. So my dad had connections to Houston from his. He went to college at University of Houston. And he had some friends there that became real estate agents. And so over time, he made those connections and quite frankly, I kind of just jumped on board this bandwagon. So my family has some houses in Houston as well. And using that real estate agent, he's also a property manager and made it an easy process for me to buy that property as well. I was going to mention one of the things that it was pretty cool about that Houston house is fortunately, it's gone up quite a bit in value. And so I've been able to do some cash out refinances. And that's really what led me to being able to buy our place in LA, at least a good portion of it along with my wife's savings as well. So it has been one of those vehicles that they always talked about that is supplemented my life also.

Michael:

Zac I talk about that realtor all the time with other friends, because does he own like 50 houses in Houston and self insure?

Zac:

Yeah, so he owns more than 50. There's some crazy stories from back in the day, how he was able to buy all these houses on the insanely cheap price. So he has all these properties. And he decided that there's just no reason to insure, because of the cost of actually ensuring all of them, he might as well self insure the income is incredibly good. He has provided I understand very, very little in the way of debt on these properties. So it's just their cash flow machines. Yeah. So why do you need insurance, when he's not spending nearly the income that's generated? So he's really helping to control his expenses a lot.

Michael:

I was explaining to somebody recently what the whole concept of self insuring was. And, you know, let's say it was 50 houses and you know, it was about 1000 bucks a year to ensure each one that's 50 grand, he's throwing away at insurance, when if the house even if the house does burn down, it might cost 50 or 60, to rebuild it. So right, it's a wash, you know, one year in and the likelihood of that happening is pretty close to nill.

Zac:

Yeah, absolutely. And especially when you're talking about properties, and in Texas, where the values are dramatically less than what they are, are here in California.

MIchael:

Right. And the rebuild cost is cheaper.

Zac:

Exactly. Yeah. So you know, here in LA, if you can find a house for as we were actually just recently talking about this, Michael? Yeah, you know, if you could find a house for under a million, you're feeling pretty good about it. If you're in some of the the bigger cities, or bigger parts of LA, I should say, were out there. It's nothing in comparison. It's pretty amazing, different California perspective, it's really amazing.

Michael:

Alright, Zach. So I want to shift gears here a little bit and talk about, you know, the financial advisement things and the financial advising aspect of real estate investing. And so if someone has been saving up for real estate, you know, they want to make a purchase, but they don't have enough money yet. How would you advise them? What would you tell them to do with their cash? Do they put it in a bank? Do they invest it? You know, what, what are some options for these folks?

Zac:

Sure. Yeah, it's an interesting question, because obviously, it takes time to build up for that first downpayment, if you're planning to put 20%, down, or even even less than that. And so it really comes down to more about timeframe. So if you think it's going to take more than one year, as an example, to accrue enough money to actually buy a property, in many cases that make sense to go and invest, right, there's risk associated with it, of course, right, the stock market goes up and down this year, with a pandemic, we've learned that all too well, we saw the stock market dropped dramatically, and in February and March and come roaring back up, and then the rest of it from that point to today. And so you have to understand that there's some risk associated with it.

But hopefully, over a year or two years, if you have that kind of timeframe, the market will grow and help you build up that savings account so that you can go out and buy the property, give you a little bit of a boost to there. The hard part is if you're if you're really close, if you're six months, you're nine months to buying a property, it just doesn't make sense, in my opinion. And the reason is, is because we don't know if a pandemic is going to come in three months from now, right in December. Sure, there was some news coming out out of China, but we didn't know what was how that was going to affect us here in the US. And next thing I know, we're we're talking about a stock market that's down 35%. And so because of that, you really have to make sure that you have enough time to let the investment recover, if there is a pullback, and in a 3-6-9 month timeframe, in my opinion, it's not enough. And even in a in a year, it's a little it's pushing it depending on how high risk or how much you're in the stock market versus the bond market. So just want to make sure that you've got enough time frame to ride through any of the volatility that may come in the short term. And then hopefully, it helps you give that give you that boost.

Tom:

It's a super insightful and just thinking about, you know, time horizon of buying and how much at risk, you want to put those funds. I'm curious, I'd love your input on just kind of general position on you know, you have your wealth and your investments in certain places, right, and real estate and equities and bonds. Is there any general guidelines you give to clients or friends or whatnot as ways to kind of mix that around it? Also, do you typically recommend having a what kind of cash position you know, as a as a percentage, and I know everyone has a unique situation, but I'd be curious to hear your kind of general guidelines.

Zac:

Yeah, absolutely. It's a good question. So from my perspective, you I'll start with the emergency fund part of it. You, you really do want to always have some cash position or an emergency fund, from my point of view, it does depend on who you are. But if you have somewhere in between, I always say three to six months of expenses, right? So look at your budget, and try and figure out what three months of expenses looks like or six months, then you're you have enough time, I should say you have enough cash to cover a potential hard time, right? Whether you lose your job or a pandemic. But if you're tying real estate, what if someone doesn't pay their rent for one month or two? Are you able to cover it through your cash that you have in your reserves? So I always like at least three to six months worth of cash on hand.

From there, that's when you start talking about investing, right? That's cash is kind of the core part of your portfolio to allow you to do all this other stuff. And once you start looking at at the broader perspective of Do you want to buy stocks? Or do you want to buy bonds as an example, not to sound like a broken record, but it comes down to the timeframe. If you've got 10 years, you can go ahead and be fairly aggressive, and take advantage of the stock market opportunities, right, we know the stock market, at least historically, has gone up quite a bit more than what the bond market has done historically. Bonds are still great investments getting you way more than what the banks are paying, you obviously take on risk their bonds can, you know, companies can go bankrupt and so that bond can can lose its value.

But you know, if you're buying quality there, you're probably okay. Or you're buying a mutual fund or an ETF you'd be just fine. So the longer the timeframe, the more you want to add to the stock market. So it is something where Unfortunately, it is a bit of a time horizon question. Younger investors definitely can take on more risk, assuming that they've got a job, and they're planning on continuing to work and take advantage of the different investment opportunities out there.

Michael:

And Zac, when you say time horizon, what do you mean?

Zac:

Yeah, so it's really about how long until you think you're going to need the money. So I know in, say, for example, I need I need to buy a car. And two years from now, two years in the investment world is a relatively short period of time, it's not six months where I need to keep the money in cash. But maybe in two years, I need to be a little bit more in a balanced portfolio, I say balance, it has stocks and bonds in there. If you're talking 10 plus years, then you can start looking at having more allocated toward stock and less towards bonds. So it's just a matter of trying to find your comfort, right? If you're looking at the stock market, and the downturns make you really uncomfortable, then it's probably something where you don't want to have a lot in the stock market.

It's no different than real estate in that case, right? Sorry to cut you off there. But I was gonna say it's no different in real estate, right? If If you can stomach the market changes or something happening, where you have a huge expense because the AC goes out? And you'd be okay long term. But if, if that makes you really uncomfortable, it's a little bit of a different story.

Michael:

Where would you put on the risk spectrum, real estate? Now, we know that there's some liquidity aspects of it, where it's not as liquid as some of these other. But in talking about time horizon, you know, where do you plug real estate in and thinking about that?

Zac:

Yeah, I mean, for a time around, then I always like to think about real estate as at least a five year investment, personally, five year or greater. And the reason I use that as my scale is because if there is a market downturn, then there is time to allow the real estate prices to recover. You don't want to have to sell when the market goes down, whether that be stocks or real estate. So I always think about it at least a five year timeframe. And ideally, if it's a good investment, and it's performing like you want it to, hopefully you hold it a lot longer.

Michael:

But so as far as categorizing it, if we had to put investments on a spectrum, where would we categorize stocks, bonds, real estate, as far as risk is concerned?

Zac:

Yeah, that's a tough one. Because obviously, there's lots of different real estate. As long as you have all these other components where you have plenty of cash built up. I think real estate is part of a portfolio could be a little bit under the stock market. But you have to make sure you have diversification. If you've got one property, quite frankly, it's probably a little bit higher than the stock market. Because if that tenant moves out, that's a high risk. So as you build out your real estate portfolio, naturally, the average risk goes down. I think a diversified real estate portfolio is more conservative a little bit than the stock market.

Michael:

Yes. Great answer.

Zac:

So did I pass?

Michael:

Yeah you did. We'll send you a check in the mail.

Zac:

Thanks.

Michael:

I'm circling back and this is you tell me this splitting hairs. But in circling back to your car analogy, if you got to get a car in two years, does that mean that you're you know, you're investing in the stock market, whatever the equities market to generate some additional income to buy that car. Does that mean that you're pulling out of the market at one year, eight months to have that in cash? Because if you have a down cycle and that six month time window like you were talking about, that means you take your winnings and walk away and say, Okay, now I know I can buy the car, do you keep riding that train, hopefully upward and kind of gamble with it?

Zac:

Yeah, I can tell you that financial advice from a financial advisor,

Michael:

And then what you would do?

Zac:

It depends on what you're comfortable with. Personally, if you say if you have a solid income, and you're not worried about making up any difference, sure, you can go and wait till take the money until you truly need it. But to be protective, to be a, what we call prudent investor, right? You would probably take the money out a few months in advance in preparation for buying the car.

Michael:

That makes sense, right?

Zac:

It that just depends on personal situation. But surely from a financial advice perspective, you'd want to take the money out and not risk it in the market.

Michael:

Okay, good to know. All right, so let's shift gears again here. And I would love, love, love. So we were talking before we had you on the show and about the different ways that investors can get access to money for real estate investments that might be a little bit non traditional, or might not be so front of mind for folks. Because I think what a lot of people think about investing in real estate, they think, Okay, I got to bring 20% I'll go to a bank and get 80% or 75%, whatever it is. And that's that's all there is to it. And there's no other way. Can you shed light on some of the other options that might be available for folks?

Zac:

Yeah, for sure. Our broad perspective, it's great to go out and get loan. But if you could bankroll yourself, that's even better, right. And there's pros and cons to it all course. But I think the couple ideas that I wanted to share today are really ways that you can at least partially bankroll yourself. So you don't need underwriting to prove you and all that. So,

Michael:

Which is the worst for anybody who's ever gotten a loan will tell you?

Zac:

Yeah, especially now with the refinance moving as crazy as in my…

Michael:

Oh my gosh with COVID. Right. It's insane. And Tom what about you, you’ve been waiting, like four or five months. Right. Your refi?

Tom:

Yeah, it’s been a while, I think just you know, the combination of COVID plus the interest rates being there at just like resulted in a slog fest of getting through. Literally just closed after, like you just like you said, Michael, I we do our like, you know, updates sometimes on the podcast. And it's like the same thing again, and again. I'm still waiting.

Michael:

I'm still waiting, still waiting.

Tom:

Anyways, yeah, closed? Yes.

Zac:

Well, congratulations. That's a big deal these days.

Tom:

Ugh, thanks.

Michael:

It's a huge milestone.

Zac:

Yeah, yeah. So if you're trying to figure out how you can get money on through your savings and other ways, you know, you can always look at your retirement accounts. And like I said, there's pros and cons to everything. But one of the ways that I think does work pretty well is looking at your 401k. So if you're working at an employer, you can been contributing to your 401k. And you've been contributing for a long time, hopefully, you've accrued a pretty good amount of money in there, and you can borrow from your 401k up to certain levels, I'll go through that in a second. And what you would do is, you actually pay yourself back at whatever that interest rate is that they are, that your employer tells you, the rate would be. So as an example, maybe you're borrowing and the company allows you to borrow four and a half percent. When you pay yourself back, you're saying essentially paying your 401k, the loan back with four and a half percent interest, right?

The interesting part is, so you can take up to 50,000, right, it's actually 50% of your account balance up to 50,000. So the most you can ever get as 100 is 50. Grand. So if you have, let's say you have 35,000, or say 30,000, just for easy numbers, 15,000, you could borrow from your 401k. If you have 100,000, you could borrow 50,000, from your 401k. Right. So it's an easy way to get money out of you're not exactly getting it out of your retirement accounts. But it's allowing yourself to borrow your retirement accounts to go and do other things, other investment options. Normally, the way that it works is. And so this is something you'd have to check with your employer, because everyone, every company is a little different. But they would just start taking the repayments directly out of your paycheck.

So just be prepared when you're obviously when you're going through this process, that your paycheck is going to go down a little bit because you are repaying that loan. And the one big risk that I'll have to point out is if you leave your company, whether it's by choice or not by choice, there is a possibility where they can actually put that out as a distribution, which is a that's the risk, the big risk here. Right? Because if it is turned into a distribution, you have taxes on that money, most likely, and it's very possible that you could be paying a penalty if you're under 59 and a half. So it is a great option. Just you got to be aware of the risks and leaving the employer that risk I'd say.

Tom:

So I think I know the answer to this. What have you in a previous employer, you know, had saved up a bunch of money and what was 401k I'm guessing that kind of sweetheart lending where the lenders herself and is not necessarily available if you have some some older retirement accounts that from previous companies.

Zac:

Yeah, so there's a couple things, the question is really about if you're still working, right, if you're still working and your new employer has a 401 K, you can and there's a lot of different options, but you could roll that account into your new 401k. And so now let's just say for example, you got 50 grand at the old 401k, and another, and you've been saving in the new one, and you got another 30 grand, well, most of the time, the employer says, Okay, you've got 80 grand, we're gonna allow you to borrow 50%, so 40 grand, you could borrow from that account, and then go ahead, and, of course, invested in any manner you'd like,

Tom:

Man, this is like our, I think our like 60th or 70th episode, right? You know, and this is one of the coolest things like, I don't know, that like that I've learned. Like, this is magic. So you know, you're paying whatever interest rate, it's just going directly back in your pocket. It's like forced savings, and a forced loan at the same time. This is like, Yeah, I don't know, upside down. Awesome world. This is a

Zac:

We could go down this rabbit hole. And these are all the ideas that are that allow us to do that. I mean, it is pretty cool. I have all these different options.

Michael:

So Zac, just to summarize, because I remember when I learned about this a long time ago, and it blew my mind. Just Of course, I learned that a long time.I was doing 401k loans when you were in diapers.

Zac:

Right, exactly.

Michael:

Well, there was a point eventually got it. I'll get there in a minute. But so what you're saying is that you can take a loan from yourself, and it's not taxed as if you were to take it out when you're in retirement age.

Zac:

Exactly. Yeah, it's since we're on a real estate podcast, I'm sure a lot of the listeners will will be able to do quarter coordinate, or at least think of refinances as exactly what this is. It's kind of like a cash out refinance in a way where you're taking the money out, you're really borrowing it from yourself. There's no tax consequences, just like when you refinance, you take that money out, and that, of course, you have to pay the bank money. In this case, you're paying yourself money,

Michael:

Right? Yeah, no,

Zac:

It's a different different source.

Michael:

That's a great analogy. I actually did this for a property to get the downpayment, a while back, and it was an amazingly easy process. I just, I was through Fidelity at the time, and I just told them how much I needed. And it's a great exactly, you're saying that 50 grand or up to 50%. And then it happened to be four and a half percent interest. And so every two weeks, it just got deducted from my paycheck. And I could choose the repayment period, from one to five years. So I just chose the maximum five years because that made the paint the repayment as small as possible. But it was just I mean, I had the money in my account, like the next day or two days later, it's it's so easy to pay it back. Because I did a refi and paid it all back in one lump sum, and there was no penalties, it was just the easiest thing, probably the easiest money I've ever borrowed.

Michael:

I think that's the true value of it, quite frankly, as I look at that, they call it a bridge loan, right? Where you're borrowing money from one place. Normally, it would be from like a hard money lender or something like that. This case, it's just from your your self, quite frankly. And you take that money and you go and you rehab a house or you do something but that adds value to a property. And then you can refinance, get a more traditional mortgage, or you don't have to worry about it, and you pay that loan right back. I think that personally, I think that's where the real value of something like this comes in play.

Tom:

And just the last kind of practical, tactical question is, is it all be managed through the company that manages your company's 401k? Is that Right?

Zac:

Yeah, exactly. So all of this would happen through your employer's 401k. And it has to be your current employer, because like I said, If you leave, that's they're not going to let you borrow anymore, since they can't take from your paycheck anymore.

Michael:

Awesome. And then I guess one of the other big downsides would be the opportunity cost of not being in the market. Yeah. Because those funds are actually out of the account. Now, raise your borrowing on margin or anything like that.

Zac

Correct? Yeah, that's definitely one of the big potential downsides, right? So if you're an aggressive investor, and you're in 100%, of the stock market, you're missing out on whatever those stock market returns are. So you definitely have to make sure it's worthwhile and say, I get I'm getting that interest rate. I'm getting that. You know, you mentioned four and a half percent right on your loan, Michael?

Michael:

Yeah.

Zac:

You're getting four and a half percent, but could you be getting more money on that money by doing something else? Right, by leaving it in the stock market? And that's possible, right? It just depends on the timing. But you want to make sure if you're doing this, that that investments and awesome cash on cash return kind of investment.

Michael:

We're gonna be digging in here. Just a minute about a couple of different retirement vehicles and retirement plans. Can you give everybody kind of a high level overview of what some of the different vehicles are, you know, 401k IRA, Roth IRAs, you know, what are those and who might have one?

Zac:

Yeah. So I always think about as if there's three different buckets for that you can invest money in. So bucket one, number one is your taxable money that's like if you have a individual name, joint checking account that you want to move money into an investment account, or buy property or whatever the case may be, that's all non retirement related, right in the sense of, there's no tax benefits by using retirement accounts. So bucket number one, taxable accounts. That's, that's number one. Number two, would be traditional retirement accounts. And traditional retirement accounts are available to essentially whomever but there are limitations depending upon income, if the contributions are deductible, and there's some tax conversations that you want to have with either with your financial advisor or with your CPA.

But the traditional retirement accounts, the basic gist of them is, you can put money into this. Ideally, it is tax deductible, so it comes off your income. And then on the other side is once you turn 59 and a half or older, then you can take that money out penalty free, and you just pay taxes on those distributions. So where's the big benefit, there are one, it's on the contribution, right? You, you have the ability to deduct that contribution from your income. Assuming you fall within these guidelines, like I said that you can work with your CPA to narrow down. But the big benefit comes when the money's in the account itself. While your wallets going you don't have to worry about taxes at all. Right. So if you sell an investment, for a gain, you don't have to pay taxes on that gain. And so the money can compound a lot quicker over time.

So for younger investors, these are retirement accounts are really great opportunities to have quicker compound interest, because you're not paying taxes on those gains, you're just paying taxes when you take it out, hopefully in a really long time from now in retirement. So traditional IRAs. Now, traditional, I say traditional retirement accounts probably more broad. And that's because you can include a lot of different types of accounts. So you can have a traditional IRA, you can have a traditional 401k. If you're self employed, you can have what's called a SEP IRA account, or simple IRA account. These are all pre tax or traditional retirement accounts. So that would be the second bucket. The third bucket is Roth IRA accounts or Roth accounts in general Roth retirement accounts.

Now, a Roth has benefits as well, but they work in different ways. So there's, of course, the contribution, and there are limitations based on your income. So if you make too much money, you might not be able to contribute to a Roth IRA account, they have, they cut you off, essentially, the IRS cuts you off at some point. And so when you put money in there, if you can, you don't get any tax benefits for doing that. So first year, quite frankly, you're probably a little annoyed, you're like I'm putting this money into an account, I can't touch it till I'm 59 and a half or older. And then, you know, at the end after that, then I can finally start using this money. But the big benefit here is that even though you pay taxes, you put the money in this account, once it's in that account, it grows completely tax free. If you're a young investor as an example, or you you think you're not going to need this money at all, if you're already into or are close to retirement, this money is hugely important, because the money that grows tax free is about as good of money as it can get.

Right. So Roth retirement accounts are absolutely and considered the third bucket a really important part of a portfolio. And the the considerations there or I should say the different types of accounts, your traditional IRA. So in here you have a Roth IRA, and you can have a Roth 401 K, but depending upon your employer, some employers allow you to have a Roth 401 K, which is one quick note, regardless of what your income that you can contribute to a Roth 401k. There, like I said, there are limitations on Roth IRA accounts. So kind of weird that they forgot to include the Roth 401 k as part of that limitation.

Michael:

But so Zack did, maybe I misunderstood you what you said in the traditional 401 K, the growth is also tax free. So why is one How is that different than a Roth 401k?

Zac:

So officially, that would you would with a traditional retirement account, you would say that it's tax deferred, right? So you put money in there, it's all pre tax money, so you don't pay taxes until you take it out after 59 and a half. Like I said with the first time homebuyer, that, things like that there are a few ways where you can take some money out without paying a penalty before 59 and a half. But the way that we would always like to think about as these retirement accounts are for retirement. So you'd wait till after 50 and a half to start taking distributions and you don't have to pay penalties, but you do still have to pay taxes on this account.

Michael:

Okay?

Zac:

The Roth Ira in sorry, if I was confused in the first go around was really where you pay the taxes on the way in. You don't have to worry about taxes while it's in there. The benefit is afterward when you take those, those funds out after 15 and a half the money comes out tax free.

Michael:

Perfect. All right, what else you got?

Zac:

So the next one is actually if you've got IRA accounts. So and this actually applies to 401 K's also, but it's an borrowing from yourself. In this case, you actually can take money out of an IRA account. And this could be a for a Roth IRA, or traditional IRA, up to $10,000. And if you're married, it can be 10,000. For each of you, if you're buying a new property, essentially, it's a first time homebuyers. And so the rules around this are actually a little bit more flexible than I think a lot of people would imagine. Right? The the definition is that your first time homebuyer is just that you don't have ownership interest in your main home or primary home anytime within the last two years of the new purchase. So it does make it quite a bit more accessible to you than just saying first time homebuyer maybe you bought a house 10 years ago, and you've been renting for a few years or something like that, and you want to go back to buying this gives you a huge opportunity to get a little bit more cash.

So that's one ways you can do this first time homebuyer exception to take money out of retirement accounts before the age of 59 and a half. And for traditional IRA. Well, for both of them, you don't pay penalties for traditional IRAs, you just got to be careful because there are still taxes involved. Right, because all that money is still pre tax. With Roth, it's actually quite a bit easier. There's just they waive the penalty for first time homebuyers. And Roth is after tax money. So you're good there to like I was saying with both traditional IRA accounts and Roth IRA accounts and 401K's for that matter, you can do that $10,000 for each you and, and your spouse, if you're married, to take that money out and use it for the first time home purchase.

The one other way that you have the opportunity to, in a way borrow from yourself, it's a little different than the 401k loan option. But it's actually called the 60 day rollover. And so there are lots of different ways that you can roll your IRA account money to other IRA accounts, maybe at a different firm or move it from a 401k to an IRA, or whatever the case may be. There's lots of different considerations. So you want to understand all those different options. But one that's really interesting is called a 60 day rollover. And what that means is that you're going to take money out of your IRA account or out of your 401k account, borrowing, it's literally a distribution. But you have 60 days to get that money back into the account. And as long as that money's back in that account, within 60 days, you avoid taxes and penalties. And the the reason that is really helpful my opinion, is because let's say you do need to you maybe you want to pay cash for a house. And this kind of pushes you over the top to be able to pay cash, so you can get a better deal.

And then you can go and refinance and assuming it's not the middle of a pandemic, and rates are really low. And all those things that are causing mortgages to take forever to close, aren't around at that point. 60 days hopefully would be enough time for you to close and get that money back into the IRA before you have to pay taxes and penalties on it.

Tom:

It's like a like a vacation. Just want to go out a little bit, see the world. You so you can do that with…

I was gonna say conjugal visit, that's not the right term. Wrong term. The opposite of that. Just so you can even do it. Even if you're moving to a different account. So it can be even be in that same account, jumped out of it and then put it right back into that same account.

Zac:

Yeah, yeah, for sure. Mm hmm.

Michael:

Like how stringent it is like the 60 day Really? 60, 61 62 days?

Zac:

It depends on everyone. The IRS knocking on your door. You know, if you want the IRS knocking on your door, sure. Take it out for however long you want. No, I mean, that the reality is that, from what I understand, and this is where a CPA question because they're the ones that I get actually reported, of course, the IRS, it's 60 days. I wish I could say otherwise. It'd be awesome if you had more time, but I wouldn't push it.

Tom:

And this is all just in a similar question I had practical tactical, is your you would just manage this with your the company that is you know, what's the right word? The investments holder?

Zac:

Exactly. That's holding that Yeah, yeah. So you can just work with your whatever investment firm you're with. They'll help you with the distribution. And as much as you know, I, you'd like to trust the person that you're working with, I would put a calendar reminder for, you know, 45 days out. And make sure that that money is kind of getting wrapped up with whatever refinance or whatever you're doing to make sure that money gets back in the account on time.

Tom:

Incredible. I'm fired up about both of these magical money.

Michael:

So Zack, what happens if you don't get it back in on time the bank takes too long to refinance done, you know, we can we can tell the IRS Oh, it's the bank's fault. My guess is they're not gonna buy that.

Zac:

Yeah, they don't care at all.

Michael:

If this happens how fingers do you lose?

Zac:

I start with 10. And then each time it happens, I just lose one. So I'm down to four fingers? No, no, the reality of this is that if you don't put that money back in, and it's a it's a, it's a traditional IRA account your tax on it and if you're under 59 and a half, you could be penalized to right. So that penalty right now is that is 10%. So you could be paying depending on your incomes a lot in taxes on that distribution, which is why getting it back in 60 days, is really important. Nobody wants to pay the government any more taxes, and then the CPA tells you to do. And so you want to manage that as best you can.

Michael:

Make total sense. And that's great. Okay, you must be out of ways to get money, or

Zac:

Almost.

Michael:

But wait, there's more?

Zac:

When you get two options, we give you the third for free. Now they. So the cool part is actually with Roth IRA accounts, there's a lot of different options there to where you have, there's a lot that goes into it. So it is something that you really want to be careful. And you can look this up on, there's tons of websites that you can go to, to get the details in your own situation. But the basic idea is that if you have a Roth IRA account, you can actually take, potentially take money out of that account, your contributions specifically. And as long as you've had that account for more than five years, then it's potential where the the earnings would come out tax free as well. So you can get because you already paid taxes on your contribution, right? You don't have to worry about those taxes, but you could potentially take the earnings out on top of that.

And it really just comes down to making sure you have the account for a long enough period of time. And making sure you're not taking too much money out, you're still limited to the reason why you're taking money out in the first place. So first time homebuyer ideas and things like that. So but after 59 and a half, then this matters, right? As long as the money's been in there for more than five years. You're not paying taxes, you're not paying penalties. And you can take as much as you want out. Before that there's a couple complications that that you just want to be careful. But there's definitely ways to access money from your Roth IRA accounts and not have a huge tax bill, at the end of the day.

Mihcael:

So what are some of the other reasons that you could take out the earnings on the Roth IRA?

Zac:

Good question. So there's quite a few. So you could take it out for qualified education expenses, you could take it out for a disability or a death in the family. I believe it's for a family I know, if you pass or as an example, God forbid, then your beneficiaries could take it out at that point, regardless of age. So there's a handful of other factors that can come into play to allow you to take the money out without paying taxes or penalties on that money. You just want to I know it sounds boring, but you just want to check with your CPA. I mean, that's the big thing. These are the CPA is gonna be the one to make that final call, because that's, that's the world they live in.

Michael:

Fortunately, and fortunately for us, unfortunately for them, I don't know how you want to look at it.

Zac:

Yeah. faxes and dealing with the IRS does not sound like the greatest job to me, but there's probably people who hate the idea of being a financial advisor too.

Michael:

So that’s why I leave it to the big dogs.

Zac:

That's right.

Michael:

Perfect. Okay, Tom, any other questions?

Tom:

No questions, just comments. I'm just tickled pink with what I have learned today. I'm like, immediately gonna, like round up me and my wife's retirements house and then go, go make some more. Make some more money with some more money. Anyways, yeah. Incredible, incredible content. This is this is great, Zachary.

Zac:

Yeah. Now, I'm glad that this is helpful. And yeah, I think that big thing is just creating, making sure that everybody has a team around them. Like just like as a real estate investor, you want to have your property manager, you want to have, you know, your contractors or, you know, whoever creates that full team around you. The same idea for financial planning and financial advising specifically, it's like, you want to have your financial advisor, want to have your CPA, you want to have your state attorney kind of get make sure everything's in line. I think after that, ever, collectively, everybody can help make sure that you're successful in your investments.

Michael:

Right on and speaking of Zach if people have other questions, questions about financial planning or financial advising would love to utilize you for your services? How what's the best way folks get in touch with you?

Zac:

Yeah, they can send me an email the email for long one but it's we can maybe post it in description or something like that for here totally. But it's Zachary.Breverman@duncannewman.com.

Michael:

Right on. And Zac, when the world opens back up, the pandemic is over. We can go eat at restaurants again. Where's the first place you're headed to?

Zac:

That's a tough question. Good. Potsie fancy. Yeah, this is oily water. Honestly, this is the most nervous I've been. Quite honestly, I've actually been okay with eating takeout more often.

Michael:

Okay.

Zac:

It's just easy. You know, you don't have to get all dressed up and do anything fancy.

Michael:

Well, that's not a fun answer tells me to go sit down and eat.

Zac:

Quite honestly the one thing that I right now I really miss is having a really good steak, like from a high end steak restaurant.

Tom:
So hard to do that at home. It hard to have that same experience.

Zac:

It is tough. It is tough. And I can try and make a steak as much as I can. And it just don't ever come out. Not like Michaels the least.

Michael:

Yeah, it’s because you use a microwave. Of course it doesn't.

Zac:

Yeah. Well, you know, I always mess up the timing. So it’s problematic.

Michael:

Right on. Well, Zac, thank you so much for hanging out with us. This was super super insightful, as all of our conversations are. I really appreciate you taking the time today.

Zac:

Thanks for having me. I appreciate it's been fun.

Michael:

Okay, everybody that was our episode a big big, big thank you to Zac Breverman for coming on the show was such a pleasure to have you, looking forward to doing it again in the future. We talked about a lot of things in that episode. So go back and give it another listen if you didn't get all of it. Use it as a jumping off point to go research and have additional conversations with financial advisors in your world. Looking forward to seeing you on the next one. Happy investing.

Ignore The Noise - Here’s How to Actually Calculate Projected Cash Flow Nov 09, 2020

In this Episode Emil, Tom & Michael cut through the noise and explain how to calculate cash flow properly.

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Transcript

Emil:

Hey everyone, welcome back for this week's episode of The Remote Real Estate Investor. My name is Emil Shour. And I'm joined by my co host,

Tom:

Tom Schneider.

Michael:

Michael Albaum.

Emil:

And today we're going to be talking about how should you actually calculate cash flow. There's a lot of different formulas out there. And we want to clear the air and give you a we believe is the best way to calculate what your projected cash flow should be as you're analyzing a property. So let's get into this episode.

Theme Song

Emil:

Alright, guys, so this was actually a topic that I thought would be interesting to cover, because I feel like there's a lot of misinformation out there. And I feel like it's really easy to read case studies and blogs and go on YouTube or on social media. And you'll see people talking about their cash flow. And the numbers seem outrageous, right? It's like a property renting for 1100 dollars. And they're talking about $400 of cash flow a month. And obviously, it seems like there's a lot of things missing from the way their, their expected cash flow should actually look like. And so I thought it'd be good for us to dive into this on this episode. Have you guys seen the same thing? Like a lot of people?

Michael:

Yeah, I have a property that rents for 1100 cash flows 400 bucks a month, so this is gonna be interesting.

Emil:

Oh, do you

Michael:

No just kidding.

Emil:

Do you guys see this a lot? Do you guys like get this kind of feeling like being prevalent out there that a lot of people maybe aren't calculating cash flow the right way?

Tom:

Or they just inflate it a little bit to feel good about yourself.

Emil:

Sound cool?

Michael:

Yeah, he's a bit of an ego thing.

Tom:

Yeah, the thing with returns and what I like about this episode is man assumptions are just so important. And two people can be looking at the same deal, analyzing it and come up with completely different returns based on the way that they're calculating these, you know, what's in the sausage factory of those calculations is just so critical.

Emil:

Yep.

Michael:

I agree. I think that's kind of where deals often get made or broken is in the assumptions. And if you make a bad assumption, you can very easily buy a bad deal. And you could just as easily lose out on a good deal. So getting good at making assumptions is huge. But I totally see this regularly, where people aren't including the things that I would include in their cash flow calculation to determine what it is, I think it's it's too often to light.

Emil:

Yeah, I agree. I've actually seen examples of this of properties that I've analyzed, like someone posted on Twitter, a property they just purchased. And I remember that exact property, and I had underwrote it as well. And my cash on cash was like half of what, you know, they said their cash on cash was going to be so I've seen it on like, on property, like specific properties, I've underwritten, too. So hopefully, it's a good episode for people to just have like a little bit more of like realistic expectations of what their cash flow could look like after they really account for everything and peanut butter spread all the expenses that come up throughout the year, right, Tom?

Tom:

Jiffy, that Oh, yeah.

Michael:

Jiffy on the spot?

Emil:

All right, let's start out by talking about like, what is the formula? What expenses should you be considering as you're calculating this number?

Michael:

The PITI is an acronym for your principal, interest, taxes and insurance. So the principal and interest is just determined by whatever the mortgage looks like, whatever the interest rate, whatever the amortization period is, and then your property taxes, if you are escrowing, these, the lender will often pay them for you. And so you pay monthly into this account. And you don't have to have this big property tax bill once or twice a year. And so I would always call the county assessor to determine what the after sale property tax looks like for an investor, and then obviously, divide that number by 12, to get a monthly cash flow amount.

And then your insurance, I use a very ballpark estimate of point eight 1.2% of the purchase price for properties under 150 K. And for properties over 150 K, you're probably looking closer to one half - .8% of the purchase price, one half percent to .8% of the purchase price. And so I'll use that number divided by 12. And again, apply that to my monthly cash flow. So you've got your principal interest, taxes and insurance, and then your property management on top of that, Tom, what are some other expenses that I want to hog the mic here that you would include in your monthly cash flow?

Tom:

Ohh, vacancy, so an often assumption used is half of a percent of the annual rent or perhaps a month, depending on what that term time is, like, like a more conservative would be doing it a month, but hopefully that would be shorter than that. Another one is within that property management fee, or I guess this would be separate but they would be managing that process. If you're using professional property management would be turned costs would be repairs and maintenance costs and to define the term cost. That's the cost You're paying after your tenant moves out, and you have to get the property rent ready again. So that's typically more static stuff, some paints and carpet, perhaps if there's some older deferred maintenance that was there when the tenant was living there that kicked down a line that would be addressing any of those issues. So turn costs, what do you typically budget for your? I'd love to hear what you guys typically budget around turn costs.

Michael:

1 million dollars. I've seen this inverse relationship between monthly rent, amount of the property and turn costs. So if I've got a $2500 a month rental, my turn reserved that I'm escrowing is going to be a lot less than a $500 a month apartment. So can I have a bigger security?

Emil:

Do you guys have a separate turn reserve? Yes, don't just leave it as a repair and maintenance and it kind of just gets lumped in there.

Michael:

I mean, it can, I just am mentally bucketing money for when the turn comes, that's totally independent of the regular repair and maintenance and the regular capex that I'm anticipating and also reserving for a page back the roof, exterior paint that kind of stuff.

Tom:

You have a mental escrow account.

Michael:

Yeah, mental escrow account, but also I put it into my calculator, it is a separate line item. But yeah, mentally, I'm thinking about like, Okay, this money is going towards the eventual turn inevitable term for kind of middle of the road rental, I put a couple hundred bucks. Yeah, on it, depending on when the last time that the unit was turned. If you did a big turn at the beginning, your subsequent turns are probably going to be a lot less. And you can also do things on the front end, like tenant proof properties, put in vinyl flooring, laminate flooring, as opposed to carpet, you never have to worry about that, again, you know, maybe tougher cabinets, builder grade cabinets, you can put into the getting into get less banged up. So there are things you can do on the front end to make your turn reserves down the road, your turns less expensive.

Tom:

I’m going through a turn right now on one of the properties. And thankfully, the property manager which just did their move out inspection in the properties in great shape. So this is going to be a fairly inexpensive turn, it's like 400 bucks or something like that just to do kind of a deep cleaning. But in my experience, turn costs have ranged anywhere from 400 to like 10,000 bucks if there's a lot of deferred maintenance. And where you see those big deferred maintenance is oftentimes if you have a tenant that's been living in the property for a super long time, then stuff builds up over time. Sneaky stuff sneaks up like fences and any kind of like loose decks and stuff like that is the one that always surprised me that I'm like, dang, that's expensive. So in budgeting, kind of depending on the condition of the home, my kind of down the middle of the line, say we're talking about a 1700 square foot three bedroom, two bath, I typically budget around 2000 bucks or something like that for the turn if it's occupied. And it's, you know, been so for 12 months.

Michael:

Wow. $2,000 you budget for the return? I mean, for the for the turn,

Tom:

I'd say anywhere between 1000 and 2000 bucks. I mean, I don't know you don't necessarily and be overly cautious, but then optimistic.

Emil:

So how, at this point, how are you even making any money on these with all those assumptions? I'm kidding, we don't have to get into that. But I think the only other one we're missing is utilities. So if you're buying a single family home, most of the time, water and electric are going to be even lawn service, all that stuff is going to be covered by the tenant. So you don't have a ton of utilities to pay for. If you're buying multifamily. A lot of times you as the owner, you're on the hook for water heat, sometimes depending on where you're buying a couple other different things. So I've noticed with multifamily, you have to account for a lot more utility versus single family, the tenant is covering a lot of those.

Michael:

And also depending on how the property is metered, you may not be able to push utilities onto the tenant for multifamily and a lot of multifamily also have what's called a house meter, which is a common area usually just electric meter. That's good for common area lights, exterior lights, that kind of thing. So you'll as the owner will likely be responsible for that. Let's say again, just check how the property is metered. And that'll give you some indication of whether or not you as the owner are going to be paying utilities whether or not you're going to submeter it or check some of that expense back to the tenants in the form of a utility bill back or just included on the rent. Again, check how it's metered.

Emil:

Yep. So okay, so I think those are all the different line items It was interesting to do because you guys have a couple more line items than I do so that may be some homework for me to start being a little more conservative. I thought I was being conservative here I am looking at you guys like dang

Tom:

Looking back at my bottle I I estimate typically like 1000 bucks not 2000 bucks in that like catbacks turn costs but a lot of that is dependent on what I'm seeing like within the inspection if it's like in pretty good shape your point to Tom How do you ever cash flow on your on your property with that turning cost is is right and so yes, a little bit less overzealous with my Yeah, not 2000 roughly you know 750 to 1000 bucks is is more where I target that turn costs the once a tenant moves out. So within that cash flow assumptions,

Michael:

And is that inclusive of like cap x reserves to for HVAC roof? Or is that a separate line item?

Tom

Two separate line items. So one of them would be for R&M for costs that I'm incurring? Well, the tenant is in the property. So roughly 75 bucks a month, maybe 100 bucks a month, and hopefully a lot of the months that doesn't happen, and you don't do that, but then a separate line item for reserve for capital expenditures.

Michael:

And so is your turn reserve considered cap x?

Tom:

Yes, that is that. Am I thinking about this the same way that you are? What? Go ahead, Michael.

Michael:

Yeah, I mean, I just have a separate, I break it out, separate I call it, you know, turn reserve versus capex. My turn reserve I expect to spend every year or every tenant turn versus the cap x is more, I think 10. Instead of that a little going into this bucket, that's going to be a piggy bank to draw on when I need to replace the roof replace the fat. But at the end of the day, I mean, the money is going into the account anyhow. So I just mentally earmark it for certain purposes.

Tom:

I like it. So just to paraphrase the three buckets that you have within these type of costs is R&M tenant occupied, right. Yeah. And then one would be turned costs just bread and butter, cleaning paint. And then the third one would be more specific for like, roof or like, you know, major property system? Ah, back. Yeah,

Michael:

Big ticket systems.Yeah, exactly.

Tom:

I like it. Nice. Nice.

Emil:

You got a lot of very detailed Michael, I like it.

Michael:

I'm a reformed engineer. I don't have a choice.

Emil:

All right. So we've gone over, like, what's the formula world of things we consider, we've kind of like sprinkled in some of our assumptions, but maybe we should just go through each line item and give what we think maybe are some good assumptions for people. Would that be helpful?

Michael:

Totally. Let's do it.

Emil:

Okay. All right. So mortgage, I don't think we need to get into how you can go online, use a mortgage calculator, figure out your mortgage payment. That one's pretty, pretty simple. Insurance. Michael, I really liked your, your kind of formula, I use something pretty close. Can you describe that again?

Michael:

Yeah, so I like to use and this holds fairly true for properties. 150,000 purchase price or less. So I like using point eight to 1.2% of the purchase price. So let's just take an example a property's 100,000. on the low end, we're talking $800 a year on the high end, probably around 1200. And what's going to make the difference on that sliding scale is one, how conservative how much insurance? Are you looking to get? What type of policies that are replacement cost versus actual cash value? Is it really a comprehensive policy? Or is it named peril? So I am a very conservative person, I come from the insurance industry, I grew up in the insurance industry, so I get a more expensive policy than is available for that same hundred thousand dollar property, you know, my guess is you could go get insurance for 400 500 bucks annually, it is available is out there.

But it's probably not going to be the type of coverage that I'm comfortable with. And so to help me sleep at night, I'm going to up the coverages, I'm going to add some additional layers to it probably get some additional liability coverage. And so the additional coverages just have additional cost. So for the extra $300 a year, or $600, or whatever it is, that's often worth it to me. So I've just over the years and purchasing properties and helping other people purchase properties, that point eight to 1.2% of the purchase price tends to be fairly reasonable. And I'm confident that getting that type of coverage, you shouldn't be paying much more than that, that's going to be on the high end, being very conservative.

So if that ends up being your biggest expense on the property, you know, of course, we might want to go back and take a second look at things and say, oh, maybe we were too conservative. But I find that typically the $300 that we might be too overly conservative isn't going to push something from a no go into a go category. There are typically going to be other expenses that are significantly larger as a percentage of the income that we want to take a second look at and see if we can't refine those a little bit more. So that was a super long winded rant. Hope that answers the question Emil.

Emil:

No, that was good. That was great. Okay, so that's insurance. Tom, anything you want to add there anything you kind of like to use for an assumption that's made different from what Michael mentioned,

Tom

If you look at the Roofstock calculator, really helpful tool, you log in to Roofstock and look at an individual listing. And then you click on financials. Just below that financials tab, you can click on cashflow, you can see kind of a rundown of all these different costs. The Roofstock calculator is pretty handy in that you can see all these assumptions. One thing I like about Michael's example for insurance is he does it as a percentage of the purchase price. It's just kind of general guidance. And a lot of values in the risk calculator does it a percentage of income. So I think in some cases, a percentage of income makes sense. And in some cases, a percentage of the value makes sense. So just as kind of like an FYI, you can see these assumptions in here and looking at a property that's $110,000 we can see this insurance value is pretty close to Michael's assumption of point zero Point 8% point oh 8%.

Michael:

Yeah, yeah,

Tom

Where that would be $800. This example is a little bit less than that at $110,000. Home is around $600. But within rootstocks calculation for insurance, they'll actually get a value that a insurance company will, will bind again. So part of the Roofstock’s operations team, they'll go out and work with one of our insurance partners, insurance costs can change based on what kind of deductible you have. So depending on what value you have, it could either the price go up or down. But that's my two cents is I'll just touch on Roofstock as a platform and their calculator, the value they have and where it comes from.

Emil:

Cool. So next one is property tax. I don't think you should estimate anything for this one, I think Michael mentioned called the property assessor, some cities, they have a like part of their website, you can literally just go put in the value that you're going to be buying at you and put in the address, and it'll spit out what the new property tax will be. So this one's probably no one you kind of estimate based on percentages or whatever. This is something, it varies from state to state, city to city, you should probably just go figure out what it is for your market. So you can accurately estimate it.

Tom:

There's a lot of landmines and trying to calculate property taxes, one of them being if you're looking at last year's taxes, the current owner might be an owner occupied, so they get a homeowner's exemption. So I would be conservative in that property tax assumption.

Emil:

Cool. Alright, so next one is property management, property management. This one's usually pretty easy to figure out, you know, as you're interviewing different property managers, you find out what their property management fee is, whether it's flat fee or percentage of monthly rents, like Tom and Michael were talking about, and this isn't something I should I do but I should be doing in that property management or you can have it as a different line item, adding it make sure you add in whatever you think for lease or releasing fee, right, so releasing fee will usually be a smaller percentage than a completely new lease, but factoring in every year that the property manager is going to charge either a release fee or if it's a new tenant, a leasing fee. So adding that up there, Tom, you want to add something

Tom:

Yeah, just specific to roof stocks calculator that it has or any calculator that you're building perhaps in Excel with rootstocks calculator, It defaults at 8%, I remember something that we wanted to do on the product side was make it like updated dynamically based on picking a property manager if you use one of Rootstock’s preferred property managers to automatically update, but whatever the case is, when you know what that property manager fee is going to be for rent collection, you should update your calculator accordingly, within rootstocks calculator, it defaulted. 8%, but you should keep that updated.

Emil:

All right, give me on. Okay, so after property management, we have utilities. And so for utilities for anything, two units, plus, I use $1,000 per year per unit. So if I'm looking at, let's say, a four unit building, and I want to figure it out monthly, it's just $1,000 times forums 4000, divided by 12, to find the monthly for single family, I don't have a more cookie cutter approach. Again, it's it's a lot of the times utilities are going to be covered by the tenant. But sometimes depending on some cities, like I own a property in St. Louis, a single family home in St. Louis, the water bill and the sewer bill are separate. Whereas most other cities, it's all on one bill. And so the tenant pays the water bill. But the sewer bill comes to me as the owner. So that's something I have to factor in as part of my utilities. Are you guys any kind of formula you use to estimate utilities?

Tom:

I think on every lease that I have the tenant pays for utilities, I don't even have that in my, in my model, I guess it's more common with multifamily and bigger stuff. But utility isn't even something that we'll have. Perhaps during the turn, you know, I might spend like $10, or whatnot, just during the turn time where the utilities will be on me as the landlord, but for the most part, yeah, I don't consider that. In my cash flow.

Michael:

I was gonna say for me for multifamily, it's, it's similar, I think 1000 bucks a year per unit is fairly reasonable, depending on what utilities are being paid by the owner. And usually the listing will say on or paid heat, water or whatever. And that can give get pretty good insight into all tenant paid utilities. Okay, that's gonna be a whole lot less than a grand a unit a year,

Emil:

Like 12 months of expense, prior expenses from the seller. And so you can kind of see like, how much are they paying for all these different expenses and see if it lines up with what you have and if you need to adjust up or down but as I have no information, I just put $1,000 a year per unit.

Michael:

Yeah. And I would say don't hope that you get those t twelves. Go demand those in the due diligence. I would say that's something that you really need to get a handle on before you close the property because you could find out that you were way off on your estimate and really buy yourself an alligator.

Emil:

As our good friend Michael Zuber likes to call it absolutely. Next one is repair and maintenance and capex some people separate those out. Most people separate them out. I have them as one line item now and for multifamily, I'm using hundred dollars a month per unit is what I do for repair, maintenance and capex just kind of all together. for single family I've usually used 120 550 per month on single family is the amount I've used for repair and maintenance and capex as one line item. How about you guys?

Michael:

like Tom for my repair and maintenance, I break it out into those three that we talked about. So for repair and maintenance, I'll use 75 $200 a month depending on the property size, and location and tenant class. So in a milder climate with a good tenant, that's not a massive property, I'll use 75 bucks a month, all the way up to the size of 100 bucks a month. And then for capex, I really let the inspection report dictate what that looks like. So if you've got that in advance, like on a roof stock property, you can get a decent handle on what that might look like. versus just looking at the photos or plugging something in for a run of the mill single family home that seems to be in decent shape 750 bucks a year, between 750 to 1000 bucks a year for capex usually should do it, that's, you know, in three years time, you'll have 2000 plus dollars set aside.

And also, depending on if I'm going to get a home warranty or not, for that property is going to also determine what type of capex budget I'm looking at. And capex is kind of one of those tough ones too, because it's a bit of a living, breathing, moving target. If I just replaced the H fac this year, well, now I'm going to put less money set aside for that each of that going forward because I know I got another 10 to 15 years out of it. So depending on the life of the systems, I call it the property will dictate what that budget what that number should be.

Tom:

Ditto to Michael and I like that concept of kind of trade off, you know, you might not what you might be spending more on one year on the turn or or catbacks you know, major property systems that's going to take away for future costs related to to R&M. So similar to Michael and structuring that and if you really wanted to geek out and get really sophisticated on building a crystal ball to estimate some variables that we used when I was working on one of the REIT the vintage of the property was the size of the property just because oftentimes these costs, especially on the turn are directly related to how big the property is and square footage, and perhaps certain vintage, you might expect more or less on those turn costs. Those are some important variables to consider.

Michael:

The one thing I would say on vintage is just look to find out what's been done on the property. I've got a 4-Plex that was built in like 1892. And we did a total gut rehab on it down to the studs, we put in brand new electrical brand new plumbing, brand new roof. I mean, everything is brand new. So the year of construction is at 92. So if someone attacks record, that's what they would see. But as far as the insurance is concerned, the effective year of construction in 2019. So I would say you know, with a take it with a grain of salt look just a little bit beyond the year of construction to determine Okay, what was done? Absolutely, if something was built in the 50s it's going to have more maintenance and something that was built in 2000s. But if that 1950s has all new electrical plumbing, I would say they might be comparable or that might could even be more updated.

Tom:

before we run out of time. I'd love to hear your guys's thoughts, more multifamily dudes on like in ciliary and silivri income like perhaps having a laundry machine or having like storage sales. How do you guys underwrite that when you're thinking about cash flow on your multifamily? Because there's also the costs of like up keeping those type of amenities?

Michael:

Absolutely. So for me, I'll just jump in here Emil for I gotta hop off. It's something that I think about, and we'll calculate if it's like a reasonable assumption. And so for me, I just have laundry, the vast majority of multifamily on site coin laundry, it's not a big moneymaker by any means. I mean, 15 to 20 bucks a month, maybe. But there's cost associated. so there's costs associated with that T rex and paying the water and electric bill for those machines because those are on house meters. So the big ones that I like that I use is storage, digital storage or parking. I know pretty darn sure what I can get for those on a monthly basis is for rent comps talking to property managers and also it has zero expense. So those are ones that I really like adding into the pro forma or using to drive value and increase the NOI.

Emil:

For me I am newer to multifamily so I don't have like the confidence Michael does and knowing Okay, we have a garage we have some spaces how much we can get for it. So I don't even account for any of that and laundry. Even if you have a bigger building maybe you account for it, but I haven't been when I'm looking at stuff I just those to me are are extras, but I haven't really been accounting for those is that extra income because like Michael mentioned, they do come with some extra expense as well. So unless it's parking, parking and storage, that's that's on the property, but laundry, it's you know, you're paying for that as a landlord potentially. Okay, so you guys had mentioned turn that you guys actually have it as a separate line item. I think we already were to talk about kind of what you guys set aside for that. So Tom, you mentioned like $1,000 every year every other year, how do you set that term budget aside?

Tom:

Yeah, I would set it as an annual You will amount 750 to 1000 bucks. And again, if the property's been occupied for a long period of time, I would expect that eventually be a little bit north of that value. But you know, be happily surprised when you get back in your turn cost is 400 bucks, 300 bucks, and that that you can roll around in that extra money.

Emil:

Yeah. And you know, it also, I think it depends on property type, right, with multifamily, you're just gonna typically see higher turnover. So you're gonna have more turns where a single family I don't know about you, Tom. But like, single family, a lot of my tenants stay really long term like I've had of the four single family homes I've owned over the last couple years, I've had one turn, the rest of them have stayed even with rent increases, like single family tenants just seem to stay a lot longer.

Tom:

I totally agree. I mean, I was saying I had a turn right now, but it's like, it's pretty far and few between. I think you're right, though. And there are studies around SFR having longer duration. And it makes sense. I don't modify my cash flow assumptions. I'll still assume you know, based on whatever is on the lease like expect, the worse that they're going to move out. But generally speaking, like you said, oftentimes be surprised. happily surprised. Roll around that extra dough.

Emil:

Awesome. All right. So then the last one, I think we should cover here that we mentioned in the different expenses, you should be considering his vacancy. What's funny is for single family, I always do 5%. I feel like that's like the industry standard. But again, if I'm looking at my actual vacancy across my portfolio, it is way below that I think it's just good to be conservative, because I don't know, maybe you're in a city or an area where your tenant does leave once a year, whatever that may be. And it kind of equates to 5%. But honestly, I've heard so many people who have seen my family and they're like, you know, they're good landlords, they have the same tenants for five to 10 years. So your vacancy becomes real tiny.

Tom

Especially Emil, I think if you are getting in really nice school districts, it's a hassle. Like if you have a rental in a nice school district, and you have good tenants with kids, like no reason to move out, you know, I think it's an upside to including that in your acquisition strategy a little bit.

Emil:

Totally. So that 5% for single family for multifamily, I do seven and a half 8%, usually just depending on where I'm investing in. But I feel like that's a solid level, like seven and a half percent. A lot of these things also, especially as you're learning a new market, every market I think is different. And you're estimating these expenses, but I imagine in five to 10 years, I'm going to be much better at like being able to look back at all my expenses for five years and say, Okay, here's what it actually averaged out to be. And here's how my pro forma should change. So you know, I think right now, it's like, especially in the early goings, you're kind of just taking some different assumptions, either talking to people who are in that market, or figuring it out. And then I think over time, you're just gonna get really good at knowing, alright, my expenses are basically this amount every single year per unit. This is my vacancy over the last five years. So I think, just with time, you'll get really, really good at these pro forma. Yeah,

Tom:

Yeah. And when you're setting that budget, and thinking about your cash flow, that's goal setting, right? And to be successful, and to make money as a real estate investor is to, you know, spend less and make more. And once you identify those numbers, those are specific values that you're working against. So when you get to the end of the year, it's like, Okay, how do we do against these values, and hopefully beat them. And if you don't, you know, reasons why and how to improve upon it. And if you don't beat those value goals, hopefully you put enough of a cushion, that you can still be fine. And then get back at it next year and work with your property manager if you're working with a property manager. So it's fun.

One other line item for you Emil is HOA fees. So if you're buying a property, and there's a homeowner's association fee, and those can be super high in some areas, especially if you're buying like condos, or they can be really, really low. So that's a really important consideration because that's money in money out.

Emil:

Yeah. And like you mentioned, some of them are high and some of them are low. Like I have one property, I only have one property that's in an HOA, and it's $21 a month so as I was looking at it, everything else I really didn't want a property with an HOA but at $21 it wasn't really affecting my monthly cash flow. And so yeah, I went with that. But yeah, be careful sometimes it can be $100 plus, so that can really really you know, mess with your cash flow number. So good call Tom.

Tom:

And kind of back to that exercise of comparing your pro forma assumptions for cash flow to actual you have some actions that you can do to try to improve them specifically around shopping. for insurance costs, that's something that I need to do right now, to revamp the insurance costs, looking at mortgage rates, interest rates have never been lower. So you can beat those values. And then looking at that trade off between taking care of items on the turn or just repair replace. So there's a lot of places that you as an investor, in working with your property manager and some of your other partners that you have, there's actionable item, actionable items to improve on those values.

Emil:

Yep. You know, there's other small things, right? Like if you are again, buying, let's say, a four unit building, and you're on the hook for water, installing low flow toilets, right, not expensive, but over the course of a year, it can add up to some decent savings that probably more than paid for the toilet in the first year. So like there's, you know, little things you can do to also try to decrease your expenses along the way.

Tom:

Yeah. And rent growth versus vacancy. You know,

Emil:

There you go.

Tom:

Have we done a debate on that rent growth versus vacancy?

Emil:

We haven't we should

Tom:

That's coming up in the pipeline, for sure.

Emil:

Yeah.

Tom:

I like the question of you know, do you are raising rates at the risks of vacancy? Right, I got a feeling I think I know where we're gonna land. But it'll be fun to just switch back and forth in that debate.

Emil:

Yeah. I also think it's depending on what you invest in, I think dictates how you do it. Right? If you're investing in something that's valued on cap rate makes a lot more sense. Because it's all based on income versus a home or up to four units based on sales comps. You know, you're less incentivized

Tom:

Very astute point, Emil makes a lot of sense.

Emil:

But we can get into all that in a debate.

Tom:

Yeah, it'll be a good episode.

Emil:

With that. I think it's probably a good spot for us and this episode. Thank you again, everyone for lending us your ears, and we will check you out in next week's episode. Happy investing.

Tom:

Happy investing.

The Most Important Aspects of An Inspection Contingency w/Jim Barker Nov 07, 2020

In this episode we get Roofstock and Streetlane's VP of Construction, Jim Barker's take on what investors should keep an eye out for on inspection reports, and what to consider that might not be on it.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. In today's weekend wisdom, we have Jim Barker. Jim is a seasoned professional in the single family space. He is the VP of construction at Streetlane and Roofstock and has seen thousands the homes. And the question we asked for him today is what are some key parts of the inspection contingency that he looks at?

Theme Song

Jim:

Yeah, I know it's a it's a great question. And we're buying houses every week for institutional clients and bought thousands of houses for various owners over the last few years. And these are always things that come up is when you get an inspection report back -- what to worry about and what is fixable. Because there's things that you want to avoid that that are or maybe you know, functional obsolescence or something that is really foundational to the home that that is going to be a long term problem. And that those are the things that I really look for when I am going through an inspection report. And then there's things that are just either aesthetics or basic functional that they have a dollar amount next to them for a repair, replace, but as long as you understand that, it's still a good asset, and those things are easily fixed.

So that's kind of how I divide up the inspection reports. When I go through them, I really look for any sort of long term functional issues like structural cracks, I really try to avoid poor drainage, and that may cause water damage. And another thing with basements that we see quite a bit of is, you get a 50 year flood, or 100 year flood, which I use that term, but how come it always seems like this, these flood events happen so much more often than 50 or 100 years. And if you're a property owner, it always seems to happen while you own it. So I'm very leery about drainage, especially in homes with basements and want to make sure that it's not sitting on a downhill slope or that the gutters are properly diverting water away. But you know, other things like does the home have insulation in the attic? Or that that's something that you don’t really think about, but it really impacts the livability of that home.

And the things that everybody always wants to look at, or like old HVAC the water heater, and it's good. But those are simple fixes. I mean, it's $1 amount, but once you swap it out for new equipment, you don't worry about it again for the lifespan of that equipment. So I guess that's it really for me is I want to focus on things that are not easily fixed and structural water damage, strange layout of rooms and things that may not show up on the inspection report the neighborhood issues, right? That's a as somebody who's doing their due diligence, not just to look at the asset, but really look at, you know, the immediate surrounding neighborhood.

Emil:

I like that. I like that you frame that. An old age back and all the water heater, they're really not big deals because a first time investor, they'll see that. And I think like the warning signs go off. And you're right. It's just it's $1 amount. It's not that complicated. Someone can change it out in a day. Like it's not a long term issue. It's just going to cost them money to fix.

Jim:

Yeah, no, it's the things that where you really have to rip into the structure or that I don't like to deal with it. If I'm not an experienced construction professional or have a contractor that I really trust, it's just tough to. You'll even fix some of those issues, and you're never quite sure if you really got them or like you said on the water heater, once you change it out, it's done. I would say it probably should touch on it though. Something that we've seen pretty regularly in the portfolios that we manage to is older plumbing systems seems to be one that's coming up regularly. And there's a lot of homes that are popular for SFR investors, but they're built maybe 40 or 50 years ago and that there's a series of items in homes that are really what I'll call like lifetime replacements and things like a driveway the supply plumbing so you really have copper plumbing from so a lot of these older houses, and then the drain line plumbing sewer lateral to the house.

And these things last 50 years. I mean, they're things that you don't ever think about replacing and a lot of times don't show up on an inspection report because they're your underground or within walls. But it's a good question to ask the inspector especially if you can have them focus on a few things is to give their evaluation of what are the materials that are they're used for supply plumbing, the waist plumbing, and give some evaluation of the driveway and other any of the other lifetime type replacement items as we see it right after 50 years. They do give out there are things that you may need to address and they tend to be a little bit more pricey when you have to take care of those things. They're not showstoppers, but you should definitely know about them. When getting your home inspected

Tom:

Thanks, Jim and thank you to all of our listeners. If you enjoy the episode enjoyed the podcast, please subscribe and give us a rating and have a great day. Happy investing

Market Deep Dive: Atlanta Georgia with Dan Nelson Nov 04, 2020

Tom and Michael chat with Dan Nelson from Excalibur Homes about the specifics of the Atlanta Market.

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Transcript

Tom:

Greetings, and welcome to The Remote Real Estate Investor. On today's episode, we're going to be deep diving in the Atlanta market. And we're here today with Dan Nelson. And I'm also here with

Michael:

Michael Albaum.

Tom:

All right, let's do it.

Tom:

Before we jump into the interview, let's touch on some of the quantitative aspects of the Atlanta market. So this information is coming from the Census Bureau, Macrotrends as well as John Burns. First, I'm going to talk about the population in Atlanta proper, just over 500,000 individuals in the greater MSA population, there is just under 6 million so 5,000,800 and we've seen a population growth of 2%. Over the last year, the median household in Atlanta that's $71,000. The existing home values year over year has increased by 5.5%. And the effective apartment rent has increased by 2.4%.

The home value entry level according to John Burns is at $196,000. The existing median home price is $279,000, then median single family rent is $1,364. And the year over year rent growth of that single family has grown a whopping 5.6%. The single family gross yield is 7.8%. Jumping into a different category. Let's talk about the occupancy rate. So the occupancy rate in Atlanta is 91.3%. The number of unique units properties are artists 2,331,002. And of that the owner occupied mix up 59% of that or 1.367 million, renter occupied and makes up just over 750,760 9000 to be exact, and vacant right now is a little bit under 200,000. And that's at 8%. All right, let's jump into the interview.

Excellent. So before we jump into the Atlanta specifics, Dan, I'd love to hear a little bit about yourself and the company that you work for and all that good stuff.

Dan:

Yeah, my name is Dan Nelson. I'm the VP of Sales with Excalibur homes. I'm a third generation realtor. My grandmother, Mary Nelson was just recently inducted into the DeKalb County Hall of Fame for realtors, which was exciting for the family. My dad, Mike Nelson, the founder of Excalibur started the company back in 1985, he had a primary focus towards property management versus sales looking for a little bit more stability for himself and our family. While he was at the same time simultaneously was in the National Guard, flying helicopters, my brothers and I all grew up within the company. So we started in, you know, Middle School in high school with learning turnkey, and construction and landscaping during the summers as well as once we were old enough to drive taking administrative positions within the company, learning everything from the ground up, essentially how to each department operate, understanding each job and also working each job for a couple years at a time.

I took a brief stint down in Florida, working in the multifamily industry with some with a company out of Tampa called 908. Development, they did a low income tax credit company where they did a high rise in downtown St. Pete. So I handled the lease up and stabilization of that project that was in the 2009 to 2011 timeframe, I had my Florida real estate license down there. While I didn't need it for that job, particularly, I moved back to Atlanta in 2012, I had my Georgia real estate license here. And that was about the time 2011 2012 we started seeing institutional folks and through the Atlanta market, doing things we've never really seen before buying properties on a level that was kind of unheard of in the SFR space, you know, typically they were not really big players and this type of market until then.

So when I came back, it said, Hey, Dad, you know, we're going to go buy a couple hundred houses at a time, you know, not five, not 10. So it's a very exciting time for us to go through and one learn how an institutional level underwriting works, how they're evaluating homes, you know, what they're going to consider capitalize expenses versus what a mom and pop investor might. And the level of buying was very interesting for us to learn how to navigate and compete with some of the larger funds out there at the courthouse steps, essentially, you know, we'd have teams go out on the Tuesday of the month when they were trying loans. And we'd go out there with a big stack of certified checks and hope that we would win as many bids as possible. As well as putting out you know, 50 to 100 offers a day on the MLS trying to capture as many opportunities as possible.

So that, for me was probably the most valuable experience in the shortest amount of time for real estate related to acquiring investment properties for investors. And that experience has translated very well to assisting our mom and pop investors as well as Roofstock customers that are entering Atlanta's market to understand how big of an area we were in and each individual sub market that we're in and how different types of properties are going to perform over a certain period of time. And from there, I got promoted to Vice President of Sales. So now my job entails growing our team, you know, marketing and making sure that we're bringing in more customers assisting customers like yourself, acquiring as many properties and good opportunities, giving good counseling advice as to what type of investment strategy might be best for certain buyers, whether it's, I'm looking for a capital gains type play, or I'm looking for more of a retirement play, whatever it may be, depends on which investors and what stage of their life and what's most important to them.

But we take that into consideration much like you guys do to building a customized buy box for certain buyers. Excalibur as a whole is kind of a full service company, whereas we manage about 2500 homes here in metro Atlanta are one of the larger companies in metro Atlanta, with a pretty large footprint. We're in 12 to 15 counties. We're located here in Alpharetta, Georgia, which is about 30 minutes north of Atlanta itself. And we've been here for 35 years. The property management is what it is we're obviously going to handle properties for owners make sure that we're addressing tenants leases moving in tenants address Seeing work orders to maintain properties etc on call maintenance. But at the same time, we have a sales division that's going to help people acquire and build portfolios or help them exit the market at a certain time.

Tom:

So, Dan, super interesting. Full disclosure, I'm an Excalibur customer, a happy Excalibur customer. But one thing I didn't know was that Excalibur had been in business since 1985. And and you given the background, I thought it was interesting, talking about how, you know, things changed in 2010 2012. All this institutional capital came in, how did all of that change the process, specifically around like evaluation, and then any other changes with management and what kind of changes that that look like?

Dan:

On the acquisition side, it definitely sped up our timeframe. So whereas traditionally, you would go out, take a client to a house, walk through it, you know, determine exactly what your plan is, prior to making an offer. We're now sending out sight unseen offers and making our best judgment on renovation budgets based on our experience and how much renovation we do, and we're doing, you know, millions of dollars in turnkeys, and large renovations, as well as new constructions, we have a very good pulse on what's happening in the construction side of the market, which is very beneficial to our clients. The timing of it is you've probably seen this before, when you're trying to acquire a home, there's a lot of people trying to acquire homes. So from last year to this year, in September last year, we had roughly 20,000 active listings

This year, we're down about 48% in the month of September for 2020. So obviously, the demand keeps increasing supply has been going down, which makes it more competitive for us to get properties under contract. So our technique is putting out offers with our best judgment on what the property value in its current condition in estimating what a renovation is going to cost us on the front end, so that we can get that property under contract before they see 1520 other offers from other investors and owner occupants that are still competing in this price point. And then from there, we'll go out there and one of the main selling points on Excalibur is we're able to go out there and you know, one to two days with the construction team and say it's exactly $12,000, or it's exactly $5,000. So if we were off on our initial judgment, we know within a matter of days that we can renegotiate this deal, or we found something that gives us the opportunity to pull out because it's too significant for us to one be able to renegotiate with the seller or to it's beyond the comfort level of another investor and something they might be willing to spend for a renovation.

So that's one of the main things is the speed of which the transactions are happening right now and the competitiveness of the market. So I think it's it's no secret that Atlanta has been a good opportunity for people nationwide and worldwide. So once institutional guys got here that created a level of competition we weren't ready for and we got used to. And now we're kind of changing with the times on a monthly basis instead of a yearly basis.

Michael:

Dan, kind of in that same vein is more of a strategy question. Are you the offers that you're writing? Are you giving them an expiration date of 24 hours or 48 hours that the seller is forced to give you a response? Because in some markets, like especially in California, it's so hot, it's so competitive, you want to give the seller a deadline so that they're not looking at other offers, but also want to be flexible enough so that they consider your offer, as opposed to they know they're getting 10-12-15 other offers? How do you play that?

Dan:

The short answer is yes, in most cases, we're going to give them an expiration of 24 hours from the time of delivery. The long answer is it's a case by case scenario. So if we can get a listing agent on the phone relatively early on in our underwriting process, when we say hey, these numbers look pretty good. I want to call and make sure this property is available before my team spends half an hour putting together a contract package or rootstocks team putting together a contract package for your customer.

If we can get them on the phone and find out and kind of take their pulse of where they're at. Are they expecting offers? Or are we the first one, we can kind of change our strategy based on feedback, that listing agent somewhat forthcoming with in a lot of instances, but I would say over 50% of time, you don't get somebody on the phone, you say I'm not missing this deal. I'm making the offer, I'll just put an expiration on there.

Michael:

Sure. I think that goes to hammer the point that we harp on so often that this is such a relationship centric business, you know, you can get that person on the phone and you're agreeable, and they're agreeable. There's a lot of stuff you can glean from that conversation that know is a lot of like shedding light on the situation, you know, that you had no idea about going into?

Dan:

Yeah, and it's also a good opportunity for us to explain who we are, if they're not familiar with Roofstock or Excalibur. Give them a little brief history of our processes. You know, there's a lot of investment companies that will throw offers out there. Their technique is every time I'm going to go ask for a significant discount after the inspection. We try to make sure our reputation is such where we make an offer and if we do have to cancel the agreement because of the findings in the inspection, we're typically not tying them up for the entire length due diligence period. So that one, while it may not have worked out, they're not going to, you know, brush our offer to the side the next time or two, we make a competitive offer. And we go and find out the findings are in line with what we thought and there may be a minimal reduction, but it's something that both parties can live with. And, you know, the seller achieves their goals as well as the buyer finding an opportunity and a competitive market,

Tom:

Relationships, relationships man.

Michael:

Yeah, relationships and also reputation. I mean, that is definitely going to proceed, folks, I think much more so than they realize, especially if they're repeat customers in the same market. I know that if someone sees the same players pulling the same tricks over and over again, there's no way that anyone's going to want to do business with them. And that kind of stuff gets around right? You hear about those kind of folks pretty quick.

Dan:

Absolutely.

Tom:

Let's go ahead and jump into Atlanta, a lot of good stuff to cover. And the way they want to start this discussion is talking about different pockets in Atlanta. So as much as we can use kind of landmarks, either, you know, cities or freeways, how would you typically talk to an investor, you know, in thinking about the different pockets of the different types of returns that you're going to get?

Dan:

We kind of look at Atlanta, more like a clock. So you've got major interstates and highways running through Atlanta going south to north, we're looking up the 75 corridor, more pointing towards the nine or 10 o'clock, our beef got Cobb County running up that way. On the east side, you've got Paulding and Douglas County's directly north is Forsyth and we can kind of just start, I guess we'll just work our way around from swell nine o'clock. So directly north of Atlanta, you've got Roswell, Alpharetta, coming and Dawsonville. Those are traditionally higher priced markets with very high rated schools. So the opportunities there are are going to be less common. Most of the time, when we do find opportunities up that corridor, they're going to be in Cumming, Georgia and Forsyth County, which is an excellent place to invest. But over the last six months, I may have bought five houses, you know, which is a small number compared to what we're typically doing on an annual basis because the inventory is lower, and the pricing is a lot higher.

Tom:

And when talking about higher pricing, we're talking 200,000 Plus, right?

Dan:

Yes, so the medium median price up there is probably going to be the 250 and higher. So you're not going to have a lot of homes that are going to meet the rental house metrics where the rents don't quite keep up with that purchase price. Now, if we could buy there all day, we would focus there as much as possible because of how we expect that area to grow and, and how the schools are performing. So North metro Atlanta as a whole, when you're talking about Cobb, Cherokee, Forsyth, and Gwinnett, and Holme counties, those are all very, very good opportunities for you to buy in as a whole. Obviously, there's going to be schools that range from lower caliber to much higher calibers, but as a whole, they're going to have better quality schools, you're going to have better appreciation rates, but you're also going to see that is intertwined with higher property values.

So with that being kept in mind Gwinnett County and Cobb County have been two very good sources of rental properties for us to buy with blending a higher HPA value, the home price appreciation value with a good cash flow value. So our philosophy is typically built around. We're not always looking at cash flow only. We want to look at how the properties can perform the tenant caliber in a certain area, the length of tenancy, turnkey expenses related to those types of tenants, and the appreciation value and exit value. So we're looking at the internal rate of return as a more important factor into the equation versus the cap rate only. But that goes also back to what we talked about before is what type of investor are we talking to? Are we talking to somebody that's retired and is looking for passive income, so they don't care about appreciation? They're going to leave these properties to someone else. So the monthly cash flow is very important to them, and they don't care how the property appreciates, or is this a younger investor that's building a retirement strategy as part of their portfolio that wants to take advantage of home price appreciation and the monthly cash flow is not quite as important.

As long as their debt service payments are covered, and they've got some extra income each month. They can set aside for reserves and turnkey expenses.

Tom:

I got a question for you, looking at that this clock looking at Atlanta is a clock a question that will sometimes get is you know, you have these smaller cities on the outside, like how far out to that nine o'clock, would you still consider that part of the Atlanta Metro like Dallas Rockmart Temple egg At what point would you say Ah, that's pretty far out where if the economy within Atlanta, you know, people aren't really desperately commuting into there.

Dan:

Yeah, our footprint is rather large and we consider everywhere we are metro Atlanta, so we're roughly a 50-55 mile radius around from Atlanta. So out on that west side that you had mentioned, we would consider Villa Rika. And Dallas and Douglasville and we've recently are getting into Temple. So that's almost on the Alabama line. I wouldn't consider temple quite metro Atlanta. But we are now including that into our portfolio and our footprint. That's an area that I've liked over the last seven or eight years due to expansion in the city, there's only so much land available inside the perimeter. So OTP, which is outside the perimeter seems to be a very good opportunity due to most people are willing to commute a longer way in metro Atlanta versus different parts of the country, just because we were set up differently. And we can talk about transportation later.

But I would consider that West Side a nice path of progress. We've had opportunities there with cheaper land expenses, and with how much our dirt costs here in metro Atlanta, that's been a really good opportunity for builders to build entry level homes that also fit the model for a rental house. So when you're looking at price points that are going to make sense between 150 and say, 240. You're not seeing a lot of that being built anywhere. But that west side and the South Side corridor of Metro Atlanta. So we've been very bullish on Villa Rika, Douglasville and Dallas, because we've had good calf rates, we've had average or above average school districts, and the rental demand has been really strong out there.

Tom:

That's great. That's great.

Michael:

And but at the risk of sounding silly, Dan, I'm going to ask the question, anyhow. Why do people live in Atlanta? And why are people move in there?

Dan:

Well, there's a lot of reasons to be here. Obviously, our cost of living is amazing. So your dollar stretches a long way here. We've got a temperate climate for the snowbirds move in South we don't have Boston's winter, nor do we have Miami summer. So that's a big reason. We've got relatively good schools, it's it's a great place for families. There's a lot to do here. And now it's becoming a big hub for you know, video production and things like that. We're now on the east side, Hollywood, you know, the city of Atlanta itself has a lot of entertainment value, whether it's major sports or entertainment itself, as well as the music scene and your short drive away from a very large man made lake where I live Lake Lanier, which is a lot of fun if you're into watersports, or boating in general. And you're only an hour from Blue Ridge Mountains for people that like to camp or hike or just do the outdoorsy things, we've got a little bit of everything here. And and obviously it's it's an affordable place to live.

Michael:

Great. And who are some of the major employers that are either there now or that you know, are coming into the area?

Dan:

Yeah, we obviously have a large handful of the Fortune 500 guys like Home Depot and Coca Cola ups Delta's here as well, as well as the CDC. So I think those are It's no secret where they're located. One thing was interesting related to you guys, you guys are more in the tech field than I am. But I saw a company Deluxe, I believe, was announced last month that they're putting a new facility here in Sandy Springs, which is just outside of the perimeter in Atlanta. And they're going to have a fin tech operation that's creating about 700 new jobs, which we thought was pretty exciting down there.

Michael:

Very cool. And correct me if I'm wrong, but isn't the Atlanta International Airport, the busiest airport in the world?

Dan:

Oh, absolutely. And when I get to travel into different parts of our nation, I get a little bit jealous of how easy it is to get. And

Michael:

I was in Atlanta a couple times. And yeah, just getting into the airport like, Man, this is a frickin city in LA. So, I mean, it is just remarkable what they do at that Airport.

Dan:

The first experience there is always pretty overwhelming. Once you get used to it, it's it's very easy to navigate. Now here lately, it's been a little bit easier, you know, traffic's been down since everybody's working from home, etc. And the airports kind of experienced the same type of effect.

Michael:

I was just gonna ask Dan, you were mentioning that the kind of Metro radius spans out, you know, about 5055 miles or so. So, as folks are looking at different industries that are moving in different companies that are coming into the Atlanta Metro, how should they be thinking about work movement, employee movement? You know, if I find that a company is moving into the north side of Atlanta, is it appropriate to be thinking that folks living in the south southern part of Atlanta at that six o'clock mark on the clock would be traveling?

Dan:

Well, that's what's kind of unique about Atlanta is a lot of people have a 3040 and even one hour commutes in the car. Not a lot of people are using public transportation because it was set up, you know, incorrectly. It's not super convenient. People would rather sit in their car and listen to a podcast like yours or listen to the radio for an hour rather than the hustle and bustle. That's the Marta train or bus system. If somebody's coming into Atlanta and sees that, you know, their companies can be located on the north side. There's options related to different earners, whether it's a higher earner or somebody that's an entry level position. So that's what's kind of nice about North metro Atlanta or the southern side is that You're going to have different housing options that are going to play into your specific budget that makes it a little bit easier for people to spread out and say, this works best for me individually and my family individually.

Tom:

On continuing the clock rundown. So we're at about we've gone kind of noon, you know, higher end less of a cash flow more of an HPA, we went to nine o'clock that West Side Douglasville talking about kind of a good blend kind of a more popular more recently, why don't we continue our way around it going down to six o'clock, I think that's a little bit more the airport area, what kind of return profile and all that continuing a little circle around.

Dan:

So you're looking at places like Clayton County and Henry County or even South Fulton for that matter are typically going to be higher cash flow areas where you can find rental properties and opportunities, they're going to be a lower price point. And I think there's a lot of us out there that said, Hey, I'm ready to start investing in real estate. And I don't want to spend $250,000, I would rather spend, say 140,000, or $130,000. So there's going to be a lot more opportunity for areas like that to achieve what you're looking for, what you're going to be looking at there is a higher cap rate scenario. So you're going to have a higher rental rate related to that purchase price in an area like that. But typically, you're going to have a lower rated school system typically going to have a lower appreciation value. And you might experience a higher credit and vacancy loss. And you might experience more frequent turnkeys.

Now, that doesn't mean it's going to happen every time. But on average, it's going to happen more often in areas like that. So you're kind of blending the good with the bad there and say you know what, I like the cash flow value of this property. And I'm willing to take a little bit more of a risk on some of these other things happening. But when you do that, we want to make sure that our clients and customers are coached to say, let's make sure that you're set up with a reserve, if you do experience something like this. So if you're one, you've got to replace your tenant, and you already have to repaint a house painted, you know, we pay roughly $1.10 a square foot for an interior paint with walls trim and doors. So if you're looking at a 2000 square foot home, and you're going out there and spending a couple thousand dollars to repaint it, year two then that's you know, it's a big chunk of cash that not everybody's willing to experience, a lot of people want to come into the market, say, I'm buying a house, and it's going to make me money from here on out.

You know, that's that's not how investing works for everybody. And I'm sure that's not how it works in the stock market for them either. So we just coach them to say, here's what you might experience in an area like that. But there's a lot of positives of being down there building a portfolio like that. And you may experience a tenant that stays for 10 years and never calls you once and pays on time every time. Or you may replace your tenant every couple of years and deal with some you know, above average turnkey expenses. But that's going to be more common in those types of areas. So you've got Henry County, I like Stockbridge and McDonald a lot. They've got some marginal schools that are are, I would say average where you can find good cash flow properties over there. We still do a lot over on the Clayton side. Jonesborough has a lot of really high cash flow opportunities there. Again, the negative stuff we've already discussed. But the positive there is that the return is really good when the tenant stay.

Michael:

Dan, you're familiar with the 1%? Rule right?

Dan:

Yes.

Michael:

So is that in South County? Will we be looking to find properties that may meet that metric?

Dan:

Yes. So while we can still find opportunities like that, there's a lot less of them now than there used to be. And that's due to this supply and demand that we've been talking about. So with that being said, we're getting close to the 1% rule on average. And every once in a while we're getting the 1% rule. You got to factor into sometimes those are going to take into account having an attached property, which would be a townhouse. We don't typically recommend buying condos down here. But a townhouse would be an attached versus a detached single family home, those are typically going to have a higher HOA payment per month than what you might experience with a detached home for a similar price point in a similar area. So while you've got that 1300 dollar rent on $130,000 property, you might see a 85 to $150 a month HOA whereas if you found a detached property with that rental rate, typically the HOA is going to either be zero in an area like that or much smaller than what you might experience with a townhouse

Tom:

Are HOAs pretty common throughout Atlanta?

Dan:

They are, they're very common part of having boots on the ground like Excalibur with you guys are with our clients during our due diligence period, we're typically getting a copy of the covenants and restrictions to make sure that one we don't have a leasing restriction or cap. You know, if there is a cap, it's pretty risky for people to go in and say this is going to work for me forever because they might find out losing a tenant Three years later, cap has been met, you're no longer allowed to lease this house. So we want to take that into consideration. We also want to make sure that the HOA covenants weren't written in a way where they can go back and change the rental restrictions later with a vote that we may be included on but It may not go our way. So those are things we'll look at during the due diligence period to limit our exposure to something like that having being forced to sell at an earlier time than you had projected.

Michael:

Did I hear you right when you said you would steer folks probably away from condos down in the Atlanta area, but not from townhomes.

Dan:

Correct. Most of the time. condos, if they're going to be in an area that our clients are going to want to be our tenants are gonna want to be or my employees are going to want to be typically the HOA and condo fees are going to be pretty high and they're going to dip into the cash flow significantly whereas the townhouse typically will experience a slightly better appreciation and these price points and it will have a lower Hoa fee.

Michael:

Got it. Got it. Okay. And I want to circle back to property taxes. But go ahead, Tom, and they want to finish up on three o'clock.

Tom:

Yes, look at the clock through so All right, we've gone north, we've gone West, we've gone south, let's make our way over to three o'clock. So like the Lithuania's and Stone Mountains and…

Dan:

Yes, so Stone Mountain Decatur like Sonia, those are all going to have, again, higher cash flow opportunities and lower price points where you're not going to get that on the north Metro side, I think the one difference is on Decatur, you're going to have different pockets. So you could have a part of Decatur that's trading in the millions and then maybe five minutes, 10 minutes down the road going to the hundred and $30,000 price points, there's a little bit of a difference in what you're going to find out there. We're obviously not going to be finding rental homes in that million dollar pocket. But there are good opportunities there. Again, those are that's going to be an area where the public schools aren't performing quite as well as what you're gonna see on the north side or the west side. Or even there's a couple schools that we like on the south side as well. It's just a lower average of them.

Outside of that there's a there's a lot of opportunity for fix and flip or forced equity plays in DeKalb. County, whether it's Stone Mountain life onya or Decatur. So if the risk tolerance for the investor is a little bit higher, and they say hey, you know what, I'm okay with not doing a move in ready home, I've got 3040 $50,000 for you guys to not only fix something but renovate something and upgrade it, then there's opportunities there from time to time where you can spend a little bit more money have a little bit more day one equity and generate a really good return based on what type of rents were able to generate for something like that.

Tom:

On the furthest reaches east. Do you guys manage over an Athens?

Dan:

We do not manage out in Athens we do a lot in Gwinnett County, and Logan Ville is an area that I liked a lot for a very long time buying rental properties. They've got good schools, and it's a little bit more rural, but it's a very strong rental demand. And you get a lot of bang for your buck as far as the houses go out there if we can find the opportunity. And that bleeds into Walton county right there on the on the east side as well. So that's an area that we've liked out there as well.

Michael:

You good on the clock, Tom.

Tom:

Yep.

Michael:

Perfect. So Dan, I know from county to county property taxes can vary pretty widely. But are you able to give folks a real rough broad picture of what they could expect to say in property tax what they could expect to pay in property taxes? And talk a little bit about how property taxes work is based on purchase prices at some county assessed value.

Dan:

Yeah, essentially, county by county and zip code by zip code, we're going to have different millage rates for for each area, the tax assessor are going to have an assessed value. So they're going to use that as a calculation to say, you know, if our assessed value is x, and our millage rate is x, we'll multiply the two to come up with our tax bill in different areas are going to have different, higher and lower taxes. So whereas Fulton County's got pretty high taxes, going a little bit farther north and Riverside, you could be an Alpharetta, Fulton and have really high taxes or Alpharetta, Forsythe and have much lower taxes. So we're going to look at that on a case by case basis for the investor. And a lot of times the listings or projections that investor might see are not going to accurately reflect what they're going to get. So we'll give them an idea of based on what we're seeing and the appreciation that we're looking at from the assessed value now to when you purchase it and the new values applied, you might expect say a two or $300 increase, they've got a good idea on how they're going to budget that.

Michael:

Great. And so as an investor looking to identify what their property tax rate might be, does the assessed value have any correlation to the purchase price or the fair market value or if there's some kind of regularly assessed new assessment at some kind of regular interval that independent of a sale, it's going to increase or decrease just kind of depending on what the markets doing?

Dan:

So typically, you know, if you own a property for a while the assessed values not going to significantly go up even if you're renovating because they don't know you might see something where somebody purchased a home last year for $100,000 but $30,000 into it and then we buy it for $150,000 you're going to see a pretty significant jump In the taxes from the previous year to this year, due to something like that the home is identical when you're selling it, typically the assessed value is going to go up at a reasonable pace based on what's happening in the overall market. The assessors aren't always typically going to go into each individual house and say this house is worth X amount of dollars, they're going to kind of use metrics from how a certain cities performing or a certain zip code is performing.

Michael:

Okay?

Tom:

Have you guys had any success in challenging the assessed value in trying to lower the property taxes?

Dan:

About 50% of the time? It's kind of like contesting an appraisal, you know, the problem with that is, is you have to know what you're getting into, because it could go the other way, too, you know, with an appraisal, you say, Hey, I think you're wrong. Here's why. And they say, Oh, yeah, I was wrong. Now, I'm going to do it the opposite way.

Michael;

I'm gonna go way low.

Dan:

Yeah, recently, my family has a house up on the lake, where we didn't quite agree with all that was assessed, and we had an appraisal, and they still weren't willing to change it. So it really depends on what county you're in, and who you're talking to. It's very localized government. So at that point, it depends on how successful or how lucky you might get and how valid your case might be.

Michael:

So it sounds like a sale might trigger a new assessment, a sale of a property could trigger a reassessment. Right, so well, they're going to put out those bills annually. So when they see that the property is traded hands at a much higher value, then they're going to take notice of that. Yes.

Michael:

Got it. Okay, cool. Talking about kind of price points, you touched on a little bit kind of north, south, east and west. But maybe you could touch on average price point for a three, two single family and what the average rent might look like to give folks an idea of where based on their budget, where might they should be fair, that they should be? Where should they maybe consider looking?

Dan:

Yeah, if I generalize it, I would say if I was looking at a higher cash flow opportunity for $130,000, I'm typically looking for something between 1200 and 1350. k, let me use a different number, because they're not going to find anything like that in the north metro area. So if I said, hundred and $50,000, then I might be looking somewhere between 1400 or so probably for the rent. If I was $150,000, say in a really good school district on the north side, I'm typically going to be looking at 1275 to 1300. So there's a pretty good gap there. And on the you know, the higher cash flow stuff, you could probably get something closer to 1% rule every once in a while. But on average, it'll be closer to that 1400 1425.

Michael:

So the Delta in rents between I guess, within the south side of the north side is about 150 to $200 a month, would you say?

Dan:

Roughly, and again, this is all going to be specific to each individual home and each individual city, but that's probably a good rule of thumb to generalize that.

Michael:

Okay, fantastic.

Tom:

Is section eight, pretty prevalent threadably. And we'd love to hear your guys's experience, we have an episode coming out, or might come out before this one where we talked to an attorney about section eight, just talking about how different is from, you know, city to city anyways, I'd love to hear your input.

Dan:

Yeah, we do manage section eight, we don't manage a ton of section eight, my brother would be a little bit more well versed since he's on that side of the company on the management division. But as far as I know, the housing authorities react a little bit differently, some are a little bit easier to work with than others. For the most part, our experience has given us kind of an end to where we know how the system works. So we can do things rather efficiently now. So while we would prefer non section eight over section eight, as far as management and the workload that goes along with it, it's not something that has as much of a stigma that would say as it used to, I know a lot of landlords say, I don't want to deal with that. But in the city of Atlanta, it's not like you can refuse it.

So if your only opportunity is a section eight tenant, then that's something you're going to have to acknowledge and rent to you can't just deny an application due to section eight in certain areas.

Michael:

Dan, I want to ask you about a real hot button issue that everybody's talking about COVID-19. A lot of folks both on the buying and selling side are where sky is falling prices are going to plummet renters are going to stop paying rent. curious to know what you've seen out in Atlanta, both from a price point perspective on the sales side. And then as a rental collection side on the management.

Dan:

Yeah, related to sales from 2019 to 2020. On attached and detached we saw 2% increase in the average sales price. So still continuing to go up not as quickly as it has due to our economic recovery, but we're still seeing increases and we don't really have a reason to believe that that's gonna change mostly due to our low inventory and high demand. So that being said, we haven't really been affected by COVID-19 or the pandemic. I think the main thing as far as our jobs as real estate agents and realtors has been occupied showings has probably been the biggest hurdle so it's a little bit more difficult to get everybody's schedule along. And make sure people are following proper protocols with, you know, coverings for their shoes hands and face and disinfecting the home and things of that nature.

But with a vacant property, they're still selling in a matter of hours and sometimes just a couple of days. So we're moving product very quickly, the appreciation from last year to this year for detached housing has gone up about 7% in metro Atlanta, whereas attached only went up about 4%. So for the people out there concerned more about the internal rate of return versus the cash flow detached seems to be a better opportunity in metro Atlanta. As far as how that's affected us on the rental side, in the property management side, I would say during the height of the pandemic, we had about an 8% change and rent collection, but that has been steadily getting better month by month. So it was not near as significant as other parts of the country, you know, due to a lot of different factors of one us being a central business and to reopening a little bit earlier. So things you know, didn't seem quite the same in our part of the country as it did in others.

So outside of that we're actually having a record year as far as leasing properties, you know, in previous years and our highest volume months. You know, during the summer, we're typically expecting 70 new move ins are 70 new leases, whereas this summer, we're doing, you know, 140 150 so we were…

Michael:

Holy smokes!

Dan:

We were doing a great job getting people moved in and following safe protocols with some different approaches that we took to closing our office to the public and changing out our lock boxes to accompany showings and move ins and things of that nature. So we worked around what was in front of us and found a way to be really efficient with what was going on.

Tom:

That's incredible about the appreciation and just for clarification for folks who are not familiar with the term detached or attached a detached would be a single family home where an attached to them would be possibly like a condo. So even more reasons to invest in single family over over condos that that huge jump in appreciation over condos.

Dan:

Exactly.

Tom:

That's fantastic.

Michael:

I think Dan, that just goes to further drive home the point that it's so important to understand your local market, nationally might not be the same story as what's going on locally. Atlanta is the prime example. We hear doom and gloom, but really, you guys are killing it.

Dan:

Right.

Michael:

So that's That's great to hear. Great to hear.

Dan:

Yeah, it doesn't look the same. But we're still getting it done.

Tom:

A few more questions. Our last couple of minutes we have here. So a term investors like to throw around is near my son Charlie shining into he's throwing around some investments. Yeah, exactly. is the term investor friendly. Right. And that could have to do with rent control eviction moratoriums, where does Atlanta sit with regards to rent control and that kind of stuff?

Dan:

Well, that's fortunate that we don't have to deal with that we've seen in other parts of the country that have you see investors leaving kind of hurts the tenants more so the investor they can pull their money out and go reinvest somewhere else, and now they've got less product and opportunity for them to find a rental house. So we have a large rental market here, because that's not something that we have to deal with locally. And it's not something we expect to have to deal with anytime soon. As far as the evictions that has been something that we dealt with during the pandemic, because our courts were closed just like everybody else's were. So Excaliber’s philosophy was let's get with our owners, our landlords, and let's work out payment arrangements with tenants. Let's forgive late fees that obviously we couldn't go to court and, and, and argue about anyway.

And let's make this as feasible as possible to collect what we can collect during these times and get everybody back on track. And that's reflected in the change of percentage of our collection not going drastically the wrong direction. So the courts have reopened, and we're getting pretty caught up. So anybody that was unable to make payment arrangements or their situation wasn't able to change, we've been able to release most of those properties as we're able to get them out through that process.

Tom:

That's great to hear working with the tenants and the owners and coming up with payment plans and being human about it. So that's, that's great to hear.

Michael:

Tom, I don't think I have anything else.

Tom:

I got a good question to end with Dan. So we've been away from Atlanta for five years, you Lance and you got to get a meal. Where are you getting? Where would you record? Where would you go to get your meal in Atlanta where you haven't been there in a long time and feel free to use, you know, North suburbs or wherever, wherever else. So

Dan:

That's a good question.

Tom:

Tell you what, you gotta throw two meals in there. You get a fancy meal and you get Yeah, this is my go to you know. So two meals.

Dan:

That's a good question. I would probably say I want to get some local pizza Antiquos. They've got a couple different locations around Atlanta. I don't know why I like it so much. I do. I just do. It's delicious. It's a little bit light and airy trust.

Tom:

Like an Italian kind of, you know, thin crust.

Dan:

Yeah, yeah. So you can smash more pizza than you would want to.

Michael:

Such a good point.

Dan:

Other than that, I have a really good friend up near where I live that owns a barbecue restaurant called Q barbecue that I like a lot. So I would probably go back to that order, whatever their sampler platter is and just work my way through it until I go to sleep

Tom:

Beautiful

Michael:

Does Atlanta have their own style of barbecue?

Dan:

Not really, you know, Atlanta is kind of a melting pot, which is why, you know, we're growing so rapidly. We've got people that do it kind of in a Georgia way, which is a blend of some of the Southern ways, but you've got, I think everything out here, but Texas, I think Texas is the only people that can do Texas barbecue. So we don't try to do that. But I would say this, this one's probably more Kansas City style with a little bit of South Carolina mixed in with the vinegar based sauces and stuff like that.

Michael:

I’m drooling now.

Tom:

Sounds great, awesome. Any final thoughts for investors looking at Atlanta,

Dan:

Contact Roofstock. Today, we've got new opportunities going on the site every day. You know, Excalibur is the boots on the ground as the local broker with just this last year, we've partnered up with you guys on that side. We've obviously been managing you guys for many years now. But keep an eye on the site. There's new inventory going up, just remember that it's going quickly. So if you see it that day, make a decision and give us an opportunity to get it under contract for you. And from that point, I think you'll be pleased with the process that Roofstock has put in place and calibers local knowledge will kind of help you throughout that process, making sure you're making a wise choice.

Tom:

Thank you so much, Dan, this is a very informative.

Michael:

And Dan, if folks have questions about the Atlanta market about Excalibur what's the best way they can get in touch with you,

Dan:

You can visit our website at Excaliburhomes.com, we've got a web portal there where you can send us a message and either myself or my team will reach out to you responsively. So you’ll probably hear from us same day in most cases.

Tom:

Fantastic.

Michael:

Dan you're the man, thank you so much for taking the time to hang out.

Dan:

Absolutely it’s a pleasure. And we'll talk to you guys soon.

Michael:

All right. Take care.

Tom:

Dan, thank you so much again for jumping on and thank you everybody for listening to The Remote Real Estate Investor. If you enjoyed this episode, enjoyed the podcast. we'd love it if you would subscribe and give us a review. All right. Happy investing.

Michael:

Happy investing.

Michael Zuber on When to Buy Turnkey vs When to Use The BRRRR Strategy Oct 31, 2020

In this week's nugget of weekend wisdom, Michael Zuber weighs in on when to employ different acquisition strategies.

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Transcript

Emil:

Hey everyone welcome back for another episode of The Remote Real Estate Investor. This is one of our weekend wisdom episode. So hope this catches you on an amazing weekend. So in this week's episode is somebody you guys are probably familiar with. If you've been following the show for a while, we have Michael Zuber back on who is the author of one of my favorite real estate investing books called one rental at a time, he also has a YouTube channel by the same name, definitely recommend checking out both of those. If you want to check out if you missed Michael's previous episodes, he was on episode 11 and 37. So go check those out. He's a regular on the show, and we wanted to bring him on for a quick weekend wisdom. So hope you guys enjoy this one.

Theme song:

Emil:

You mentioned doing BRRRR during 2010. Really before it was even BRRRR. I know you've also mentioned you know, if you're a busy professional, like you don't want to tie up a bunch of capital like buying a turnkey can be smarter because you're not having to keep putting a ton of money in. I'm curious if you have, Are there times in the market cycle that you prefer one or the other? Or how do you decide right now I'm going to be I'm going to follow the birth strategy versus right now I think I'm just going to use less capital go turnkey.

Michael Zuber:

So for me personally, or are we talking about your audience? Because we're really different people, right? Your audience is busy professionals. That's probably what you're asking about.

Emil:

Yeah, but I'm curious. Just even from your story, right, you were a busy professional. And at some point, you kind of made the transition. So maybe it was just being comfortable…

Michael Zuber:

When you think about, so buy and hold rental properties is one rental at a time, right, you can get at one rental at a time, basically two different ways. One way is you can buy turnkey properties, which I consider clean, zero make ready, right? Means you buy it, you either have a tenant or you you stick a tenant in no additional dollars out of pocket, just so we can clean up the understanding. I believe in the beginning, when you have yet to build a team when you have yet to really understand the network and all the nuances in any market the right thing to do the least risky thing to do, the fastest thing to do is to do what today is called a turnkey property.

That said, as you gain experience, as you gain units, you as an more experienced investor will have the option to make choices, there will be market cycles, I've been doing this 20 years, and there's been two or three portions of this cycle where bur is just more profitable. The best example was 2010 to 2014 in that market, because it was generally bouncing off the bottom, you still could get yesterday's prices and tomorrow's values. So if you bought a dump, you got yesterday's prices, but once you polish it up, you can get tomorrow's value because there wasn't a great supply of them. That was such a special time. BRRRR was a huge benefit for me because I recycled 95% of my capital or more every time so I could just keep on buying as fast as I found deals in my pile of money never left and it never had to grow. So that was a pretty special time.

Lots of people, Brandon Turner included were very successful in that time. And he's built a great career off of it David green as well I believe but most markets are not 2010 to 2014 where you really couldn't do anything wrong. Right? In between 2010 and 2014. If your project was too much longer than it should have been you won if your project cost you an extra 10 grand you won I mean it was it was a special time and for people to not nuance The difference is just not fair. That was so special. It may never be that easy. Again, that said you can always find what I now call slumlord properties today you have to find really slumlord properties but they're out there right? These are ones that can't be financed, no bank would loan on them you have to pay cash very few buyers have appetites for properties that smell and have bugs and just are disgusting but if you can negotiate a fair price you can go in get it because it doesn't really cost that much more to fix a disgusting versus a semi disgusting because it's still paint still new floor still new kitchen still new bath, still some floor it's all the same stuff.

So you can still go in you just got to buy them right I would tell you in a market that is so hot for owner occupant that doing bird today is a lot harder than 2010 to 14. Not impossible. I'm going to suspect the market will get better for Burr in the future when it's more even keeled today, at least in the markets. I'm in owners are dominated the market 90% of the offers are coming from owners only 10% from investors. I have never seen it that way. It is so hard to be an investor today because there's no inventory and everything that clean is getting bid up by FHA buyers, which put less down and have lower interest rates. So I can't compete. I put in 100 offers or so this year and haven't gotten any of them.

Emil:

Yeah, that's kind of what I was getting to that answers it perfectly. It's it's kind of like a blend of experience having the right team knowing how much all those things are actually going to cost you which only comes with experience and then partly timing.

Michael Zuber:

Yeah, the one thing I would really close with is I would never tell someone to make BRRRR their first investment Too risky, too many ups and downs. It's just too hard. You don't even know if you want to be a landlord yet. And now you're going to take on working with general contractors without knowing the team, the risk profile of your first rental property being a BRRRR project. Not great.

Emil:

Yep.

Michael Zuber:

Your chances of success are not great,

Emil:

Especially as a remote investor, which is our audience.

Michael:

Yeah, not great. Time man, time. The thing that people don't realize is a busy tech professional. It's usually not money. That's our constraint. It's time, time, right? We time use it more efficiently. I tell people you can learn your market 20 minutes a day, people fight me on now like frickin ages. Do it stop going 1000 directions in 1000 different things. Just focus, tighten up your focus. Look at it 20 minutes a day and move on. Right? You've got life you got to raise a family. You got all this 60, now you're working at home you're working 24 seven. And you know, use Roofstock Learn to market pick, look, get after it and just move on.

Emil:

Love it.

Awesome. Hope you guys enjoyed that episode. And thanks again to Michael Zuber for coming on. We'll have him on on a future episode as well. Alright guys, enjoy your weekend. Happy investing.

Halloween Special: Real Estate Horror Stories w/Chad Carson, Gary Beasley, Michael Zuber, Jim Barker & Tom Schneider Oct 28, 2020

This week, we bring you something different with a collection scary real estate stories from some friends of the show. Join Chad Carson, Gary Beasley, Jim Barker, Tom Schneider & Michael Zuber for some creepy stories for the Halloween season.

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Transcript

Emil:

Hey everyone. Welcome back to The Remote real estate investor podcast. On today's episode, we have something really special for you guys. In the theme of Halloween, we wanted to go out and collect a bunch of horror stories very, very spooky real estate investing stories. And so we asked a couple friends of the podcast to share some stories they've had along the way. Some of them funny, some of them a little scary, some of them real spooky. So we have a total of five people speaking given their stories today, and that includes author and coach, Chad Carson, Roofstock CEO, Gary Beasley, Jim Barker, who is the VP of construction at Roofstock, our very own Tom Schneider, you guys know from this show, and author and good friend of the show, Michael Zuber. So without further ado, let's hop into their stories.

Emil:

So first up, we have author Chad Carson. So let's hear from Chad.

Chad Carson:

It was actually an investor friend who tried to get me to take over his property and manage it for him. And we went and looked at it. It's like, Yeah, I got this tenant who's not really paying that well. And that's okay. Yeah, we'll see how that goes. And it was a big is a brick house with a huge basement. And I said, Well, I'm gonna have to go visit the house. I'm not gonna take it over before looking at it. And so we walked to the house, we were walked inside, and we could just tell the tenant was really not at ease. Like he was just kind of nervous about something and kind of watching us too closely. And I noticed he got really uneasy when I started going towards the door to the basement.

And I said, Oh, okay, I guess I better go the basement, open the top of the door, the basement. And all I heard was thousands sounded like of wheels going squeak, squeak, squeak, squeak, squeak, squeak, squeak, like lots and lots of little wheels and little sound like little feet, you know, little rodent feet running on these wheels. And so I kind of went to flick on the light and I looked at the bottom of the stairs, and there's like two red eyes, kind of looking up at me in the dark, and I flipped the lights on. And there are, there's there's one whole room in this basement with just tons of tons of rat cages or mice cages too.

But that was only one part of this basement operation this guy had going on, there was all the reptiles and the other part of the basement that were the they're eating all of the rodents that he was raising, so he had big huge snakes. He had turtles and these big bats. He had I don't think I saw any alligators, but it's turtles and iguanas. And so it's like an exotic pet operation going on this guy's basement. This is one particular horror story. I was glad it wasn't my property and I told the guy as we walked out I said I'm not managing this property until you get rid of this tenant.

The final part of the story I'll try to make fast is that he did get the tenant notice the tenant had to leave it was like 60-90 days later when he finally got it out and we went back to the house with the same friend and we're like we walk in the front door the same front door it looks it looks empty oh okay and not so bad and we're walking down the hallway the same hallway that had the basement door and all of a sudden this massive like big you know kind of dark brown mouse rat thing like comes charging down the hallway right so we both for the living room and take off is this mouse like was not scared of us at all like runs around the corner right when that happened I was right before he said Ah not so bad.

There's this looks not so bad is this mouse comes charging down and after the mouse comes charging down we're getting ready to leave because I'm like let's just get out of this place. And I look over at my friend he's got this big huge roach crawling out of his shirt that must have dropped down from the ceiling somewhere. So long story short you know that if you get a bad tenant and that's the moral of this story was he didn't screen his tenet he didn't inspect it he didn't pay attention to what's going on and things can get out of control if you're not paying attention so that's that's the lesson there.

Michael:

Holy Smokes. I thought you're gonna say yeah, you decided to take it over and have him cut you in on the business and get 10% commission for all the animals and sales.

Chad Carson:

Oh man. I didn't touch that property I was I helped them advise them I you know from a distance so I didn't get any more roaches or or my shoes.

Emil:

Right Next up, we have Gary Beasley so roofstock co as many of you know, he has a really spooky story to share with you guys. So let's hear from Gary.

Gary Beasley:

When I was in the hotel business, this would have been back around 1997. I was in the midst of acquiring a very old hotel in Claremont Berkeley hills called the Claremont Resort and Spa. So this is right on the border of Berkeley in Oakland. It sits on top of the Hayward Fault. The really creepy thing we found out right before closing The general manager of the hotel came over the grab behind the diligence room took me in his office and said, Gary, I got to share something with you. Like, okay, what is this is the building have termites or something, he says, he hands me this file doesn't say anything. I opened it up. And it's a thick file full of handwritten notes.

These were from guests, and from people who worked at hotel, and was all very, very similar. And it all happened on the fourth floor of the Claremont hotel. So the guy's name was Henry Feldman, I could remember it like it was yesterday. And he looked at me and he really wanted to watch my reaction as I opened through and started reading some of these notes. But there were dozens and dozens of accounts of people seeing a woman in a long white flowing dress, and either hearing or seeing one or two small children. And sometimes they would look out their window and see them in the Rose Garden. And like her tending to the roses, and sometimes she'd be kind of floating the hallways and like Oh, come on is this I'm looking around for a camera. He's like, no, read more there. This is no joke. And a lot of these are pretty recent.

And then a number of things would happen in the rooms. One, sometimes the lights would go on and off unexplainably. tv would go on in the middle of the night, really blaring loud. Water would be on in the bathroom when they clearly had not been in the bathroom. drawers won't open in the dressers. And then one that was pretty freaky was a lot of people complained that they tried is when they tried to exit their hotel room, the door handle was hot, it was really hot, and it wouldn't, then they couldn't turn it. And so like this is really odd. And also, the other thing that was very common was people being awakened by someone thumping on their chest when they're sleeping, like bam. And no one's in the room.

It's like what is going on. And in fact, I heard this from when I was getting my haircut one day there. But the guy who used to cut my hair was telling the story that it just happened at someone who's the hotel, this was a few years ago, and she like, moved to a different floor or whatever. So I'm trying to say I asked him what's the commonality of all this stuff? Because you know, I have no idea. But none of these people know anything about any of the other stories. Oh, there's one more and then I'll tell you the kind of the genesis of it. And what puts the theory. There's an NBA team that used to stay there when the warriors have people in the LA Times will stay there. There was an A famous NBA player. I think you can even find this online somewhere, who was there and he was complaining about the noise in the next room, the little kids playing. And he called downstairs and they said Sir, there's no one in the room next to you. It's vacant. It's not been booked.

He's like, no, there is you could come up here right now. And so they come up open the door. Sure enough room, no one in the room, totally vacant, nothing touched. He freaks out. And I think he actually checked out of the hotel. I don't think he went to a different floor. So all this crazy, crazy stuff, right? And so I said, well, Henry, you know, what do you think that the genesis of it was? He goes well, there was a woman who lived here with her small children. Before it was a hotel, on the property. It was just a house. And she and her children died in a fire on the property

Michael:

That's wild.

Tom:

It's like all the different mediums to it's like the electrical, the water the…

Gary Beasley:

Exactly, exactly. So he said, I'm not telling you, you know not to buy the hotel. I don't know if any of its true. But I was told by my lawyers, you know, this is the kind of thing we have to let everybody know about. And he said, we've never had anybody hurt or anything like that. So if there is anything there, it's not a malevolent thing. But he said I started very much a skeptic, but with all of these things happening that are so similar, because I don't know.

Michael:

Wow, how many how many stories is that hotel here?

Gary Beasley:

It's the top floor, the fourth floor.

Michael:

The fourth floor? Okay.

Gary Beasley:

Yeah. And then there's a tower as well, that goes up. There's a bell tower. So there's one room that actually connects to the bell tower where there's been a bunch of stuff. It's kind of centers around that whole part of the hotel

Michael:

That is so wild.

Tom:

If you haven't seen the hotel, just google Claremont hotel, and you'll immediately go Yeah, that's probably haunted.

Gary Beasley:

Yeah, it’s probably the largest wood frame structure this side of the Mississippi. So another bit of trivia with this hotel, so it was owned by this great guy named Harold Schnitzer. For probably 50 years before we bought it from him back in the late 90s. And he was one of only I think three owners and the hotel was built after the 1906 earthquake. But the land for that hotel, reportedly was one in a checkers game. Back in the around the turn of the century. So there's a lot of really, really interesting colorful history around the hotel.

Pierre:

So you guys still ended up buying it?

Gary Beasley:

We did end up buying it.

Michael:

Wow.

Pierre:

Have you received reports of this kind of stuff happening since you've bought it?

Gary Beasley:

So you know, it never has been something that's been that widely reported or talked about obviously, this kind of stuff is still happening because I heard it from my the guy who was cutting my hair there probably five years ago, because I used to go there just to kind of stay connected and and all the people who work there like oh, yeah, it's just like common knowledge that this stuff happens. But But yeah, so I think if there's if there you know, there's something if there was something going on before we bought it, it's still going on.

Michael:

Wow, you just in about four and a half minutes convinced me to never stay at the Claremont

Tom:

Just avoid the fourth floor.

Gary Beasley:

Some people pay a premium and ask to stay on the fourth floor. Like I said, No one's ever been hurt. I mean, you might be a little spooked.

Michael:

Yeah, yeah.

Gary Beasley:

But this way if the TV comes on or whatever, you know what to do. It's just nothing to worry about. Just go probably turn it off. Make sure the waters not running in the bathroom. Calmly Go back to sleep calmly Go back to sleep.

Pierre:

Put a pillow on your chest.

Gary Beasley:

Yeah, no. So the whole theory is she's trying to wake up or kids or wake up whoever's there and get out of here. Yeah. Happy Halloween boys.

Emil:

Okay, next up, we have our very own Jim Barker. Jim's got another pretty spooky story for you guys. So let's hear from Jim.

Jim Barker:

There's a lot of weird stories out there and I thought seeing a giant pipe organ built into a home was really up there, that was in Long Beach California but, but this one was a trip out to Indianapolis and we had a group of houses there for the firm that I was working with that that were really in need of a lot of renovation they had purchased these sort of sight unseen really low purchase prices knowing that they needed some rehab but didn't know exactly how much they needed and and when we got into this house, I think my first experience was walking into the home it didn't have the utilities on the walls were sweating. And being a Southern California native and and at the time kind of living in Florida and going out throughout the southeast. I didn't really think about it but that was like oh, it's got a basement and I kind of went to go walk in the basement I think I was using my my cell phone flashlight and it almost stepped into like a about five feet of water their water is just full of water in this basement.

So kind of quickly realized we needed to get a waterproofing company out there and they did a good job they they pumped the water out of the basement and identified Yeah, we had this long term issue there with this house and created a plan for us to waterproof the basement with some excavation around the outside and some sump pumps and rock Okay, this is a it's already a scary rehab house but it wasn't truly scary at this point, just a little odd, but when they got the basement dry and then the next step was sort of remediate all the water damage in the basement.

And they said okay, well take us a couple days and then you can come take a look at it really scope out this house after we're done. So in the process, they they stripped this entire basement of the drywall that was around the basement walls, and let it dry out had some fans in there. And then and that's really when when I got the call from this vendor saying Hey, you got to come back. This is something weird going on at this house. And yeah, I'd seen a lot of things probably you know, a couple thousand SFR houses that had been at this point and nothing really fazed me whether it was a hoarder house or or anything else that you might run into but when I got back to this house, he's like yeah, I just you know, it's so strange you just got to go in and experience it for yourself and so this house was odd enough already man had been stripped of drywall and didn't have cabinets or anything in the kitchen. So it just kind of looked like this old creepy space.

And as you went down in the basement, it was just kind of like a split level. So as you walk down the stairs and kind of went down there like what what does he guide me into I really didn't know and like, get to the bottom and you see this like, weird, creepy. Two foot by two foot hole that's been cut in this cinderblock wall of this basement. Like, what is that and go in there and like, what were they tunneling outside of this basement for I have no idea and stick your head in the little hole and you're like this doesn't even seem safe. But sure enough, they tunneled out and kind of created this maybe six foot by four foot little room that couldn't have been more than in two or two and a half feet tall, underground, and it had nothing in it, but a foam rubber mattress and some old like 1970s floral cushions from couch cushions and like what was going on in this house if it wasn't visible? Who decides to randomly tunnel outside of their house? And what could they have possibly been hiding in here?

You know, is that their escape room? makeshift escape room? Was it a, something where somebody was being smuggled, like I really didn't know. So it's just like, I don't know what to do with it other than like, we've got to get rid of it. And so luckily, we didn't ever find out anything bad happened here. But it was a scene out of Saw or something where you look down in this basement and everything is torn up. And there's this hole in the, in the side of the foundation wall. And so we quickly just crushed it from the outside, made sure that room was gone back-filled, the dirt and patched up that basement wall, and the house turned around. But there was a lot of speculation with me and my coworkers at the time and some of the neighbors, what the house might have been used for. And the the old man that used to live there. And I think one of the neighbors speculated that he had two wives and maybe he only ever saw one of them at any given time.

So the stories is just got more and more wild as we went along. But I don't think there was much truth in any of those specular stories, but it sure was a strange room and we never did quite figure out what was really used for but it no longer exists. And now it's a perfectly functioning SFR rental house and, and yielding well for the current owner.

Tom:

Oh my gosh, just Yeah. Just perform an exorcism on that part of the house. How scary Jeez.

Jim Barker:

Yeah, just Who knows? And maybe just a little hiding room or playroom for some kids. But yeah, when when you find it like that your imagination shirt runs wild.

Emil:

I was trying to think in the background of something not ridiculous that could have gone on there. And I'm drawing a complete blank, like I can have it couldn't have been anything legitimate and had to have been something just, I don't know, really not safe or legal. Or…

Jim Barker:

I'm convinced that the weirdest stuff happens in basements. And maybe it's just a myth from not growing up having a basement but now in my experience, I'd like a whatever weird happens. It's always in a basement.

Emil:

All right, next up is our very own co host, Tom Schneider. Tom has another great, great story for you guys. Let's listen to this one.

Tom:

So I was at the time this is, I don't know 10-15 years ago, I was working in acquisitions. And there was a property that I was looking to buy. This is for a company that eventually went public but we were in major buy time. And this property was located in this area called the Iron Triangle in Richmond and you guys are familiar anyways, I go to this property with my construction manager that I work with and the property is listed as vacant per the MLS listing so vacant. We go there I have my super key so I'm able to unlock the door and me and the contractor opened the door and you know I couldn't put it into words but it was so obvious this home was not vacant. There was nothing visually you can see that really spoke to someone was there but I don't know call it intuition as soon as you open the door and stepped inside you we're not the only ones in this room.

So we continue you know we look at each other and I think he felt it as well and we are walking you know through the house I think it's like a three bedroom one bath doing our our standard process right. First we go over to the kitchen estimated costs, pretty standard, you know and still have that kind of sinking feeling that this is not we're not on our own in here. So looking through the kitchen testing the water, you know a little bit of brown spurts out of the water just like a not a good omen. You know some rust or whatnot. Anyways, continuing working our way through one bedroom, another bedroom until we finally get to the master bedroom. And, I mean, we both just looked at each other. And in the corner of the room, there was this closet. And it was just slightly opened a little bit. And, you know, we had to know, is this house empty? Or is it not.

So I walk slowly over to the closet and I, it's dark out to, you know, not a lot of windows and I open the closet door. And looking in there. And I see, in the back of the closet, this is a weird deep closet, I see two eyes looking right back at me. And I turn around at the construction manager, we got to get out of here! So we sprint out of the door. I think we forgot to put the super key on and we were just spooked called the listing agent, that house is not vacant, you got to go and take care of that and made it out alive. No major issues. But man, it's it you got to trust your intuition. If you you feel the energy of somebody or you know something, I still don't know today could have been a bear. I don't know. You got to trust that, that intuition and double check with the listing agent that your house is vacant.

Emil:

Next up, we have Michael Zuber who many of you know he's been on the show a couple times. I actually remember hearing this story on Michael's YouTube channel. And we had to invite him on to recount it here. So here it is.

Michael:

Yeah, so let me set it up. Because again, so we were probably in year eight or year nine of our investing journey, we probably had 100 doors by this point, we had probably had 500 tenants by this point. And again, while this story is truly just truly nasty, I do want to say that most tenants are just awesome people. So I don't want this one horrible event to scare anyone away. But it is it is pretty bad. So this starts in a very unusual manner. Somebody comes in to pay rent, my property manager takes the check, tries to apply the check to the unit and says innocently enough name on check doesn't match tenant in house, what's going on? Right? Not thinking any of it.

The tenant at this point, I don't know. The first error or honesty or whatever you want to call it says oh, by the way, so and so I've already forgot their name, the other tenants left. And I moved in and I want to pay the rent that he was paying. So we're like, Okay, cool. We're not going to take your rent, we have to put all tenants through an application process, right? But good news is you have the money. So you're good, good sign. We think we're gonna get through this okay. So he fills out an application right there. He again tries to pay before he leaves and we say no, right? You're not an approved tenant yet. We can't take your money. But we should have an answer in 24. Worst case, 48 hours, right process is smooth.

So lo and behold, that evening, I get a call. And I start to hear this story. Right? Because I have at this point, they're not bothering me, the owner, I'm probably somewhere in Europe or Japan or somewhere. But they call me go we got we got a problem. I'm like, Oh, crap, what problem we're going to talk about today. So they go through it much like I have with you. And now they tell me that the application that the gentleman filled out, everything is wrong on it except his name. He's lied about everything. Where he works. Past references didn't check out. Just nothing is right. Other than his name, and the only reason they think his name is right is because it matched the check. That's that's all they know, at this point. And they're like, what do you want to do? Because he's already moved in. He was already going to pay rent. And they're just not sure.

And I'm like, well, you're my property manager. What's, what do you think the process is, this is this is not an approvable tenant. Right? So call him up. See if he has a legitimate excuse, which I don't know what it'd be, but check. So, my intention is okay, the guy's got to go, right, 30 day notice, you know, get out we'll you know, we'll Park friends but you're not approved right seems to set it makes sense. So long, behold, he calls me they call and now it turns tense. He is clearly upset. Which at which point the property manager the owner of the company gets involved because he is just berating my property manager, right my point of contact and he makes a call that Okay, you've got to get out in three days, you know, just three days to pay to quit and At which point he really doesn't like it.

We think nothing of it. He's just a grouchy tenant at this point, he tried to cheat the system and get out. Lo and behold, about two or three in the morning, my property manager gets a phone call from the police. I find this out the next day at like 6am or 7am. But apparently this individual sent out a mass communication on his social media, advertising a hammer party. So you know what, I grew up in the 90s. I'm thinking MC Hammer, right? I'm like, okay, he wants to throw a big bash. Before He Leaves. I'm like, in my, my property manager goes, No. He goes, he threw a hammer party. I'm like, all right, I give up. It's not MC Hammer. What is it, he told his entire social media staff to bring a hammer to his unit. And they started putting little holes in the drywall. Right, just smashing the drywall smashing the toilet smashing the tubs with hammers.

So much so that he almost broke into the unit next door, at which point the police were called, and people were arrested, because there were people on parole that shouldn't have been there. And lo and behold, we spent, I don't know something like $20,000 because again, right, once you start putting holes in drywall, you know, stuffs got to go. And, you know, toilets got to go and sinks got to go and countertops got to go and cabinet doors were just bashed off. They were demoing a relatively nice unit. And this all started from a guy who wanted to pay rent. That's the terrible thing of this story.

Tom:

I'm never gonna hear hammer-time Just think of it and not think of that story again.

Michael Zuber:

Yeah, it was a, it was not a good experience. And I just I think about it all the time. All he wanted to do is pay rent. He I'm sure he thought he was doing the right thing. But then you start lying on your application and your job doesn't check out. And yeah, I mean, it's just like, who knows what was going on? We never had a chance to dig into that. Because he just went from, you know, trying to sneak through to I'm going to be mean, And oh, by the way, he went to jail. He went to jail that night. And we're talking,

Emil:

You and I we're joking before we started recording. But I mentioned I feel like if you've been doing this long enough, everyone who's been doing this decade or two, like they have a crazy story like that. It's impossible not to have one.

Michael Zuber:

Yeah. You will. You're in the people business. I mean, I didn't understand that for years. Right. I thought it was spreadsheets, I thought it was sticks and bricks. I thought it was stuff. It's not stuff. If you're a landlord, and you're a long term landlord, you're dealing with people, people go through life. Sometimes you're winning in life, and sometimes you're losing sometimes. You know, it's it comes up aces, and sometimes it's deuces and Damn, I mean, it's you can run into people that are having pretty bad days. And I'm sure they don't mean maliciously, maliciously, but he was angry. And he destroyed a unit and ultimately, frankly, paid the price with his freedom because he went to jail.

Emil:

Alright, thanks, everyone. Hope you didn't get too spooked out during all this. But hope you all have a great Halloween. I know it's going to be a little bit different of a year, but hope you all enjoy it. Anyway. One other quick thing to tell you guys about before you head out. We're running another Roofstock Academy promotion this month for all of our podcast listeners. And if you're not familiar with rootstock Academy, that is our online on demand training and coaching program where you can get one on one coaching with myself, Michael Tom, also in our private slack community. And we have tons and tons of hours of on demand lectures for you guys to go through to really, really power up your knowledge of real estate investing. And that code if you go to roofstockacademy.com and check out just enter the code HALLOWEEN, you'll get $151 off enrollments. So again, roofstockacademy.com, and apply the code HALLOWEEN at checkout before October 31 to get $151 off enrollment. All right, we'll check you out on the next episode. Happy investing

Our Top Tips for Finding & Vetting A Good Lawyer Oct 26, 2020

In this episode, we wrap up our series of finding an vetting solid vendors with the lawyer. Join Emil, Tom and Michael to learn their strategy of finding a good lawyer.

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Transcript

Emil:

Hey everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and I'm joined by,

Tom:

Tom Schneider,

Michael:

and Michael Albaum.

Emil:

And today we are going to be continuing our series on tips for finding and vetting different members of your real estate investing team. Today we will be covering the lawyer. Let's hop into it.

Michael:

Tom, what is in your hand?

Tom:

What?! What are you talking about?

Michael:

Looks like you have a tail.

Emil:

What is going on?

Michael:

Is that a crop for like a horse?

Tom:

It's this thing called an Orange Whip. It's it's actually pretty fun.

Emil:

I hope you don't use it on your child.

Tom:

No, no, no, it's a golf tool that I just kind of hold at my desk, and it has tons of wiggle waggle.

Michael:

Mm hmm.

Tom:

So when you swing, I'm kind of a gimmick guy like a golf gimmick guy so like is that they buy something you know, like a straight jacket that helps you whatever your swing, I'll buy it. I got this thing recently called. And I'm very pro Orange Whip it. So when you swing back, this orange ball that's has like a ton of wiggle waggle. It makes really good tempo and improves your swing. So you're not coming over the top, you got a nice inside out swing.

I'm funny with golf. I don't play like that often. But when I do, like, I just like, you know, go all out. And so like 10 months of the year, don't really play it. But then two months, like, oh, man, I need this gimmick. I think I figured out and yes,

Michael:

I was gonna say I've known you for a couple years and not once have I ever heard you mentioned golf.

Tom:

I mean, we must have not talked during that little month sequence that I was really into it. But as a shout out there, Orange Whip. This isn't a paid promotion. But I think if you're in a golf and you want to have good tempo, and strengthen, get an Orange Whip, I'm pro Orange Whip. So that's what's behind me.

Emil:

You're gonna love this. So my brother in law started this little it's another gimmick. It's called putt cup.

Tom:

I’m in, Ooh.

Emil:

So a mug that has a flat brim so you can lay it on the ground and just practice your putts. You know if you'll put mugs on the ground, but it has this flat side to it. So you get a nice roll in there.

Tom:

That's beautiful. At first I was thinking oh, there's a hole in the cup. So when you putt it goes in, but that doesn’t make sense.

Michael:

Wouldn't be a cup anymore would it? It’d be more of a funnel.

Tom:

Where does he sell it on?

Emil:

Amazon. You just go look up putt cup.

Tom:

I'm in.

Emil:

Another gimmick for you.

Michael:

Also not a paid promotion.

Tom:

Yeah, another amazon.com!

Emil:

Have you heard of it?

Tom:

Have you heard of it?

Michael:

It's a little book company.

Emil:

Small boutique retailer.

Tom:

Related to Amazon is this thing called fake spot. So an Amazon companies could like spam a bunch of high ratings when they have their product. But there's this thing called fake spot that you I think I posted on that Academy Slack channel that will analyze if the ratings are fake, and it gives a true ratings by looking at and getting rid of the bots. It gives you an honest take. So Orange Whip, fakespot, and Amazon. Those are my three recommendations for today.

Emil:

Okay, guys, well, we could be talking about golf and Amazon all day. But people are here for our real estate knowledge, or lack thereof. So let's talk about how you find and vet, a lawyer. We’ll break it down into three parts. So when in the process of your real estate investing journey or buying a property, should you look for this person? How do you source? So how do you go out and find a lawyer? And what are the best questions to ask to make sure they're legit, and can help you and be a valuable member of your team? So let's start with when in the process. Should you find the lawyer? Do you guys have went Have you guys done this in the past?

Tom:

All right, so I'll jump in first. If you are investing passively, you're holding properties in your own name, you know, it's not necessary that you buy them in an LLC, I would argue that within your checklist to get going as a remote real estate investor, getting an attorney in place is not high on that list. And that you don't have to do it before you start evaluating. You don't have to do it before you start buying. If you are looking to own these properties into a more complicated structure, with either LLC is sure you're going to want to have an attorney either to help you, you know, set up your LLC or using like a Legal Zoom or one of those type platforms.

But if you are like myself, and perhaps you own a couple of properties, not in an LLC, you have it in your own name. It's not necessary to have get a lawyer upfront, or even after you own. You know, it really depends on what you're doing and what your threshold for risk as it relates to having things in your own name. You know, as far as timing, I would say it depends and it's not necessary to do upfront.

Michael:

So I'm going to take the counterpoint to a slight degree. I think it depends on what your risk tolerance looks like and what your starting assets look Like, if you don't have a whole lot to your name, it's probably less important to go chat with an attorney prior to. But if you do have a lot to your name, you could have a bigger target on your back. And so, I think just understanding what you're getting into the risks you're taking on, and what structure if any might be appropriate for you, those can all be really great questions to ask on the front end, prior to purchasing. And just as if you're looking to get involved with real estate as a whole, again, good questions, to be asking questions to go get answers to just so you're coming to the table with all the information or as much information as you can.

And so having a consult with an attorney doesn't have to be yours. But one, a real estate attorney in general, can be really great, and how do I protect myself, but also understand that they are likely going to try to sell you something, all kinds of asset protection, and they often will use scare tactics. So take everything you hear with a grain of salt and go talk to other investors about what's actually happened in their world.

Tom:

Another thing to think about is, what are the different use cases that you're going to be using attorney with, so one of them would be on the front end, you're, you know, setting up a structure, maybe you're putting a fund together, maybe you're putting together a single member LLC, you know, that's a use case of using an attorney. And if you're not going through that, it's not necessarily that you find one other use cases that come in with an attorney is perhaps you buy a property, and there's an eviction with the tenant or some kind of issue like that, more likely than not, your property manager is going to have some legal, you know, representation, or kind of like a third party that they'll use to manage the process of eviction or three day notices and all that stuff. So it's not necessarily that you personally have an attorney to do this, your this is something that you're paying your property manager to do, they're gonna forward some of those costs to you, but they're going to get kind of better, better pricing, because they're like at scale, and probably have like, pre made templates for a lot of this kind of stuff. What other use cases would you be using an attorney with you guys think of?

Michael:

That's like, 85% of my experiences with it, I've used mine in an insurance issue, I had to bring in my attorney and just be like, Hey, I'm not getting the service and answers to the questions that I'm posing. And then also with a contractor that I had to fire, they were saying, they're asking for all kinds of stuff, and I ended up firing them and I copy my attorney, and you have to pay me and I said, That's not gonna work like that. And here's my attorney. And so if you'd like to say anything, you could say to both of us kind of a thing. And that solved that problem pretty quickly.

Emil:

And that was the end of that,

Tom:

On the front end, if you're buying with, you know, friends, or whatever creating a fun, so structuring that whole thing. I guess I'm repeating myself again, I did that before. But

Michael:

Yeah, I think I think structure is a huge part of it. And so making sure that you get that right on the front end is super, super important. And so I've used my attorney for that. So we were talking and it's so one word can change the meaning of an entire contract. So making sure that that's right and designed to protect everybody involved in it actually is designed to do what it's intended to do is really important. So I've used done that in the past and setting up multi member LLC partners have have her structure that and draft up those documents.

Tom:

On those documents, there are some good hybrid approaches, such as LegalZoom, and Rocket Lawyer where they have these templates that are pretty much ready to go. Be it tenant related templates, which you're not going to need if you're using a property manager, but setting up an LLC and that kind of stuff. It's a nice hybrid approach, which might be a little bit more cost effective than bringing on an attorney where you're paying $500 an hour or whatnot. Just because, you know, setting up an LLC is kind of a punch and play thing where this it's a well worn path where these hybrid approaches where you could buy these templates can be more cost effective.

Michael:

Yep, I would agree.

Emil:

I'll just, I'll speak quickly to my own personal experience, I wouldn't say this is the right or wrong way to do it. But just so our listeners kind of have an example of, you know, when in the process, one of us use it. So for me, I bought four properties in my name, no LLC, just directly in my name. And after my wife got married, had our daughter, we started really thinking about, you know, what are some of the legal implications of having all these properties in just my name, you know, we had a family member who went through probate, which again, if you want to learn more about that, Episode 41, like Michael talked about, and so I really wanted to avoid those things.

Once family came into the picture, you start thinking a lot more about these things. And so that was the point for me, which was actually earlier this year, that I decided to enlist the help of a lawyer to help us create a trust so everything you know, in case, knock on wood, anything happens to me, it flows directly to my family without much hiccup or headache. So that was kind of just my my personal journey into when I picked up working with a lawyer and..

Michael:

In episode. 40 We also talked about trust stuff. And we talked about in that episode about anyone who's investing in real estate should absolutely investigate whether or not a trust is a good fit for them. I think probably it's going to be,

Emil:

Especially if you have a family and again, you, you know a lot of these properties in your personal name. And there's all this like, legal stuff that can happen if you don't set it up properly. So good idea.

Tom:

It's interesting how much of real estate like strategy wise, it's like, next generation, you know, just like…

Michael:

Yeah, after you die.

Tom:

Totally. Yeah. But I mean, what a great gift that you can give to your family's future. I think talking about defer, defer, defer, and then you die, you know, with regards to 1031s and taxes. So anyways, short commentary, there

Micheal:

It’s the gift that keeps on giving, you know, real estate.

Tom:

Yeah.

Emil:

Anytime you talk about legal stuff, it's always just such a happy episode.

Michael:

It's always the doom and gloom and morbidity, right?

Tom:

What's consistent in life, death and taxes?

Michael:

Death and taxes.

Tom:

That's it. There we go. Next episode.

Emil:

All right. So let's, let's move on to how do you source How do you go out and find people to interview? So how have you guys in the past? You're looking for a lawyer? What did you do?

Michael:

I got super lucky, my older brother had a good friend who I'm also friends with. And one of his good friends from college was a lawyer. So I reached out to her and we've been good friends. And I've been a client of hers for a long time. So it's great that she's very young and but experienced, and so she's going to be around for a while, and looking to grow as well. So I don't have to work with someone for five years, have them retire, and then go look for another attorney. So she's been awesome to work with. She's super, super great.

So I just happen to know someone, I didn't really have to do a whole lot of interviewing, and we kind of just grew together naturally. And it was a really good fit. Tom, what about you?

Tom:

I would go back, we've talked about in some of the other episodes of the hierarchy of where to identify these type of vendors. So at the top of that is personal relationships that you may have. And when I worked at one of the single family REITs, got to know the attorney, actually, we might actually have him, come on to the episode, he didn't come on the podcast soon. He's the general counsel at Mynd Property Management, where another great resource is professional references and then looking at forums BiggerPockets, brucite, Academy members have access to our Slack channel, and then just general view, so I say those are the key spots in descending order of what I'd recommend for identifying a lawyer.

Emil:

I think the big theme, and we're hitting on it in all these episodes is the power of networking and asking either the people you work with or networking with other investors who they know because they've worked with them, they have experienced with them, right? It's not like you're just going on Google and who's the first name that comes up, or the first ad that comes up, and it's just so powerful to network and ride the coattails of others, if they found good people.

Michael:

Yeah, you don't need to reinvent the wheel.

Emil:

Alright, cool. That was a fast section. So moving on to the last part. What are some good questions that our listeners can ask? When they're interviewing a lawyer to make sure that's the right person to bring on to their team?

Michael:

For me, I think the first question is, do they work with real estate investors? Because there's all kinds of attorneys out there that specialize in different disciplines, just like you have all kinds of different doctors, specialists. You know, if you had a problem with your hearing, you wouldn't go to an orthopedic surgeon, probably I don't know, I that's my guess. There's not medical advice. So same thing with attorneys, and accountants, and really all the team members were talking about these episodes for that matter. So making sure that they specialize in real estate, and specifically working with investors I think is really important because they're going to look to do certain things for you that are going to be different than if you were an owner occupant.

They're going to treat you in a very specific way and look to structure things very specifically for you as an investor. And so when they have that experience and background, that's going to be really helpful for you. I also like asking where they can work, what states can they work in? Are they licensed in multiple places? Are you in California and the attorneys in Colorado? Does that pose any issues? also asking what their fee structure looks like? That's a big one we talk about with a lot of the vendors we speak about working with, are they hourly do they want to retain, do they charge by 15 minute increments? You know, how do they bill? And what does that look like? And then asked if they charge flat rates for certain services like setting up an LLC, asking them what their typical turnaround time is on inquiries and how they best like to communicate. If you text them a question, you get charged for that, if you call email, what's the best way to get ahold of them? Tom, I don't want to give you the scraps again. So I'll make sure you get in here

Tom:

I’m coming up with some fresh stuff. So some Attorneys Offices, there might be multiple attorneys. So here's an example of a question I like to ask him. If there's multiple attorneys, you know, is there different rates, so if the office perhaps has multiple attorneys, maybe there's a younger associate, that they do more template work, or more kind of bread and butter work at a lower rate? That's something to ask us, you know, are there many attorneys that I have resources with, because you know, with law, there are different types of specialties. So perhaps, if you are one a slightly more expertise on particular areas, it could be a bigger law office that has more resources versus a kind of a one man show or one woman show that's that's doing all the different work.

This is just a way to evaluate different attorneys and what their resources are. I would also ask them about some specific use cases that they had, in working with investors, have they done the initial contract work upfront in structuring funds? Have they done any work as it relates to dispute management with property managers or contractors? Have they done any work as it relates to eviction is just kind of go through their repertoire of what they have competency in, in law? And just let them speak? Kind of get them started? And let them talk about it?

Michael:

And I think it's fair to say, Tom, would you agree that most attorneys during this kind of interview phase are not going to charge for their time?

Tom:

No, I would be overt and clear that, hey, you know, I'm in the process of evaluating. I'm speaking to two other attorneys, and may or may not be speaking to two other attorneys, but that's between you and me. And just let them know that you're kind of in that evaluation phase.

Michael:

Yeah. Yeah. I totally agree.

Emil:

Solid.

Tom:

And references, references, get some references. Love that, you know, can't say that enough. for everybody. That's like, honestly, the biggest sort of BS detector is if you can get a reference who isn't their grandmother, or niece or nephew or whatever, you get a real reference and talk to them.

Emil:

Solid. I don't have anything to add. I'm glad you guys. One note I had was expectation setting. But I think Michael, you talked about it like, like, let's say you decide to work with them, if you email or call or text, like, are they going to charge you for those 15 minutes, or whatever it is? Or like, you know, for smaller stuff? Within reason, right? Like, if you're emailing them every week or something, okay, it's probably fair that they charge you but like, if you have a question every couple months, are they going to like charge you or that kind of just part of working with them? Anything else? Add here, guys, before we wrap up?

Tom:

I think that's good.

Michael:

I think that's good. And I would say, you know, if you're questioning it, just go reach out. It's one of those things like legal and accounting is one of the two areas where it's kind of a pain in the butt because they're expensive to deal with. But the things that they'll be able to do for you and answer for you are well worth the expense. And we are not experts, as real estate investors in the law. We are not experts, as real estate investors in accounting. So we need to go find people that are and finding good ones, they are well worth the cost. And so just kind of bite the bullet and keep track of those expenses because they are all deductions.

Tom:

Yep,

Michael:

It often ends up paying for itself in the long run. And this is your and your family's financial future. And so don't skimp out on a couple hundred bucks of an attorney to try to go do it yourself to then potentially have a get messed up down the road. It's a small expense in the grand scheme of things when it comes to the risk that's being mitigated.

Tom:

Pennywise pound foolish Don't be penny wise pound foolish.

Michael:

That's right. That's right. Man I should have been an attorney.

Tom:

Let's go study bird law.

Michael:

That's right, bird law!

Emil:

Cool. So let's wrap this one up. We're doing a little giveaway for people will leave us review right now we're at 93 ratings on Apple podcasts. And we're trying to get over 100 so the next 10 people will leave us reviews. We're going to randomly select two people and send them some cool stuff, maybe some books and some some swag and stuff like that. So if you haven't already go leave us review on Apple. We love hearing from you guys. And as always, we'll check you guys out in the next episode.

Michael:

Happy investing

Tom:

Happy investing

Real Estate Is Like A Bond Indexed For Inflation With An Equity Kicker w/CEO Gary Beasley Oct 24, 2020

Michael:

Hey everybody, welcome to another episode of The Remote Real Estate Investor. This is our weekend wisdom episode. I'm Michael album and joined today by Tom Schneider and Roofstock CEO, Gary Beasley.

Theme song

Michael:

So, Gary, we want to ask you a question about what is your favorite metric to use when evaluating properties? And how do you think about that metric when it comes to total return.

Gary:

So I like to think of single family rental homes as sort of like a bond that's indexed for inflation with an equity kicker, and I'll explain what I mean by that. And the reason I think it's particularly relevant right now, is we're in a low interest rate environment, people do feel like with all the money we've been printing over the last few years, there is a potential for inflation down the road. So you want to think about what kind of investments could potentially be inflation hedges in case inflation. And the Fed has said, we're gonna keep rates low, and we're not so worried about inflation, so we're not gonna be as aggressive in raising rates.

And then you've got this equity kicker element in homes, which is really the appreciation component of it. So let me tell you what I mean. So the bond component is that the cash flow that you could generate from the home when you own it, and that's like the bond piece every year, you could raise the rent to at least keep up with inflation, because their annual contract. So if there's a lot of inflation in the market, you can raise the rent. So if you had to sign a 10 year lease that was flat and inflation went up, you would be in trouble. So you've got that annual indexing.

And then you've got the capital appreciation piece, which if the property goes up, you know, 3%, a year or 4%, a year, which is historically has done over the long term, you get that capital appreciation piece, like you would get, say, in a stock with a stock value going up, you've got the value of your underlying asset going up. And what's nice about real estate, unlike with stocks, which are harder to, in most cases, put leverage against unless you have a margin account, anyone could get a loan for a house. And so you could get a 70 or 80% loan on the house. And I like to give a you know, very simple example, if you have a home that basically just covers its costs over, say, a five year period, but it goes up at three and a half percent a year and you have an 80% loan on it, you could get a 14 or 15% annualized return on that, because you've got someone else paying down your mortgage and creating principal value, you've got, you know, you're you're riding the property value along, and you're getting kind of four to one leverage on your equity.

So when you sell it, your annualized return over that period can actually be quite high, even if you're not pulling money out or getting current return along the way. So when I look at investing in homes, the yield is one component of it. But I'm really more of a total return investor, I don't necessarily feel like I need to pull the money out every month and then spend it or put it into something else, what I'm trying to do is create value in that asset. And so I like the idea of having someone else pay down the loan balance for me, and create value over time just by getting that exposure to housing, and letting the market be your friend. And then at some point in the future, if you decide to liquidate it, you've got a lot of hopefully embedded equity value, that's when you could sort of realize the benefits of that investment.

Michael:

That's a great kind of analogy and pictorial representation. Can you talk just real briefly about how a bond works if somebody wanted to go buy a bond, so that way they can compare that investment versus real estate? How does that traditionally work?

Gary:

Yeah. So when you buy a bond, what you buy is a coupon on that that bond, and then you get your money back. So you could buy a municipal bond or Treasury, something like that. And let's say you get an interest rate on that bond of 3%. And you buy your hundred dollar bond, and you get $3, every year back. And then at the end of that term, you get your hundred dollars back. That's the entirety of your return. And that's a 3% annualized return, because you're getting your 3% every year, the difference between like a bond and a single family rental home, which you might be able to get a similar kind of return every year on a home, but the value of the underlying home is going up. And so then instead of getting $100 back, maybe you get $120 back, right and so that's where that's that equity kicker piece that I'm talking about. That's over and above that bond piece.

Michael:

Already, everyone that was our quick weekend wisdom a big big, big thank you to Gary super informative. If you enjoyed the podcast, please feel free to leave us a rating and review wherever it is you listen to your podcast. We look forward to seeing the next one. Happy investing

Our Top Tips for Finding & Vetting A Good Property Manager Oct 19, 2020

Tom, Michael and Emil continue our series on how to source a powerful real estate team. In this episode, we discuss the property manager.

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Transcript

Hey everyone, welcome to another episode of The Remote Real Estate Investor. My name is Emil Shour, and I'm joined by my co-host,

Tom:

Tom Schneider

Michael:

And Michael album.

Emil:

And in today's episode, we're going to be continuing our series on finding and vetting different people on your real estate investing team. So last couple episodes, we've covered insurance carrier and lender and then in today's episode, we're going to cover the property manager. So let's get to it.

Theme Song

Emil:

Alright guys, in the last episode, we gave a quick shout out before we got into the episode and want to do that again. Give people shout outs for leaving us reviews. So this last one came from IanC11. Love the pod great for someone who is new to real estate investing combos and personal experiences are super insightful, and the info is easily digestible. Thanks, Ian. Appreciate it. Man.

Tom:

We are almost at our 100th review on Apple podcasts, which is pretty awesome. And I think for the person who hits, who writes the 100th review, what do you think Emil? Some sort of like,

Emil:

What if now nobody wants to write a review? Because they're waiting to get to 100?

Michael:

They're waiting?

Tom:

Yeah, I think we sent him a shirt, a roof stock Academy shirt and books done. approved, budget approved.

Emil:

How about the next 10 reviews? So anyone from 94 to 104? will pick one person and send them that cool pack you mentioned?

Tom:

Well, maybe it's at 98, 95. There's a term for this type of promotion. It's we could be at 100. I don't know we could be right below good reason to write the promotion. We'll do it for two people.

Emil:

Two people. There you go. Alright, next 10 reviews, we're going to randomly choose two people and send you some cool stuff. Okay, so we're talking about the property manager. This episode, we're going to follow the same format that we have been, which is a three part question series. So the first part is, when in the process, should we be finding our property manager? When in our real estate acquisition process? How do you source a property manager? And what are some good vetting questions to ask them to make sure you're finding the right property management partner? So let's kick it off with when in the process? Should a new real estate investor start looking for a property manager? What do you guys think? When have you guys started looking for your pm in the process,

Tom:

I would say you can't do it early enough. Because it you know, if you take one thing from this episode, and I've probably repeated this a couple of times, is you can bring, especially as a remote investor, leverage that property manager as local boots on the ground. And you can begin the interview process by adding them as a data point within your acquisitions process. So let's say I'm looking to buy a house in Columbus, Ohio, or Atlanta or Indianapolis, you know, in talking to property managers, I can get their feedback on properties that I'm looking at and neighborhoods, it's a really, a secret sauce to a remote investor is bringing in that local property manager early and often. So I would say as early as possible, what you don't want to happen is in a transaction, you know, you've found a great property you like it fits, checks off all the boxes you're looking for. And then like last second scrambling to find a property manager, you're not going to make as good of a decision. And plus, you're wasting that opportunity to use that property manager as part of your acquisitions team. So early and early. Yes, early.

Michael:

I agree with you, Tom 150%. I think you, you nailed it. And they can be your eyes and ears, they can be adult, they should be involved in the due diligence process, they can give you insights into markets and sub markets and streets where you want to avoid and things where you want to be looking out for. I think they a good property manager is going to really have their finger on the pulse of a particular market. And so that only goes to stress the importance of finding not only just a property manager, but a good one. And Tom, to your point of scrambling last minute to find a PM, I've been there done that I did that twice. Actually, in the same market, I was really excited about the market, I was really excited about the deals, I didn't have a pm in place. But I had a really great agent.

And I've talked about this in the past. And so I purchased the deal. And then I threw it in interviewed a bunch of different property managers, and there were just no good options. So I had to pick the least bad of all the options. And like, just to put it bluntly, it sucked. Like it was so bad. I ended up firing the property manager A few months later. And it was a really awful experience. And after I closed that second deal, I was thinking about selling both properties and just getting out of the market because it was such a nightmare dealing with the pm in that market, because there were just no good alternatives. And the whole time before I fired him I was looking for alternatives and I just couldn't I just not none existed. And so I can get into it a little bit later. But I then convinced my agent to start a property management business and that worked out pretty well. But so in lieu of find if starting your own property management business are forcing someone to do it on your behalf. Definitely try to find a good pm early. Well, before you purchase. Again, if I hadn't been able to do that I would not still be in those markets today. I think your investment lives and dies by your pm.

Tom:

Yeah, I think we had an earlier episode where we talked about the decision of using professional property management or self managing, yes. This is the the, this episode, the guise of it, I think I'm using that word right, is you are buying remotely and you are using professional property management is the assumptions that we're making. In this episode,

Emil:

I would say that once you've decided on your market, once you're saying I'm gonna go invest in Dallas or Atlanta or wherever, I think your next step should honestly be to go talk to property managers, they know so much about the area. Yeah, you can spend tons of time researching online, looking on forums, whatever, but like property manager lives and breathes that they're managing, often hundreds of properties in that market, they can tell you the areas that they like managing where they don't like managing, where they're seeing a lot of growth, rent growth, whatever it is, they can tell you the types of properties that they are able to lease up very easily, versus ones that are more difficult. They're just a knowledge of wealth that I think you should tap as early in the process, like you guys mentioned. So honestly, it's like, once you've chosen a market, I would go start talking to two property managers, honestly.

Michael:

So Emil, I actually work with a student in the academy who takes almost the exact opposite approach. He's involved in a particular market, loves, loves, loves his property management company, and is now investigating other markets, only those in which that same property manager operates. So he's actually following on his property management coattails to other markets, other states, because he likes them so much, because he believes in them so much. So you can almost use your property manager as a roadmap so to speak, if they're operating in other markets as to other markets to potentially investigate. Now, of course, you can still go do your market due diligence and validate it for yourself. But knowing that that piece of the puzzle is already solved for you, makes it kind of nice.

Emil:

Yeah, this person probably chose a market and then found the property manager, and now is using them to explore other markets, right?

Michael

Correct. Yeah, it's only it's only for secondary. After you've established that property management foothold,

Tom:

I'd like four different property managers that I interface with, and man, it'd be a lot cleaner to just have one.

Michael:

So much better.

Tom:

That sounds pretty good.

Emil:

And just knowing that you have a reliable property manager to keep using, like, that's so invaluable.

Tom:

Yeah. And some specific stuff that I've gotten from property managers is they're like, for the most part, they're pretty honest. Like, in talking about a neighborhood, if they like or don't like it, in my experience has been a pretty like low pressure sales, like not like high pressure, like, Oh, yeah, this is the house right? where they'll give honest feedback. And some specific feedback I've gotten is, oh, you know that property, it's really consistent rent, it hasn't shown a lot of appreciation. But you know, it's always occupied that kind of neighborhood. Another one was looking at a property.

And they were talking about the bedroom count, I'm like, Yeah, it's a four bedroom, two bath, and like, oh, wow, we manage a bunch of properties there. And there's very few four bedrooms, that's going to move right off the shelf. So getting that kind of insight information that you wouldn't be able to get if you didn't bring a property manager in super early. So those are some specific examples of the benefits of bringing the pm in as early as possible.

Emil:

Nice way to throw some good anecdotes in there. All right, ready to move on to the next one, then?

Michael:

Do it.

Emil:

So our next question, or subtopic is how to source? So how do you go out and even find a couple of property managers to start interviewing. So what have been some ways you guys have researched potential property managers in the past?

Michael:

I'll jump in here and say personal references have been top of the charts for me. And if there's not personal references, then professional references, whether that's the agent you're working with, or through roof stock, or other investors in the area that you might not know on a personal level, the slack forums if you're a member of the Academy, or bigger pockets, great places to reach out to folks and ask who they've used to, they've had success with. And then cold calling and Google reviews, I think good sources as well. We talked about this in the past, but a lot of those reviews, you kind of take them with a grain of salt to a degree in that it's usually the unsatisfied folks that are leaving the most reviews and the loudest reviews.

But also by that same token, I've mentioned on previous episodes, that the people making these reviews, if their tenants are your future clients, and so you want to make sure that the client population being served by the manager is happy and satisfied, because that's who your tenants are going to be dealing with as well. So that's kind of the hierarchy that that I'll use, and it's a lot of cold calling, a lot of cold calling.

Emil:

Yeah, I've recently there's a property manager in St. Louis, who I'm looking to grow with. I was just doing a round of interviews last week and it was one pm that really stood out to me. And I always like to look at reviews but at the same time, like you mentioned, take it with a grain of salt because it's a You could have 100 happy tenants and they never write reviews and it's right I've disgruntled ones who were like, they want to get back at whatever pm and so that's the way they do it. This one actually had a bunch of great online reviews. So I thought that was really cool.

Michael:

That's even better sign.

Emil:

Yeah, rare. Yeah.

Michael:

Yeah, that's pretty. That's pretty rare.

Emil:

Anyway, Tom, what about you?

Michael:

Oh, just one more to add. Sorry, Tom,

Tom:

Take all my points. Make sure you take em all.

Michael:

How's the scraps man? NARPM. National Association of Realtors and Property Managers I think is that acronym, but there's some national accrediting body for property managers, and if they're a member of that…

Emil:

National Association of residential property managers, just look.

Michael:

Thank you, sir. So checking out that website can be helpful. And it's just another accolade for them to put to their name into their business. So they're usually held to a certain standard level, which can be helpful to know that they've got that in their back pocket, I Tom scrap away,

Tom:

Scrap away, I'm gonna try not to just repeat it, but the the Maslow hierarchy of selecting a property manager. Okay, I'm just gonna repeat it. So the first reference is a great place to start. But that's not the end all process, then you go into your interview questions and references, but personal references and professional references, and the best professional reference with the property managers I found to be his agents. So is there an echo in the room. So like Roofstock has some references within all the markets that we operate in, we go through a pretty thorough process of identifying property managers, so professional references, and then kind of blogs, social reputable forums, our friends BiggerPockets, Roofstock Academy, we talked quite a bit about specific local property managers that we like. And lastly is the old Google search bar. So on top of that list is where I will start in opening a market searching for a property manager. Yeah.

Emil:

As someone who works in digital marketing, I want to give one word of caution to our listeners, just know that a lot of times online, when, let's say, someone posts about who are the best property managers in x markets, you'll a lot of times either find vendors or vendors will peg a customer like they're watching those forums. They know a lot of investors are there. And so sometimes they'll peg a friend or somebody to go post on those. So just know that going in, right that things can on the internet can very easily be skewed and always do your own research. That's the one tip I want to give people here.

Michael:

Wait, you mean? You mean the internet doesn't have like editors that make sure everything is factual?

Emil:

Look, man, we're saying that all here, but think about it. Think about it. 10 o'clock at night, you're looking around. And you know, there's a couple couple people chiming in for the same property manager online on a forum, right? You're not immediately. You may be skeptical, you may not. So I just want to heed that warning to our, our wonderful listeners.

I don't have anything else to add here. You guys, you guys hit all the good ways to source potential property managers. Alright, so let's get to the good one. I think this will probably take up the majority of our time here is the vetting questions. So this is such an important part. It's important because I think it's easy to get a list of questions to ask. And I think property managers often get a lot of the same questions, and they can get good at responding in a certain way that they know and investor likes to hear. So I'm curious if you guys have like, tried and true questions that kind of help break past the the canned responses.

Tom:

Emil I feel like Michael and myself has been like taking a lot of the low hanging fruit with some of these initial questions. Would you like to take the lead and leave us with more more scraps?

Emil:

Absolutely. I thought you'd never ask.

Tom:

Being a gentlemen.

Emil:

I'm going to go through kind of the questions I mentioned last week, I did a round of interviews. I'm just going to go through the questions I have listed to ask and some of them they get canned responses, but I need to know them anyway. So the questions I like to ask, and there's always things that come up that I don't list here, but how many properties Do they have under management? This kind of just lets you know, you know how big of a shop they are. I don't think there's a right answer for big or small. It's just good to know how many people they're serving.

Tom:

I think the size of the market is really important. Not so like if it's a much smaller market, it would be unreasonable to expect them to have these huge amount of properties. But if it's a very big market, so I think there's some thoughts in evaluating their answer based on what market they're in. Sorry, go ahead.

Emil:

Yeah, I mean, maybe some pros and cons, I would say, like, let's say they have less properties under management is you may be taken care of more, because you're not one out of 1500, you're one out of 200 properties under management, but they like maybe they only have 30 owners that they work with, right. So you're just going to naturally get more attention. The advantages, maybe some bigger shops is that they probably have some of their more like their processes and reporting. More buttoned up. I don't know. Do you guys have any anything else add in terms of properties under management?

Micheal:

Yeah, I like your take, too. I would also just add that I think a lot of the smaller shops are kind of more boutique key, and they can often be a bit more catering to their owners. And so I don't think that number alone, necessarily dictates good or bad, or strong or weak. It's just an interesting number to note, interesting metric to note and just kind of be aware of.

Emil:

Yeah, yeah, it's helpful as you're asking these other questions. Go ahead, Tom.

Tom:

My last thoughts just on volume of how many units they manage, I would, if I had to choose between one that manages less versus more, I would pick the one that picks more just in viability of the company, like it would stink, if you had a property management company that didn't manage a lot of properties and wasn't profitable, or wasn't able to stay in business that would just stink casting to all things aside, needing to change if for whatever reason, they were not able to stay in business. So that's not like a tried and true way to say how profitable that company is, or you know, if they're able to be sustained as a business, but looking at indicators that it's a business that's viable, that's going to continue on would be important to me, because I don't want to have to go and go through the exercise again.

Emil:

Okay, so some other questions, I like to ask, areas that they cover within that market. So there's some property managers that will have just a geographic concentration, they just a lot of their properties are packed into one area, so they'll know that area very well. So I just like to know what areas they cover where they really pros where, you know, they can help with determining rent, just knowing quality of tenant in those sub markets, so I always like to get an idea for the areas they cover. Next is the types of buildings they manage. So do they manage primarily single family homes? Do they manage a lot of small multifamily? Or do they primarily manage large, multifamily 50 unit plus or something? So, again, if someone's a property managers, primarily large multifamily, maybe me bringing them as single families, not the best idea, so I'd like to see what kind of buildings they manage and that they specialize in. And by the way, guys, feel free to chime in on any of these, if you have anything to add.

Tom:

If you are investing in section eight, making sure that they have section eight experience. So you know, not just building type, but tenant type would you say or if you're doing a short term rental versus a longer term rental, making sure that their inventory that they have now kind of maps up against what you have, I love to look at companies, property managers website and see what listings they have available for rent, I can tell you a lot of occupancy one, if you know they manage 100 homes, and they have 50 homes available for rent, like that's not a great sign like 50% occupancy is not very good. And then also making sure that that map, there's a great overlay of the property where you're looking at its similar location as well as rent. So you know, if you're buying a property that rents for $3,000, in this person's property management, they manage homes that rent for $800, that may not be a good matchup. So just making sure it's similar type property, similar rent type, all that good stuff.

Emil:

Great tip. Another question I like to ask is, usually you try to speak to maybe one of the co founders, or one of the owners of the company. And I always like to ask them if they own any real estate themselves real estate investments. And the reason I like to ask that question is, I think if they personally invest in real estate as well, they just have a much better understanding of the investor and how an investor thinks. And I like that I want them to think like an investor and how do my clients think, right? Like, when it comes to income expenses, all these different things, if they're doing all that stuff themselves for their own portfolio? Hopefully, the idea is that they're treating your portfolio the same way.

Michael:

Absolutely. On that note, I like to find out if they do own investment property, where they are located, and ask them the question kind of carte blanche is hey, if we both have a vacancy at the same time, who gets priority?

Emil:

I doubt they'll ever say that their property gets that would be bad. If they're like, yeah, my property and then your property.

Michael:

Yeah, but you can keep them honest. You know, if you ever happen to see their property listed on their website at the same time, yours is you can bring it up.

Emil:

Yeah, sure. A couple other questions. So I always like to ask them what their standard operating procedure for handling repairs with tenants. So is it an online portal that people Submit through, do they call in? What is their typical response time, things like that? How do they manage tenant calls, some people will immediately send someone out other people, what I like to hear is whoever speaking to the tenant, if they call in or whatever is trying to help walk them through how to potentially fix it themselves. If it's something minor, right? Instead of just getting someone out there, you have to pay for that time, that person's time. So like, just getting an understanding for how they deal with repairs with tenants is always a good question, ask.

Tom:

Nice, I'm gonna go ahead and jump in here. fees, the Oh, so important fees. And what's pretty remarkable about property managers is it's it's not a one size fits all the way that property managers charge fees, specifically around repairs and maintenance. Some charge a percent overhead, some charge, like an hourly project management costs. So knowing how they charge fees as it relates to property manager, excuse me repairs and maintenance, how they charge fees as it relates to rent collection, how they charge fees as it relates to late charges, all that kind of stuff. And generally speaking, the ranges that I see with single family rental, I've seen as low as 6% on a rent collection, to as high as 12%. In a market where it's more competitive and more property managers, you're going to see a little bit of a lower rate, generally speaking, versus markets where there's not not that many shows in town. So that would be my kind of range and thoughts on fees. And, and also the right now we're we're all three of us are looking at it as part of Roofstock Academy, we have this playbook, this interview template, that's part of the package of Roofstock Academy, where we have it for property managers, and all these other ones. So we're both kind of skimming through our interview template here, as it relates to property managers looking through them. But I think that's such a key one, the cost aspect?

Michael:

Yeah, it really is. And it can often be the determining factor between, you know, really profitable investment versus not. And I think one of the biggest components of that is what a releasing fee looks like, or a new tenant placement fee. Oftentimes, you'll see that up at 100% of one month's rent, and I've seen it as low as 25% of one month's rent. So on $1,000, a month rental, that's $750 annual swing one way or the other.

Emil:

What do you guys think about management fees instead of percentage based being kind of like a flat fee structure. So example somebody I spoke with last week, they charge you $50 per building, and then $25 per occupied unit. So let's say you have a single family home, I believe it'd be 50 plus that 25 or 75 bucks flat a month. And then if let's say you have a four family, it would be 150. Flat a month would be I've seen that before.

Tom:

I think the psychology of it is really interesting, it's like you should have some aligned incentives, right? If the property is occupied, that's great. I want them to be happy about it. And you know, making more money versus when it's vacant. There's also some perverse incentives around construction, where if the property manager is getting paid more money, because more work is being done, and they're getting a percentage, I'm not offering a solution and more just kind of pointing out a problem on the repairs and maintenance and construction side. But to your point on a flat fee versus a percentage, I like the percentage and that there's some aligned incentives, if the property is occupied and performing well, maybe get creative with some like year end bonuses, if they're low, or whatever. I don't know,just thinking outside the box.

Michael:

On the flat stuff. I've never worked the property manager that has done it. But mathematically speaking, it could make a lot of sense, especially on higher end rentals. I mean, if you're at, you know, call it 750 bucks a month per unit in that four unit. Let me just run some numbers real quick. That's what 2900 750 by fours 3000. And let's call it 8%. Is $240, is what you would typically be paying on that and in this case, you're paying 50 plus 25 by four, which is 150 bucks, 150. You're saving 90 bucks a month right there. So I think you just got to run the numbers. I don't think it inherently means good or bad. Again, it just you have to look at the numbers for your specific situation. And in that instance, I would take that, yeah, 10 days out of 10.

Emil:

Yep. If all the other things obviously check off, right. Like, like, I know, everyone likes to key in on the fee. Oh, yeah, absolutely. You got to make sure these other things that we're talking about, I would say that those are more important, because I don't know, they're just gonna play such a big role. It's easy to get like just honed in on the fees. And something I did early on, it's all I looked at really, which is big mistake. So I think a lot of these other questions are super important to factor in as well.

Michael:

Absolutely. And I harp on it all the time with insurance, you can go get the cheapest insurance, but if they suck at the one thing they're designed to do, and that's pay claims, what are we doing here? And so same thing with property managers, if you go find the cheapest property manager, and they can't do the one thing that they're designed to do manage your property, what's the point, you know, it's going to be way more headache and you're going to pay for it later down the road, probably through the nose, as opposed to just paying a little bit more up front. And so there's the age old expression of pay for it now or pay for it later. And pay for it now it's probably going to be cheaper.

Emil:

Exactly. Any other questions? You guys really like to ask that our listeners could really benefit from

Michael:

Last one I'll throw in there is what their accounting software looks like and what their portal online presence looks like. And if they even have one, that's a big, big, big must have for me, if they don't have an online presence, it's really difficult for me to kind of keep tabs on what's going on. And not that I need to keep tabs on what's going on. But anytime I'm working with a new property manager, I over communicate like probably to the point of a being obnoxious, but that's okay, because it's my property, and they work for me. So we got to make sure that we're both on the same page at the beginning, that just takes time to do and having an online portal makes it much easier for me to track what's going on what expenses are being paid, versus once a month getting a p&l profit and loss statement showing, hey, by the way, we spent $300, this month on x, or if I had known about that three weeks ago, I would have called you and asked about it. So I think that's a big big plus for for property managers.

Emil:

And the way you can kind of suss that out is again asking about, okay, when a tenant repair issue comes up, do you guys notify me? Do I get an automated email, like a lot of the property managers I work with as soon as if it's under $500? They don't even come to me for approval, and I just get an email with the issue. But I like that, right. I like that at least I'm getting notified about it. Because if it's most of the things are running the mill things, okay, whatever you at least you just know, and you can move on. But some things is like wait, this is like the third time this issue has come up this year. Now I want to go inquire about it. So just asking them like how do you as the tenant or the owner get updates on Repairs as tenants file those tickets? Go ahead Tom.

Tom:

My last question, I'll have more of a request versus a question is to take a look at what their property management agreement looks like. This is your your prenuptial agreement with the company. It defines everything we're talking about. We're talking about fees. Specifically, what I think is, is there's like a breakup costs, I had a property that I sold the other year where I didn't look into the property management agreement, and I ended up having to pay this stupid fee, it makes me mad just thinking about it right now, because I sold the property. And the person who bought the property didn't retain their property management services. So I would look through that property management agreement and see one, what are all the different fees and different ways of the property managers gonna be making money. And then two, if the relationship was to end, either you finding a different property manager, or you're selling the property doing 1031, doing whatever? What are the implications of that with property management agreement, but love all the other stuff you guys are talking about? The investor portal is so important, and point of contact, knowing who your ongoing point of contact would be? And what preferred means of communications and what the expectations are for getting back and responses. And all that stuff is really important as well.

Emil:

Yeah, you I remember, you've talked about this one about that fee you've paid when you sold the properties. And in this round of interviews, I talked to a property manager who said the same thing. They have a brokerage out there as part of their company. They're like, if you don't use our brokerage to sell your property, we charge you 1% of the sales price. And that was like an automatic deal breaker.

Tom:

It’s a deal killer.

Emil:

Yeah. Total deal killer.

Tom:

Yeah, no thanks. Take that out. Or I'm done. Yeah.

Emil:

Yeah. So good. Good to ask that are like really review that management agreement, because it'll be in there. So you got to read those things for sure.

Michael:

Emil. a follow up question for them is do what percentage commission do they charge? If they if you do use your brokerage? Do you know?

Emil:

That's a good question. I just was like, What? Are you serious? Yeah,

Tom:

Yeah. Yeah. Why are you trying to force my hand like this?

Emil:

Yeah, but that would be a good one.

Michael:

That's a pretty big red flag. But I have a property manager where they charge like, I think for four and a half percent commission, if they are the listing agent, but no requirement to utilize them. They just offer an incentive for you to utilize them.

Emil:

So that's great. Yep. That's awesome. It's like, hey, if you end up selling with us, we give you this preferred rate. Not like if you don't sell with us,

Michael:

You must.

Emil:

Yeah, exactly. Basically forcing your hand so that wasn't cool.

Theme song

Emil:

So we've done a couple of our Ask Us Anything, we call them ama's. But there's multiple of us. So they're asking us anything's. And we've gone through the initial batch of questions, and we'd love to hear more from you guys on questions we can answer in future episodes. Literally, whatever's on your mind, Tom, Michael, and I will we'll tackle them on future episodes. And so the best way to submit those questions to us, you can email one of the three of us so I'm at Eshour@roofstock.com. Can you guys give me your email addresses? I don't know them by heart.

Michael:

I'm at malbaum@roofstock.com.

Tom:

And I am at Tom@roofstock.com. And other way to submit would be Leave us a message so the phone line for submitting these ama's is area code 415-343-5866. You like my tone goes kind of up and down like a

Michael:

and I was like I was like wait a minute. That's not how you say a phone number.

Emil:

You're like a commercial marketer, 435 he's calling one 800

Michael:

Yeah, 588 2300 Empire

Emil:

And Twitter. We're always on Twitter. So I'm @emilshour.

Michael:

And I'm at. I think it's AlbaumMichael. Michael Albaum probably works too, I'm not sure. I don't know how Twitter works, but I seem to be talking about it all the time.

Emil:

And Tom, you are at?

Tom:

@tschneido

Emil:

All right. We're looking forward to tackling your questions on a future episode. And guess we'll see you guys in the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Market Deep Dive: Indianapolis Indiana with Vincent Ash Oct 14, 2020

In this episode Mark Woodling and Tom Schneider talk with Vincent Ash From the Indy Chamber about the Indianapolis Real Estate market, economic developments and what is happening in Indy in general.

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Transcript

Mark:

All right, ladies and gentlemen, welcome to the remote real estate investor. I'm Mark Woodling. I'm here with Tom Schneider. And we have Vincent Ash here with us today from Indianapolis in the Chamber of Commerce. So we really wanted to bring him on to give him a bit of a background on why investing in Indianapolis is something that really any investor should want to be interested in. So I think this is a good opportunity to not only hear from us, but really get one of the local experts who has an idea of what's going on in the market that we don't get to see or read about in your daily news.

Theme Song

Mark:

So, before we jump in with Vince, I want to run over some numbers about Indianapolis. So, Indianapolis consists of a pretty broad range, the populations 876,000 people as of 2019. So, the greater MSA is actually 1.8 million. So Indy alone 876,000 versus the greater population 1.8 million people and the population is growing at 1.3%. So the median household income is $64,200 number of units is 867,000 single Family properties, of that 58% are owner occupied in 32% are renter occupied, leaving about 10% that are currently vacant. So as for home price and rent, existing home values have actually gone up 7.2%. The effective apartment rent growth is 3.6%. home value at entry level home is on average $163,900. The existing median home price is $227,000. And the median for rent as of December last year was $1,259. year over year rent growth is 4.7%. And single family gross yield on average is 9.6%. Home occupancy rate is 95.4%. And apartment occupancy rate is 94.7%.

Vincent, why don't you give us a little bit of information about who you are and your position with Indianapolis chamber.

Vincent:

Absolutely. So my name is Vincent Ash. I am the director of Indianapolis economic development for the city and our county that we are also associated with I have been at the chamber for a little bit over two years now. I'm very much an Indy, local, Indy native, I moved to Indianapolis when I was five years old and pretty much been born and raised there. Prior to my role now at the chamber, I worked for Simon Property Group as a financial analyst. For those who are familiar with Simon, one of the biggest rates in the country and probably internationally as well. But I worked as financial analyst for them, no do a real estate transactions and then moved over to the chamber. My role as director of develop Indy is we basically are the economic development arm for the city of Indianapolis. So we work on business attraction, business expansion, real estate, real estate, redevelopment projects on a larger scale, looking at multifamily projects and things of that nature.

We also work very closely with the mayor's office in the city, on any economic development policies that they are looking to, you know, change or implement or modify. So overall, we have a pretty big scope. We do have a person, our team that focuses on business retention, we have an ombudsman that helps facilitate, you know, permitting, and regulatory and zoning questions. And then we have a project manager that focuses on retail. So we're touching a lot of different phases of economic economic development overall, it has been very successful, pretty respected throughout the city, not only as the economic development arm develop, indeed, but also as an indie chamber, having a lot of businesses that's associated with us as well. So that's overall what we do and kind of my role at the Indy chamber.

Mark:

So if there's anything that comes up, let's say that there's new business opportunities in Indianapolis, you're probably the first person to hear about them and really understand, you know, new companies that are moving to the area, new jobs that are coming in. And frankly, you're kind of a salesperson that's trying to bring in those companies and really make Indianapolis look as attractive as possible.

Vincent:

Absolutely. Yes, I'm not a salesman, but Trey, but I have to do it. For this job really just as like an attractive mechanism. I think the state does a good job of attracting people to Indiana. Fortunately enough for Indianapolis believe 60% of the GDP from the state is located in our in our central region, Indianapolis region. So overall, our state depends on our capital as well, Indianapolis, and as has been Bode very well for, you know, everything that we've got going on for us in the overall,

Mark:

That's great, well, this is a perfect conversation to be having. So let me just get in a little bit about really what we're looking for, you know, we all want to understand kind of the macro level economics of what's going on in Indianapolis, but we don't need to go into like population trends and jobs, income, you know, cost of living particularly now, but we're looking for you really, some of those nuggets of information that make any out of state investor feel like there's a level of confidence that they can have not just in buying into the city, but eventually they're going to be buying into real estate and owning, you know, brick and mortar and renting out, you know, properties in the area.

So, you know, maybe you can give us a little bit of an idea about what we're not hearing in the news, you know, and what you're seeing in the local economy that somebody in, let's say, on the West Coast isn't good to hear about. So maybe give us some general economic highlights. And maybe we even start with a little bit of a COVID-19 impacts and what you're seeing, since that's such a relevant topic.

Vincent:

So COVID-19 is affected everybody in the world and Indianapolis was was not any different for that. We did realize that, you know, it did affect a lot of our small businesses. And particularly, we look at our restaurants, our breweries that have been very successful here in Indianapolis, but those have been impacted the most Well, COVID is our as our restaurants or personal services. Are you looking at Barbara's beauticians? So overall, from a covid impact, our small businesses were hit the hardest, that we did some very innovative things at the chamber. As far as some traditional lending, as well as you know, help collaborate with a CDFIs to do paycheck protection programs that help keep these businesses afloat.

We also are doing like a reimbursement grant now, overall, to kind of help those small businesses and they've been very appreciative of those efforts. And it has honestly kept a lot of our businesses being able to stay open. Throughout the midst of this, I will say from a, from a broader scale, we're looking at some of our corporate, you know, attraction projects, or some of our expansions and growth that we've been able to see. I will say there was a pretty much a slowdown, I would say in April, I think as companies would kind of figure, trying to figure out what they will plan and planning on doing. But I kid you not. And I thought I was gonna be twiddling my thumbs throughout COVID. Because I was like, there's no, nobody's making a large capital investment, like going for it. There's no way I'm going to be busy, I was really just looking at ways that I could pivot and help out and other avenues going for so but we weren't, we didn't say very busy, stay very busy overall, when we looked at from our industry standpoint, Indianapolis is very diverse. And that was has helped us be pretty successful.

Mark:

So Vincent, maybe give us a little bit of a background of what Indianapolis is really known for, you know, that the jobs in the area that you see are really growing are just some of the basic highlights of why people are moving to Indianapolis because we know it's been growing a ton. We've seen rent growth, personally from Roofstock’s point of view really increase and seeing a lot of investors moving to the area and wind to invest there. So yeah, give us a high level and kind of walk through what you see. Indianapolis as in your eyes.

Vincent:

Yeah, absolutely. You know, kind of, as I was saying, from an industry standpoint, Indianapolis is very diverse. So that has really allowed us to be recession proof to an extent. When you look at 2009, we've been able to maintain a steady growth, when you look at you know, most of the rest belts, cities when manufacturing is left, you know, early 2000s and in the 90s a lot of those cities, you know, struggle, overall industry standpoint as being diverse, has been very beneficial.

So some of the major industries that we have here are looking at life sciences, pharmaceuticals, so Eli Lilly is a major anchor in our city. They employ about 440 thousand people just in our city alone. So you look at them and offer Eli Lilly have a lot of other pharmaceuticals or drug manufacturers that also have located here in Indianapolis and we kind of have sort of a life sciences of here. Not only that our tech scene has been exploding here lately. Look at Salesforce, and we are their second largest office globally outside of San Francisco and but we have a lot of different startups that are here indeed that are continually to grow. One of the one of those reasons why tech is is kind of booming here is from a cost standpoint, cost of living is very affordable here. But the main thing the main driver is workforce.

So we are within 70 mile radius, I believe we have close to 100 different it's a major college institutions. In particular, you know, some major ones Purdue I, Indiana University, all State University rolls home and Butler's located in Indianapolis, we have 40 institutions that's just located in Indy overall. So from a workforce and talent perspective, tech companies feel like they can attract a talent by locating here. So that has been very well received and our startups are continually to grow. High Alpha is a big venture group that's here indeed is very strategic about helping growth those hundred companies that they have been associated with Xylo being one of those startup companies that is growing, we just got an announcement that Kanos which is based out of Belfast and Ireland is going to grow here in Indianapolis and make any Annapolis their main hub.

So from a tech scene, we have been we have grown a lot. So when you look at life sciences, like a tech, we can look at our aerospace Rolls Royce and what they do from you know, manufacturing, engineering and aviation standpoint, they're headquartered here have about 44,000 people are that are in Indy. And then on top of that, logistics, we have the second world's largest FedEx, probably soon to be number one outside of Memphis because they are landlocked. So from a logistics standpoint, we are also growing. E-commerce is even more important now throughout the midst of COVID than it ever has been.

And we have seen major growth in pretty much all four of those sectors to even throughout the midst of this pandemic. And so it bodes well overall, from a diversity standpoint, the industries that we have here in Indy, allowing us to continue to be able to grow where our hospitality industry our convention industry is very in service industry is very huge here in Indianapolis, our convention center is we have Gen Con every year, you just looking at some of the announcements that we had recently from a sports standpoint, and they were supposed to have NBA All Star game in February, I don't foresee that happening with a pandemic going on. But you have NBA All Star game, we have Final Four, we have the big 10 Football Championship, the National Football Championship, all within, I think, a couple years of each other. And Andy has been very good at hosting big events, and our sporting industry has continued to be successful. So even though we see, you know, some downturns in our sports, in our hospitality, as being able to continue to grow in life scientists, tech logistics, aerospace has been has an other, you know, advanced manufacturing jobs proven us that we can, you know, stay resilient, and really recover and continue to grow throughout the midst of any type of downturn in economy.

Mark:

Oh, that's important. No, that's really, really good to hear. I mean, we want to see every market thrive and come back. But we know you guys are set up for it with it right infrastructure. And, you know, I agree these low cost of living areas are just really what people need, you know, people leaving San Francisco and saying, I can have a quality, quality lifestyle, but for half the price. It's so great. Well tell me a little bit about maybe what is happening, and we don't see it today. Maybe there's some new opportunities or you know, what's trending maybe with a kind of new interest in the areas or anything that you give us some, some intel on that others quite don't know quite yet, but is considered public knowledge.

Vincent:

I can say from a real estate development standpoint, we have been getting the attention of a lot of out of state developer. And so we have a lot of new pretty big projects lined up. One of those is a remodel of a former Coca Cola bility Hendrix Commercial Property Group, which is based out of Wisconsin is actually nearing completion of that project, which should be I believe, at the end of this year, basically took a Coca Cola bottling plant made it a mixed use, work, live play type of environment. There's a couple of tech companies that's going to be located there. They have all new independent restaurants that are new to Indy that will be there but they're no franchises, which is I think we're pretty big for is having a lot of local restaurants and local breweries very, a lot of very good ones. But this development alone really wanted to focus on the independent aspect, bringing new concepts in, they have an independent like film theater that's going in, that's going to be a part of heartland Film Festival.

And so they they have other retail components associated with it, but we were seeing a lot and we have we do have some other projects, you know, lined up from a you know, real estate related redevelopment standpoint, where companies and developers are coming in finding you know, properties, you know, like a former Coca Cola bottling plant and remodel it and refurbishing it. And we like I said, we have a few of those as well. We really kind of hit stream with a lot of multifamily developments, like I said, a lot of outside of the state developers are interested in, the good thing about indie is that we really haven't hit that significant, you know, density or high rise. But there's so much potential to do that. And developers are noticing that. So we got more high rises developments that's coming into our downtown core. Of course, that's where, you know, most people most take people, you know, want to locate and want to be in downtown. And the good thing about that is, is that they can live downtown, but also stay outside of downtown and still really have any type of lifestyle they want.

I would say, and I usually say this to any business or company that we have coming into Indianapolis, you can have any lifestyle you want, within a 30 minutes drive. And when I say 30 minutes drive, I mean 25 miles, yeah, I'm not, I'm not talking about, you know, six miles like that you get like in California, six miles will turn into a 45 minute 30 minute drive is going to be about 25 to 30 miles, you can and you'll have that any type of lifestyle you want. If you want to live downtown, you can live downtown, if you want to live in a suburban, you know, style, like a house, you can do that within 30 minutes drive up downtown, if you want to live on a farm, you could do that within 30 minutes drive downtown. So you have all these different mixes, and then you have these neighborhoods, of course, that surrounds our downtown area that are, you know, seeing significant investment, redevelopment of their homes, you know, appreciation values continue continually to increase as well.

So, we have a lot of cool pockets that's outside of downtown to a lot of good neighborhoods that have you know, the retail, the restaurants, the bars and things that people want to be around, that are growing, you know, significantly as well, and then even more pockets just continue to pop up. So it's been, it's been great to see, you know, it comes with its challenges as well, you know, making sure that we're not, you know, increasing poverty, we're giving people access, you know, to those quality jobs and stuff as well. So, we do focus on that, as well, making sure that you know, we don't leave, you know, some of our residents that are here behind, and we're helping grow them and scale them up as well. So, but, uh, but overall, it has been tremendous growth, from a real estate standpoint alone, you know, over the past, I would say three years, it's been pretty much boom, and then looking at some of the projects that we have lined up the next, you know, five to 10 years is going to look completely different.

So now is really the time to really look at Indianapolis, long heart and look to see ways to you know, really invest into the market as it still continues to go up. You know, I have colleagues that live in California as well. So and understanding how much you know, real estate costs in California compared to here, I'm like, you could live like a king, if you if you move to the Midwest. You know, for half a million dollars you can live like you'd be in a close to a mansion. So understanding that dynamic dynamic as well. I mean, that's, that's why you see a lot of real estate development that's happening here. So from a cost standpoint.

Tom:

One of my favorite parts about these market spotlights is learning about the specifics of these little neighborhood pockets. So, you know, within talking about some of them, you mentioned the kind of core downtown is there like specific names of different boroughs? Like I'd love to, you know, for you to kind of touch on like this specific area. And like, you know, if you threw a dart on a dartboard like where it is relative to kind of like downtown, like, how'd you categorize that?

Vincent:

So I'm going to be biased and talk about my neighborhood first. Yeah, of course. Yeah. So Speedway Indianapolis, for those who are not familiar is home to the Indianapolis Motor Speedway, the biggest sporting venue in the world that you know, is home to the Indianapolis 500 which of course will be without fans this year, but it can hold up to 400 to 500,000 fans at one time, I think 100 runni, Indianapolis 500 have 500,000 people. So our community that we have here outside of race weekend. It's a great community. It's just west of downtown. It literally it takes me a 12 minute drive to get downtown to work. Because as I as I work downtown to and commute to me is pretty important. I don't have to worry about hopping on a highway just hit the streets and I'm there within 12 minutes.

So Speedway is a great community, great school district. A lot of new redevelopment projects are happening in Speedway. I'm about five years ago, they were very critical to them to reinvest into their main street which is just adjacent to the track and we got de Lara which is a Italian car manufacturer for IndyCar. So there we have Daredevil brewery that came in big was brewery and other brewery came in AJ Foyt who's a famous racecar driver has a winery that's located on the strip. And there's a lot of mixed use new mixed use development that's going in as well. So that corridor has been great. It has been received very well by the community.

But there's also a lot of other plans for some projects that are really going on now really, you know, to that point as well. So Speedway is a great community highlight fall Creek place which is literally just north of downtown. So if you look at a downtown map, we have a highway system and goes around downtown. So it's just north of the Interstate, if you're looking at a map so that area has been seen significant investment I mean, we're thinking you're talking about houses 10 years ago, that was around 100 hundred and $50,000 that are now worth 600 $700,000 so that area has been a very cool pocket and you can kind of see the growth this is happening right around the area is you know, expanding on that neighborhood and new redevelopments going in there but they have nice you know, cafes and eateries very neighborhood feel in that area Broad Ripple which is north near I will say obviously focus on College Avenue 65th street so a little bit further north north in our city, that area has always been very well received very well. A good neighborhood has a good main strip with a lot of different restaurants and bars.

So those those three are pretty significant Fountain Square area which is just south east the downtown is another area that has been you know, has been booming. If you watch hg TV and are familiar with the show good bones, they are really flipping and redevelopment homes in that in that area of Fountain Square and Bates Hendricks that area as well has you know some local music that areas more like entertainment has some smaller music venues for live concerts. More of a cultural center that I think than the rest of the other neighborhoods. But overall, I believe those four neighborhoods are probably the biggest and have seen the most growth but you are seeing a lot of other different pockets like you know popping up or whether that be you know, Riverside Park which is just northwest of downtown area has like three golf courses but they're you know, redoing a one of the golf courses in putting in an amphitheater that's gonna cost like $15 million, and really making the quality of life type of feel more neighborhood type of feel a couple breweries have went in along with close to there as well.

So we have a lot of different a little more pockets that have been starting to see a lot of more traction. But overall, those neighborhoods are kind of like the biggest, like probably the highlights in Indianapolis outside of our downtown and they have been seen significant increase in investment over the past few years.

Tom:

And 30 minutes from everything. or excuse me, 23.

Vincent:

Yeah. And I kid you not I when I say 30 minutes, you can hold me to that get anywhere in Indianapolis in about 30 minutes drive, whether I'm going to Southside want to get north or if I'm downtown and you know, want to get home to the suburbs I pretty much a 30 minute drive so close. Well, I hate being stuck in traffic.

Tom:

Yeah, I think I've been an indie a couple of times and love it, man. Yeah. One of the things that really stood out to me is some of the investment in the downtown like there's this I think they call it a Riverwalk.

Vincent

Yeah, our canal, right.

Tom:

Yeah, yeah, it was it was this, like, how many miles is that? What did it look like? very new to this, it looks like a big investment for the government of building some some cool features. Go ahead.

Vincent:

Absolutely. So our canal was actually built in the 90s, late 90s, early 2000s is when is when it was kind of built, it was kind of built very proactively without a big plan in place at the time, but it was like, hey, let's just build a canal where people can you know, run and have a good time on over the past. Like I said, probably about seven years, we've seen more mixed use development that's been popping up activating the canal front way retail, or there's a workout facility that's down there as well very, like a niche type of workout facility and it wasn't really a franchise. So you have more, you know, restaurants that's popping up to activate the canal is about three mile radius.

So if you like running is a good place to go running on as well. I think one of another like big initiative that we have here in Indy, is we do have a river that runs through Indianapolis is called the White River. And the master plan associated with that is pretty aspirational. And a lot of people are focused on it, and making that a reality and really utilizing the riverfront as a asset, which a lot of times I think in years and pass in history has almost looked at as as a boundary or barrier. And you look at that pretty much real estate redevelopment across the nation. You know, the highways, railroads, and you know, rivers are kind of looked at boundaries or barriers but really looking at it, utilizing it as an asset. And we've seen a significant development around it.

We will continue to do so. You know, cleaning it up, make sure allowing people to be able to even swim in it is as bad as A plan for the past 15 years, which is now coming to fruition where people can actually, you know, safely you know that you be in a water, what has been historically a big industrial city, you know, that has effects, but that has been cleaned up. We haven't seen more development around that as well. So since we don't have a lot of natural resources, like, you know, like Denver mountains in or California and things of that, you know, utilizing natural resources as assets that we do have, and being able to build around those.

Mark:

you know, Tom invents it, we were actually in Indianapolis just last year, Roofstock did a property tour, where we read a 50 passenger bus drove through some of the major neighborhoods, like you're talking about Speedway, it just saw what the real estate looked like when and toured some of the properties. But what struck me as being real interesting was we drove through a few opportunities zones, and of course, you know, opportunity zones, that's really where there's a ton of investment because there's some tax breaks that investors can get. But what I always noticed was how many little coffee shops and little hipster spots are popping up alongside of those opportunity zones. And so you saw the live in you know, the communities were becoming more of a walkable area, you know, they had the the walkability to the coffee shop, maybe tell us a little bit about what you've seen and changes with opportunity zones, and how that's affected Indianapolis in general.

Vincent:

Absolutely. So just a little background about opportunities zones, once that program was rolled out by the federal government, pretty much I believe 80% of census tracts within our city was could qualify for it. So of course, we submitted them all. So to state then, of course, the state hand picked different census tract to kind of focus on so once they did that, our downtown is actually a qualified census tract, the state basically had to determine and predict not only, you know, out of what can qualify for what we can use, but where do we predict investment will happen. And I think they did a very good job of, you know, predicting that. So opportunities I was we have seen a lot of investment, we have seen quite a few like multifamily developments utilize this and have, you know, went adjacent to where those coffee shops are when adjacent to you know, kind of where the eateries and breweries are already located. And it really just enhancing overall the feel and walkability to neighborhood.

You know, to that point, we have been a major, major focus on mass transit here in Indy, we do have bus systems, but now we have a bus rapid transit line that has dedicated lanes, so it's not getting stuck in traffic, and the station's more feel like a subway style nation that have just a bust up on a corner. So those are bus rapid transit line has been very well received. The current one that we do have goes south from our university of Indianapolis, it's just south of downtown all the way up to Bravo area, and it hits quite a few opportunity zones. The next couple that we have going in, goes alongside of those new opportunity zones as well, we have one as going east to west, from West Washington Street, all the way out through downtown to the airport.

And we also have one that is going from downtown, out to the northeast think fishers Lawrence Lawrence area as well. So the way those opportunities also set up has been great. And we really are now you know, building our mass transit infrastructure, you know, around those opportunities zones and kind of enhancing the, you know, walkability and you know, the feel of it, you know, you don't necessarily have to own a car to be able to get around and get where you need to go. So that's important to us as well. But yeah, the neighborhood fields has been becoming very popular, very well received overall. And, yeah, we have a ton of coffee shops, but a lot of good local ones, a lot of good local coffee shops and breweries. So everything has been very well received

Tom:

both sides of it. I love it. You're reading my mind. I was going to ask about, you know, local transit and some of that, you know, just one last question on the opportunity zone, asking for a friend. So an opportunity zone, it's just a big tax advantage that the government gives or how would you define the scrape benefit that's catalyzing so much growth?

Vincent:

It's a tax advantage that the federal government is able to add a capital gains tax that you're able, basically savings that you're able to benefit from so but the program was to peak investment into distressed areas. So that was the intent of the program was to spark investment in distressed areas. And like I said, it's been very well received. Our downtown is one You know, a lot of projects specifically as told us you know, they're focusing on that from a business attraction standpoint, a lot of companies have also said like, yeah, we want to be located in opportunity zone as well to take advantage of you know, the savings that they'll be able to benefit often from as well. So it's been very well received. A lot of people are using it here locally, I'm sure across the nation but the good thing about Indianapolis being you know midsize city cost of living is great question. Life is great. People really see it as opportunity. I hate to use that word again, but a big opportunity to utilize, you know, that program.

Mark:

Yeah. And Tom, the way I look at it as, as an investor, you don't need to be the one necessarily taking advantage of those tax advantages. But you can sure piggyback off of everybody else's investments and really just see what's trending. And I think that's the, that's always the key, what's trending, where are people investing a lot of money into, and my eye is always, you know, see if you see a Starbucks, it's a good sign. If you see a coffee shop, it's a really good sign the breweries, yeah, that's a home run. Now, this is great. Vincent.

And so, you know, in in regards to some of those pocket markets, you know, we like to tell our viewers and, you know, our listeners, what are those markets that are really going to be kind of that next up and comer because a lot of the the properties sold on Roofstock are, are in, you know, more workforce housing type neighborhoods. So it may not be the the bars, breweries and coffee shops that we're looking at. But more of, you know, what are some of those areas that you could give our listeners some insight on that will be great investments, just because of maybe the new companies that are moving into those areas, or that significant investment that that may be going in based on opportunity zones?

Vincent:

Yeah, absolutely. So yeah, that's a good question. And as I mentioned, some before, like the Riverside Park, which is north east, I mean, northwest of just the downtown is pretty ripe for real estate development. be quite honest for you, there's been a lot of investment from a corporate level is a district called 16. Tech, which is really like a collaborative nature for r&d for companies located for r&d purposes and Life Sciences. This literally just south of where all these homes are located. There's a massive plan for you know, the part like I said, we're redoing it $50 million into the amphitheater, now the master plan over was like 100 and $50 million literally sits in between two universities.

Do you have any any you have IPY? There's located downtown, and you have Mary University, and that is also a growing University in Indianapolis as well. And yeah, this neighborhood, which actually I grew up in, so but I grew up in a neighborhood, and you see the growth that's happening pretty much on both sides of it. Residential really hasn't caught up really, at this point in time. But you have seen some people being able to come in here, and you know, taking advantage and investing into that community. So I would definitely mention that one. There's definitely neighborhoods, adjacent to fall Creek place that has been seeing a lot of growth, a fog replaces just north of downtown. So you look to, you know, the east of you know, that neighborhood, you can see significant growth as well. So, I think those are two neighborhoods, and really just focusing night, last night religious liberty, those two, but the good thing about those two is, those neighborhoods are very close to downtown.

So you could really just take a radius around downtown, probably, you know, 334 miles, even our Near East Side, as east of downtown has seen significant investment, significant growth as well. But from a real estate standpoint, you know, could still use some investment. But you see the commercial, you see, you know, you see, you see to the breweries, you see the companies, you see, you know, the cafes, but you know, from a single family home, there's a lot of, you know, distressed properties that could still, you know, be taken advantage of. So yeah, you could literally take a radius just downtown, probably a mile or two radius, you know, I would say two to three miles and just kind of focus in on that geographic, those geographic areas that, you know, probably are the next to pop that have started, have started seeing some significant growth. Some of those neighborhoods are, you know, a little bit more fluid, but, you know, the ones that chase into it are the ones, you know, that are getting there. So I those are definitely some of the ones that I would say, from a real estate investment standpoint, as you should probably focus on and move for, like here at NAB as a term of investment.

Mark:

Oh, that's great. Well, I think my only last question would be, you know, in terms of the vision, let's call it the 10 year vision of where Indianapolis is planning on going, you paid a really good picture of what what's happened, how it's changed what's going on in the near future. But what do you think about in 10 years? How would you see Indianapolis growing?

Vincent:

Continue to see a lot of growth? And like I said, I think our tech, I think our tech sector tech industry is gonna continue to grow as you look at the Midwest, you know, from a cost standpoint, and from a quality of life standpoint, I think we can compete with Chicago, but they just, you know, just have the the cool factor, I guess to it. So I think we compete with them. Both. From a cost standpoint, Indianapolis makes the most sense. So I think a lot of companies are starting to realize that especially even from Tech, the tech companies, but from 10 years from now, I think overall economy in from industries that's here and indeed will continue to grow. I think there's going to be a big shift from the big major superstar cities to some of the smaller midsize like a second tier cities.

I see us as one of those one of those cities, you know, we're being very proactive of making sure not only are we growing our economy overall, but as you mentioned, some of the, you know, the workforce housing that you know, that your investors probably typically invest in, also making sure that we're doing a good job of, you know, skilling up those residents, you know, we have been very innovative and some of our policies and looking at inclusive growth, and making sure that we're growing our middle class and making sure that we're giving people that are in poverty, access to quality jobs. So as a whole, you know, we can continue to grow, like I said, you know, there's economy as we grow and grow, if you look at it on paper, he's like, Oh, this is any office is doing great, like they're growing, you know, but, you know, there's been, you know, some cons to that, you know, you look at our poverty has grown a little bit as well. And so we have been very, you know, like I say, innovative and noticing that early working with Brookings Institute and other policy makers to make sure that we curb that and we're growing and an inclusive manner.

So not only are we continue to grow our economy, for higher skilled higher wage people, we also are growing middle school, middle class as well, who were decrease in poverty, like all of those are major, importantly, focused focus for us, I think, overall, a 10 years from now is going to be very well received, not only from an economy standpoint, and I think the growth that we're gonna be able to achieve, but also from a talent workforce, enable to attract diverse groups of people come to our city, which we think we've done a solid job on, but could be better, like most cities, probably you could say, I'm kind of a perfectionist, you know, some of those things, but But yeah, being able to attract very diverse groups of people, I think those are, you know, the neighborhoods, especially, when you look at cities and municipalities like this, people want to live around diverse groups of people. And so being able to, you know, focus on those being able to grow those will, will continue to help help our tech industry will continue to help, you know, our life sciences and R&D industry will will continue to help us attract, you know, you know, the college students that are already in our region, you know, VA Indianapolis and live here long term.

So I think from a growth standpoint, you know, Indianapolis 10 years from now is gonna look totally different from what it is today. I know you all visited last year, you can probably already seen like, Oh, yeah, this is pretty cool place, I think 10 years from now is going to be on a entirely different level. And, you know, probably looked at the way Nashville is looked at, or maybe looked at, even similar to Chicago and in some instances or Pittsburgh, I really think like, oh, I know, it's my job. And I could be a little bit biased. But I think the trajectory that we're going on some of the policies that we have in place and some of our vision, we're gonna be able to achieve those goals and Indianapolis is going to continue to be successful.

Tom:

The last thing that I want to touch on is some of the points of interest and you'd mentioned one of them that Indiana Indianapolis Speedway, the Indy 500, the Indianapolis Colts, I think I remember and running on that little River Walk I think there was like a Hall of Fame. What other would you say would be like, you know, destination driver points of interests? Which was that? Did I see a Hall of Fame? Did I see a Hall of Fame?

Vincent:

I think you’re talking about the NCAA Hall of Champions.

Tom:

Hall of Champions Sorry, sorry.

Vincent:

The NCAA is located here in Indianapolis. So their headquarters is here is on the canal wall and they have like a Hall of Champions like museum adjacent to it so that area because there's a couple of museums in that area as well that has been you know highlighted and that are are great to go to our children's museum is probably one of the best in the country has received multiple awards of being able to do that so…

Tom:

Is it like dinosaurs or what's what's in the children's?..

Vincent:

There is a huge dinosaur and outside of it, you may have drove by and seen it. Yeah, so there's a huge sometimes dinosaurs right outside of it but I think what we kind of preach not only you know are we gonna see are we a city where you come and have fun like but from a family aspect to like you know, I've been to other cities and I'm not going to knock any of them but I've been to other cities with like my family I'm like, just cool for like, you know, Millennials like this is great for younger people, younger professionals but like I can't see myself raising a family here and I think Indianapolis does a good job of making sure that is family oriented. As well as being able to go out have fun so I choose museum is great.

New Fields is our art museum. They have tons of great pro programming that go that goes on there year round. So like in the winter, they have like a winter lights thing. That's pretty cool. That's very well received family friendly, but also you can indulge and have a drink while you're walking around checking out you know, the winter lights. So New Fields is great army. Our museum is great. We have of course he said it. You mentioned coats. You have the Pacers that are here in Indianapolis. So our NBA You know, you know we've had our walls over a few years but you know, we always compete in from a basketball standpoint Indiana that's just basketball. You just enriched in basketball culture from so our Pacers are an attraction standpoint as well. Like I said, we NBA All Star supposed to be here February. I think they're just gonna probably shift the schedule back due to COVID for everything. Let me see we have a triple A baseball team. So not professionally, but triple A has the best attendance and all of minor league baseball.

Tom:

That's that park is awesome. I remember it's like a sunken diamond right in downtown. That's Yeah.

Vincent:

So it's pretty cool. So yeah, that area. We have, of course, our White River State Park, which is just along the river next to you know, our victory field where our baseball team plays that where they have a lot of concerts here as well. We have another outdoor music venue a little bit north of the city area called Noblesville. It has a host a lot of concerts. So of course, we have the track, trying to think of some other ones. Our airports been like rated top 10 in the country for the past, since it's been built as our airport is always very well received.

Tom:

Yeah, big international…

Vincent:

So I would say those are pretty much the biggest highlights. And then of course, we have our cultural districts, our trails we have, I think we have over 95 miles of trails throughout throughout the city. Connect connecting different districts and the ones that kind of mentioned mentioned before Fountain Square, Broad Ripple mass app is a pretty nice hub downtown, and Indiana Avenue as well. So we have a lot of different from a cultural standpoint, like work live play type of field. I definitely have to mention Eagle Creek is one of our biggest parks. It has a reservoir on it. So it has a lake bring a boat to some kayaking, as well as trails that you can highlight is bigger than Central Park in New York, that our biggest park that we have here in the city, nice restaurant, right that sits on the reservoir called Rick's boat yard. I highly recommend that literally just went there just Friday with my family.

So beautiful, like ambience, you know, feet. So we're setting as you know, over the reservoir. So we have a lot of different pockets and a lot of nature things that we kind of highlight guys, reservoirs, another one of them were from a neighborhood but they have restaurants and things over there as well. That's just north fish's area, which is in our region. It's not an Indianapolis proper, but it's a suburb has has exploded, you know, top golf course. Then you get to IKEA. That's a big win. So does IKEA is up there. Oh, so yeah, officials, district officials have been community has, you know, seen a lot of new development, they got some nice mixed use developments that's in that area as well. So I know it's not my job to advocate for other municipalities within our region. But that…

Tom:

Being a good guy.

Vincent:

Yeah. Advocate for our region.

Tom:

That's awesome about IKEA going in. I mean, that's one of my strategies is just to follow where these big corporations that have the budget to identify these up and coming areas, like let them do the work. So my very last question is, and you've already used an example on that of that restaurant that's on the lake. That sounds really awesome that I definitely will will check out but if I'm going to go visit Indianapolis, and I have one meal to get where would you recommend me going to?

Vincent:

Man, that's a tough one. I think I may know the answer. It's a steakhouse. But it's a steakhouse. So you got to go St. Elmo’s here one. So you definitely have to go there, I would say depends on your taste. I will say we was courting a tech company. They you know, they didn't want to really go high in you know, so you know, we took them to a barbecue joint, so, okay, so you know, you gotta I gotta know what you feel but i would i highly do highly recommend if you have one night that you have to go to St. Elmo’s

Mark:

Where would you go the visit? I kind of threw that out at you but where would you go what's the what's your spot?

Vincent:

Man as I say I like I like hole in the walls. So that's kind of that's kind of my go to so

Tom:

You're good company. Where's our hole in the wall, we gotta blow them up!

Vincent:

Go, you gotta do some barbecue at King Ribs is just west of Indianapolis at on 16th street like heading out to Speedway. I kill myself because I like come downtown workout more workout at Orange Theory and then like I got to drive up 16th Street and smell one one of our donut famous donut places Long's donuts they smell it as I'm driving by and then I gotta drive by King ribs know that too. So it's like I'm like shooting myself but…

Tom:

You got a bunch of sweat points from orange theory

Vincent:

I can indulge but yeah, that's that's what I would go to King Ribs. That's that's kind of what I would go to for me. We have no shortage of restaurants.

Tom:

Love it.

Vincent:

Well, one quick thing I'll throw out I saw the website downtown indy.org it's a great way to like really learn about you know the details of some of the the neighborhoods you explained. Somebody wanted to do a deep dive, but maybe Vincent, give us a little bit of maybe tell us where to go for the Indy chamber if people want to do a deep dive because we can provide a lot of highlights, but we'd love to, you know, have people go there, if you recommend going directly to the website?

Vincent

Yes, I'm gonna give you a few websites that you could go out and check out downtown indy is a good one that highlights the downtown area, and things in restaurants in our downtown corner, visitindy.com is a their organization just promotes on tourist attraction just for Indianapolis. So our museums, our parks, different events, as well do317.com basically will show all the different concerts and things that we have going on, and different other beer festivals and things like that, that we have going on as well. So do317 is a good website as well. I will say you know, since COVID, we have had too many events. So like like the rest of the nation. So I'm very much looking forward to being out going out to a sporting event or things of that nature. But I will say those three websites are probably the best websites to utilize to look at happenings happen, indie,

Mark:

Dnd what's indies indie chambers website that people can visit as well.

Vincent:

So it'll be Indychamber.com. And if you want to, we have different tabs, we have a lot of different organizations like we advocate, legislative. So we have policy team, we have a small business department that does lending games, free small business, poaching, of economic development, focuses on attraction. So if you want to see highlights of different companies that are coming here, feel free to click on the economic development tab, check out either develop Indy, which is a nap which proper, which is my team, or nd Partnership, which is our regional team that advocates for our region.

Mark:

Well, I'm a big fan of always visiting a city's economic development website that they get shows the major companies focused industries, quality, quality of life cost of living, and a ton of economic data a little bit high level. But again, it can really get into some specifics. So I always recommend that people go check that out. But hearing from you directly, I think is always the way to go. So appreciate your time today. Vincent, this was absolutely fantastic. And looking forward to maybe doing a catch up with these days soon and see what else is going on post COVID-19 once we get through all this.

Vincent:

Yeah, I appreciate it, Tom and mark. And definitely we come to any next time, feel free to hit me up. And we can catch up. This has been a great change of pace, doing this, having this talk with you. And not so you know, in the grind of work. So this is good change of pace. I appreciate the invite.

Tom:

Awesome. Get some barbecue. Awesome.

Vincent:

Thanks, man.

Mark:

Thanks, Vincent.

Mark:

Just want to say a big thank you to Vince for participating and giving us some insight in a way that we really don't get access to on a daily basis. So this is definitely a privilege to have people like him on to really give us an idea of not only what's happening today, what's happened in the past, but what's going on in the future state of Indianapolis. So great, big thanks to Vince and looking forward to doing this again.

Tom:

Happy investing

Our Top Tips for Finding & Vetting A Good CPA Oct 12, 2020

In this episode, we continue our series of how to select and vet strong team members. This week we discuss the CPA.

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Transcript

Emil:

Hey everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour and I am joined by my co hosts,

Tom:

Tom Schneider

Michael:

and Michael Albaum.

Emil:

And today we're going to be continuing this series we've been doing lately on building out your team. So how do you find and vet the different players on your quote unquote real estate investment team. In today's episode, we're going to be tackling the CPA, which stands for certified public accountant for anyone who's not familiar. So let's hop in.

Theme Song

Emil:

All right, before we get into the meat of the episode, the meat and the potatoes, meat, potatoes, the salmon and, the salmon and couscous. Let's go with that. We have some people leaving us some awesome reviews I want to give a quick shout out to so recently real estate financial freedom wrote,

“The show has the feel like we are sitting around a table talking shop about real estate, they do a good job catering to beginner but also go into depth into more complicated real estate subjects. If you are thinking of investing out of state, this is the podcast for you. This podcast makes real estate feel very approachable.”

Emil:

Thank you so much love the review, we'll try to give everyone a shout out if you leave us review was mentioned at the end of the episode. But please leave us reviews. We love them. And we'll give you a shout out in a future episode.

Michael:

Thank you so much.

Emil:

Alright guys. So we usually tackle three questions on each one of these episodes, which is when in the process? Should you look for this individual? How do you source them? And vetting questions to ask them to make sure you're choosing the right person? So let's start with the first one. When in the process of acquiring, let's call your first rental property, do you need to go out and find a CPA? What have you guys done

Michael:

Now. Now .ow now now

Emil:

All right, Mr. delay?

Michael:

I think that first question, it really depends. I chat with someone in the academy a few weeks ago who does their own taxes, they prepare their own returns anyhow, using, you know, TurboTax, whatever. And so they said, Yeah, I already understand how taxes work, I understand tax works. And so adding one rental property to the mix is not a big deal whatsoever. So they've been doing their own. So if that's you great, but if you don't prepare your own taxes, or you want to go hire a professional to do it, I think it can be really great to have that conversation as soon earlier in the year as possible. Because as we all know, taxes are due in April for the year prior.

And you can't really do a whole lot of changes after the fact. And so chatting with a tax professional as you're getting started in owning real estate is going to set you up to have some really good habits and makes tax time so much easier for everybody involved. So I would say as soon as you're considering real estate, talk to a tax professional about how your personal situation might be affected by owning real estate, what some deductions look like and what your overall taxable basis might look like as a result of owning real estate and how that might change as if you previously didn't. So I don't think it's ever too early to start that conversation. Tom, what are your thoughts?

Tom:

Yeah, my thought is just kind of on the first piece of this is something that you could file your own taxes and talking to people in Academy, asking about the stuff. My advice is always, you know, it's worth paying that money for a professional, there are a lot of tax benefits with real estate, you get the three DS depreciation deferral and deduction. And you really want to squeeze as much juice as you can out of those three. And it's difficult if you don't have that specific real estate experience. My wife's a tax attorney, but we still hire someone different does, you know international tax, which is very abstract and interesting.

But my point is, real estate tax specifically, is there's a lot of fruit on the tree that you want to harvest. And you want to take advantage. So it's worth paying that money to find somebody. So timing wise, you know, it doesn't have to line up with any of your acquisitions. There is some neat stuff that Michaels talked about in the past will try to sound cool doing cost segues and stuff like that, but

Michael:

Nailed it.

Tom:

I mean, as long as you give yourself some leeway before going into tax season, I would say that's the real kind of timing and doing it hire a professional who has real estate specific experiences is important before tax season. So that's my timing two cents.

Emil:

I like it. I'm going to take the counter point. And I'm going to say that this is a person on your team who, Yes, you can look for them early. But I think there's so many moving parts earlier on to focus on your property manager which market you're going to invest in finding an agent if you take that route that I think the CPA can come a little bit later. I think a lot of fuel can get caught in all the nitty gritty of I should check off all these boxes. And it's like focus on educating yourself and then get that first property. I think the accountant can come a little later. So I'm gonna take the counter point,

Michael:

I think it's a really good point to make a meal and that who you ultimately work with can totally come after the fact I think it's really important that somebody at least have the conversation with a tax professional about a like how does real estate affect me personally, because I hear about it all the time. But I don't understand. So for me taken, you know, an average deal, whatever that looks like in your market, or wherever you think that might look like for you as a buyer, how would this affect me because I think it gives a really good insight and helps a lot of people purchase strategically based on some of the tax advantages that they may or may not qualify for. But I 100% agree that the actual person doing the tax returns can totally come after the fact.

Emil:

That's a good point. So also, I think when I bought rental properties I chose to that was the first year I hired a CPA to do my taxes. It was like I started doing some, like some side project consulting stuff as well. And so that makes me W2 mix with rental properties. I was like, You know what, I'm just going to give this to a professional, make sure I'm doing it a correctly and be getting maximum deduction so that I save as much as I can. I think we said all the time, a good CPA, they will save you way more than you actually pay them yearly.

Michael:

And I'm just curious, do you guys use a CPA on any kind of retainer or annual program or you just pay them for the time that you use when you speak to them? And then for the tax return? How does your program look?

Tom:

With my CPA, it's sort of a one time event every year I you know, it's not any sort of like recurring contractor engagement, I could like, use them one year and go somewhere else, but they already have a lot of my information. So it's, it's a lot easier to have some continuity with them. I've been meaning to do a little bit more like a consultation of kind of lifting up the books on all that I have within because right right now I basically just send them all my information all by my 1098 for my mortgage, my 1099 for property managers, I send them all that information, and they just come back with a nice, clean, albeit like pretty long tax return, just because there's so many moving parts that they understand. I've been meaning to do kind of more of like a like an engaged consultation and and have answered your question. But what I do with right now, it's just every year, just a one time do the going through the exercise, but no more strategic stuff. But I'm just something that I think I probably do this year on the list of things to do.

Michael:

Do it, do it? Yeah, it's really worthwhile to do that. That planning portion of things. And then what about YouTube? You pay them like an annual fee? Or do you just do the tax return fee? And then the hourly stuff?

Emil:

Yeah, it's just the paid to do my tax returns. But I'm probably in a unique situation that my CPA is my brother in law's very good friend. So I can always ask him stuff. And he's really cool about it. But he used to charge me a lot less like he was very inexpensive to start, I think like, friend discount. And I told him this past year, I was like, I asked you a lot of questions throughout the year, our taxes are getting more complicated, like just raise that fee that we normally pay you and he was like, I've never had anyone asked me to charge them more. But thank you. So you know, it was like he's become more consultative throughout the year. And I just want to make sure like, I'm compensating him so he's not like goddamnit Emil's texting me again, right.

Michael:

You don't want him to feel like you're taking advantage.

Emil:

Exactly. So I was like charging us more. And it's still like totally reasonable. So that's kind of how we have it set up with him.

Michael:

Great.

Emil:

How about you?

Michael:

Oh, yeah, I'm just hourly, and then whatever the tax return is at the end of the year, and so I'm chatting with my CPA several times throughout the year, kind of about next moves and strategy type stuff. We don't really have this formal sit down session where Okay, we're gonna talk strategy about what it is, but I'll call him up and ask him Hey, you know, cost seg, do you think that would have a big impact on my, on my taxes this year, and talked about the numbers and yada, yada, yada. So there's definitely expense ongoing expense throughout the year, but it's just whatever the hourly fee is, however long the call is, that's what that's what I pay him almost like an attorney. And it works great. And I I think it's well worth the money. I'd say it sucks when I get the bill. But I think it's it's money well spent. And it's a deduction to keep track of the…

Tom:

Yeah, it’s a deduction it is for listeners who are newer, Michael has a lot more moving pieces on within his projects. He's doing multi families doing, you know, all kinds of stuff. But at least for myself, it's a much more simpler engagement of kind of the the annual thing, but I think as you go into more complicated deals and structures, there is more meat on the bone for going through with your CPA. So he would be on the further end of the spectrum of kind of more, I guess, opportunity for tax savings and more more need for higher engagement.

Michael:

Right, right. Right. Yeah. more need for planning, I think. Yeah, absolutely. My first couple years, my first one, I had a handful of deals was not nearly as frequent or this often. So I think it's a really good point to make, Tom that this is going to be a pretty person that you probably won't speak to very regularly when you're first starting out.

Emil:

Yeah, good point. All right. Let's move on to the second part of these episodes where we talk about,

Michael:

We've got about a minute 50 left to cover these next topics. Good luck.

Emil:

All right. So moving on, we're going to talk about how do you source CPA? How do you go about finding someone who could be your potential CPA? So how did you guys go about it?

Michael:

I called around a bunch of different people. I was using this guy that my dad was using, with a big firm down in LA. And he was, he was really thorough, and he was really good and he was really expensive. And it just got to a point where I was like, Yeah, I just can't, like afford you. Slash need that level of service. So they provide all kinds of stuff. And a lot of that's baked into the cost of the returns. So I went and found my own person. And then that didn't work out. Well, I had a bunch of problems with the IRS because this guy was a pain in the butt. So then my brother found someone he liked down where he lived. And so I was using him and I have been for the last several years, and he's been great. He's a smaller shop, but really knows his stuff has a lot of real estate clients.

So it's been a really good fit since but trial and error and we're going to share here in a minute, some of the interview questions that you can ask a CPA that I wish I had thought of a couple years ago when I was going through this process, because it would have been a lot less painful. Tom, what about you?

Tom:

Yeah, so using the same framework that I used in the last episode in sourcing a CPA, I think at the top of the pyramid is personal references is a great place to start and then pass there would be professional references. Oftentimes, a partner with a CPA is an attorney. So you know, if you have an attorney like oh, what CPA recommend, or do you have a CPA like, oh, what attorney you're like, they're oftentimes working together. The third level would be forums Roofstock Academy, that's a place where within our private Slack channel, we talk about vendors and CPAs pretty regularly, or at bigger pockets or friends there have a great forum. And then lastly, just general online research. I sourced my CPA from a reference a gentleman named Paul Kidwell, who was one of the early employees at Roofstock. Think he was our like VP of data, something just super smart guy. He's an advisor. I’ll stop now, but I got my CPA reference from me.

Michael:

Emil, I know you shared already that your brother in law's best friend, was that the first one that you use? Or did you have some trials tribulations leading up to that point?

Emil:

No, I wish it was more of a science that I could divulge sort of listeners, but I've known him for years, too, before we ever actually, like needed his services. And he's a good guy. And I was like, he was the first person I thought of when we needed a CPA and just let him run with it. And he's been great. So yeah, it was more of just going with my gut. Somebody I know. You know, I mentioned like, this is what we're doing. We're investing in property out of state and he was like, totally comfortable with it. And he's been he's been awesome at handling it. So

Michael:

Right on.

Emil:

Yeah, our situation is a little easier.

Tom:

I’m gonna give a shout out to my CPA, though. So I use Iryna CPA accountancy Corp. And she's awesome. So just a little free advertisement, something like Yeah, why not? Why not sure these people she's located out of Oakland and in Northern California, but her website is irynacpa.com. And I've used her for the last, I don't know, five, five years or so. And she's fantastic.

Emil:

Yeah, my CPA is Dan Ratynets. And he's at Eichenbaum, Comer & Ratynets.

Michael:

Awesome. And I've been using Josey Schenkoske with Bianchi, Kasavan & Pope and they're out of Monterey, California. They go by BKP and Associates.

Tom:

Some love, some love shout outs.

Michael:

Yeah. So I just want to give a kind of real quick personal anecdote from when I was going through my trials and tribulations trying to find a CPA. So I went from that really expensive one that my dad used. And then I was sourcing my own. And I found this guy, he was a one man operation. I went met him and we talked and he goes, Yeah, I can totally take care of all of this. And this is my accounting firm. That that totally sounds like he knew what he was talking about. No problem. My personal return, including all my real estate stuff was gonna be like 400 bucks.

I was like, Wow, that's amazing. That's cheaper than h&r block. And so I got, you get what you pay for, two years later to get to another account. And he was like, Yeah, but I don't know. Like, what this guy did. This is not at all right. And so I had to pay for it to be corrected after the fact. So don't go with the cheapest option. That doesn't necessarily mean it's the best by any means. So look to that people above and beyond what it costs.

Tom:

I love the phrase penny wise pound foolish and you know, you might be like, Oh, this is awesome. I'm gonna save a couple hundred bucks doing this. And I bet you the pain the butt of going back and trying to fix that stuff, you know, know what the market rate is. And typically, we're just going to give super broad ranges But usually, I'd say like 1000 bucks is a pretty if you have a less complicated going up to I don't know what do you think the range Michael?

Michael:

Couple thousand, depending on how complicated that is?

Tom:

Anyways, I think oftentimes, you're going to get what you pay for.

Michael:

Totally, totally. And keep in mind too, for everybody listening. These are West Coast, California Bay Area prices that can totally range as you go in different parts of the country. I feel like attorneys and CPAs often have relatively similar pricing. So at least has what I found here in California for the most part.

Emil:

All right, so let's wrap it up with questions to ask that in questions to make sure you're going with the right person. You guys want to go through a couple of questions that you really like asking?

Tom:

Yes. All right. I got my question. First one is they need to have real estate experience and what kind of profile of customers they have is so important. I don't want to be somebody kind of break In this type of market as a CPA, and there's a little bit of specialization, so knowing that the other thing that's really important is what states they like have coverage in. So, Oh, am I stealing Michaels? That's cool, it's good, good, good,

Michael:

I'll get better ones at the bottom,

Tom:

I'm gonna leave you scraps. So if I have properties that are in, you know, Florida, Georgia, Pennsylvania, Ohio, I want to make sure that that my CPA has some experience there and has done in file in those different states. So yep, I took those two. Let's take it from there.

Michael:

I like asking the questions of what are your various rates? We touched on this earlier, but do they build by the hour? Do they build by the form, that's typically seen, like an h&r block style will build by the form. So if you have big we'll see that's this dollar market, Schedule E that this much and then ask if there's a flat rate option, that's a really, really important one to find out. But like I mentioned, that's not the only deciding factor.

The other thing I like to ask CPAs is what can I do in advance that will make this process so much smoother and easier for you? Do you want a shoebox full of my receipts? Do you want an Excel doc with all of my expenses, because that's how I work best? And so just having that open communication on the front end of Hey, this is what my system looks like, is that gonna work for you? A lot of new investors have kind of the benefit of they might not have any systems yet set up. So they can tailor their system to work well with whatever their CPA is looking for.

Emil:

I get the real scraps, guys got nothing. Good luck. The only thing to add there would be, I think ask them if they work with other investors. That's a good one. I think Tom grab that already. Right. He said about other states or like being able to fund this now. His first one was about investors. All right. Okay. So I got a real bottom of the barrel you scrape. The only other thing I would ask just going off of what we talked about earlier, is expectations around like you asking questions or consultations throughout the year, right. So some people will say, this is my hourly rate. Or Yeah, you know, if you have any questions, no problem, just call me whatever asking that and getting the expectation right up front plane. Another good question to ask.

Tom:

I'm gonna sneak one more in references, don't sleep on the references. So perhaps ask if they have a client sort of a similar profile, if they wouldn't mind sharing email to basically check on that. That is just such a high ROI with regards to value. If you can talk to someone who has a similar situation, they like working, I recommend not sleeping on references.

Emil:

It's such a good one that I don't do enough. It's like such a good best practice. That is, you say, Don't sleep on it. I think you're stressing it because it's really easy to sleep on. But it's such an important one.

Michael:

Yeah, references. I think across the board is one of those things that it's so easy to physically do it, myself included. Don't do it enough. I don't know why that is. I have no problem talking to people. I've no problem picking up the phone and calling. It's just one of those things.

Emil:

Yeah, I don't know either.

Michael:

Yeah. If anybody has an idea about why Neil and I can't call references, please leave us a rating review. Let us know in the comment section what we can do better.

Emil:

Oh, wow. We're to wrap up that episode. All done.

Emil:

We'll see you on the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Weekend Wisdom: The Master Lease Oct 10, 2020

In this short clip Danny Plueddemann explains to us what a master lease is, how it works and why is may be a great option for remote real estate investors.

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Tom:

Hey listeners, Happy Saturday, we're trying a new thing where we're doing little micro episodes. And today we're going to be talking a little bit about the master lease as a little something over the weekend. We're here with Danny Plueddemann. And Danny, tell us about the master lease.

Danny:

Yeah, yes. And most people think there's two options you are you going to self manage or hire a property manager, like, those are the only two options out there. And this is a third option, and it's better is better for me as a property manager, and usually is better for them. So yeah, I'm your tenant. So instead of hiring me to be your property manager, you rent the place to me directly. And I'll hit you up for discount on the rent for a long term lease, and I'll try to sublease it and it's for something higher, and I'll try to make money on the spread.

If I'm smart, if I'm doing do a great job, if I'm an awesome property manager, I'll make some money, but I'm responsible for that payment, whether the property is occupied or not. So I'm taking on all the vacancy costs, and I'm taking on a low maintenance cost. So I'll fix whatever's wrong, I'll pay you whether it's vacant or not. So there you go, steady income, and then I got skin in the game, you know what I mean? If I really care about, you know, property, managed to say, I'm gonna care about your property, just like mine, maybe, you know, but everybody understands that you're the one making the mortgage payment, the place goes vacant, you're the one who's replacing the water heater, if that breaks, so that's your problem. So this is the way you know, for, you know, really savvy investor that, you know, I know, my NOI is gonna be this much, can you match it? Beautiful, I'll do it.
And then it's for other people. I mean, the last one I did was was a 23 year lease, she just wanted me to match her mortgage payment and pay your house off. That's it. So I'm gonna give her house back free and clear and 23 years, and she's thrilled. And then she's going to have an asset, you know, as free and clear before she had a liability. And she knew she had a liability because it was vacant, and she was cutting, cut the grass, pay the bills and pay the taxes, pay the insurance, and she was losing her mind. So we cut we call it the perfect tenant program. I'm your I'm your tenant, I'll rent it from you. That's it. And then. So anyway, hopefully that explains why it's better for the investor, and then why it's better for the property manager. Frankly, if we can get the landlords out of the way we can do a better job. I know, I know, there's not supposed to say that there's a lot of property managers out there clutching their hearts, they don't talk bad about landlord, but you know.

The asset is the tenant, you know, the house, a vacant house is a liability. So if we can focus on the tenant, and do a good job for the tenant, this is a strange business because we you know, the tenant is one that pays us, but the landlord's one that hires us. So we're always caught in between here's always posted, you know, we have to we have to deal with the landlord wants to know whether they're telling us to do the right thing or not. They're the one who hired us. So we got to do it that way. But then the person that paying us is the tenant, so we know how to make money. So anyway, that's kind of a long answer.

Tom:

Yeah, it's an interesting program, you know, talking about different types of leases out there, and you miss out on a little bit of downside of if there's some major rent depreciation, but it's a little bit of a hedge of just, you know, vacancy where you're collecting that rent month in and month out,

Danny:

Ideally, rental prices will go up. And I would benefit from that. On the other hand, if rental prices go down, like that in 2009, then I would take it on the chin, so we could but for the long term leases, I'm happy to build in this call an escalating lease where every five years it goes up 100 bucks. Hopefully, that'll cover your increases in taxes and insurance. Yeah, hopefully, there'll be some rental appreciation. And yeah, I can pay more, the longer the lease. And I think that's how much can you pay? Well, one way to do it is keeping good records. What did you net? What you net the last three years?

And if you had a turn, if you had an eviction, if you had anything that you'd probably net and you know, 60 70% of the gross? So absolutely, I can just match that. Another way to explain is what would you factor in for maintenance, vacancy and management, and, you know, just I'll just throw out the 10% for management 10% for maintenance, and 10% for vacancy. Maybe I'm high there's a lot of different ways to break it down between, you know, turn cough capex costs, BlackRock hedge fund, they're factoring 8% for maintenance, I thought that was interesting. And they started out at 6%. And then after they bought 20,000, single family homes, I think, a pretty good data set. Everybody's trying to figure out what their net would be. But that's another way to do it. And you know, maintenance is the biggest frustration between property managers and landlords. You know, there's just a high level of trust, I'm spending your money. Why aren't you getting any money this month? Well, because I replaced your water heater, why aren't you getting my next and this is a huge level of trust, huge source of potential conflict.

Michael:

Danny, I love this concept. I think it's really cool. I've got some triple net lease stuff in my portfolio. And I love it. I mean, frankly, it's the easiest stuff ever. Just curious because this is kind of a modified triple net lease like Tom was alluding to. So I could see someone who hears this concept and say, well wait a minute, you as the property manager are renting this property from me and then turning around and subletting it, so couldn't actually be in your best interest to cut corners on expenses. So that way you make a better return. What would you say to someone that asked you that question?

Danny:

That's great pushback. Thanks. What I would say is if you're worried about Yeah, deferred maintenance, I'm not gonna keep it up. Let's do this. Michael, instead of doing a five year lease, let's do a 15 year lease,

Michael:

Boom, problem solved. I need you in the Midwest, Danny, this is great.

Danny:

Yeah, and that's how I'm doing like when I do a turn, when I'm doing a master lease, I'm going to spend more money than than the owner would have. I'm going to get the carpet out of there. I'm going to put an lvp for example, right. But I know how to take care of the tenant, I know how to keep the place occupied by keeping the tenant happy. That's the asset. Now I can just focus on the tenant. And I can you know, do the right thing without worry about anybody looking over my shoulder. And that's the key. That's the key to making this because if you're not a good property manager, don't even think about signing a 15 year lease, right? You're gonna lose your shirt.

Michael:

You're gonna get cooked yeah.

Danny:

And you know, I know it sounds cocky. I think I'm good enough property manager. I know how to do it. That's cool. You got triple net lease. Are those commercial or residential?

Michael:

Commercial. Yeah. I've never heard of property managers doing this master leasing. Do you know of many others across the country that do? Are you kind of a unique beacon in this department?

Danny:

No, I heard about it from a guy named David Tilney while he was in Colorado Springs. He's since moved the Florida. Yeah, but isn't shortlist isn't shortlist, I mean, I can give you half a dozen names of people that are doing it. Most property managers don't want to be on the hook to pay for maintenance.

Tom:

They got to be good, or the, you know, the pm is going to be in the hole. I don't know, I think it's a really interesting lease, especially as a remote investor to kind of take that worry away from the day to day and it's like, you know, I have my lease, it may not be as high of a return if I was, but it's a way less risk and just kind of…

Michael:

It’s guaranteed, I'm doing something quite similar in investing in Portugal. And they do they just exactly like you do we call it a guaranteed return. So keep it over 4% 5% return on your money. And we'll take care of everything we'll manage it will lease it out. And we're just going to arbitrage make the difference on it. And if you're happy with the guaranteed return, we're happy with, you know, ours and everybody walks away happy. So I think it's a really cool model. To your point, Danny kind of speaks to the property managers competence. Because they're putting their money where their mouth is. Yep, you can manage this thing. Great. Do it and let's see you pay for it.

Danny:

Yeah. And that's why it has to be long term lease, like five years a minimum, because any given year, even though I'm a great property manager, I'm just being cocky, but I might have an eviction and I might replace a water heater that you're sure I'm going negative. But that's okay. I got four more years. I think I can do it. Yeah. But you know, if you're thinking about selling your house and one or two years, that's a good reason to just hire a property manager and not do a master lease because it really does need to be a little bit more long term for the noi to even out.

Tom:

Thank you Danny. And as always, happy investing.

Market Deep Dive: Charlotte North Carolina with Danny Plueddemann Oct 07, 2020

Tom and Michael talk with Danny Plueddemann from Home Vault Property Management about the Charlotte Market.

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Tom:

Greetings, and welcome to The Remote Real Estate Investor. Today we're here with Danny Plueddemann, when we're going to be talking about the Market of Charlotte.

Tom:

Okay, before we get into the interview with Danny, we're gonna hit on some numbers talk about the quantitative aspects of the market and Charlotte. So at a very high level, the population in Charlotte is 872,000 people. This is from the Census Bureau in 2018. The greater MSA population in Charlotte is just over 2 million 2,054,000. This is from 2020 from macro trends, and we're seeing a population growth of 4.21%. And this is also from macro trends, the median household income, and this is from John Burns is $63,400. And this is an improvement from last year. That was it 63,000. The number of units we see in Charlotte is over a million This is 1,049,329. And as a breakdown of ownership, 60% of the properties are owner occupied, while 31% of the properties are renter occupied, and then the remaining eight percentage is vacant homes. A little more information on home prices and rent, the existing home values is increased 7.6%. And this is coming again from John Burns in the September 2020. Report, the home value for entry level home is at $214,000 700. The existing median home price is 286,700. And both of those metrics are again coming from John Burns. The median single family rent is that $1,388 again from John Burns, and the year over year rent growth is 3.7%. And again, this is coming from John Burns, the home occupancy rate is that 93.4% and the apartment occupancy rate is 93.7%. Again, both of these metrics coming from John Burns. Danny, thank you so much for coming onto the show. Before we start getting into Charlotte, let's get a little bit into yourself. Let's tell us a little bit about your background. What makes you an expert. What are you doing in Charlotte today and all that good stuff.

Danny:

Thanks, Tom. Yeah, so I call Charlotte my adopted hometown talking about that I've been here longer than anybody else but 20 years and everybody hears a transplant everybody's I'm a Yankee that knows the Yankee till I moved to Charlotte. But yeah, I mean, in property management, I worked for the big banks for a while I did mortgages for a little while. I've been in property management for last 15 years. We just did a exciting merger so we're Home Vault property manager in six different markets, five different states. So that's really exciting. I am the Chief Investment Officer which I'm trying to decide what my job titles I think I told you I like yours Tom, your Investor?

Tom:

Yeah, that's right. Director of Investor Education, getting help helping people out in the business to serve.

Danny:

Yeah, I might steal yours. It's funny as I was doing my email signature yesterday and Chief Investment Officer sounds so pretentious that I changed it to investment guy and I was like, man, nobody's asked that's not serious enough. Yeah, so now I'm an investment officer in my in my email signature. But yeah, property management focus on helping the landlord so if you're happy landlord I want to help you buy more properties. If you're not happy I want to come come up some alternatives for you either you know buying the property from you selling to one of our existing clients, Master leasing the property something to take away the pain points that's what I'm doing now.

Tom:

Alright, let's go ahead and jump into it. So the market of Charlotte so as a first step tell us about kind of the main primary cities and some of the core principal cities within the metro go ahead and yeah, let's let's do it.

Unknown Speaker

Yeah, Charlotte is a great town. Let's see here. We're about as far south as you can be and still have four seasons we got winter, spring, fall, summer, that's fun. Just but everybody's from somewhere else. That's the fun thing about it. We got Florida halfbacks people they thought they wanted to retire in Florida was too hot. So they move halfway back to New York, they're in Charlotte. Now. surrounding towns are like, like Gastonia Concord, Kannapolis up north. Gastonia is West, Monroe down south.

Michael:

So Danny. I'm gonna jump here for just a second. So I lived in the Bay Area, California outside San Francisco for a long time. Tom's a bay area guy. Everybody knows the bay area for Silicon Valley. Most people move to the area for tech. So is there a similar draw for these transplants out into Charlotte or is it kind of a mixed bag?

Danny:

Yeah, there's some cool comparisons with California. We can we can talk about that. Yeah, job. So finance sector is the biggest, biggest employer we have. Bank of America is headquartered here. Wells Fargo used to be headquartered here before San Francisco stol it from us. Yeah, so the first gold rush actually wasn't in California. It was in Charlotte.

Michael:

Really?

Danny:

Yeah. So there's, we're still we're still competing. And I was gonna ask you guys If you if you don't know, I'm going to say Charlotte is the second largest bank in town after New York. But I think we go back and forth with San Francisco. Who's the bigger after?

Tom:

I didn't realize there were so many parallels with San Francisco and Charlotte, the gold rush the huge financial sector. Sorry for interrupting.

Danny:

I think it's related. I don't know this for sure. But you know, we have a mint here like since we had the mines here, the gold mines here that were us men here, there's a man in San Francisco. I think that's the connection. They're just after they had the mint there that attracted the banks. And yeah, we're huge banking town. That's what we're known for. By the way, we're the first ones to declare independence. A lot of people don't know this. But for us, Independence Day is may 20 1775. Everybody else celebrates June, 4 of July, we had a declaration of independence, unfortunately called the resolves, like we do here by results. So that's horrible marketing. Nobody's gonna pick up on that. And then we lost the original. So that was, you know, we don't get any credit.

But yeah, we're the hornet's nest of rebellion for England's that's why we at the Charlotte Hornets basketball team. And then for the Gold Rush, like the UNC Charlotte, University of North Carolina Charlotte university that the mascot is the 40 Niners the miners 49. So that's kind of the connection there with San Francisco. I'll tell you what's different, you know, San Francisco, you got the ocean on one side, and then you get the mountains on the other side. So as far as supply it’s really limited, we don't have that we got we were in the Piedmont Valley. So we can we can grow any direction, every direction. So there's no limit there. So there's much more supply. So obviously, that's keeps prices down. Atlanta is the same thing. They can sprawl and they have been forever. So a lot of investors looking at Atlanta when they're trying to figure out what Charlotte's gonna look like, in 20 years. They go hang out in Atlanta, and look at the traffic there. And then, you know, eventually the barrier to growth, its growth is traffic, you know, every exit get farther from downtown is a little bit more expensive.

Tom:

Well, that's a good transition question. So talking about the major transportation within Charlotte, so there's big international airport. Why don't we touch on that, you know, trains, planes and automobiles like kind of the different major infrastructure as it relates to travel?

Danny:

Well, you guys can tell I'm a history buff. We got a lot of trains here because we had a lot of textile mills here after those cotton. So yeah, we got trains going north and south here with originally was to take cotton everywhere. It was actually a big rail yard then the Civil War, the Confederates used this as a rail yard. And then yeah, the airport's huge, American Airlines has a hub here. So you know, if you're flying anywhere in the southeast, you probably come through Charlotte. It's just the way that airlines schedule things with what's it called a Hub Network, something like that. Yeah. So yeah, and then you're exactly right. You know, the trucking. There's a lot of big trucking companies headquartered here for the same reasons I think it's just the trains come in trucks take them out. There's a lot of transportation is it's helped us diversify the economy from banking a lot,

Tom:

You know, kind of, I think, as Michael was alluding to, there's a lot of universities in like, the tech space has been a really booming piece as well.

Danny:

The bad guy is Riley. I think you're getting those confused with rally because they got some better schools up there. You know, there's UNC Chapel Hill Duke. So that's like the Research Triangle. And we're competitors with rally sorta Right. I mean, they got the government center there. They get the more famous schools were more like the commercial side of North Carolina, business, commerce, banking. That's kind of our reputation here.

Michael:

And Danny, were you involved in as an investor in the real estate space before getting involved in the property management business?

Danny:

Yes, I was doing mortgages. I had a great run with the mortgage. So after big banks, I started my own mortgage company. So that was 2000 2001. And I had a great write up for the mortgage business. And yeah, I was buying properties. And I was selling them on an option given people option to buy them and I had for about 2025 properties in my name when the market crashed in 2008. I had all these houses sold, quote, unquote, they're sold to people that they realize they're upside down, everything dropped 20% across the board, they realize they're upside down. And so they call me up. Danny, you got a problem. Your house is the roof is leaking. I had a rough ride down. Hopefully I learned a few things. Yeah, like a lot of property management get started at that time, nobody could sell their house. So we have what are called accidental landlords or reluctant landlords, you know, they got relocated to Florida, they're upside down their house. So it was a great time to grow a property management company nobody could sell.

Tom:

That's so funny. You mentioned that one of the other property managers from Birmingham, the exact same story they were fixing, flipping and then accidental landlord really like enjoy the grind of it going back on the different you know, talking about Charlotte and some of the different areas. I'm looking at Google Maps right now of Charlotte. And I'd love for you to define some different areas as it relates to general strategy. So what areas within Charlotte you know, someone's looking at Google Maps would be more of a cash flow play, which one would be more appreciation which one would be more in the middle? Are there any kind of up and coming areas so?

Unknown Speaker

As far as cash flow I’d say the west side. And so and the reason is it's lower income, more industrial, the airport's out on the west side, if someone says they found a deal with it with a double digit cap rate in Charlotte, they're probably talking about the west side. There's some people making money on the west side, there's a little more drama. A little more, you know, higher evictions, lower income your copper pipes might be, might be more gone if it gets gets vacant. That's the west side.

Tom:

Yep, near the airport.

Danny:

And there's pockets of exceptions, of course.

Tom:

Do you guys manage a lot of properties in that area?

Danny:

Yes, our service areas within an hour Charlotte will manage any property, we do have a flat fee, minimum $90. So that ends up making us more expensive if the rents $500. And I'm charging $100 management that's like 20% management fee, that might be kind of expensive.

Tom:

Yeah,

Danny:

That's kind of how we need to do it to be profitable. Whereas if the rents 2000, I might be the cheapest property.

Tom:

Sure.

Danny:

That's just kind of how it works with the flat fee, we got a few different fee options. But to answer your question, yeah, I mean, I don't mind managing low income and class C, whatever you want to call it, we got to have a class A landlord, I'll throw that up. There's class C landlords, the classy landlord with a classy property is not going to work.

Tom:

Yeah, So how about is just kind of general within Charlotte? Is there much of a section eight footprint throughout the different areas

Danny:

There is there's like an eight year waiting list to get on organises a huge demand for it. Yeah, we do manage some Section A mostly the ones we inherited, we're not going after it, there's a few technicalities that make it hard to manage third party was section eight. This might be a little bit in the weeds. But let's let's just say I'm managing a property from Michael. And then there's an abatement. So they take away the rent. But I'm also managing a property for Tom. So income comes in for Tom, section eight thinks I screwed something up. So they're gonna withdraw money from my account to cover Michael's bill. But the money in my account was actually Tom's money. It's a nightmare. So I got to front the money to stay in compliance with the real estate commission. Anyway, that's just like a cork that makes it really hard to manage section eight.

But if the investor understands that, and they put up a reserve, that's way around that there's an abatement, they grab the money, you just got to have that reserve. But there's pluses and minuses I don't you guys like section eight, you guys have section eight properties.

Tom:

I've done it. And it has been successful and haven't had any issues with it one way or the other. I'm not strategically like always looking for it or going against it.

Danny:

For sure, it's nice to get the check from US Treasury, you can't complain about that. If they're covering the whole amount, that helps a lot. You know, if they're making a partial payment, you know, like, let's say the tenants, you know, the tenants are on the hook for 150 bucks, and then section eights paying 850. So you get the 850 but you don't get the hundred and 50 do you get some hard decisions to make? Are you gonna spend $300 in eviction to collect 150. But it can be good, you still need a tenant screening. I mean, one one tip there is, you know, you don't have to do screening as far as rent collection income, that you're going to get the income, but meet them at their property where they're at right now. So you know, we got some things for you to sign where do you live and come over there, and then see how they're keeping up the place. That's the only thing that's gonna kill you and you got to do the repairs. I mean, if they're tearing the place up, you can say, well, that's tenant responsibility. Okay, well, the tenant doesn't fix it, the inspector comes and puts it into abatement. Anyway. So you better fix it like it or not fair or not, you better make an inspector happy. So anyway, there you go. Those are some of the pluses in mine. Yeah,

Tom:

Got it. So we talked about the west part of Charlotte What is going on? You know, South Charlotte East Charlotte North Charlotte, I'd love Yeah, I kind of thought that there's an area that's more kind of up and coming or it's more of an appreciation play. I'd love you to touch on the kind of the different pockets as you'd say

Danny:

South Charlotte is most expensive. So that would be like, you know, a blue chip stock. You know, it's gonna be solid investment, harder to cash flow. Just south, the Uptown there's Myers Park. I was just walking my kids there the other day lesson neighborhood there. You know, they'll buy a house for $850,000 tiny house built in the 60s, tear it down, build up a $2 million house so that's the most expensive area. Yeah, Meyers Park freedom Park area. That's beautiful. You see 100 year old oak trees, just beautiful neighborhood. It's pretty expensive all the way you keep going south south park Valentine pretty expensive,

Tom:

How about pineville or outside of that 485 kind of circle. Is that where it starts price starts dropping off a little bit as it remains.

Danny:

It does drop off but you got to go a long ways because yeah, you know, the neighborhood's past 45 South they're real popular to waxhaw weddington they got these deals where you know the minimum lot sizes one acre, now I'm gonna be able to build an apartment there. So it encourages expensive housing. You got to buy a lot that big.

Tom:

Got it. How about east of Charlotte?

Danny:

My favorite street is CENTRAL AVENUE driving out uptown Vietnamese restaurants, Mexican restaurants, a lot of diversity. A lot of older neighborhoods. Blue Collar neighborhoods.

Tom:

Is that like East away or is that still Charlotte as a city?

Danny:

That's Charlotte.Yeah, I'll throw out some numbers there. I think you get five 6% cap rate. And East Side. I think you're looking at two to three on the south side.

Tom:

Got it.

Michael:

And what about and how about a purchase price there on the east side?

Danny:

For a single family home? You're probably looking at 250,000 for a three bedroom, two bath that you could rent for 12, 1400 a month.

Micaheal:

Okay, great.

Tom:

And how about the last but not least North Charlotte?

Danny:

Yeah, just north of Charlotte is a little rough. Actually. That's where I live. That's also an industrial area. But this Arts District you hear about NoDa. North Davidson. That's a take off on Soho are trying to be like New York. So that's RT real trendy, real expensive and then and then go farther north. Those are expensive neighborhoods too. So you tell my Morrisville, Huntersville, Davidson area. You get the late crowd there. Lake Norman's real popular place to live. You got the peninsula club. You got Trump's got a golf course out there. A lot of the Charlotte Panthers Charlotte Hornets, professional athletes, they live on the peninsula on Lake Norman, that's a real popular area.

Tom:

Got it. And how about kind of the last general region question? Is there any areas you would say that, you know, you mentioned you guys manage homes up to an hour away? That's a little bit more in the deep cuts like maybe it's not in Charlotte proper, but man, this is kind of an up and coming area as an investor some place to look at to buying houses?

Danny:

I think so i think you know, when you're talking about that 1% rule, for example, for the most part of thing you got to go 45 to an hour away from Charlotte. Yep. So Kings Mountain just got approved for a casino. That's an interesting market. Yeah, about 45 minutes west of Charlotte, the neighbors are some on the north side. There's a proposal for light rail to go up to Davidson. Yeah, we had a really cool light rail that's, that's gone through South and North. So it goes from UNC Charlotte, North, down to 45, the outer circle on the south of Charlotte, and wow, that's done wonders for property values there. Yeah, there's just these a class a brand new apartments, they go on forever, on the light rail, that's really a lot of development. So if the same thing happens on the they call it the red line, they don't have the funding for it. So I don't know if it's gonna happen or not. But they got it on paper

Tom

That's good feedback around Kings Mountain, which is just east of RGB, just west of Gastonia, which is the city just along 85. Some other questions around owning properties in Charlotte, and the theme of investor friendly. So I'm gonna put this in a few different categories. So with investor friendly, let's first touch on rent control. Is there an aspect of rent control in Charlotte?

Danny:

No, I actually listened to your podcast with Matt Whittaker in Birmingham. That was interesting. And I agree with what he was saying as far as let's it's a progressive city and a conservative state, you know, for the most part pretty landlord friendly. I would say North Carolina, if you ever go to eviction court, there will be attorneys there from legal aid, representing the tenants. So that's something unique to Mecklenburg County, you better you better have dotted your i's and cross your T's because you're going to go head to head with an attorney. So it's landlord friendly, the state laws and then Mecklenburg County is probably the strictest as far as a tenant friendly. There's no control. Yeah, every once in a while an HOA will have a restriction on a percentage of rentals that's that may be more common like a condo uptown. It's not common at all on a subdivision but yeah, with an HOA anything can happen.

Tom:

Sure, you're reading my mind and I think you kind of answered it already. Is there is you know, outside of condos and townhouses Is there much of an HOA footprint in through development that's been done so in common to find properties that are an HOA as per single family?

Danny

Yeah, all the newer neighborhoods have a choice and they're the devil. So

Michael

I'm sure you love working with them as the management side of things get another nasty gram for garbage cans being left out or you know, what have you.

Danny:

Exactly, I did Hoa management a little bit. That's really hard job. Basically, you know, there's one person is who wants to be president. And that's usually a volunteer position and they just got a lot of time on their hand. So they don't work. They just sit at home and get things wrong. And that's the first as a property manager, that's the person you got to make happen. And they want a pitbull, you know, they want somebody to get just as angry as they are like, you know, they call me up Danny, the neighbor has their garbage cans out like you saying, and it's Tuesday and when you get really angry because it's Tuesday.

Tom:

there's a lot of things out there to be angry about but you know, garbage cans on the street that's not a good one that's not a good one to be angry about.

Michael:

That is not top of the list by any means.

Danny:

HOAs will always send the notice to the owner like property managers can be the buffer for most thing that notice will always go to they will always send it to the address on tax records. So then owner just need to forward those complaints to us and we'll take care of those get involved in that kind of thing.

Michael:

You brought up a really nice kind of segue transition, talking about tax records. What property taxes look like, in Charlotte.

Danny:

They're good compared to California, I guess.

Michael:

It's not hard to be good in that department.

Tom:

And that probably in Florida in Texas, I would assume because they're, you know, no income tax in Florida in Texas. So property taxes are super high. Go ahead.

Danny

Yeah, that's true. So it's about 1.2% of tax value. So if the tax rate is $100,000, you can expect to pay about 1200. dollars for property taxes.

Michael:

Okay. And this is a discussion I have with students all the time in the Roofstock academy about how to determine what the tax value is, versus replacement costs and insurance versus purchase price, because these are three numbers that are so often mutually exclusive and have nothing to do with one another. So if somebody buys a property in Charlotte, for 200,000, is the property tax basis likely to change? Or is there some regular frequency for an assessment that is independent of the sale price?

Danny:

There is an assessment? It's a good question. It's every I want to say seven years is not that often, I might be wrong, I might be five years and general the tax value is lower than the market value. And that's where you want it. You want your tax ID to be as low as possible. That's, that is a very common Miss misconception there. And then will it go up? Probably, probably, but it hasn't gone up that much. I mean, and then you can dispute it, you can send them an appraisal, it's Yeah, that's a little side hustle in itself, helping people dispute their tax values.

Michael:

Yeah, absolutely. Absolutely. Just to get a kind of flavor of the market. If someone buys a house, on the east side for 250,000, the rents are 1200 bucks. Mm hmm. ballpark, any idea what their assessed tax value might look like on that property?

Danny:

Less. So the market value is two to 50? I wouldn't be surprised if the tax value wasn't like 170.

Michael:

Okay, and then it'd be 1.2% of that. 170.

Danny:

Mm hmm.

Michael:

Okay, even if I bought it, you know, it got assessed last year at 170. I bought it this year at 250. That assessed value, that's the taxable value isn't going to change until they do a new assessment five or seven years down the road or what have you.

Danny:

That's correct. You're you purchasing the property, you won't change anything. Eventually, they'll do an assessment by zip code, bless their hearts are not gonna be appraised every property, they gotta take a stab at. conserve everything. I think they know that, you know, most people are gonna dispute it. It's also I even when they raise it, I think it still stays pretty conserved every once in a while. Have you surprised somewhere, but tax general is less significant less than market value?

Michael:

Okay, really good to know.

Tom:

One more tax related question is I know, sometimes when we are evaluating a property, you know, we'll use some global assumptions for an area say that, like 1%, or whatnot, and then we'll hit this little pocket in a neighborhood that has this school special assessment that for whatever reason, like this little jurisdiction is like, way more expensive. Is that common? Or have you seen that in Charlotte?

Danny:

No,

Tom:

No snakes in the grass, I guess, I don't know if like expensive property taxes stuff?

Danny:

If you do have a special assessment, it's gonna come from the HOA. And we had those like with the condo kind of thing where it was brutal back in 2010. Nobody was paying the mortgage, nobody's paying their HOA dues, and they need to put a new roof they need to raise 50 grand and everybody gets an assessment for $500 a month only pay for the roof. That's the only kind of special assessment I've heard of I haven't seen that come from city, a county here in Charlotte

Michael:

What do insurance costs look like in Charlotte?

Danny

Thanks for asking. Because I sell insurance, we could dig deep into that if you want, but dwelling is just cheap, 45 cents for $100 of coverage. So if it's $100,000 house, that'll be you know, 450 bucks in a liability policy and other 300 bucks get a million dollars for liability and put your property manager on as an additional insurance? are you guys doing that? I know, you guys got property managers.

Michael:

Every single one good.

Danny:

Are you doing that Tom?

Tom:

I need to do that.

Danny:

You absolutely need to do that. Otherwise, you're it's like sending a vendor out there without insurance. If there's a lawsuit, then there, everyone's gonna be looking at each other cross eyed who's got coverage here. And it could be it could be your insurance company doesn't want to cover the property manager, the property management insurance might cover it, but then sue your insurance company, it's so much better just get on the same page, because you are going to get sued together, I promise the landlord and the property manager the attorney is going to list everybody who's ever touched that property in the last five years. So you're gonna be sitting in the courtroom together, get on the same page, your put your property manager on it as an additional insured. That's my public service announcement.

Tom:

Love it.

Michael:

Danny, I was just having this conversation yesterday, actually with a fellow investor. And I dealt with the exact same thing. And they asked the question of why and I explained it probably less eloquently than you had, but I explained this to them. But I want to hear from you. Is it additional costs to that?

Danny:

No. And that's a good question. And it's confusing, because every once in a while someone call their insurance agent and put the property manager and they'll say, No, we don't do that. And that means you're talking to their captive agent who focuses on personal lines. It doesn't understand commercial lines. It's very, very common, but you should get a discount. You should call you Hey, I have a professional property manager here. So was a throat you know, American modern foremost, ASI, those are all insurance company, they will give you a discount, just check the box, I have a property manager, it will cost you less, there's less liability, less risk for the insurance company if they know that it's professionally managed. It's not an additional cost. It's less, it should be less

Michael:

Fantastic. Tom, you just got your money's worth. And then some out of this episode, man. I did I

Tom:

Love the tangents that some of these go on.

Michael:

Okay, cool. And I've got a timely question. Because I think again, another question I get and probably Tom gets as well from Academy members and just investors in general is COVID is still affecting the country. And so people are constantly is now a bad time or a good time to invest. Because there's a eviction moratorium and folks are losing their jobs. So they have a tough time paying rent. What are you seeing in terms of occupancy? physical and economic? As far as the property is your property management business?

Danny:

Yeah, so I didn't want prices to drop. I didn't want to go back to 2010. But I did think they were going to and I thought there's gonna be a huge opportunity, and I was wrong about that. Demand is stayed strong. Yeah, if you got a three bedroom, two bath within Charlotte 250. Under, it's gonna fly off the shelf demand is strong. The hedge funds haven't gone away lots of new york money, and they're happy with two 3% cap rate. You know, obviously, they're factoring in appreciation or whatever. They're affecting them for their numbers. But there's a lot of competition there's a lot of people don't want to buy in Charlotte, and they're paying cash. So now the market has not drop. Yeah, evictions, some of the lower income properties got hit harder. I think apartments got hit harder, you know, our average rent. It's 12, 1300. I think that's, yeah, that's I think that's been true across the country. Yeah, I'm in a lot of Facebook groups with property managers, we were all holding our breath. What's it like to manage property when you can evict somebody? Right, but you know, and there are just a few people taking advantage of it. I'll just say one from like, 2% to 4%. So but it's not that high. And I think everybody that cares about the credit, they understand that, you know, okay, I don't have to pay my rent. But that doesn't mean that the bill just goes away. You know, one day, they're gonna open up the courthouse and the bill still gonna be there. So, you know, people don't want that kind of uncertainty. For the most part, everybody who can pay is paying. But yeah, it's been really confusing. Actually, right, right now, nobody knows what do we all the eviction attorneys are in town are calling each other. We love to charge late fees.

Tom:

What it's going on?

Danny:

They don't know what's going on.

Tom:

So I'd like to touch on some points of interest in Charlotte. And these can be you know, Parks, museums. I know the Hornets which just learned about how their name was came to be. What are some of the major attractions and poles within Charlotte?

Danny:

Yeah, so Charlotte isn't typically a tourist town. You know, we got whitewater Center, which is really cool for like kayaking. It's like a artificial whitewater River. That's really cool. really unique. We got Carolyn's that's an amusement park. And that does bring in some regional kind of tourists. And we got some uptown fun place. There's some cool museums up there are museums. I love uptown. And we call it uptown By the way, because downtown is too negative, you know, we need to try to put a positive spin on this. And it is a little bit higher geographically, but that's there's no downtown and Charlotte's uptown. We're two hours from the mountains and three hours from the beach. So that's kind of fun. If you want to make a day trip to the beach, the mountains you can do that. As far as tourist kind of attractions that's more common that someone come in and do the beach or the mountains then then Charlotte

Tom:

Or the lake like Lake Norman, you're talking about earlier.

Danny:

Yeah, Lake norm is a blast.

Tom:

I have my last question. Here is kind of a fun thing and talking about different markets. Or you can get one meal. Danny, you can get one meal in Charlotte, where are you going? And what are you ordering?

Danny:

I'll go to Lang Van. It's a Vietnamese restaurant on the east side. And I'll get some pho soup

Tom:

I love it.

Michael:

Chicken beef or seafood.

Danny:

Beef.

Michael:

Good deal. Good deal. Tom, Like a good Pho?

Tom:

Oh, love Pha, can't get enough.

Michael:

Yeah. Danny, thank you so much for for hanging out with us and giving us such a great market insight. If folks have additional questions about home vault property management or about kind of Charlotte as a whole what's the best way for folks to get in touch with you?

Danny

Yeah, thanks so much, Danny@homevault.com and we just did merger we're still doing redoing our website. So you know our Charlotte website is still smartshieldpm.com. Smartshieldpm.com.

Tom:

Awesome. Well, I want to thank you so much, Danny for coming on and sharing with us and our listeners about the Charlotte market.

Michael:

This was great. Danny, thank you.

Danny

Big fan of what you guys are doing. Thanks so much.

Tom:

Awesome. Thank you.

Michael:

Thank you. Take care.

Tom:

Thank you, Danny for coming on. Love to learn about the market in Charlotte and all the other fun facts that you brought with you. If you enjoy this podcast, please subscribe, give us a rating all that good stuff really helps. And as always, happy investing.

Our Top Tips for Finding and Vetting a Good Insurance Carrier Oct 05, 2020

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for insurance.

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Emil:

Hey everyone, welcome back for another episode of your favorite show The Remote Real Estate Investor. My name is Emil Shour. And today I'm joined by my co host,

Tom:

Tom Schneider

Michael:

Michael Albaum.

Emil:

So in today's episode, we're going to be talking about how to find and vet an insurance provider. So let's hop into this one.

Emil:

Alright guys, before we hop in, let's talk updates, what's going on your real estate investing lives?

Michael:

So I had that six unit under contract I was talking about last time that fell out buyer couldn't perform, I was pretty frustrated with the whole contract of itself. I did a poor job reviewing it, but my agent didn't point out a couple pretty big ticket items that were included in that contract. And so I fired him this morning, and I'm gonna be placing that listing with somebody else. It was an uncomfortable conversation, but I think one that had to be had. And, you know, he asked me point blank, he says, What are you unhappy with the service? And I tell him, yeah, these are my issues that I'm having with it alone as independent issues, not a big deal, but kind of cumulatively, they cause me a lot of heartache. And the other thing I didn't realize is that I had signed a year long agreement with this listing agent, which goes against every fiber of my being. But again, it was something that I rushed and didn't do a good job looking at. So anytime you're signing a listing agreement with an agent, be very particular about the length of time in which that contract is enforced for.

Tom:

I love these episodes, and kind of respect Atomy stuff, putting a lot of these learnings forward to limit people in the future for making them. So looking back retrospect when you initially vetted this agent, and we'll do another episode, you know, more specific on the agent side, but what would you have done differently? I mean, one, you mentioned the one year listing agreement, what else anything else you would have done to suss out this subpar?

Michael:

Yeah, he was a recommendation from my property manager who I like quite a bit, and I was kind of looking to get it done pretty quick. So I said, Okay, sure. Yeah, we'll go with your guy. That sounds great. They've already got a pre existing relationship. I didn't think about this other group that I already had done a bunch of deals with, because my agent friend had ended up he had left that group. And so I said, Oh, well just use him for everything. And then he left the picture. So I didn't really have a good person to reach out to so this is a personal reference. Cool, just go that route. But absolutely, I should have interviewed some other folks. But I was looking to get it done too quickly. So didn't listen to my own advice. And yet again, it's come to bite me in the rear. So I don't know why I think that'll stop happening one day, it just clearly is it won't

Tom:

Good. Take away. Good take away.

Michael:

Yeah. What about you, Tom? What you got going on?

Tom:

Oh, not a lot still waiting on this refi close at the Wheelock wine wine wine complaint complaints, snail mail, blah, blah, blah. I just listened to our last week's episode, kind of related kind of unrelated, we're going into another week of bad air and in California, these fires and my wife are playing around the idea of Oh, you know, what if we you know, live or move around a little bit and one idea remote real estate invested kind of relating is like what if we like bought a house in an area that we are bullish on investing, you know, bought one probably more of appreciation play in like a Raleigh or like a Columbia, South Carolina or, and we go and live in it for like six months or a year, rent our house here in California, and then come back to California. And we also have, you know, turn that other one into a rental. So playing around with some kind of like exotic owner occupied slash turned into a rental slash bounce around, we have a son right now and be fun to get a place that has a big yard to let him run around at least for a year in his life. And who knows, maybe just fall in love in Raleigh, it's probably unlikely, but it's not out of the realm of possibility of doing some exercise like that. So

Michael:

Do it.

Emil:

Tom, we had someone on the podcast who basically did this like not in as short of a timeframe, but moved from city to city picked up a rental house hack did live there, and then change it to a rental when he left that city. So not a bad strategy.

Michael:

He just left this slug trail of rentals in his wake.

Tom:

I love that idea. And it's like your cities are fun. Yeah, go from each one to one.

Michael:

And not only that, but new cities are fun. And depending on the purchase price, too. It might never make sense as an investment property when purchased as an investment property. But if your interest rate is such that your your financing is such that it's so much cheaper, you may have just created the potential for a rental where there previously wasn't one.

Tom:

Yeah, exactly. And I think that really drills The advantage of this kind of strategy is you're like you're going sub 3% on these like awesome fixed 30 year products and buying it as an owner occupied because that's what you're initially going to do. And then your slug trail just moves away. And then you still have the remnants of this really historically awesome financing. And a house that normally where you wouldn't be able get the cash flow since you're having such incredible rates. So I don't know. We'll see. We'll see. It's a pontificating.

Michael:

Nice

Tom:

thinking about it. Yeah. Anyway, that's my update.

Michael:

And Emil?

Emil:

An update for me. We put an offer on a four unit property yesterday in St. Louis, where I'm looking right now and it was priced really well it's priced under 100 K, which is really rare to see the neighborhood's okay. Probably like a two star neighborhood rating if we were to equate it on, like Roofstock scale. But 700 k newer mechanicals, right like new new h fac new water heater, new boilers. But the insides of these apartments are a little dilapidated. But that seemed like an easier first project and kind of like full gut rehab and like new mechanicals and everything, so it kind of seemed like it was it was gonna be the right property. We put an offer in yesterday. But the seller I got noticed today that seller went with a different offer. So onto the next one.

Michael:

Are you going to put in a standing backup?

Emil:

I don't even know what that is. So no.

Michael:

You should put a standing backup offer is basically saying, hey, if that buyer can't perform, I'm willing to still buy it at your offer original offer, or some other offer. And so the seller knows that, hey, okay. I don't have to go call these for other people that also submit offers, I can go to Emil, because I know what his offer is. And it's still good on it.

Emil:

Yeah, I should just talk about that. We just left it as let's keep our eye on this. And if it falls through, we'll go back. Yeah.

Michael:

But the standing offer is nice, because it kind of separates you from any of the other people that are also doing that. And you're saying, Yes, I can perform. Yes, I will perform, should it become available.

Tom:

Love that idea?

Emil:

Is there any let's see, I find something else. And I get into offer on something like it's not like binding?

Michael:

No, not by any means. Not by any means.

Emil:

Well, then I have a nice action item after this episode. Thanks, Michael.

Michael:

You’re welcome man. And so kind of to Tom's question. What would you have done differently? Or if anything on that knowing what you know, now?

Emil:

Nothing I think…

Michael:

Perfect.

Emil:

I made an offer where I was comfortable. I made an offer where I was comfortable and let the chips land where they, lie where they land? It takes 2 to tango? I don't know.

Michael:

There is no crying in baseball.

Emil:

So yeah, no, I felt good about it. It was a I hadn't made an offer in a while. So it's good to just at least start making some activity and start pushing through again. So

Tom:

That's a funny little dopamine. I'm probably like six or eight months since I've made an offer. It's like, oh, man, we would feel pretty good right now submitting an offer.

Emil:

It's also nerve wracking. And even though you've done it a bunch, right, when it's been a while and you're back at it, like you look at your spreadsheet numbers look good. Still. There's something about like, going and actually making an offer. That's a little nerve racking. I don't know,

Michael:

I remember the first offer I made. I was like, I hope they wait so backwards. Yeah,

Tom:

I know. Yeah. It's like, Oh, I'm a sucker if they you know, accept it right away. And I know, right? Did your work? You're okay. Right. What a funny psychology.

Emil:

Yeah, of it all hundred percent.

Michael:

Emil, I love that you wouldn't change anything. Because I think we talked about on previous episodes, we should be really looking to evaluate the decision making process, not the outcome. And so it clearly you did your homework, you felt good about it. And the fact that you wouldn't do anything differently means that I think you executed really well. And now it's out of your hands.

Emil:

Thanks, man. Yeah, it wasn't like emotional at all, like, here's what I can do, here's what would be a good deal for me, and you lose enough offers. And it's just, it's on to the next. Right, so it's all part of it. So let's move on to the topic for this episode, which is how do you find and vet an insurance provider? And we're gonna start with when in the process? Do you go out and find insurance? Is it before you make offers is it during escrow, I can actually leave this one off, I don't have a ton to add to this episode, not my area of specialty, but I can add to this one. So for me in the past, I have typically looked for insurance once I have a property under escrow, that's when I'm going out and looking for insurance. I don't really do any upfront before I go and buy any properties. What are you guys?

Tom:

Yeah, so the first thing I'll do is get kind of guidelines on estimating how much insurance is going to be. And I would just put into two camps like a property is either in a zone where I'm going to have to pay extra because maybe it's a hurricane or tornado or or it's not, it's an it's an area that's relatively low. So just for like proforma purposes, have a rough idea of where I'm going to be paying for insurance. And this can be talking to other investors, forums, whatnot, and actually selecting an insurance provider. Oftentimes, I'd say your first deal is like, when you add extra properties, a lot of times you're using a similar and maybe there might be some cases where you're not, but I agree with Emil, and that it's something that I won't spend a lot of Midnight Oil, there probably is some improvements you can get on pricing and going through a lot of different ones, but it's kind of similar pricing, there's not going to be just these wild swings, unless in some areas where there is like hurricane stuff, but generally speaking, it's a pretty commodity. So it's it's similar answer to him, you know, we're all get something in escrow. And specifically, I already have insurance providers that I like, just layer right on top, Michael?

Michael:

Yeah, perfect. I'm pretty similar. I'm also waiting, I think partially because it's such an like, I'm not gonna say easy task, but it's a fairly quick task to have done. This isn't a very long process. So I can be on the phone with an insurance rep in the morning and have a quote by the afternoon and so it's not something that takes a long time that they need a lot of documentation for and you also need to have some specific property information, some property specific information, to answer some of the questions to get an accurate quote, like, what is the year of the roof? What is the year of some of the mechanicals? When was the property last rehab. So if you don't know any of those things about a property, it's tough to get an accurate quote for. But Tom, I'm actually going to disagree with you on the commoditization of insurance. I think that there are some vastly different rates out there from different carriers. And so I think it's really important to kind of compare and contrast them, I was chatting with my commercial insurance broker.

And he was telling me that if we had to go place my current portfolio with a different carrier, it would probably be about a $15,000, delta in coverage. And for like, less coverage, for less good, I guess that's a, that's a phrase coverage. So I think that there is a significant difference between carriers. And of course, there's a large portfolio. So those numbers are magnified. But even on single family homes on single units, or duplexes, there are carriers that do this stuff really well, and that are hungry for growth. And so they're going to be priced really competitively. There are other companies that are not looking to grow are not interested in that risk, like a property or a certain style of insurance is called a risk. They're not interested in that. And so they're going to price it because they don't want it but they're happy to take your money if you're willing to give it to them. So kind of like general contractors, if they're really busy, they're gonna throw out a ridiculous high bid, because they don't want the work. But they're happy to do it for that price. Same thing with insurance carriers. So I would definitely look to interview several different and get several different quotes. And we're going to talk here on this episode about how to do that effectively here in just a little bit. I

Tom:

I have no come back. I think you're right. I mean that in the sense that like once you have a carrier that you like, it's pretty plug and play. But some of the other like big moving variables is like deductible amounts, which we'll talk about a little bit more is there can be some weirdness in the way that they're applied. For example, if the premises occupied versus vacant, we were actually talking about before the episode that I probably need to change my insurance on just looking to improve it and that I haven't changed in a while or shopped around and probably some shekels to save and some liability to limit But anyways, Michael, good challenge, and you win. All right.

Michael:

I've won the day.

Tom:

It was a test and you pass.

Emil:

Tom, you bring up something good that I forgot to mention is like getting an estimate first, obviously, like in order to make an offer, you should not like have a an assumption for what his insurance is going to be ballpark estimate. So that is definitely a good point in like putting a ballpark. And I think you mentioned a couple ways to find that. So good point.

Michael:

Yeah, just to piggyback on that to Emil, Tom, you bring up an amazing point that there are these outside coverages that are not part of a standard insurance policy. And for everybody listening, those are typically going to be flood, and earthquake are going to be two separate policies that are not going to be covered on your standard policy. So if you are purchasing a property in a flood zone, or in an earthquake zone, be aware of that. And that can be found out by simple search, you know, flood zones in this area, or earthquake zones in this area. And if you plan on purchasing those insurances, there's additional costs there. And most lenders are going to require that you're going to carry flood insurance, they are not going to require you to carry earthquake insurance for the most part. And so talk with your lender about what it is that they're looking for. And in coverage. So hurricanes kind of tricky, because the way that the insurance works is typically based on the initiating events. And so if there's a flood, if the property receives water damage, as a result of the waters coming from the ground, they might not cover that could be called considered a flood. But if you left the window open, and then the rain got in, I don't know, I think it's important to make that as is their separate hurricane insurance?

Tom:

I believe there is and I think it's also extremely expensive. I remember a couple of years ago, Roofstock He was like a different investor that I knew there was flooding, and they didn't have flood insurance. And the house happened to get hit by a tree. That was I don't know if it was moved by the flood or whatnot. But they were able to argue that it's the tree that hit it. Like it wasn't the flood, it wasn't the flood, they're able to collect on their policy. And I mean, the water I think was going to cause you know, massive trouble for the house. But since the house got hit by a tree, they are able to be okay and collecting insurance to fix the property. But if it had not, it's like a funny thing. If there's like disasters, you're just like rooting for certain things to happen. You know, to be able for your insurance policy.

Michael:

We always used to joke, you know, in the business with a lot of clients and they're like, man, I don't want to put sprinklers in my building because I want the thing to burn down because it's like guys, like don't tell me this. I'm the wrong person to be having this conversation with but it's pretty funny. I get what you're saying.

Tom:

And also just you know, we're not taking lightly like the really tragic stuff with this happens with some people with these workings but it's just crazy with insurance. How one little way of your house getting damaged versus another if the waters is running into it. Oh no, they're not going to cover that. Oh, with a tree, wacks it. Oh, there you go. Now you get full coverage. The other than Sandy is the right word, but just kind of weirdness of it all.

Michael:

Yeah. So I think this begs the issue of go talk to your insurance rep, whoever that might be, and look to get a very clear understanding of what is covered, and what is not, especially based on the zone that you're in. And so be armed with that information, Hurricane zone, flood zone, earthquake zone, as you are going to look to get quotes,

Tom:

I think, well, this is an episode like just on floods and hurricanes will bring someone in FEMA or something. So anyways, future episode, let's we'll continue on.

Emil:

Alright, so let's segue into how do we actually go out and source different insurance providers wants to take first crack at that?

Michael:

The interwebs. I like online reviews and searches of different carriers and providers. And a distinction I think that we should make here is the difference between an insurance carrier or an insurance agent, or an insurance representative or an insurance broker. So a broker is kind of like a mortgage broker, and that they might not work for a specific company, they'll go out and shop the market and find a good product for you. Again, just like a mortgage broker would, and insurance agents often will work for an insurance broker. And so they're just kind of like a real estate agent. And so those can just typically be employees of the brokerage. And so but you can also have direct agents that work for a carrier themselves, like if you call up State Farm, you're going to talk to an insurance agent, but they're only going to be able to sell you State Farm Insurance. Now, they might be able to sell you something else if you don't fit into their program. But traditionally, they are going to try to place you into the State Farm program.

So you can have agents that are independent, you can have agents that are work for specific companies, and go back all of our listeners to go back and listen to the insurance episode we had Nick Aube on. He's an insurance broker, I think is what the term he coined himself. And that is Episode 26, where we talk about insurance and insurance needs of investors with Nick Aube. So he talks about the differences in insurances and some terminology there. But so it's I think it's hard to make that distinction. And understand when you're calling someone, what type of insurance they are going to be looking to sell to you, whether it's direct from that company, or it's they're going to go out and shop the market on your behalf.

So all that being said, if you already own a property, if you own your primary, you can just start with the insurer of your primary, if you're satisfied with that insurance, just like for lenders, if you already have a preexisting relationship, wherever you do your banking, you can work reach out to those lenders to start, then online reviews are really good for folks both of brokerages, as well as companies specifically, but also take that with a grain of salt, because typically the people that are leaving reviews are the unsatisfied ones, the ones that are really pissed off. So again, take it with a grain of salt, but asking for referrals and references from online forums from you know, Bigger Pockets. Or if you're in the Roofstock Academy, we've got a whole list of vendors that we're putting together for everyone to utilize. So ask people that you know that have done what you're looking to do who they've used. Wow, rant over. Sorry, guys.

Tom:

I'm going to synthesize the rant a little bit of the way that I think about it, I would think about this for any type of vendor that I'm adding at the top of the hierarchy would be personal references, you know, not the end all be all, but definitely my favorite way of referencing any type of vendor insurance. The second layer down would be professional references. So if I'm working with a lender that I like, you know, hey, do you guys have any authors and you know, whatever, an agent or a property manager, that would be kind of a tier two way of sourcing a level three would be forum so our friends at bigger pockets have awesome discussion board. Roofstock Academy has a private Slack channel, the people are popping in recommendations and experiences all the time. And then lastly, at the bottom would just be the the old Google search. So to paraphrase personal references, professional references, online forums, and then general research.

Emil:

Awesome. We've mentioned it I think on the last episode, asked the other people on your team for references for other people on your team. So ask your property manager for an agent or insurance or lenders so you can you can always ask the members of your team if they have any references, if you don't know any other investors in that area.

Tom:

Yeah. And on that team, like specifically, your lenders often working fairly close within their network. They have insurance anyways. Sorry, go ahead.

Michael:

I just want to take a moment to address everyone talks about the team so often, like us included, and I think I just want to put it out there for everybody listening in case they don't know. This is like a very informal thing. It's like my team has jerseys with the team name on it.

Emil:

You don't? My team, we all have the same jerseys. Yeah, we have our nicknames on them!

Michael:

Oh dude, I am severely lacking. I just think it's so funny because we always hear about the team. And when I first started investing, I was like God, like, I don't have money to pay my team players. I don't understand, but it's just a very informal relationship. I use the same lender as my I can there on the team, I use an agent, I can pick up the phone, and they'll answer Oh, hey, Michael, how's it going? If that's the relationship you have, that's probably someone that's on your quote unquote, team. And so I just don't want people getting bogged down with, oh, I have this formal relationship. And I interviewed this person. And I asked them formally, would you like to be on my team? It's, it's not like that. So for anybody listening that thought that we can just clear that up and hopefully ease a little bit of heartache.

Emil:

It's a good point.

Michael:

Thank you.

Emil:

All right, let's keep it moving. So the next part that we want to dissect is, what are the questions you should ask, as you're vetting these different insurance providers to make sure you're getting good insurance? And that you're covered as much as you need? Do you guys have any tips here? For our listeners?

Tom:

Sure. Sure. Sure. So in the same way that I would categorize different lead sources, I'll categorize the high level types of questions that will ask the lender, I'll ask questions about the business, you know, how long they've been? Do they have a lot of different branches? Like at what areas? Do they do insurance in? Not every insurance company will do insurance everywhere. Do they work with a lot of investors? And then maybe go into some of the specific product details? What type of properties do they provide insurance on? Like, is it do they do like multifamily, small apartments? SFR? Maybe like a makeup of their typical type of customer? Like, are they doing a lot of work with investors, I would also ask questions around communication. So you know, who's the main point of contact? What's the best way to get a hold of them? And then get into the money related question, I'm stealing all the content from Michael. So I'm sure.

Just also Michael's way more knowledgeable on this stuff. So he's going to have an easier time coming in and layering in extra good nuggets. So my other category would be around rates, and criteria and performance. So do they have various rates as it relates to deductibles? And do how do they value the house? Is it replacement value as an actual cash value? Do they have any discounts as it relates to doing in bulk, or, you know, adding on other products, and then the process of how claims are handled? So Michael, I'm gonna let you keep running with it before I pick all the good stuff. But even though you are gonna have good stuff, no matter what.

Michael:

I think, a super good outline an overview. So I think it's also important to understand again, who you're speaking to, and are they a direct writer? I mean, are you talking to like a State Farm type of agent? Are you talking to a broker who can shop the market, they're likely not going to be able to answer these questions. If if they're kind of a broker, you're gonna have to wait until they get a quote, for a specific carrier to start talking about some of these companies specific questions, but they could tell you absolutely, who they work with a lot. And something that I've realized after dealing with a couple outrageous claims is, it's really important to ask them if they're a broker, and they give you a quote for a specific insurance company, how much of their business as a brokerage comes from that one insurance company, because what I found is that there are agents that will favor insurance companies, because they're kind of in cahoots, so to speak. And so they'll want to write a lot of business with this carrier, because the carrier will give them good commissions.

And so it might not necessarily be the best product for you, it might be the best product that they have available through that brokerage, but it might not be a good fit. And so you want to talk to that's why again, can't over stress this enough, you want to talk to multiple agents, multiple brokerages and see what insurance companies different brokerages have available to them, because some brokers don't even have certain carriers that they can't write with. And so getting an idea of who they even are eligible to place you with is going to be very helpful, in addition to understanding who the best carriers are for investors in the area for your specific kind of risk. So if you have a single family home, go look to understand that market who's writing the best single family home policies out there, and then go look to find a broker that can write with them, or see if they'll write direct and you can call the company directly.

Ask them about what their insurance rating is, you know, once we get to the company level, ask there's a rating system out there best and then a&m, I think it's Standard and Poor's, I think are all rating agencies. And so they're going to have a letter grade associated with them as a carrier. And so we're gonna want to understand just what that rating is. And then of course, asking, like Tom mentioned about discounts a big one and a common one is a multi policy discount. So if you have multiple policies, whether that be your auto your home, multiple investment properties with them, that can be great to ask about and then asking about a discount for years in which you are claim free can also be a nice one like All State, I think is someone that does that for auto insurance. Don't quote me on that, but I think I've seen their advertising on that. So asking about what discounts you're eligible for what discounts exist, and then asking about if they're, if you're able to grow with them with that same insurance company, I think are always to position yourself to win.

Tom:

Hey, Michael, for those rates do want to do a quick run through of like key decisions just talking very quickly about deductibles and replacement value. And, and I'm just looking at a spreadsheet of different rates, like what are those mean?

Michael:

Yeah, absolutely, it's a really good question. So the deductible is the amount of money that you have to pay as an owner out of pocket before the insurance will come into effect. So let's say I have a 20 $500 deductible and a tree falls on my house and causes $5,000 in damage. Well, if that's a covered loss, I can submit a claim to the insurance company and they'll come out. And they'll say, Okay, yeah, it's $5,000 claim, I get the bid to have the work done to repair the damage. If it's $5,000, I'm on the hook for the first 2500. So the insurance company is going to cut me a check for the second 2500. So changing the deductible changes the amount of we call it in house risk that someone is taking on themselves. So if I lowered that deductible to $1,000, I would pay the first thousand and the insurance company would pay the next four, again, in that $5,000 damage example.

And so for that lower deductible, I'm probably going to be paying a higher premium. And a premium is just the annual cost of the insurance that I pay to the insurance company or carrier. So lower deductible, higher premiums, higher deductible, lower premiums, but I would say look very closely at the difference in premium for a significant change in deductible. So I found, for example, that, you know, changing my deductible from 1000 to 2500, only saved me like 60 bucks on my annual premium in one example. And so it wasn't worth it for me to take on the extra 2500 in in house risk for 60 dollar savings a year. If we do the payback time on that, let's just see run at 1500 divided by 60 bucks, that's 25 years to get that premium savings back to offset the extra risk that I'd be taking in house. And that's a personal decision that every investor is going to look to make about Okay, how much risk Am I willing to take on personally and what deductible makes sense for me.

Then the replacement value versus actual cash value? These are two different types of policies. And so you want to look to understand, like you mentioned, Tom, what type of policy Am I being quoted is the replacement value and actual cash value. These are often seen as acronyms on the policy as RC for replacement cost, or ACV, which is actual cash value. And so most insurance companies, for the vast majority of single family homes out there, you're going to see a replacement cost or replacement value policy. But in a lot of commercial buildings or bigger buildings or older properties, they're only willing to write an actual cash value policy or an ACV policy, because it's just so expensive to insure the building to replace it like for like, because it's older construction typically is going to be beefier and more components. So it's just more expensive to insure. So they'll insure for an actual cash value, which is basically accounting for depreciation of the structure itself. And so the dollar amount of an ACV policy versus an RC policies typically going to be less. And so talk to your insurance agent or provider about what the difference is in those policies mean for you as an owner when it comes time to file a claim or for dealing with the claim, because they are vastly, vastly different.

Emil:

Dang!

Tom:

Great, great overview I dig it, I was looking through on some of my policies that I have that I may be changing out in the not too not too distant future is my deductible moves depending if the property is occupied or vacant. And Michael is doing give me a little bit of coaching is asking me, Hey, is that does that start right away? Or is there a grace period from the time that a vacates and it's, you know, my answer was? No, it starts right away. And it's the trigger to go back and get some updates. You know, a cool thing about insurance policy is I think we might have talked about it, maybe last episode is that it's pretty easy to change out in that unlike other types of these relationships, like a lender, you can basically sign an insurance policy and at any point in time change that and Michael, please correct me if I'm butchering that explanation, and word it better go.

Tom:

No you're spot on. It's just a it's a very fluid policy and agreement in that if you are unhappy or you want to change your policy mid year, they'll refund you the prorated amount. But depending on how you pay if you pay in full, you pay the full premium at day one, you decide that you want to change carriers six months down the road, you'll get refunded that six month premium payment, and then you can go place new insurance. Now you want to be very careful on the timing of this such that you don't have any insurance lapse because Heaven forbid you're canceling your insurance on a Monday, and then you place new insurance on a Wednesday. Murphy's law says that something's going to happen on that Tuesday, right there's gonna be a fire tree or something. So make sure that you don't have any lapse in coverage. And so be very communicative with the old carrier and the new carrier about when you want to bind that policy and having them seamlessly transition is really important. Same thing for your lender, your lender is going to require notification that you're changing, the insurance companies will take care of that notification. But you really, really, really, really, really want to make sure that you're having lapses in coverage. And so be overly communicative with all the parties involved, about the dates and timing of when that change is going to happen.

Tom:

And that feature of being able to change it out, it puts less pressure on me to find the perfect policy up front, like, oh, plug something in that is good, like not letting great get in the way, if I find a house that I want to buy, great, awesome, move forward. And I know that I want to tease out, you know, getting that best rate and best coverage, that's something I can do later, I don't have to stress myself out and making sure, but great be the enemy of good on that initial coverage.

Michael:

Yeah, it's a super good point, I just changed up my insurance program for all my California properties. midterm, I said I was getting quotes for renewal. And that's something you'll get every year, the insurance company will send you out a renewal package, which basically has Okay, this is what your new rates and new coverages look like. And those will tend to go up over time, just because of inflation, cost of materials goes up. And so you'll get the needed coverage will also go up. And then of course, the premium that you're paying will also increase. And so I was just really dissatisfied with the agency that I was working with who had the policies in place, as well as the coverages from the carrier's themselves. So I called up a good buddy of mine who's an agent, and I said, Hey, quote this for me, and he got me some really competitive quotes. And so I moved everything over to him. And now I'm getting refunds from those carriers because I cancelled mid mid term.

So don't be afraid to quote unquote, fire your agent or fire that insurance company if you're not getting the service or the coverage that you feel you need are entitled to. And again, remember these folks work for you. And they are in business to pay claims. That's an insurance company's one job. And if they are unable to do that, well, well, then why would you be working with them?

Emil:

And so on that note, what are some red flags people should be on the lookout for, as they're vetting different insurance providers? And you guys might have already mentioned them, but maybe just summarizing them here.

Michael:

Yep, poor claims handling record, I think for me is is a big one, if you have to fight tooth and nail with your insurance company to get paid out on a claim, it's not worth the extra savings that you might see on your premium.

Emil:

How do you find that out before it's too late, though, online reviews, and again, kind of taking those with a grain of salt. But when they're talking about claims, specifically, I think that's one that we can look at. And also talk to the agent or carrier about what their claims handling process looks like. And what their what their rating is what their insurance rating is, with, with some of the rating companies out there. They should be touting their claims handling record, if they're a great carrier. And I'm personally having been through some awful claims and happy and willing to pay more for that coverage. Because I know it's going to get handled, not if but when I have a claim.

Tom:

It's great point I like that. I would ask about the renewal process. And I went through renewal a little bit ago just kind of accepting what they what they're sending back, which his answer is I'm gonna go be a little more proactive on this, you know, went through the process, there was like three different websites like one for paying one for site, it was super kluge. I went through this process, I paid them for all different properties that I have. And then I start getting notifications from my lender that my insurance expired and that they have paid for lender provided insurance because insurance companies will do that. But the problem when insurance companies do that is they're they're basically going to be like not a good shopper at all, and just give you very expensive insurance.

Michael:

So wait, Tom, do you mean that the lender will do that the lender will go out and buy insurance because…

Tom:

The lender buys insurance.

Michael:

Because you said insurance companies will do that.

Tom:

Sorry, lender. Thank you, thank you for correcting me. So the lender, they'll do lender will purchase insurance on your behalf and just hold the payments in escrow. So I, this happened to me just within the last few weeks where I you know renewed my insurance policy, which is an okay policy, and then I get notification from my lender that they're going to shop for insurance like there were some dropping the ball and communication. And at that same time my insurance provider mailed me back a check for the amount that I had paid to renew my insurance, and it's just a quagmire, just a little bit of a mess right now, which is that is on my list of things to do is clean up that mess. So that the renewal process just making sure like I'll probably put in like a negative review, just in this has been just such a clunky process. So asking him about the process of renewal and looking at the new rates and making sure that is a smooth process. So that would be mine. And then also I mentioned before looking at moving deductible rates like I don't like that is something I didn't look into when initially selecting the provider. So you know, having someone you can kind of who is knowledgeable in this space like Michael is a great example to kind of bounce these ideas off of is a helpful resource to have.

Michael:

And something else I would look for too is is the person you're speaking with, either at the company direct the carrier directly or broker willing to educate you and kind of hold your hand through the process if you're not super familiar with insurance, because I think it's not something that's taught in school, you don't learn about it. We covered you know quite a bit in the academy about some things to look out for. It's some questions to ask to arm you to go have those intelligent conversations. But I would argue that an agent's job is split half between education and half insurance placement. And if they're not willing to take the time and walk you through and talk to you about some of the coverages that you're looking that you should be considering or looking for. That's kind of a red flag for me. And I've had conversations with agents. And this isn't me tooting my own horn, but I've structured some of the policies in certain ways.

And they're like, Oh, well, it's a really good idea. And I'm like, you should be telling me what the good ideas are. Why am I coming to you with that, like you do this for a living? So I would say, you know, look to find someone who's knowledgeable and who's willing to walk you through this process.

Tom:

When you get a quote, Michael, you asked them for like three different versions, like on like, okay, a 2000, and 1500 and a 5000? Is that like, pretty standard practice?

Michael:

Yeah, exactly. And so I'll build out a skeleton quote of what I want as kind of a minimum, I'll send it to them. So it's not a back and forth quoting thing, we'll look to get a kind of massage to where I want it to be. And then yeah, I'll do exactly that. I'll have the lowest deductible, your next highest and the next highest, just to see what the difference in premium is. And then of course, we can look to massage, different line item coverages at different values, if they are movable, to see how the premium gets affected, because you want to look to see what levers are going to have the biggest impact. And I think so often, unfortunately, deductible isn't one of them. It's typically the underlying coverages themselves that are going to have some of the biggest impact.

Tom:

Love it.

Emil:

Great advice. All right, guys. Lots of good information here. I think it's a good spot for us to wrap this episode up. What do you guys think?

Michael:

Totally. I think if anything, you know, wasn't making sense. Please go back, give it a read. Listen, there's a lot of stuff in there. And so you know, take notes, listen to it again. And don't hesitate with any questions for your agent for your carrier. Again, they should be playing an educator role.

Emil:

Not to make this sound too much of an ad but as always, there's only so much we can cover in a 45 minute or one hour episode. And Roofstock Academy which is our coaching and training program for investors can get a lot of your personal questions answered. Talk to Tom, Michael, myself, other investors on like really specific situations. So feel like you need more help, or just want to, you know, improve your real estate investing, go check out RoofstockAcademy.com. And, as always, make sure you guys subscribe, leave us a review. Let us know what you think of these episodes and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

Tom:

Happy investing.

Our Top Tips for Finding and Vetting a Good Lender Sep 28, 2020

In this episode Emil, Tom and Michael discuss the most important factors to consider when looking for financing.

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Emil:

Hey, everyone. Welcome back for another episode of The Remote Real Estate Investor. My name is Emil shour, and today I'm joined by my cohost,

Michael:

Michael Albaum,

Tom:

Tom Schneider.

Emil:

And we're going to be talking about how to find and vet lenders, a big part of your real estate investment team. We're going to be tackling each one of the key players in its own unique episode. And in this episode, we're going to be tackling the lender. So let's hop in.

Tom:

Hey just want to let everybody know we're running a special deal with Roofstock Academy. If you want to talk to Michael and myself or any of the Roofstock Academy coaches, we are running this program right now where it's $101 off with the coupon code SEPTEMBER. This is Roofstock Academy. It is risk-free, includes coaching, over 50 hours of lectures, the Roofstock playbook. So we have our templates for interviewing vendors, all kinds of information, plus a lifetime satisfaction, full refund guarantee. And on top of that, Roofstock will pay you to invest If you invest on the Roofstock marketplace for every transaction on Roofstock, Roofstock Academy, we'll pay you $500 for the next five transactions, individual properties. So that's $2,500 worth of cash back. The coupon code that we're running is September. The coupon code is September, and that's going to be $101 off your purchase of Roofstock Academy to make the purchase go to Roofstock academy.com.

Emil:

All right guys, before we get into the topic, some we always love to do what's going on in your world as it relates to real estate investing or not just what's going on, Tom, kick us off.

Tom:

Oh boy. Having some issues with mail stuff. So I'm refinancing my primary and I took the advice of opening a HELOC then. Awesome, awesome. To have that line of credit, but I closed it out just because my lender wanted to close out the HELOC, uh, to do the refinance. And I'm waiting on the mail for the letter saying that the HELOC has been closed out and I'm like kinda concerned. It's been like two weeks. And I said, they sent the letter. So that has really put me on hold. Cause I plan to use that HELOC to go, uh, do some more rental property fishing. Cause I have to close the HELOC, open the new refinance and open the HELOC again. So just going through that rigmarole. So right now it's waiting on the snail mail.

Michael:

They can't email you or fax you that letter.

Tom:

I'm going to try it. You know, and another thing lenders will sometimes do is they have these third party, intermediary calls, I guess, is related to real estate investing. Also primary owning is they will have a third party company they'll call you. And then they'll loop in like a conference, call your bank and then they'll say, Hey, please confirm whatever your social, whatnot to confirm your you. And then they can get whatever answers they're looking for just over the phone. Cause they have you kind of authenticating for that third party confirm. So I'm trying to have them do that. And I'm trying to explain them that, Hey, can we do this? And might've kind of butchered my requests for them to do it. Hopefully can, but we'll see. I mean, that's a good question, Michael. I'm gonna knock down some doors trying to make it happen.

Michael:

Yeah. When they ask you to confirm your social, how do you answer?

Tom:

I, Oh boy. Get, get outta here, get outta here. I'm not getting my social.

Emil:

Almost got him.

Michael:

So close. So close. I could see you thinking about it? Like yeah, my social is.

Tom:

Yeah.

Emil:

That's never fun. All the like back and forth and forms and like

Michael:

Just jumping through hoops, it seems like it's not a streamlined process.

Emil:

Yeah. It never is. That's part of it. It's part of the game. So what about you Michael?

Michael:

Yep. So do to close on that six unit I'm selling in Cincinnati on October 7th. So hopefully that'll go smooth, knock on wood and then I'm actually listing a property for sale on Roofstock in Southern California. It's a rental condo that I own. There's some been appreciation down there in that market. And so I think I can redeploy that capital and go somewhere else. So I'm going through the certification process as we speak and also in the process of refinancing my primary as well. So I am not looking forward to that rigmarole as Tom mentioned, hopefully it's a bit of a smoother process

Emil:

I just refinanced like a month ago. And I'm in that process where the bank is having, it's like transferring the servicing of the loan to somebody else and nobody can give me a straight answer about how I do I just set up auto pay. Cause I don't want to send checks in the mail and stuff. And it's just Ugh. The joys of new lending.

Michael:

The fumbled handoff always.

Emil:

It's never smooth. It's never smooth. Yeah. But anyway, all part of it, all part of it.

Tom:

Anything else going on Emil?

Emil:

Yeah, I got two calls yesterday from some mailers I've been sending out the last couple of weeks, both people who reached back out to me, they didn't want to sell the property that I was mailing them about. One guy actually had a property that's on market and he's just like, Hey, I have this property. It's on market. If you're interested, I'm good. It's a little bit too big for me. And your price is a little high. And then the other woman, same thing. She, I was contacting her about a four unit, but she's like, I have this 18 unit and I want 1.2 million. I was like, that is way out of my range. And she wasn't top dollar, like I'm fishing for deals. That is a little bit out of what I'm looking for, but I was at least happy to have some people contact me back. And hopefully I think they both mentioned they'd be looking to sell those properties within a year or two, just not right now. So hopefully when the time comes they have my information, you know, we had a good call and try to be friendly and hopefully they call me in a year or two, but it was cool to at least start getting some response from those mailers. So happy about that.

Tom:

Seeds planted.

Emil:

Yeah.

Michael:

Did you feel like you were going to the car dealership, like a Toyota dealership, like getting, going to get a Corolla and they were like, yeah, we don't have this car, any Carola's for sale, but we have this pretty cool Ferrari. If you'd be interested, it's like, that's not what that's not at all. But I was asking about or interested in

Emil:

I kind of had the expectation that it wouldn't be like people just calling me like, yes, here's my property. And it'd be like just this perfect thing. Right. I knew it would be like people calling and, you know, want to talk and like kind of spinning the wheels. But I guess my expectation was kind of, yeah, just sell me the property I was calling about. But anyway, at least just planting some seeds.

Tom:

On that shooting, the breeze is it's pretty funny, culturally like different areas, like depending on who you're on the phone with, you know, like talking to some people from probably like California, New York, pretty choppy, like average call duration for this type of work. Oh, I don't know, like five minutes or something, then start moving down into the Southeast, like expanding it out. I like the changing gears of both types of conversations.

Emil:

Totally. Yeah. Someone from California called me. It'd be a real fast conversation, but uh, this is in the Midwest where people are super nice and like, it was nice. It was cool to just talk to investors who are local and I don't know, just get on their radar and chat with them a little bit. So it's cool. At least getting some response.

Michael:

When I was first buying properties out in the Midwest, I went and met with a property manager and I wanted to start asking her about questions and stuff about business related. And she's like, well, Michael, we haven't hardly had a chance to visit yet. And I was like, visit,

Tom:

You got to break bread, Michael.

Michael:

Yes, that's right. That's right. And I was like, this is cool. It's a little bit different. So it's funny when I talk to people, investors who get frustrated with like timeliness of working with other professionals and there are parts of the country, I'm like some folks just operate at different speeds. And so I think it's important to ask the question of like, Hey, if I email you, how long should I wait until I hear back? Because it standard might be three, four days, right? Where I think we're on the West coast and East coast, I think are used to a much timelier response time. And it's not someone being rude. Isn't not someone forgetting about you. It's just that they operate maybe at a different speed and there's nothing wrong with that. We just have to understand what it is, right?

Emil:

Yeah. Total different pace of life. For sure. It was nice. Like you always say people from the Midwest are super nice. It is very true. They're super nice. It's very true. All right. Let's get into our episode. So the three things I have outlined here for us to talk about in terms of funding and bedding lenders is the first thing we're gonna be talking about is timing. So when in the sequence of your investment, should you go out and start looking for lending? How do you source lenders? How do you find them? And then last part of this episode is going to be vetting and certain questions you can ask to find the right lending partner. So start with that first one timing. When in the sequence, should you even start looking for a lender? Is it before you even start looking for properties? And once you have a property under contract, so who wants to take first stab at time?

Michael:

Go ahead, Tom.

Tom:

I could take an early, early stab at this. So what's cool about a lender is you can plug them in either. If you're buying all cash, you can do this after the fact and it doesn't need to be done. But if you are going to be purchasing with financing, this is something that you want to do super early for a couple of reasons. So one of them would be, I would do this before you even start evaluating properties. Just kind of work in parallel on these two tracks. The reason that you want to do this, it's a couple. You're going to one, know what your purchasing power is. So this is going to inform sort of your buy box on how expensive a property you can afford, or you can buy multiple properties. I'm going through that exercise of getting preapproved and all that is going to inform you on that information.

The other one reason is it's going to make the transaction and everything much smoother. We've talked about before. One of the beauties of coming in with all cash is it can often lead to a much smoother transaction. If you are financing, you can make that transaction experience for everybody. A lot easier. If you have your ducks in a row, your lender identified, pre-qualified all, you know, you have all that in a row. So if you are buying with lending, doing that way up front, you know, way before you've submitted your offer already having that preapproval letter. But if you're planning to buy all cash, there's no reason why you can't go through the acquisition by it without cash, and then go through that lending exercise. So I'll, I'll uh, put, uh, in, in my response there, Michael,

Michael:

No, man, peanut gallery is on strike. You ain't get nothing out of us. I agree with everything you said. I think that's the ideal scenario, right? Where you can set things up to be executed on a very calculated and set timeline. I know personally I've done deals and have not got the lender set up in advance. I'll just start looking at deals and learning the market. And you know, I'll be two, three months out before purchasing wham get hit with a really great deal. And I was like, Oh, I got to jump on it. And so having done both the lender prep ahead of time and also lender prep kind of after the fact, it's, it's so much easier doing it ahead of time. And I don't think it's ever too early to start just having those very cursory conversations, high level conversations. I'm an investor I live in this state. This is where I'm interested in investing. And depending on who the lender is like geographically, where they are, that'll shift the conversation a little bit as well.

So if you're chatting with a national lender, it's going to be probably a different conversation then with a local lender of, Hey, I'm committed to growing in XYZ market. And this is, I know where you live. It's the local vendor versus, Hey, I'm looking at purchasing. And one of these five States, can you help me without, throughout that entire process or through any of those States? So just understanding the limitations and capabilities of the lenders is really great as well. And what kind of get in that later in the episode, when we talked about some of the questions you want to be asking, but I would say the more specific you are on your market, the more committed you are to a specific market, the more specific, and the earlier you can start having those conversations with local lenders versus you can go more high level with the, uh, with the more national folks.

Emil:

Do you guys go get preapproved each time? Like I think you guys mentioned this really smart to go get preapproved, to get everything lined up. I'd say before property one, subsequent properties, I haven't gone through the preapproval process. Again. I don't know if this is the right way of doing it, but I just knew that I got lending from that lender. Everything was smooth. All good. So I didn't do it ahead of time on subsequent properties, just the first property. Do you guys do it for each property? Curious before each property.

Tom:

If you're working, like what happens if you buy one rental property, you start adding, you start establishing a relationship with that mortgage broker and it could be not a, a full, you know, it could be just reaching out to them cause you've done several deals with them and you like them. They have a great operations team. They have great rates. You could just ask them the email, like, Hey, I'm looking at buying this and they already have, you're assuming your information hasn't changed too much. You can get just an initial check on your, your buying power. So maybe not the full thing, but as you start doing it again and again, and again, I'd say less intensive, especially if you have a relationship with a mortgage broker who knows what you're up to and you're background.

Michael:

Yep. I would totally agree. And just so everybody knows who, who, maybe isn't familiar with a mortgage broker, but a mortgage broker is just someone who goes and shops around at different lenders to find you the best product. Kind of like an insurance broker is going to go shop the insurance market and come back and present you with a few different products versus going to a specific lender, like a bank of America. If you're going to go to bank America, you're going to talk, you're going to get bank of America products. If you go to a mortgage broker, they might have, you know, seven or 10, whatever different products available to you. So just wanted to shed some light on that. And I totally agree, Tom, I think with the more repetitive you are with the same lenders, the easier it becomes. And so I'm with you and you'll, I only did it a handful of times to go get prequalified or preapproved. So I think it's also important to ask the question of your lender of like, Hey, you know, you understand my profile now going forward, what does this look like?

What do I need to be cognizant of? Because I think it can get pretty basic. It can get pretty easy to understand of what you will and won't qualify for depending on what your debt to income looks like. And depending on what the bone of value that you're trying to utilize on a purchase looks like. And so it always surprised me when people would like make offers on properties and they couldn't go get financing. It's like, wait, how did you not know that you're not going to qualify? Like you have a credit score of 400, like no, duh. So just be aware of what the lender is looking for. And then it makes it so much easier. It's you're not going to be surprised.

Emil:

And then you know your buying power, right?

Michael:

Yeah. You know, you're buying for that. Shouldn't be a surprise to you either. Like when you get that preapproval letter, I don't know. You should never be like, Holy crap. Like I either qualify for a lot or a little, like you should know.

Tom:

I've got a good point too, to make the difference between a prequalification and a preapproval. So I think this is there's some ambiguity in these two. So just as a quick disclaimer, between the two. So a prequalification is based on what you have submitted to the lender. It's a, a letter, to be honest, it doesn't really mean anything just because it's what you're telling the lender. A preapproval is a more involved process where the lender is running credit and getting verification. So those are the two different ones. I'm okay. Doing a prequalification where I'm spending information. Cause I'm going to be honest and straightforward. I mean, that's not something that you want to fluff around with because if you do embellish things at the point at which you actually needed the loan, the lender is going to find out the truth like doing there.

So it's, you're really just wasting everybody's time. So I'll do get a prequalification. I could do a preapproval, but I'm okay. So that's just a quick kind of disclaimer on the difference between a preapproval and a prequal. So pre-qualify, doesn't really mean a whole lot. It's what you tell the lender. And as long as you're being honest, that's great. It'll be the mustard, it'll work, pass mustard!

Michael:

Pass muster.

Tom:

It'll pass mustard.

Micheal:

But I think it's, I think it's, I don't think, are you putting a D on the end of that word? It's muster, not mustard, like the condiment mustard.

Tom:

I like, you know, effort, you know, cause you want to have a lot of effort, mustard. Okay.

Michael:

Uh huh.

Tom:

You can cut the mustard. It's really easy. It's a vinegar based condiment.

Michael:

I thought you would be peanut butter spreading that mustard. If I was a betting man.

Tom:

You can. It depends.

Emil:

And this episode has completely gone off the rails.

Tom:

The other reasons too early get your qualification or approval is you can get different rates. So you can go through this vetting process that we're going to talk about to make sure that you're getting the different rates. And it can be really easy to do this process once with one lender and say, Oh, I liked them and I'm not going to do it again. But honestly you can like save money by doing this upfront and doing it multiple times with multiple lenders. You wouldn't want to go through a pre approval multiple times, cause that is multiple credit checks. You know, that more kind of intensive process and doing multiple of them could be detrimental to your credit score. And that's something I would ask the lender like, Hey, is this going to touch my credit score in the process? So that was my one other point I wanted to roll back and doing it early is you can get rates from multiple lenders who are making the best decision.

Michael:

Just to piggyback on that.Tom, the way that I describe it to folks is a prequel is an interest in a lender to lend to you. A preapproval is their commitment to lend. And so I've also heard…

Michael:

Dating and engagement.

Michael:

That's right. That's right. So I've also heard that some lenders are actually do require a credit pull to get your pre-qual letter, which is the less intense. So I always say, thanks. No thanks. I won't go through that credit pool until I'm ready to actually pull a trigger on a mortgage because a lot of these prequel letters are only good for 90 days. And so if you go through that process, prequel or preapproval and they pull your credit and you do nothing for 90 days where they're going to have to do that again, to reestablish that qualification or that approval. So that's why I always say, find a lender that doesn't require a credit pull to get a prequal letter. That way you have the letter that says, Hey, I could get lending from someone once needed and then go get the approval from whoever you're going to do the mortgage with.

Emil:

Solid. Alright, let's move on to our next topic here. So it's how to source. And I'm curious if you guys go local versus national, do you have a preference and just in general, how do you guys source? Like where do you even start looking for a lender? That's a good place and resource for people.

Michael:

It varies. So a lot of times I'll ask my agent who I'm working with. If they have a good lender recommendation, and usually they will. And so I've worked with national folks on numerous deals out in the Midwest. They've also used a lot of local folks also out in the Midwest. So I like entertaining both. When I talked to a lot of students in the Academy, I talked to them about take three and just, it's super easy to start pick one that you already have an existing relationship with because you could have a checking account or savings account somewhere. Start there, see if they'll lend where you're interested, find a, a big national lender, see if they’ll lend to you and then find a local lender to wherever the property is. Start there and then dig deeper on finding more of the same.

If those one of those three doesn't work out. And there are really great resources to find fun. I mean, bigger pockets has a super thorough forum with all kinds of contributors and active members about lending and where to go and who to use. Google is just great. Getting reviews of investor friendly lenders in X market, or, you know, based on where you are, where the property is. And often I just cold call people, Hey, this is what I'm looking for. Is this something that you offer and just starting having a conversation with them? A lot of folks are really just starting from scratch, especially if you don't have, if your local bank, you know, your bank of America that you have your savings account with doesn't lend in Tennessee.

Tom:

Yeah. Under network is a great spot to start. I'll do a shout out to Roofstock Academy. That's our internal program that we have here at Roofstock that people can join if they want. One of the perks of your sec Academy is inside of this Slack channel, which is this forum amongst members and coaches. And I actually am doing my refinance off of a recommendation from one of the members in the Slack channel with Roofstock Academy. So worth checking out Roofstock Academy.

Emil:

I did the same thing. Yeah. Network is just huge. And you'd take everybody with what they say with trust, but verify. So you get that lead and then you go to your homework.

Emil:

Totally.

Michael:

Where do you look Emil?

Emil:

In the past, I have, since I've primarily bought my properties from Roofstock, I have looked through Roofstock’s networks, so Roofstock will recommend a couple of lenders and it's a good place to at least get started. Anytime you talk to one of our Roofstock experts, they can give you the contact information for a couple of different lenders who they know will lend out of state. So that's always a good place to start. I've found that there's a couple of these lenders who primarily work online, right? They're just like, they're like internet lenders and their rates seem to be better than national chains, like a US bank or Chase or whoever. So like, you guys mentioned, you find someone who's good. I've used them for a couple of loans now and that's been nice. The nice thing. Also, once you've done the homework and you've found a lender, you like is Tom, you mentioned it.

They have all your information. You don't need to do the two years of previous tax returns and for pay stubs and all this and that. They have all your information and it's a really smooth, easy process. So it's nice to do the homework upfront and then just piggyback that relationship for each subsequent deal. And that's been for residential now for, since I'm potentially looking at properties that require a commercial loan, which has five plus unit buildings. I'm talking to people who invest in those markets. Right. So just talking to other investors, Hey, who, what lender use investor-friendly agents. They have tons of lenders that they work with. So get their lists and start contacting each one. Yeah. Between those two, those have been the most helpful for me.

Michael:

Right on.

Emil:

Yeah. Anything else on sourcing guys? We can add here?

Michael:

I would just say, kind of above and beyond what we already mentioned. Networking. Just talk to as many people as you can and let them know what it is that you're doing, because I think it's pretty shocking how many people know other people that can be helpful to what it is you're looking to accomplish. So whenever I'm looking for financing, I'll talk to everybody that I have a conversation with that we're talking about real estate, Hey, you know, I'm looking for finding lending in this area for this type of building. If you haven't known anybody, let me know. And that's just not casual dinner conversation, right? Like, Hey, the chicken's really good. Oh yeah. By the way, I'm like, don't be that guy at that get together or a zoom call. Cause it was doing social distance still. But I just say, talk to everybody. You can and let them know what it is you're looking to accomplish what it is you're looking for.

Tom:

When you're talking to alumni on the phone, they're gonna try to close you and like lock it up and have you choose them and who knows, maybe they might get the best, but I would make sure that you speak to at least two or three lenders, like at a minimum. So, and you can be upfront with that in that initial conversation with them like, Hey, I'm evaluating you and a couple of other folks. So I'm not going to make a decision today. This is for, I'm just collecting some information to make the best decision. And I would let them know that because these guys are a lot of them are sales folks, right? They're trying to get you to originate your loan with them. So have that in your head upfront and you can be totally transparent and saying, Hey, this is a discovery call and not making any decisions today.

Michael:

Be strong. Don't give in. Some of them are really good.

Tom:

Yeah, they are.

Emil:

Yeah. Yeah. They'll tell you, you know, we have the best rates and we charge the lowest points and least fees and all that

Michael:

You lock in your rate today. It could go up tomorrow. So lock it in today.

Tom:

Yeah. Fear man. Fear sells. Yep.

Emil:

Yep. All those things. Alright. So our last thing we want to hit on on this episode is the meat. Vetting questions. What should you be asking lenders to find the best one? So…

Michael:

Who does number two work for?

Emil:

These episodes are becoming like South Park and funny movies. Dammit Michael.

Michael:

Sorry.

Emil:

It's good. It's good. We got to keep these fun. Alright.

Michael:

A little Austin Powers in the morning.

Emil:

So yeah. What are, what are some tried and true questions you guys go to when you're evaluating a new lender?

Tom:

I’ll lead the way on this one, do a little Michael sandwich. Well, I'll leave that first one and leave this one. So I would think about it in high level categories and have questions for each of these high level categories. We're actually, by the time this is released, we will have just put out a webinar with Roofstock on, on this talking about property managers, lenders, all kinds of good stuff. We'll probably be on YouTube, go check it out. It's by Roofstock Academy. So anyways, high level question. So the first one level of questions, and I'll let Michael get into the specific questions. I'll just put the high level ones together. So is learning about the company. I think there can be a little bit of a sniff test and looking about how big are they are, how much business they do, how many employees they have, what kind of customer experience.

So like about the businesses is a good one. The other important category of questions is how do they make money? The other ones is standard operating procedures and lastly cannot be overlooked his references. So can I talk to someone who isn't your grandmother about your business? Who's done work with you. So all I'll lead with that high level overview. Michael, if you want to just in some specific questions or however you want to take the second part of this.

Michael:

Yeah I am going to do a sprinkling. You made a really good point. And actually I just had kind of this epiphany this morning and just now, because I was having a call with the lender earlier this morning. And so about the size of the operation, this is a smaller local bank out in the Midwest. And I was having, this is now I think my second or third call with the president of the bank. And so I think it's interesting to look and see who it is that you're speaking to or who it is that you can get ahold of because a lot of these banks are structured differently and so they have the front end salespeople and then it kind of funnels through to the ultimate decision makers.

And so if you're able to speak directly to a VP or a president or somebody who is a key decision maker at that bank, you can often get things done a lot sooner, a lot more effectively as well. So I'm now starting to put a little bit more weight on that when I don't think I was previously,

Emil:

Would you say that's more important for a commercial loan versus a residential?

Michael:

Yeah. These are all commercial loan products and some portfolio type stuff. So I think that does make for him a similar transaction process for the commercial type of stuff, because that's where things tend to be a bit more flexible or a little bit more custom. The residential space is pretty cut and dry. It either is, or it isn't since the vast majority of those are getting bought up on the secondary market by Fannie and Freddie.

Emil:

Right. Yep. Good distinction.

Michael:

So, okay. So some specific questions that I like asking lenders is who do you work with? Who are most of your clients? Are you work with investors? Do you work with owner occupants? Where are they in relation to their properties? Are you work with out of state investors? I like asking you about interest rates. That's always a big one because that's a big driver of who I'm going to ultimately decide to borrow from. And of course, with the understanding that interest rates change every day, but with commercial lenders, again, they're going to have more custom products. They're going to have often a wider range of products to choose from and with varying interest rates.

So again, for residential asked that question as well, but with the understanding that they're going to change, also, you can ask them about what their fees look like and what their credits look like. See if they can give you a, just a general breakdown of, Hey, to originate this loan, what's it going to cost me? What are all the different fees I'm going to be paying? Who are those going to and what are they for? Because you just want to get an understanding of, Hey, okay. If, if lender A has offered me a, an interest rate of four and a half then or B is also offered me four and a half, uh, there's really no difference. Well, there could be a vast difference in the fees that you're paying on the front end just to originate that loan. And so that can be sometimes to the tune of several thousand dollars difference.

So we want to make sure that we're actually choosing the best lender to work with also really important to ask about prepayment penalties. These are like really important. And basically what our prepayment penalty is, is if you pay back the loan early, either in the form of a sale or just a cash injection that you're paying back the entirety of the loan early, you can get penalized. That's more common for commercial loans. I don't know if I've ever seen one in residential. Tom, have either of you guys, have you seen pre-payment penalty on a residential loan, not something that I've ever seen, but ask the question of the lender. Also asking about their specific underwriting criteria. Kind of like we were chatting about earlier in the episode is if I'm a borrower, I should know what the lender is looking for.

As far as what my debt to income should look like as a strong borrower, what my loan to value should look like as a strong borrower. And so asking these questions on the front end is going to help build out this framework for you to decide, okay, well, lender A will give you no only cares. If my loan of value is maxed out at 35%, this other lender wants it lower at 25%. So maybe I'm a better candidate over here asking these questions is I think that'd be really helpful. Ask them how they treat rental income is a really big one. Some lenders will treat it as part of your, uh, income on the debt to income ratio, others won't. So if someone is not going to treat the income that you're planning on generating or that the property is currently generating as usable income, that might be a reason enough to walk away. I don't know. It's going to depend how…

Tom:

Stop taking my points, Michael. I was going to, stop take it by points. I was like, it's crazy how the, the range that lenders have on making decisions on applicants, you think it'd be like a little bit more standardized, but anyways, excellent point, Michael, on confirming that rental income is yeah. If they treat it as income. Yeah.

Michael:

I was chatting with my buddy in the Bay area and he was looking at house hacking. And so he found this duplex, it was really interested in, and he went and chatted with this lender and the lender said, Oh yeah, you know, this is, this is the max loan amount you're eligible for. And I said, ask him if they'll consider the rental income from the second half of the duplex, as, as income, as usable income. He's like, okay. So he did that. And he's like, Holy crap. He qualified for like an additional 120 K in loan amounts.

So sometimes don't take the face value as the answer for most of these questions. If it's not an answer that you like, I'll ask the question why, you know, always follow up and either you're going to get somewhere or you won't, but at least then you'll know hopefully why that is the way that it is. And if it's flexible at all, some more questions to ask our typical club time, because you don't want to get stuck with a lender that has a really long close time, but your escrow timeline is much shorter than that. And so then you could be at risk of losing the deal because you can't perform or assume your lender can't perform in the time stipulated by the purchase and sale agreement. Another great question to ask is what's going to happen to my mortgage after it's originated.

And Tom, you had a really good rant on this, on a previous episode about what happens to mortgages after you've originated them. And so often they get bought up by other companies and then you have to change where your loan payments go and then you have to change your password, but they only accept Firefox as the internet server. And so just getting an understanding of what's going to happen to it. Who's to keep that, are you going to stilll, are you going to continue dealing with the same lender time and time again for the same loan or are you going to have to, you know, move around? So asking about what happens to it is a really great question asking them if they'll match rates, I think is great. So a lot of lenders are really wanting to compete for business. And so if you say, Hey, you know, you're offering me a four and a half and able to get 4% over here and better closing costs, will you match it most often they'll say yes.

But only if you ask the question, so which only goes to further your point, Tom, if you only talk to one lender, you only know what their interest rates and their closing costs look like versus you go talk to two, three, four, five, you have a plethora of closing costs, spreads rates spread. You can take the best one and go to your favorite lender because it was good relationship or you like working with them or what have you and just say, Hey, this is, this is a quote I got from a different lender. Can you beat it and see what they say? Most often they've got a lot of flexibility on moving stuff around. So that was my rant on the questions to ask. And of course there's more, but those at a high level are some pretty pertinent ones, at least at a minimum that I would, I like to start with whenever chatting with the new lender.

Emil:

I wrote down a couple that I just wanted to highlight on. I think you mentioned it, Michael, but just making sure that when you talk to a lender, if they're national, make sure that they lend in the state, you're going to go buy a property. The other thing sometimes you'll talk to different lenders, ask them what their interest rates are and what you need to make sure you do is ask them how many points are associated with those interest rates. So one may tell you, Oh, we're doing, we'll do a 3%. Yeah. The one could say 2.75. And what they're not telling you upfront is that you also have to pay one point. And what a point means is let's say you get a loan for a hundred thousand dollars. One point is 1% of that loan added on as a closing cost fee. So in this case, it'd be a thousand dollar fee. You pay as part of your closing costs. So make sure you ask what points are associated with those interest rates that they're quoting you. I would also ask if they lend to an LLC. So if you're planning on setting everything up into an LLC and you want the loan taken out in LLC, you have to make sure you ask if the bank will lend to an LLC.

Michael:

What do you do if they say no,

Emil:

That's a good question. I don't have anything in an LLC right now. So I don't know the answer to you.

Michael

Something you can do is ask if once the loans originated, if you can transfer the loan to an LLC and a lot of lenders won't care because they've got you on the hook for the loan. So, but some may say no. And so there's this thing called a due on sale clause, which basically says, if you sell or transfer the property, that mortgage can be called due in full. And so you just want to avoid that in its entirety. And so adding that conversation on the front end, I think is huge of, Hey, once I purchased this thing, I'm planning on purchasing, transferring it to an LLC. Are you cool with that? And if they say, yes, get it in writing. And if they say no, that might influence your decision on who you ultimately use for, for a lender.

Emil:

Solid, good points, other things to ask, let's say, you're buying a property that you want to fix up and potentially refi later doing something like the BRRRR method you want to ask about seasoning period, which is how long the bank will require you to own the property before they'll do a reassessment of the value to do that refi. So another good thing to ask, and I think that was it. Those are the only other things I wanted to add.

Michael:

I just want to pepper in one more thing. And it's kind of a, like a gut feel type of thing. Make sure you like your lender. Like I'm dealing with this lender right now that is such a pain in the butt to work with. And every time I see an email or phone call from him, I'm just like, Oh God, like I don't want to answer. And it's like pulling teeth every time I interact with them. And it sucks because they have a fat prepayment penalty on my mortgage and it's a big mortgage, so I can't even go refinance out anywhere else. And now I'm just kicking myself that it was the dumbest thing ever. But at the time he was so easy to work with and he was able to get the deal done. So I just, time is of the essence, but now I'm just like, God, like this is so awful. So just, if you can like, just like try to like who you're working with, make sure that they're easy to work with that, you know, you're not dreading their phone calls and emails.

Emil:

That sounds like a tough situation in that they seemed good on the front end. Like you couldn't have vetted it out in the front. Cause it sounded like they were easy to work with. It just happened once you started really working with them once the loan was final.

Michael:

Yeah. Yeah. It was a little, yeah. Once the, once the loan was finalized, the gloves came off, man. And it was like, let's go.

Tom:

Oh you're, you're locked in. You're locked in. This is the real me.

Michael:

And yeah, the whole prepayment penalty thing is really a pain in the butt too. So, um, it was at a time when I wasn't really even thinking about that kind of stuff, but now it's come full circle and I've realized how captive it makes you. So if you can find a lender that does not offer those, it doesn't require those. I think that's worth a lot.

Tom:

My last thing I'll add on this general episode is sometimes you might be concerned and calling up a lender to talk to them. You might be concerned about like sounding dumb or like not knowing you're doing, don't worry about it. This is talking to lenders or talking to people in real estate in general is like a muscle. Every time you do it, it's going to be a little bit easier. Uh, something we talk a lot about with Academy members, it's getting your bats in another thing is generally speaking. These people are trying to sell you.

So they're like, they're nice. I wouldn't be concerned about, you know, they're, they're not gonna be like, Oh Tom, you dumb. I can't believe you asked this question. Like, like, no, they're going to be totally reasonable. So put those fear and ego aside and start on the fence. Just jump in man. Talking to lenders, identifying them, especially if you're planning to buy with financing, that's an important thing to do upfront.

Michael:

And I think just to that, for that point, take it as an opportunity to learn to, I mean, ask the dumb questions. It looks silly because you're interviewing and speaking to a bunch of people, but you're only going to work with one of them. So ask the dumb questions and learn from it because you're probably not going to ever see those people again. Yeah. Just real quick guys. Pancakes or waffles.

Tom:

How about this savory pancake?

You thought it was going to have something after saying that like, well, I don't.

Michael:

There's no option C it's a simple a B. All right. Tom pancakes. Emil, pancakes?

Emil:

I’m taking pancakes. We've been making a lot of pancakes at home lately. Waffles is just such a production with like a waffle maker. So pancakes, baby.

Michael:

Pierre? And do not say I don't eat pancakes or waffles. I don't want to hear it.

Pierre:

You can peanut butter spread onto both of those I’ll take either one.

Emil:

Ooh, well done.

Michael:

You make a pancake sandwich with two waffles on top and bottom,

Pierre:

But I'll take a German pancake any day.

Tom:

What about a giant fluffy Japanese pancake. Oh, sorry. Go ahead.

Michael:

Ooh. And so what's different about a German pancake.

Pierre:

Oh, it's the Dutch baby. It's like a, I'll give you the recipe right here. Three eggs, a third of a cup of cream, a third of a cup of milk, a quarter of a cup of butter and half a cup of flour and preheat your oven to 400 degrees, put a cast iron pan inside the oven, preheat it, melt some butter on it. Throw it in there for 15 minutes. And it's like a big old souffle.

Emil:

Wow. Sounds incredible. Alright. I know what I'm doing this weekend.

Michael:

That sounds amazing. I'm a, I'm a pancake guy too. If anyone's ever eaten at iHop, I'm a big fan of the, I think it's like a junior happy face, like a chocolate pancake with chocolate chips and whipped cream on it. Such a kid at heart.

Emil:

So are you like 13 years old?

Michael:

I'm like 9, I'm this many years old.

Emil:

Thank you guys again for joining us on this episode as always, please leave us a review. Guys do we like reviews?

Michael:

Big fans of reviews.

Tom:

Love them, love them.

Emil:

We need to, we need to bring back giving people shout outs when they leave us a review. So leave us a review and we'll give you a shout out on a future episode and we'll catch you on the next one. Happy investing.

Michael:

Happy investing.

The Art and Science of Making and Negotiating an Offer Sep 21, 2020

Check out Tom, Michael and Emil's strategies for submitting winning offers.

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Transcript:

Tom:

Greetings and welcome to The Remote Real Estate Investor. In this episode, we're going to be talking about the offer all the way from we found a property. We like now it's time to make the offer to negotiations, to getting into contract. All right, let's do it. Alright guys. Welcome back. So before we jump into it, how are you guys doing?

Michael:

Yeah, I'm good, man. I'm good. Um, I got this six unit that I'm flipping under contract, which at a full price offer. And we got a backup offer a little bit higher than that, which is always nice. So hopefully that goes smooth. We're supposed to close here in like two and a half weeks. Very excited about that and wrapping up a couple of rehabs that I got going on, which is also very exciting. So all things good and the air finally cleared up. So it's not so smoky. So everything moving in the right direction.

Tom:

Nice. I'm going to tease into those, your offer, your back and forth when we get totally more into the episode, but a congratulations. Always fun to get a property in contract.

Michael:

Thanks. Yeah, I'm excited. I'll be a lot happier once it's signed the wet ink on the dotted line, but we'll, we'll stay tuned.

Tom:

Nice. How about yourself Emil?

Emil:

I'm good. I'm a, our listeners can't see me and they never can see us, but I had to go to my inlaws. Cause my internet connection at home has been funky all week. So how do you get good internet connection went to the in laws. So I got a new environment. Maybe that'll spark some new creativity for today's episode. We'll see.

Tom:

Nice at the start of the pandemic, I was always being like, didn't want to pay exfinity any more of my money. And then eventually my wife was giving me a hard time about how bad our internet was. And I like talk to a rep and he's like, you have the slowest possible program like possible. It was like bent for like, not really minimum amount of use. So I like texted and it's yeah. For those of you trying to be cheap on the internet, don't be give him your money. It makes life a lot easier.

Emil:

I'm sure internet companies have been doing awesome. Cause everyone's working from home now. So everyone's like cranking up their internet before you could get by. And now it's like, nah, I need, I need the top notch internet.

Michael:

And I wonder how much they're throttling people too. Right. But like, Oh you I'm sorry. Guy looks like you need to upgrade your package in order to get the best internet service.

Emil:

Oh yeah.

Tom:

I worked on me, man. It worked on me.

Michael:

You guys seen that South park episode. Oh yeah. We're the only internet provider in town. We'll be at your house between 10 and two. Uh, so sorry.

Emil:

That's true. Like I called them on Tuesday and they're not coming out til next Thursday. So like a week and a half, that is just not working. So that's fun.

Michael:

Nice.

Tom:

My other fun stuff is a, my baby is now walking around, which is fun. He does like an Elaine dance walk. So just like going through the halls or what's the other example? Like the inflatable balloon, man's like pretty entertaining.

Emil:

Hopefully people got the Seinfeld reference. I love that

Tom:

Um, awesome. All right guys, let's, let's jump into it. So we are in the offer episode and why don't we go ahead and start with the tip f the offer process and Michael, I'm gonna pick on you first. So you found a property. You like, you've done your diligence and it is go time. Where are you doing? What are you up to? How are you going about it? Walk us through it.

Michael:

So I've run the numbers. I know the area I have projections lined up. Right? I've already did all that.

Tom:

Correct.

Michael:

So now it's coming down to determining what the offer price wants to be. And I used to not be real scientific. I'm still not that scientific about it. Let's say I like to put speak in numbers. It makes conversation a little easier. So if I found a property it's listed at two 50 and the deal works at two 50, I'll offer, you know, two 30 just to see what's going to happen. And, and we'll probably meet somewhere in the middle, which if anybody has read the book, never split. The difference would say, that's dumb. You shouldn't do that. So I've also been known to make really specific offers like two thousand two hundred and thirty thousand seven hundred and sixty three, because that shows that I put a lot of thought into it. And so I like to be very specific at times too, but I always like to go lower than I think I'm wanting to or needing to go.

Now that's an example of the deal working at two 50. And so if they come back and say, no, forget about it, two 50 or bust, I'll pay two 50. If the deal is good enough, and I've done that in the past, if I need the numbers to be at two 30, well then I'm probably going to be offering around 200, one 90. Most people do want to split the difference. And so they're going to say, okay, whatever, we'll call it in the middle, but also use that tactic of writing very specific offers. Something else that I've done a lot of in the past is I'll actually write three different offers. One is going to be an all cash offer. One is a traditional financed offer. And then one is a seller financed offer and they'll have three very different prices. So like if it's an all cash offer, we'll take the two 50 example, I'll offer 160, all cash I'll offer, you know, maybe 200 traditional finance and I'll offer 230, 240 seller financed with really favorable terms for me. And so that way it's a choice for the seller. Pick one of the three, as opposed to a yes or no decision. So that was kind of long winded answer. I know

Michael:

Super interesting. The putting three offers together. I've never heard that before. Did you come up with that one on your own or did you like a mentor?

Michael:

I wish I had come up. I think I heard it on a bigger pockets episode actually from one of their guests. And I was like, that's genius. And as soon as I heard that I was actually about to offer on a property. And that was actually that mixed use building that I talk about a lot of other episodes. And so I did that on that property. I was able to get, I think, a really great deal on it, I think potentially because of it. And also when you look at numbers next to one, another things often seem better than they are naturally. Right? So if someone sees Oh one 60 that's wave low, well now they see an offer a 200. Wow. That might be a great offer when you compare it to two, one 60. So I think that there's definitely some psychology that goes into that as well.

Tom:

Tons of psychology and this, and we'll touch on that in a little bit. I'm curious when you do that, that triple threat offense, like when someone negotiates back, do they usually pick the same track? Are they usually picking all cash or the finance or the celebrant, or is it pretty, pretty split?

Michael:

It’s pretty split, I think, cause it just goes to speak volumes about the seller. Every seller is different and every seller's motivation is different. And so if you can look to understand why someone is selling, that really gives you a lot more ammunition to go in and tailor an offer to them. Because I think too many people, myself included are just like, Oh, this is a number that works for me. So take it or leave it on the offer side. But there's so much more to it than that. You know, if I know that the seller is an older couple looking to get out of the business, but like the income, well that screams seller financing, right? That might be a really great deal. And so helping them understand what that is, can be really beneficial. So I always ask the question, Hey, why are they selling? And try to get an idea of what's going on behind the scenes, because my offer is going to change as a result of that,

Tom:

On that psychology of fun Roofstock history. Uh, initially the website just had a bite. Now it wasn't, you know, there wasn't any wiggle rooms on offering. There's this huge psychology in real estate of people needing to feel like they're winning. I think both on the buyer and on the winner side. So, you know, with most deals, they, you know, there's a little bit of negotiation going on, but it's really interesting. The it's a game. People want to win the game and negotiate it. So open it up to you, Emil. So blank slate. You found a property, you've done your homework. How are you going about your offer process?

Emil:

Yeah, so it's probably changed over the years. It's funny, Michael, you mentioned Chris Voss's book, Never Split the Difference. I ended up doing that same tactic on my first property. It was like I offered 80, the seller came back at 85 and we ended up at like 83, nine 71, cause I just put a random number on it. So that worked. That was cool. Honestly, when I first started out, I was probably just looking for what property can I find that meets the 1% rule and how can I just get a little bit below that? Right? Like you mentioned, Tom, it was a game. Okay. Here's the list price, let me start out 10% underneath and underneath list price. And we'll take it from there. Barring that the list price wasn't like out of control, right? Like check, just make sure that it was in line with where it should be valued.

Now, now I've, I've started to like really hone in on a specific market in the beginning. I kind of just, where could I find a deal buy it? Right. So I've floated around from market to market. Now I'm really trying to hone in on one market and understand, okay, what does a single family home in this market sell for? What does a duplex, triplex, quad all these different types, right? What are they selling for and what is a good deal versus what's an average deal. And I think it really depends. Like if you're looking at a property that the prior owner has done a lot of the work coming in and expecting to get 75% of list price, you're probably just going to keep making offers and lose, right. Which is in a way demoralizing, especially on your first property, you keep doing that, keep doing that, wondering what's going on.

Now, if we have a property that has a little bit of hair on it and has a little there's things that need to be fixed, the roof needs to be fixed. Maybe mechanicals need to be changed. Like just certain things need to happen with the property. The rent is under market. Then that's where you have some leeway, right? To negotiate more. Again, this is all just best practice. You can go into a turnkey, try to offer 20% less than list. See what you get. But I guess to wrap it up my, uh, final thought here is it really just depends on the property type. Is it a good deal for that area in that market? So summary is if it's like, do I want something that's going to require a little bit more work? Okay. I'm going after a certain property type I'm going to offer way less because I know I'm going to have to come in and make repairs. So like you were kind of mentioning maybe going 20, 25% below list price. If it's, it also just depends on what it's listed at, right? Like some people could list it at the after repair value and it needs a lot of work, but you have to just kind of figure out how much do I have to put into this and with that and what I'm putting however much I'm paying. Is that a good deal? All those things together. I hope that makes sense.

Tom:

I dig it. I'm going to throw a couple of points on top of that. I think you need to be really specific on what your maximum bid is before you get into an offer and especially into a negotiation situation. So before getting into submitting an offer, having a very specific amount on what that max bid is really important and a way to get to that is looking at what kind of returns you're requiring. Um, Excel has this really cool feature called goal seek where you can back into that number based on variables, on what kind of cash on cash or IRR and all that kind of good stuff. So going in with a max bid is just so, so important, uh, going into an offer situation,

Michael:

Tom, before you move on, can you say more on that? Why is that so important? If I'm going to get into an offer and man, maybe I'll offer this and maybe this will be my max bid. I know they came back with this and maybe I'll move it here. Why is it so important to know ahead of time?

Tom:

Of you listening are similar to us gentlemen, as we can be kind of competitive and it's fun to win, right? And nothing gets my juices going, like getting into negotiations. It's just, it's fun. You know, you're playing a game and if you're playing this game, I say to the game, but you know, you're investing, right. If you don't have like a hard threshold, you can get in trouble by kind of continuing to go to back and go back and forth. And you know, with these properties, we spend time with them and you can let yourself fall into the fallacy that, Oh, there's never going to be another one like this. When you know, you got a good quote.

Michael:

Yeah. The deal of a lifetime only comes around once a week.

Tom:

Exactly. When you give yourself that hard number, it's just super black and white. As soon as that number is above. And you're not able to come to an agreement, one of the most important tools in your toolkit of negotiation is the ability to walk away. Now it doesn't work that's okay. So that's one piece is just making sure that you have that max offer in place. The other is knowing some context about the seller, which isn't always available, but here are some pieces of information that I think are really helpful. If a property is occupied and cash flowing, oftentimes a seller may be a little bit less loose to, you know, to a deal cause it's like cash flowing, it's making money. So sometimes on those types of properties, it could be a little bit tougher to get a huge discount. Once you it's still worth going through the exercise of submitting an offer.

But just generally speaking for a lot of sellers, if it's not occupied in cash flowing, they might be okay, like holding it out a little bit longer. The other metric that I like to take a look at is how long it's been on the market. That can be a scenario where you can get a little bit of a better deal if it's been sitting on the market for a long time. So that's something that I will think about on the offer amount, submitting an offer and having it taken seriously. I would not go beyond an 80%, but oftentimes if it's a new property and it's really competitive, the seller's just going to shake it off. So I wouldn't be too aggressive. When if you had know your max bid and there's a lot of wiggle room, perhaps your max bid is even over the listing price, knowing your max price and where it fits against your, um, the list price can inform where your offer price is going to be.

What can happen is let's say there's a new property. That's listed. You have a max price that is well above the list price. If you try and be cute and put an offer well under the list price, and this is a new hot property, you're not going to have an opportunity to buy it. Cause there's probably a lot of other people in there. So have it in your mind on what is the delta between your max price and what the list price is. So when you come in and submit your first offer, you're putting the offer in that gives you some wiggle room, right. To negotiate. And, but you also want to make sure that it's somewhat competitive. If it is a new property in a competitive market, otherwise you're just going to be the go through and going through the exercise of submitting your offer and just having it fall on deaf ears because those ears are getting clouded by a lot of other offers.

Michael:

Yeah. It's such a good point. I talked to people all the time in the Academy about when they asked the question, Hey, what should I offer on this? How do I think about this? I said, well, what is it worth to you? You know, a property is only worth what someone's willing to pay for it. And if you're going to offer three, five, 10 grand under list price and you lose that deal, is it worth it? Or is it worth it to come in at full list and just give the seller what they're asking for? Because the deal still makes sense. So I say, figure out what the numbers tell you offer there. But also you've got to give some weight too. If it's a hot deal, hot market, you might lose the deal over a thousand bucks. Is that worth it? Especially if you're financing it. So really that's 200, 250 bucks at the end of the day that it costs you.

Emil:

Do you ever just work backwards to say, okay, this is what I can offer to hit that cash on cash number.

Michael:

Goal seek goal seek baby. Yeah. That's exactly what the goal seek function does in Excel. And it's amazing. It'll calculate down to the dollar based on whatever variable you're trying to manipulate and whatever target you're trying to hit, it'll spit out, okay. Based on this, this is what your offer price needs to be. Or your max price needs to be in order to hit that goal.

Emil:

I said that as a like loaded question, obviously. I was rambling, but that's, that is how I make offers. It's looking at what is the cash on cash I want and working backwards from there, right? And again, there's all these factors where if it's been on market for a day and I'm coming and I need to come in like 30% under, maybe I'm not going to waste everyone's time. Right. I'll keep looking. So it kind of just work backwards from what is the cash on cash I'm looking for through the underwriting and go a little bit under there to start my offer process.

Michael:

I will say to that point, even if it's been on the market a very short time, I'll still come out, swinging for the fences if that's available, because you don't know, unless you ask the question. And so if you can offer a quick close or all cash or you know, are able to fill whatever void the seller is looking to fill by selling the property, you could have a chance you can. I mean, I've made some ridiculous offers and gotten them accepted and I'm like, wow,

Emil:

Right away.

Michael:

Yeah. Like on that sixth unit that we talk about a lot. So bought a six unit out in the Midwest for like 90 K a, which is 15,000 a door, which doesn't exist literally. And it doesn't exist. And I wouldn't have got it if I had an ass. And so my agent told like all his buddies about it and they're like, no way. That's like, Whoa, that's not possible. So sometimes. And of course that's the exception, not the rules, but sometimes the impossible can happen just by asking the question.

Tom:

A point I was making earlier. Like, you know, if you try to be too cute in a competitive market, you know, and you have a number that works for you, my advice would be like, you're looking to invest and it's early on the market. Don't be too cute and throw too low of a number if it's going to be seeing a lot of offers. Does that make sense?

Michael:

Yeah. Submit strong offers.

Tom:

Yeah. Submit strong offers as long as they yeah. As they make sense, but especially for properties that been sitting a lot longer, you know, then be a little more aggressive. So you had a fun thought exercise, but let's turn the tables. Okay. You're the seller, what's your strategy around negotiation on seeing offers, come in the mail. Do you want to lead us off with this first one?

Emil:

Yeah. I'll lead this off. Cause I sold the property earlier this year so I can, it's fresh on my mind. And then Michael is kind of going through the process now. So it's fresh for him as well. In the beginning, when I first listed my property, like anyone else I'm listing it at, what do I think the full, full value is? Right. Like not a deal because I know someone's going to come in and try negotiate anyway. So why would I willingly just list it at like a lower end? Right. Let's see what we can get for it. And then after getting tons and tons of low ball offers slowly move the price down. It wasn't a ton. I think it was a low price. Tom started at like 71, moved down to, I think ended up being like 65, right after just getting tons and tons of low balls and it was a couple months. Right. So no bites. And then finally got something close to that. 65 K all cash a little bit less than what I wanted. But at that point, you know, the buyer, the buyer made a good move. I had been a seller that had been on the market for a couple months. I was tired wanting to get rid of this property. And so they got a, you know, a little bit of equity built in. So I think it really just depends. Like, do you need the cash now? Or like how much time do you have, if you're willing to wait, your property is cash flowing. You may not like be willing to, to yield, like accept offers that come in and they're super low. So I think it really just depends on, do you need cash now and all that.

Tom:

I guess in this situation, really, the negotiation begins when you set the list price. So you'll set it a little bit higher and let the offers come in and, and manage the low balls. It will, you know, kick the low balls out of there, but slowly dripped down over time. Right?

Emil:

Yeah. And we just done a couple thousand dollars in work on the turn, like new vinyl plank flooring, repainted, everything, new tenant. So it was, it was a good turnkey property. So for me, I was like, okay, let's list it on the higher end of the range that I think this thing would go for and the market will speak and the market will tell you if it's legit or not. So just adapting to that.

Tom:

One of the tricky things with those listing of properties that are especially kind of the lower price ranges, valuing it off of the rent, you know, off of a cap rate, the value is probably gonna be very different than off of the sales comparable. So as a seller, you could be thinking of this evaluation off of like a cap rate buyers, especially if it's owner occupied, you know, they might be looking at it as sales comp. So that can cause a disconnect. And it just kind of an interesting, interesting point to bring up, go ahead, Michael dye.

Michael:

That can cause a huge disconnect, but I was just going to ask him, you know, when you got those low ball offers, did you just flat out reject them or did you counter?

Emil:

Depends. I think the first couple I countered and then they counter, it was like, I'm talking. I think I had to listen at 71. I mentioned, and I was getting offers for like 45. And so I'd counter with like 67 and they would counter with 46. So I'm like, all right, this person's obviously just thrown out lots of offers looking for a motivated seller. Right. So at that point I just declined. Yeah. So yeah, I would, I would play ball. I would see how, you know, are they just looking for a deal? Are they serious, you know, pebble back and forth and then call it from there.

Tom:

I think that's a psychology to making offers and listening to a meal as a seller. Like if you're making offers, you know, if your max bid really is 48, 47, great, keep going that line of thinking. And then the offer back and forth will end. But if your max bid is really up in the sixties or in the fifties, usually back and forth happen, I don't know. Would you guys say like maybe two or three times, at least in my experience. And usually it's, it's a pretty quick, so again, to my point of not being too cute on the deal, cause you just, you won't get deals, especially when you've done an initial kind of discovery of submitting that offer. And the seller is coming back to you at like 98%. Chances are the seller is not going to find a huge movement off of that, but at the deal still makes sense for you. Great. Come move up a little bit, get a little bit closer to him instead of just slowly creeping up to your max bed. All right, Michael, you're the seller,

Michael:

I'm the seller.

Tom:

What's your thought process in dealing with offers coming in?

Michael:

Yeah, so similar to Emil, I just got a bunch of low ball offers like real low, like real, real low. I countered a of them. I flat out rejected others because you can often tell in the language of an offer what kind of person they are, how motivated they are as a buyer, what, what it is they're looking for, or just how much of a pain in the butt they're going to be with to deal with as a buyer. And so I've told people know, even though they've had good offers because I just don't want to deal with them as a buyer, it's just a headache. Uh, so I had a seller financed offer that actually I accepted and the buyer, I don't think he really had any idea what they were doing when they made the offer. And so we countered and we got the terms, basically all the terms we asked for and I was like, great, this is awesome. This is going to be fantastic. And then it started coming down to asking for documents on the buyer because now I, as the seller needs to do due diligence on this person as a buyer and a borrower, because I'm essentially loaning them the purchase price.

And of course I can foreclose on them if they don't make good on their mortgage payments, but I'm not in the business of, for closing back on properties that I've sold to someone because I want to collect the money and I want to be done and I want to walk away. So they started getting really squirrely with it. And I'm not going to give you tax records. It's kind of thing. And I said, well, then I don't think this is going to work out. So we got a full price, offer all cash via 10 31 exchange and they can close quickly. And I said, great, let's do that. It's at the end of the day, less money than the seller financed offer, but it's less headache. It's seem it's seamless. And the buyer clearly knew what they were doing. And that was very apparent. And so that's worth dollars to me.

So I said, okay, let's, let's go that route. So as a seller, I mean, if just someone is reasonable and puts forth a reasonable offer, I'll entertain it, I'll look at it, but it all comes down to, again, what the seller's motivation is. And I try to never fire sale properties. I never want to be in a situation where I have to get rid of something where I would be the seller in that $90,000 deal for six units. These people just wanted the property gone, they didn't know what to do with it. They needed to sell it. I hope to never be in that situation. And so to be able to command top dollar for the properties, because either in good shape and B, because I don't need to sell them. And so if I get a good offer, great, if I, if I didn't get a good offer on this property, I was just going to keep it in cashflow the heck out of it. Cause it's, it's a monster, but I just didn't want to deal with it. I've got too much other stuff going on. That's it? Okay. Let's sell it, make a profit and, and walk away.

Tom:

That's awesome. That's great. Having a buyer who's in a 10 31, just that much more of a motivated. So he keeps within the rules and all of that. I'm in the seller seats to the last property I sold. I wasn't too aggressive on setting the list price. I was a 10 31 seller, so I had to fund some properties. Oh man, I wasn't as aggressive as Emil. That's funny. I said that like I was surprised, but I kind of was, cause I forgot that I was 10 31 into another property and I'd already identified the other service. There was uh, some moving pieces, but I was less aggressive on the price. The property was, it was the low 100 thousands. I like maybe if I had waited it out could have got 110, but I ended up selling for 104 was the number and listed it super quick, sell, selling it on Roofstock it probably valued more on the income approach, just being in that slightly lower price band, but listed it got a couple of offers.

I personally don't care too much about all cash versus the offers with lending. I know with owner occupied, you know, there's a lot of difference in that whole, at least the psychology of, of buying owner occupied, but in selling, I didn't really care too much of a difference between all cash versus lending offers. I know there's some risk about buyers who are coming in and using financing of it falling out, but I wanted to maximize that dollar amount and I was okay. The transaction being a little bit longer doing a finance approach. So, you know, I saw offers that were cash as well as finance and I was fine taking the higher offer that was financed and yeah, a quick, quick, smooth, close.

Emil:

Selling. All cash is nice. It's it's much smoother. I, that I sold my property, all cash. It was, it felt like a lot less paperwork and moving parts, which was nice

Michael:

Is because you don't have this, unless there's an appraisal contingency that the buyer puts in, you don't have the bank snooping around the house telling the buyer, Oh, you have to do this, that and the other thing. And then the buyer coming back to you and says, Oh, the bank's making me do this. Will you do it? Well, no, I don't want to do it as the seller, but you can't do it as a buyer because you don't own the property yet. So it's just, you can get into this real rigmarole pretty quickly. And so I think both on the buying and the selling side, there's a reason why all cash gets the reputation it does. And because it's just such a seamless transaction so often.

Emil:

Yeah. Having experienced it as the seller, I understand why it's so valuable to be in the seller's shoes, seeing a buyer who's like, I'll pay all cash close in two weeks. Like that's super nice. That's valuable.

Michael:

Yeah. And I think to, to, to that exact point in mail, if you're a seller you're kicking around two different offers, one is cash quick, close one is financed. Do the math, run the numbers and see what it's actually going to cost you to keep that property and sell it to the financed offer. Even if it is higher, because there are true hold costs to owning property. And if there's a financed offer, there's a financed offer that takes 60 days to close. What are your whole cost for those 60 days versus the all cash quick, close, and also make sure to factor in your commissions that you're paying out at the end of the day. It might not be such a big difference.

Tom:

I dig it. Any final thoughts guys that you guys want to add in related to submitting your offer and on negotiations?

Michael:

Yeah. I think ego plays such a big part of this and I'm totally guilty of it. No one could see me, but I just raise my own hand. I'm like mega guilty. We probably all are Tom. Like you were alluding to. I was a little competitive. And so, you know, I hate losing. It's a bummer, but I've learned to get out of my own way. But I found that in negotiation, giving folks a red herring, right. Give them something that doesn't really mean anything to you, but make them feel like they won. Right. And I want the seller to think, Oh yeah, I totally got him. You know, taking him for all he's worth kind of a thing. So putting stuff in your offer as a buyer that you don't care about or put it in as a seller that you don't care about and be happy to give it up, but make it as, as a bargaining chip. Well, okay, well, you know, I'll this for you, but you've got to do that for me. And so I think when you give someone a favor or do something for someone, they feel this need for reciprocity and they want to give you something back. And if it's something that you don't care about or is free for you, I'll give that stuff away all day just to make somebody feel like they won.

Emil:

So like to cover closing costs or

Michael:

Closing costs are a good one or to cover closing costs, which does have a monetary value. But what I'll often do is offer to put down a really big deposit as a buyer because sellers like to see that. But at the end of the day, if the deal is not going to happen, it's not going to happen. I just have to make sure that I'm willing to work within the timelines that are stipulated, or if a buyer wants, uh, extra time for due diligence, they have to either pay more for that. They can pay us a dollar amount set fee or they have to close faster. And so if a buyer wants an extra 20, you know, whatever, five days extra for due diligence, and then they're going to give themselves an extra 10 days for financing, I'll say you can have the five for the diligence, but you got to close at the end of that time period,

Tom:

Appliances could be something that you either care about or don't care about that you can use as a bargaining chip.

Michael:

Absolutely. Yeah. And something I've done too in the past is just give, you know, separate yourself as a buyer from all the other buyers. And so writing notes can be helpful, just, you know, humanizing yourself. I've offered to give, um, start college funds for sellers, for their kids. If I find out they have kids and so, you know, just do stuff to be different. Don't just be another offer, another name and another number

Emil:

Creative. I like it.

Tom:

I like it. Michael is creative. Three offers college funds. I love it. Michael, you bring it every time. All right. Emil, final thoughts.

Emil:

I think I was joking about this on Twitter once, but it's, it's funny how, as the seller, when someone makes a low ball, you feel offended, but as buyers, we go and do it all the time. So like Michael mentioned, pull your ego away on this stuff. Right? It's just numbers. And do what the numbers tell you.

Tom:

Be data-driven. That's awesome. Be the numbers, be the numbers. Uh, my just last little, little bit, it might be a little bit repetitive. Uh, as I was saying, follow the numbers, know what your max bid is going into it. How does that relate to the list price? What's the competitive scene. If you're looking to buy a property, you know, you gotta make competitive offers, just make sure that they're within your boundaries. The other is the process of buying owner occupied and buying rentals. I find to be so different, especially in Northern California, just because you can't buy, unless you throw your logic out a little bit. I have a friend who's on his 15th offer that he's and he's putting in good offers, but you know, he's, he's doing his homework. He's looking at the values, he's doing all this stuff and they just keep getting denied. So if you're buying owner occupied, you know, you've got to throw your logic a little bit out the window, if you ever want to close on stuff, but buying a rental man, just be data driven and know the numbers.

Michael:

Not even buying owner occupied, just even buying rentals in a owner occupant market, because you're competing with people that don't care about what kind of return they can get. They love the house. So they're willing pay for that property. So I think above and beyond, just if it's a property for you, if you're competing with owner occupants, that's something to be aware of.

Emil:

One last tip I just remembered. So a lot of times let's say multiple offers are submitted. The seller will ask for final and best from everybody. One caveat. You can't always know if they're be asking you and just calling for final and best, or if there's actually a bunch of other offers, but usually you can tell and going along the ego thing, like if you know, okay, this is the max dollar amount I can offer to still get my return. Oh, but I want this better deal. So I'm going to go lower than that. Like you got to weigh those things, right? Like I think Tom, you were alluding to like, what's your max offer. So consider that when you have like the final and best, rather than just letting your ego be like, I got to get the best deal possible.

Michael:

That's a great point.

Emil:

But I'm going to get the best deal possible. So don't worry about, it

Michael:

Sounds like a song I'm going to get the best deal possible. Do we have a fun question, Tom?

Tom:

Uh, yeah. Yes. I got a fun question. So my question is what are some pet peeves that you guys have that people wouldn't normally find is pet peeves? Non traditional pet peeves. And I can go first. I'll also, you guys have some time to marinate on this and this wasn't always a pet peeve for me. I had a manager, uh, excellent boss, Eric shout out out there. So he had a pet peeve of, we would go into the markets. He was actually a boss at Roofstock for a little bit. And we would have meetings with property managers.

Emil:

He was a boss.

Tom:

He was the boss. Yeah. I had to be two ninjas to get to him. So we would go to meetings and we'd be like 15 minutes early. And he's like, no, Tom, we've got to wait in the car. I hate it. When people come into my office early of like going to a business meeting a little bit too, or like early, he was so strict about like, you know, not he found cause he found it so annoying in that moment. I was annoyed by that, when that happened, uh, in future references. So it's one thing, you know, obviously you don't want to be late. Right. But respecting people's time before the meeting, I thought it was really interesting. I don't care that much about it as in like, don't feel bad if we jump on a meeting early, but I thought it was just like a peculiar pet peeve that I liked showing up to early

Michael:

Tom, that was the most passive aggressive thing I've ever heard you say to me at our meetings, if it's early.

Tom:

Um, but anyways, that's my peculiar pet peeve.

Michael:

This might be kind of traditionally you tell me if this doesn't count, but I can't stand talking to people that use like industry specific terminology without defining it. And I'll be talking to somebody and they're like, Oh yeah, I was totally doing this defibrillator K five 72. It was crazy. I was like, you know, I don't know what that means. And I think you know that you want me to ask just so you can hear yourself talk. So I think, you know, using acronyms or industry specific vernacular without defining it or explaining it, bring me into the conversation. I want to know I'm interested in what you have to say, but when you're talking so above me, it's not fun.

Tom:

That's a good one. Real estate is notorious for acronyms and jargon.

Michael:

Oh my gosh.

Tom:

Just use ACH to pay your EMD dispositions and all this stuff.

Michael:

Is it, is it a, is it an IO? And what's the AVM. Yeah, it's crazy.

Michael:

Alright. And Neil, what do you got?

Emil:

Oh, mine. I don't know if this one's weird, but like my biggest pet peeve,

Tom:

Peculiar pet peeve.

Emil:

Peculiar pet peeve. Is people singing like trying to sing well. It just after like 15, 20 seconds, I don't know what it is. It makes me uncomfortable. I have no clue what it is, but it makes me feel uncomfortable.

Michael:

So what you're saying is singing and the podcast would not be a fun for you.

Emil:

See you're, you're singing terribly. So it's all good. It's when people try to like actually sing. Even if they're good, I'm going to digest it after like 20 seconds. I don't know what it is. I have no clue if it's obviously, if I'm listening to someone seeing, cause it's a concert, not a big deal, but if it's just like, you know, doing everyday stuff and sing after 15, 20 seconds, something in my brain, just like, like starts rattling. So I don't know what it is. Very strange.

Tom:

So there's a bell curve of quality. And if it's really bad, no offense, Michael. That was, you know, that's really good. That's okay. But all, everything in the middle, but no, it's not all day medium to good. That bothers you.

Emil:

Yeah. Like trying to sing. I mean obviously if you're trying to sing and you suck, that's like I can handle two seconds of that. But even if good, I dunno,

Michael:

But excellent. Okay. Like if someone was an opera singer and you didn't know that and they were just like doing whatever in the house and started singing, but they're really good.

Emil:

That's okay. You know, you're just in awe. Right? If someone is just spectacular, like could be on whatever one of those singing shows, you're like, Oh man,

Michael:

I would love to get you out as a judge on one of those, you would be so uncomfortable.

Emi:

I'd be I'd last 10 minutes. And I'd be like, my, my brain is shaking. I'm outta here. I don't know. That's my very peculiar pet peeve.

Tom:

Hating, hating singing and joy, all right, Pierre, you're up next?

Emil:

Apparently there you go. I just hate joy and puppies and rainbows and all that stuff.

Michael:

Yeah. I'm curious to hear Pierre’s.

Pierre:

Well, I am going to roast my roommate's on this one, dude. Let me just preface it with, I love you guys. You guys are great. Except you guys trigger all my peculiar pet peeves. They might not be ultra peculiar, but one of them I can resonate with you deeply Emil. I live in a household full of musicians and they all sing.

Emil:

It gets annoying, right?

Pierre:

Oh God.

Emil:

Thank you. Thank you,

Pierre:

Lord. Especially. Yeah, especially when they're trying to..

Tom:

You gotta get those, you got to get those 10,000 hours in right? Isn't that the number of 10,000 hours?

Michael:

You have to do it on your own time.

Emil:

That's how Pierre lost all his roommates.

Pierre:

I'm going to lose all my roommates. I'm looking over my shoulder right now. One of my roommates practices by singing into a microphone and amplifying it. Dude, you have a mixer and you can channel that audio into your headphones and get the same effect of hearing yourself through the microphone. But no, he puts it on the PA system and blasts it out right when I'm about to get off of a long, stressful day of work. And I want just a little bit of quiet and okay. So, but that's so yeah, I'm just connecting with you on that. So for me, I don't know how peculiar it is, but I have a little list here. Crumbs on the counter, crumbs on the counter just make me depressed. I'm like, how am I still here in life where there are still crumbs on the table and crumbs on the counter.

Michael:

That's your yogurt topper.

Tom:

That's why you need a dog.

Pierre:

Yeah.

Tom:

Honestly, dog, solved. Right?

Pierre:

And then when people use scented laundry detergent,

Emi:

That's peculiar one.

Pierre:

Somebody used tide. And I was like, dude, who just bought the tide. I will pay you to not use that. Like, I'll buy you a new bucket of unscented, laundry detergent. So no one ever uses that laundry detergent in this house.

Michael:

Is it the aroma that bothers you or the fact that it is scent in general?

Pierre:

The aroma of any scented laundry detergent kind of makes my blood boil almost as much as crumbs on the counter.

Tom:

I dig it. I mean, I feel like a what's it, what's it called? When you think of fondly of the past. I think there's a word for that. Nostalgia. Yeah.

Pierre:

Scented laundry detergent gives me a nostalgia of times I don't want to be back in.

Emil:

We're getting a real deep.

Pierre:

Yeah. Sorry that I'll stop there.

Michael:

Everybody likes their own brand.

Emil:

I could not see that about you, Pierre.

Pierre:

What do you mean? Like every time you guys asked me a question, I'm like, I don't, I don't like pizza. I don't eat cereal.

Michael:

No salad bar.

Pierre:

But love you roommates.

Michael:

Yeah. All right. No laundry detergent. Add it to the list.

Emil:

Do you like puppies though?

Pierre
As long as they're not washed and scented laundry, detergent, love puppies.

Tom:

Oh. But a puppy playing and fresh laundry.

Michael:

So cute. So cute.

Tom:

All right guys, that's a good spot to, uh, cut us off for today. Thank you everybody for listening. We hope you the episode. And if you did, we'd love it. If you would subscribe and give us a rating on your podcast app and always happy investing.

Michael:

Happy investing.

Emil:

Happy investing.

Strategies, Stories, and Lessons Learned After 482 BRRRR’s w/Mark Ainley Sep 16, 2020

In this episode, Michael and Emil chat with Mark Ainley from GC Realty and Development about his experience with hundreds of BRRRRs.

Mark Ainley with GC Realty - c. 630-781-6744

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Transcript

Michael:

Hey, everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael albaum. And today I'm joined as usual by,

Emil:

Emil Shour.

Michael:

and we have a special guest with Mark Ainley with GC Realty and Development. We did a deep dive on Chicago with Mark a while back. He's got a property management business, but today's going to be talking to us about the burst strategy. So let's get into it.

Michael:

Mark. Thank you so much for coming back on the podcast. We had so much fun with you doing the Chicago deep dive for anyone who didn't catch that episode. Go give it a listen. We've got Mark Ainley with GC Realty and Development. How are you, man?

Mark:

I'm good. I'm not as hot as you guys. You guys got a lot to fire in us out there.

Michael:

So yeah, big time fire. It seems like the market's hot. The state is hot. You know, everything seems to be on fire these days. Um, so today I wanted to chat with you. Not just I, but Emil as well. One is chat with you about BRRRR. Cause we were chatting with you before we recorded the last episode. And you were telling us how you had done like 480 some odd BRRRRs out in the Chicago area. Is that right?

Mark:

Yeah, no, we did between Oh eight and 18. We did a, just over 400, I think it's 482 to be exact units, which were all made up of like one to four unit buildings.

Michael:

Fantastic. So for those of our listeners who might not be familiar, can you just give us a quick and dirty definition? What is a bur and how does it work?

Mark:

Sure. Buy, renovate, rent, refinance and repeat the acronym goes. Now when I started doing it, I didn't know what it was. I just thought I was smart. I wish I would have pointed trademarked it or… I was thinking about that today when I was preparing for this call. I'm like, man, if I would've came up with that, that was so smart. So we started doing it and it was really a business model to us and how we were approaching it back then.

So for us, when we started in 2008, I got my into real estate in 2003. And you guys know out there in California, just as much as we do here in the Midwest, you couldn't do those types of things in the two thousands, just because pricing was so high, the opportunity wasn't there. So I really didn't have a, that access to those types of deals until the market crashed. And when the market crashed, the math just made sense to me on a couple of things I was looking at how to go at it.

Michael:

Right on. And so why do you think just at a high level, we're going to dig into some details of a couple of birds you've done, but at a high level, why is it such a powerful tool or vehicle, whatever you wanna call it.

Mark:

So it is powerful because the concept of it is you are not leaving any of your money into the deal at the end of the day, instead of a there's tons of these late night commercials are vest with other people's money or no money down, or do seller financing, all that type stuff. You can do these types of deals without having to do these by these crafty sales type pitches or get some guy to tie you to his second loan. I don't know. They got some crazy things they do out there to find ways to not have to put money into a deal. And this one's halfway legit. Now don't get me wrong. You have to find a way to have money on the front side of things. And we can talk about that. But, uh, um, at the end of the day, you can get out of a deal having little to maybe five, 6% in the deal. And sometimes even we were successful. We even were able to exceed what we had in there on a cash out, depending on the lender we're working with.

Michael:

That is so cool. So I know people talk about the rural all the time. People tell successful and unsuccessful burgers all the time, but you've got enough under your belt. It sounds like you've probably done some good, some bad and maybe I think in between, right?

Mark:

Yeah, no for sure. That's how the, the quick story of, uh, in our adventure for an 80 units, our first property, we bought that we're going to Burr and we did, it was a little, had a little more hair on it. We were combining a couple of deconverted condos and rolling into one, and we're going to cash out at the end of the day with a three flat versus a few individual units. And, uh, got stuck with stop work, order permits. We, we did, we made all the mistakes we could, you know, and then, uh, when we were getting inspected for the stop work order permits, we had someone else that didn't have a permit, horrible, horrible, but we did 131 other units in the time. It took us to do that first project. So, uh, that's kind of a horror story of, of, uh, bad planning or really being too optimistic. And then obviously making a whole bunch of mistakes of permits and, and who are really dealing with.

Emil:

Wow.

Michael:

So when you were first getting started in that first unit, you refer back to we a lot. Who is we and what kind of experience did they have doing this type of project?

Mark:

So I had a couple of partners when we started off in the four and 80, we're kind of broken up into two groups where I had one part in there. I was consistent on both a hundred for 480 units. The first group, I had a partner and he was doing rehabs all around the city. And again, the concept of just kind of buying it cash and then refinancing out w what we really started with. And then, uh, as we part ways with the first partner enrolled with our second partner, where we did the balance of the units, it really turned into, Hey, we have a bunch of, uh, uh, private money that we could use and, uh, move faster and be able to, uh, go that route. So I've always had partners, different skill sets. You know, my one partner at the time, you know, he had the money, the first partner had the money.

And then my other partner that was consistent the whole way through, he had the construction, no hallway at that point. So I've learned all that stuff since then. It was kind of the we.

Michael:

Right on

Emil:

When you guys are doing all these deals, and this is something I wonder for myself, do you need to buy everything, all cash when you're going out and buying these properties?

Mark:

Yes and no. A lot of the properties where you're really trying to find the add value ends up being in properties that might not be financeable, uh, where it might be missing a kitchen. It might be missing furnace. It might be just, my mind would be habitable where conventional loan won't be. They won't finance you. Or, you know, they have the two or three K loan, which is a lot of hoops to jump through or would even make sense to do something like that for that.

So you're buying a property that is really going to be bought by an investor only, and that's going to require cash. Now, whether that cash out of your pocket, or maybe you have a uncle or a private lender or a partner that that's where the cash ultimately is going to come from, and that's going to be. So if you think about it this way, when you're buying properties that can only be bought by investors that are have cash or are not financeable, now you can beat your in kind of the section of a properties out there that only a handful of people can actually buy. So if you have a hundred thousand dollar property, that's not, financeable, you know, out of a crowd of 10 people, you might only have a couple people that really have the means to pull together that a hundred grand to do it.

So now the supply and demand laws that property's going to go even for cheaper, which means there's more of an opportunity as far as the gap of what you can put into it, appraised for and cash out for on the backend.

Emil:

So what kind of properties would you guys target? I'm sure after doing this enough, you had like a, a model or a buy box. We were like, alright, this is the kind of property we really want to hone in on. I don't know if I'm asking for too much of the playbook, but..

Michael:

Give us the secret sauce.

Mark:

No, no. So when you, I guess when it comes to BRRRR, the name of the game is a for trying to do as many as you can. The name of the game comes down to speed. So we did hone in on that and we honed in on, on single family homes, two flats, whenever for a reason, even though it's only times two, it always took us so much longer to do it. Three flats, forget about it. It was, uh, we always, uh, screwed up the timeline and messed out up that side of things. So we started focusing on single family homes that were in that really eight to $1,200 range, um, two to three bedrooms, one maybe sometimes a two second bath in the bathroom. So we focus on that. We focus in a handful of neighborhoods and we focused on certain floor plans. So we even were able to focus on specific, floor plans where we knew it just based on that floor plan. And we did 12 other like that, that these were gonna be our costs going into it. And we knew that we were creating comps for ourselves along the way as well too.

So one of the important things about a BRRRR is your backend. If you gotta make sure it plays out now, we were working through probably what would be the hardest time when it came to appraising. Cause there were no comps and appraisers were ultimately scared to do anything that was kind of pushed the line. If you're the highest comp in the neighborhood. That was a red flag in that 2013, 14. So now there's comps out there and be able to control that backend to make sure that a you're compping out based on stuff you're doing is one of the bigger pitfalls that people run up against.

Michael

And for our non maybe Midwest listeners, two flats and three flats are duplexes and triplexes.

Mark:

Yes, yes, yes. Yeah. We call them flats.

Michael:

Good deal. And so the vast majority, it sounds like you bought in cash. Did you ever purchase anything financed on the front end

Mark:

In the coming out of the great recession? You know, we had a couple of banks give us some deals or get properties off their hands. And what we thought were, sweetheart deals never turned out to be sweetheart deals. So this, the best deals we ever did were the ones that we bought cash.

Michael:

Okay. It's interesting. I was chatting with a meal a few months back about a strategy that I've used in the past for buying rehab and burn type buildings and the multifamily space. And what I did is I'll buy them for cash turn around day one and get a commercial refinance out of 80% because they were financial and then use that cash to then fund the rehab. Once it's done refinance again, and depending on what your refinance costs looks like, that can start to add up pretty quick. So you might want it to go about a different way, but for whatever reason, they only charge me like a thousand bucks to refinance. So it was the cheapest money I ever got.

Mark:

When you're borrowing the money on the front side. Uh, you maybe like, people always refer to the uncle, that's got money or whatnot, or a partner, but you know, a lot of people are going through call hard money lenders, and that gets really expensive. And I always tell people, I really figure out what your numbers are. So we were paying 10% across the board, but we just rolled that money over. We never had any points. We never had to refinance it. Those guys, they just want to keep their money working. So we might even refinance a project and have sit on that money for a couple of weeks and pay that interest. And that's where the costs, we always had to be efficient about it, but we're able to, as long as they're getting their 10%, they trusted that they're in good hands with us. So making sure that you're measuring that money out of pocket, and then that comes into the timeframe of doing the deal or how long it takes you to get to the refinance point, which people have pitfalls on when it comes to that, or if they didn't plan.

Michael:

And Mark, I want to get really specific on how you structured some of those deals. So that 10% was that interest only. And was that paid monthly or was there an end payment date to talk to us a little bit about how that work and how you structured it?

Mark:

Yeah. So how we did it, we did it on a monthly basis, 10% interest only, and we tied them to mortgage it. We had a mortgage and a note for every property. So if we sold the property, we have them sign off on the payoff and then we would basically move it to another property to make sure that they were always protected on their side of things.

Michael:

Perfect. And so I just want to give folks an idea of what those numbers look like. So on a hundred grand at 10% interest, only on a monthly basis, that's $833 a month. And so you're making those payments every month while you're using that money until you can refinance pay off the a hundred thousand and then look to go do it again. Right?

Mark:

Correct. Correct.

Michael:

I love it. Can you walk us through what your best Burr was? Cause I think everybody remembers the high notes and then we're going to ask you in a minute, what your worst one was.

Mark:

The best deal, I actually had this, uh, I talked about this when Joel Fairless, I was on his podcast and uh, you know, we got this property and the cool thing was, you know, we buy on the auctions, auction.com and uh, the couple other, um, I can't think of top of my head, but a couple of our different auction sites and this particular property bounced around to a couple of different auctions and were able to finally bid it. And it was a sight unseen. You know, we had to do all our due diligence. We could from the outside and we got the property. It was actually a four flat, uh, so four units. And, uh, we were, I think we bought them for 20 or 25,000 each they're small units. And I think we only put about 50,000 into it altogether. You know, when you do it enough, you just get lucky sometimes.

And this is one of those ones where we had some luck on our side, defendants were happy with even the, not a hundred percent updated conditions. So a lot of that money, we did have to spend on what we thought we're going to spend. So, you know, we actually ended up putting it into a roof versus updating a couple of units. And then we ended up selling that building turnkey to an another buyer a few years later. But the real ultimate win was we ended up clearing probably about end be about $130,000 on that one, uh, when we sold it. So we got the cashflow for call that first year, and then we made 130. So that is probably the best deal. And I still think about that all the time. Cause like, man, you can only duplicate that.

Michael:

That's fantastic. So I just wanna make sure I understood you, right. So you bought it for 25, a unit and four units or 25 total?

Mark:

So I think we bought it for if we're going to be specifically, I think we bought it for 28, so we had 80 into it. We put 50 into it. And so we had about a 130, we were getting about 3,800 a month. So yeah, I see your mouth dropping. It was sick and that sense and refinance it out and we refinanced and went out to, because it appraised really good. So we actually got more. So we actually cashed out then I think it was about 160. It appraised out for like 200. So we got 160 out and then ultimately sell it for, I believe we sold it for right around. I think it was around two 50 to two 70. I don't remember the exact number, but it was a hundred K plus that we made on the gross let alone, we were able to cash out some and we cash flowed all the way. So that is the best deal that I hands down. I even thought about that today. Make sure there wasn't anything I was missing. And that was probably the best one we ever.

Emil:

Yeah. Those are, those are those all star BRRRRs that you read about and people, I mean, you not only make your money, you cash out more on top. So you got paid for doing the renovation and you're still cash flowing. So it's like, yeah, the best of everything.

Mark:

That was a win. And I got plenty of lackluster ones too that offset that. So yeah. I only stay high on a moment for a few seconds. So I started thinking about the other ones, but.

Emil:

We try to always bring people back down to earth, have the right expectations, not always have Rose colored glasses. So tell us about a time when it didn't go so hot.

Mark:

Will you start back to the first property that we bought? You know, we were trying to combine that with another two units and make it a legal basement. And then the city came in, we got stopped in violation. So by the time we were done, we had about $280,000 out of pocket that we're paying that heavy juice on, on a monthly basis for, I think it was about three years. Wow. That was a, a gone wrong. And that was a painful one to say the least the other thing we had go wrong is the we've had a couple, bad appraisals where all day long, like what are you talking about? Reproduction of the building or comparables, you know, they wouldn't accept the off market comps for us. We knew a bunch of deals that happened in the neighborhood. One was us. We sold, we don't sell everything on them a lot.

So a lot appraisers will not go deeper than MLS. So it's up to us and for anyone out there looking to do a burn, make sure you know what your comps are on your exit side. So even going into the deal. So you're planning a refinancing at eight weeks from now, 10 weeks from now, you better hope you have two of those three comps on file right now that you could bring to that appraiser. And if they're off market, you got to make sure that you're getting the information to the appraiser so he can account for it in his appraisal.

Emil:

So now having kind of looked at like your best scenario, your worst scenario, it's kind of saving this for the end, but I want to ask it to you now. You've probably learned, okay, these are the types of BRRRRs I want to take on. And these aren't. So like, do you have like, like your tips or takeaways from the BRRRRs that go well, versus the ones that end up being just running really long and expensive

Mark:

As far as, you know, you buy a property that might have city violations on it, or some sort of a, if you buy a property in the city, Chicago, and maybe it's been vacant for a couple of years, if your attorney didn't catch the injunction on it, or some issue that you have to clear up a court before you can put a renter in there, that's something I see people get hung up on all the time where, uh, they bought a property, they fix it up, but they cannot refinance until that rental injunction on the title. The city puts out on the title is lifted. So dealing with the city is a pain in the butt pre COVID, let alone having to deal with self post COVID. So just having a property that has violations that are almost beyond your control, you know, you could take any sort of problems that need to be fixed a rehab and kind of put a timeframe on it.

But when you start working with municipalities or cities or a big city like Chicago, and now they're controlling it and you have to wait a month for a court date and all that stuff, that's where I've seen a lot of people, including myself, kind of get tied up in these deals that they take forever to get your money out.

Emil:

Is that something you see during title? Like when you run title during due diligence, but you just kind of say, Oh, we'll get through it later. Or is this something you couldn't foresee until like you bought the property?

Mark:

I've seen it happen both ways. So for us, we, we took it on not understanding what it was and then we got bit by it. But we've also had scenarios where we bought a property and it was in the process of being put on the title where we got kind of dinged, just bad luck in that sense.

But I see the problem with a lot more people. They just try pushing through it, thinking we'll make it work. I like to be part of things or investments that I can control. Uh, almost everything go along and, and the BRRRR part, the one thing that I think you have the least amount of control of when it comes to that, is that appraisal on the backend. Um, as far as how much you're gonna get out. So you can pretty much control everything every other step up until that appraisal part. And even then you could have influenced not the right word. Cause it sounds like you're, you're paying somebody off, but you can have a, some inclusion on the data that's being included if you provide a valid comps. So

Michael:

What a, what an eloquent w to say that you can have inclusion the outcome. So speaking of timing, Mark, a question that I, and Emil probably get all the time is seasoning period. How soon will a lender re give me a refinance based on a new appraisal, as opposed to the sale price? What have you seen in your work?

Mark:

So funny, quick story. Um, I had a guy call me up last week, looking for a bank that will take a property. That's not six months seasoned. And I said, man, you didn't talk to the bank before you he's like I did. I didn't know what season meant. He's like, I heard him kind of ramble. So by being in season, I just didn't understand. I thought maybe he was talking about the time of year or maybe it's busier in the summer,

Michael:

Or maybe he was talking about a cast iron pan.

Mark:

Yeah, and he goes, I know Mark, just, just laughing, get out with it, please help me find somebody. I could take a, take the letter, tell him like, Oh my gosh, like it's horrible, like scenario to be in. And I could see. So the season part is something that post COVID I, you guys probably know this, uh, the banks have really cut back on a lot of the banks that were saying, Hey, listen, you get the job done, um, we'll, we'll give you the money, but now they're moving back to that season piece. So for us, we were able to work with a lot of local community banks. And you know, there's, you know, the community banks, you get that relationship. It's almost like a 60, 1960s feeling relationship with some of these local community banks where they might have the seasoning issue with anyone new, but because you've been banked with them and you might have x amount of dollars in their bank, they'll work with you. But when you come from out of state and you want to do it, then their risk levels go up and they usually don't work with it. So I found, I don't know, uh, it was down in San Diego, but a guy that was, he found a, uh, bank there that was giving a higher interest rate, but he was, they were doing non season properties.

I don't know if it was a credit union or whatnot, but finding that bank that will do it non seasoned and they're out there. It just ends up taking a, you just have to figure, use your resources to find that out there. But the bottle is tough to do altogether. If you want to continue to build on it, if you have to wait for that six months for it to be a season now for us, we never had to wait. Um, and that we wouldn't have done 482 units if we had to wait six months every property.

Emil:

When I was doing research on this, I found that anytime you wanted to get a mortgage back… So any Fannie Freddie loan, they required a six months seizing period. At least every bank I called like four or five different banks. And everyone kind of told me the same thing where you guys getting different loans or were you getting Fannie Freddie loans when you were reading?

Mark:

We were not getting any Fannie Freddie. So we were working with local community banks and we were able to whether they get a credit line, we're getting, they're holding our portfolio again. If someone looking to do it has to build that relationship. And, uh, you have a little money in a bank that people will be flexible, um, all around the country, as far as banks go and stuff like that.

Michael:

And so for all of our listeners who just might not be familiar with what a seasoning period is like Mark's friend that called and asked him, it's basically the amount of time that you need to own the property for, until they will give you a reappraisal or refinance. And so that's often six months for those Fannie Freddie products, or it can be more flexible with those community banks. But so definitely have that conversation on the front end prior to, I would say, even purchasing the property and know what your exit looks like, who's going to do the refinance will do that. Will they give you a new appraisal? Are they only going to give you your purchase price, plus your costs? You just want to have a very clear picture and understanding of what that looks like. So you don't get caught looking on the backend.

Mark:

The other thing, when it comes to that appraisal, if maybe it's not a Fannie pretty type a low and you might get into, but other banks, they might not do it against appraised value. They'll do it against what you have into it. So that's another way I see people get tripped up. So they might have a a hundred thousand dollar property and they put 50,000 into it. So they have 150 all in and it pays off for 200. And I know they could get a, um, all their money out, but the bank will say, well, show us how much you have into it. And we'll only loan to, uh, to that amount. Uh, that's where I see another way people get, uh, caught up with that.

Michael:

I was gonna say, so shifting gears here, Mark, the podcast, you know, it's called the remote real estate investor. And so the vast majority of our investors are doing this remote. What would you say to them? Cause I think a question I get in the Academy all the time is how do I get started doing a BRRRR? I don't know anybody half. The reason I use Roofstock is because I don't want to have to get to know anybody. You already have these relationships. So if somebody wants to do a remote BRRRR, where do they start?

Mark:

Um, it's a generic answer to start, but, uh, you know, having the right team and I tell people to find someone that's already doing it, and then they have the resources and they have the know about to do it. So example with just saying myself, you know, so for any property management company, they have the ability to do turnovers, right? And where we've worked best with out of state investors, kind of going after the birth strategy has been all right, you buy this property and we can do a, what we call it. We call it heavy turnover. So anything in that 10 to $20,000 range would be a heavy turnover and you take a 900 square foot ranch. You could do a lot for 20 grand in a sense of redoing the floors, redoing a bathroom, you can update the kitchen and that amount and possibly a replacing a mechanical or two. So you can get that and then get it to refinance out and get a majority of money out. So having, whether it be a property manager company that has a little more of an expensive maintenance apartment.

So for us, we have all in house maintenance. A lot of property managers will outsource that part, but any property manager that has in house maintenance has the capability to do those shops, any other sort of a developer that a local to whatever region. I mean, they can usually put you in touch with the right people to do it. So having just the right team that you can trust, I guess, and if you're able to find a proper manager that that's going to actually be responsible for the property all the way through, and then have to put the right tenant in there, find a tenant that's gonna fit, whatever rehab you just did. And then ultimately be responsible or be around six months from now, if something went wrong with the rehab or maybe the deck that was fixed broke or whatnot. So if you're able to keep one group, like some of our clients have done together, um, for the whole time, then that just lowers your risk as an out of state investor as well, too.

Michael:

Perfect. And so for anybody interested in investing in Chicago or doing firs in Chicago, that's something that GC Realty can do for them.

Mark:

What I ended up doing a lot is people call me up. They might be looking to buy a property. Maybe they were working with a realtor in our office. Maybe they're working with another local realtor, but I'll tell them either a it's something we could do based on the timing. Or I'll put you in contact with two or three guys that I know can get the place fixed up for you. At least I can help him with the scope and then they could do the actual work and then they'll come back to us to manage. So ultimately the end of the day, usually if we don't help directly, we help indirectly as far as set people out, as far as Chicago goes.

Emil:

Michael you've had the same experience, right? Like you've your property managers in some of the cities you own property in, they've helped you find a contractor and kind of help manage the process. It seems like if you're an out of state investor, relying on your property manager to help with that whole process, they're like the key to this whole thing.

Mark:

Yeah. And I, I put myself out, you know, in Chicago, I got a guy, right. That's what you need. And there's those people everywhere. I mean, there's just those, uh, networking people that are just machines when it comes to connecting people. And, uh, you know, there's a lot of people I talk to on a weekly basis. I might never talk to again, but they'll, or at anytime soon, but they pop up a few years later with six or seven properties that they want me to manage now or something like that. So just kind of drive the people to where they could succeed. And I think the number one thing is starting with the right person to direct you in any of these cities. And I'm sure you guys have property managers all around your network that can at least be the starting point for somebody you're a restock Academy. People to be able to go from there then.

Michael:

Yeah, totally. And Emil to answer your question. Yeah. I reached out to my property manager and ask if they could put me in touch with, but then I still did screening interviews to make sure that it was going to be a good fit for me because the property manager wasn't involved because of the scope of work was just a little bit too much for them to handle. So I sought to make sure that it was going to be a good working relationship.

Mark:

I'll get every so often, uh, a guy that will be like, he'll want to a GCA from California. He wants to just be part of all and that's fine. And what I'll do for him. It's like, alright for the foundation, call this guy for the roof, call this guy and I'll give him seven or eight people and like go for it and they'll knock it out and they'll bring back the property to rent. So that's another approach to it. You, you can literally, you know, nowadays, you know, I know a couple of investors from California that literally do a couple flips a month here, whether it be flips or rehabs, but they, they, they have their trusted guy on the ground here throw up those little cameras in the corners and they're practically on the job site every day, seeing what's going on. So with technology these days, and, uh, I can't think of the service, uh, that camera, the security service, but, uh, it can almost be there on the job. So as long as you have the people, then they can actually trust you. At least know if they're coming or going even.

Emil:

That's super smart. I never thought of that. Like just putting up a ring cam and that's like hooking it up to wifi or whatever. And then you can check your job site.

Mark:

That's all that too. And, uh, you know, so they actually have the locks as well to where you can, uh, change the code from, from your phone in California. And so when that, when that contract came back, cause he's saying, Hey, I can't get into the code's wrong. I see some guys do that too, because they don't want to pay someone like us, a few grand to oversee it. Your times was funny at that point, but, uh, that's fine. It is what it is

Michael:

Right on. Mark, I'm curious to know, is there anything that you could see on a project or potential deal? That's an immediate, no, go for you. Like it's got a foundation issue or it's got a roof, you know, is there such a thing or do you, until you put a price on it, are you not scared?

Mark:

So I've never been a fan of fire properties, um, properties that might had a fire, even if it's just like the second floor has got a partial fire, you just never know. I would never feel comfortable, um, going through without having to really take the part the whole place. So we've never really messed around with fire properties. As far as a foundation goes, we talked about last time, the housing stock and age here, you know, you deal with the foundation stuff all the time. It just ends up being what you do with that foundation. Now, if a house is leaning and it's a hundred years old, more like we're not gonna mess with it. There's a couple of cracks. There's plenty of guys around here that can seal that stuff and make sure that you don't get that moisture in that basement.

Michael:

So, so the, the fire,It was like a dagger in my heart. So I don't think I shared with you Mark, but a lot of our listeners know that I have a mixed use commercial building that I'm converting to residential. And I had two fires, not one but two fires in the same building a week apart. Oh, wow. One in a commercial space and one up on the roof during the reroof project. So dealing with the insurance company right now, getting that whole thing adjusted. But yeah, it's a total nightmare.

Mark:

I'll tell you a quick story. I I've been very lucky when it comes to fires. Um, and luckily I haven't been investigated probably cause the coincidence of them, but, uh, lucky in the sense of we had a, a, a, a property that, uh, we had a really bad foundation issue and, uh, and no one's ever been hurt. So I'll give the caveat that we've had fires and no one's ever been hurt. So we had that building that, uh, um, was almost leaning. It was like a hundred thousand foundation and December 9th, 2017, it burned down. I'm like, Oh my God, total loss. And then we had another one that just being done. We had a four unit and I converted it to a two larger unit and it just didn't make sense. And the building ran horrible and I had to do something. I maybe converted back to four solid, this kind of lose money and it burned down.

So I got lucky two different ones. I had another building, a vacant building, a burned. Now the one thing I went wrong with on there, because this story is, although I made money and I talk about profit-wise, I made a killing, but I was under insured for some of these properties. I could have almost walked away with another 40% of what I walked away with if had I insured it now, there's always the, what you pay monthly versus what you, you know, you're preparing for something that more likely is not going to happen, but, um, just always have that serious conversation with your, make sure you have a trusted insurance guy that you're talking to that can, uh, uh, put that all in perspective here, what that looks like.

Michael:

It's so funny. Cause I come from the insurance world. And so a lot, a lot of people might be like, why the hell is this guy Mark laughing and celebrating that he burned his properties to the ground. And what people don't realize is that if you're going to have a loss, you kind of want to have a total loss. I want it to burn to the ground because then you just get the insurance money and you can go do with it. What you want. The issue is when you have partial losses, when the fire department's really good, or when the building was built, well, you're like crap. Now I got to go repair this thing. And it's, it's a whole nightmare. And that's what I'm dealing with right now.

Mark:

We had the two total losses that they were so bad that the city even came in and tore them down, like within 24 hours. So the one property we even know about, we went there, it was gone. It was something we didn't get to yet. We had a kind of a backlog of properties and it was vacant, but yeah, gone.

Michael:

Cause that's expensive. Property, you know, debris, removal, cleanup, all that stuff's expensive may or may not be covered under your policy. So yeah.

Mark:

Yeah. We had to definitely pay them back for that. They liened it. So they actually got us two properties later. They liened, uh, the land actually for that one. So…

Michael:

Well, that's crazy. That's crazy. Emil, you ready to start wrapping stuff up here?

Mark:

I got a couple other things you want me to hit on real fast. Yeah. So just let me run through my notes here real fast. So I think for the people that come out of state, they don't realize how long that, that time to get from the day you close to the day, you could actually get it rented to either a, have the opportunity to get reappraised or start the seasoning process. So I think, uh, making sure that people are allowing enough time in there, whether it be their borrowed money or their hard money, or be realistic by the expectation. So just even doing a $20,000 rehab is still going to take probably about 60 days from the time you start, you're going out there verifying scope and all that stuff where people are like, Oh, I thought you'd be done in a couple of weeks.

It's like, Aw man. Like, no, we've got to get permits. We got to do these things. So making sure you understand how long you have to maybe have that hard money out there or when you're seasoning period actually real, really start is something that I see people go wrong on. The other thing that I see, and this is a big one and we are, we did this too. When we first started buying these properties, we did whatever it took to get it rented. Um, we only did let me reword that. We only did what it took to get it rented, where we left a lot of capital improvements like, Oh, that Ruffino made me, you know, you can see through the roof by your name. I got a couple of years out of it or that hot water heater. That's literally rusted in drip. It's like, Hey, as long as maybe we get another year and we did those things in a, you know, maybe the, the garage, we didn't, uh, do something with the garage where now we weren't, it wasn't part of the rent.

And, uh, so we, we, uh, we, we shot ourselves in the foot where we were able to see how bad our maintenance was, uh, from not really doing a full project and our average, uh, for our kind of our first 140 units versus the balance of, um, you know, I think we spent about another 12 or 13,000 hours, average per unit, just on making sure we did all those things. That way we're not nickel and dime on maintenance for the next two years.

Michael:

That's really smart spending the money on the front end to making it more maintenance, proof, more tenant proof. You go so far.

Mark:

Yes. You know, when you're getting the appraisal, another thing is, uh, you have the full scope out there. Hey, mr. Appraiser here is the laundry list of everything I did. We have about X amount of thousands of dollars into it. And just want to accompany this with a couple off market cops there. So you can put a nice little package together for the appraisal. You can't tell him he has to use something, but you can at least provide them with the data for him to decide if it's worth using or not. And here's the thing, when an appraiser, he walks in the house, he doesn't necessarily know what the house looked like before he was in there. So he doesn't realize or appreciate how much you actually did. So I know one guy he actually gives before pictures and after pictures to that appraiser, so he can justify the 40, 50 grand. He might've put into it. So that's, that's another, uh, kind of good one to make sure you can at least control as much as you can in that part of the process.

Emil:

What type of investor is this a good idea for? Like, I'm sure you've done this with plenty of out-of-state investors who are interested in investing in Chicago, would you say there's a certain type of investor who like, is a good idea versus I don't know, some characteristics of people where it's like, like one thing I can think of is you have a super busy job and like all these other things where you make good money, it's like, is it worth all your time and energy spent in a BRRRR versus buying something turnkey? I don't know. I'm just curious if you've had that experience.

Mark:

So in a BRRRR, you might just say you run through a whole Burr and you might have only, uh, you might only get 95% of it. Now you have typically 5% of the deal, but if you bought that right, there should still be some equity in the deal that maybe it didn't appraise for enough. So one of the tips I have, or one of the things I say is make sure that when these property or buying or the reward is worth the risk, because there's risk when you're doing this type of strategy, where even if you're not getting all your money out, you should still have a nice piece of equity. So that whole add value piece is why you do it. You know what I think a lot of a turnkey model type investors or investors that are buying, I don't know, you call it top of the market. Um, they might have something that they could get very hands off of, low touch, but they are buying at the top of the market.

You might not get all your money out, but you might still have another 10% equity in there even for a future opportunity to maybe borrow against and do something more to it, or at least have on against your, a personal financial statement as something that you have some equity. And so I think someone that's looking to add a little more value and kind of build that equity worth a faster, this is what it's for. This is like, if you don't have time to be a full time investor, but you don't want to do kind of the armchair type investment, uh, this is kind of the go-between.

Emil:

Yeah, that makes sense. And you know, I've, I've always thought like, even if you leave five to 10% in the deal, like you're still getting a much better deal than you would had you just gone and had to put 20% down 25% down, whatever it is.

Mark:

Oh yeah, for sure. For sure. And so you have that 5% in, and hopefully you have another 10% equity still because it didn't appraise out for the full max. So that's a way better spend than just putting 25% down that, you know, you're not gonna gain money on.

Michael:

One additional point to on, on how long it takes to just get this stuff done. And what really surprised me and kind of caught me looking was the whole time and you're holding costs. And so if you're, you know, you're paying utilities for this property, the whole time folks are working on it. And the utility bill is going to be a lot higher than if people are just living in it. Cause they're using power tools and bathroom and water and all that kind of stuff. So I had a month where I had like 800 to a thousand dollars, just utility bills for this multiunit building, because there are a bunch of people working in it and I'm like, Holy crap, that's insane. And something else to keep in mind is you got to talk to your insurance carrier provider agent and ask them what a vacant property or property rehabbing insurance policy looks like, because that might be very different than a tenant occupied policy. And they're often a lot more expensive. So just make sure you're very accurately putting together what your numbers look like for your… whatever your cost of your money has. And then your, your insurance utilities, your property taxes. You still gotta pay those even though there's no one living in it. So just make sure you're very, you get a very clear picture of what the actual numbers look like,

Mark:

Cutting the lawn, shoveling the snow and, uh, that, that builder's risk policy is yeah, it adds up.

Michael:

Yes, it sure does. It sure. Does Mark. Anything else that you wanted to share with us and Neil? Anything else you got?

Mark:

One other thing that you could do with the appraisal. If you are, maybe you get a bad appraisal, you can always contest that. And I'm not sure if everyone knows that. But if an appraisal comes back, you say, hey, listen, you know, they might've had low comps now. It's not smart to contest it unless, you know, uh, that there's actual facts out there that can help you get closer to your value. But, you know, even if that appraisal that comes back gets you another five or 10 grand on a hundred thousand dollar property, that's a, that's a big chunk. Contesting the appraisal. Now we ran into the issue all time of we're trying to turn money too fast. So to appraise, try to contest an appraisal for another four or five grand. We were, it was slowing us down. So that was one of the things that was tough when we were trying to compound, uh, these deals. But if you're doing, what are you doing to take the time to test that a appraisal and try to get that other five to 10% out of it.

Michael:

Really good advice.

Emil:

Does it cost money? Does it cost money to contest? Cause I remember I was doing a cash out Refi on a property earlier this year and it came in low and we just tried to contest it. It didn't move anywhere, but I dunno if maybe there was like a formal contesting process.

Mark:

You know what, I want to say there's like a a hundred dollar fee. Um, but I might be confusing that with, if the guy couldn't get access and he charged you for it, I'm not sure. But uh, so worst case now I think it might be a hundred bucks. Yeah. Yeah. So again, risk versus reward is not that much, even if it keeps the fader $10,000 or even $5,000 out of pocket for an extra hundred bucks in a couple of extra weeks that there's value there.

Michael:

Money well spent.

Emil:

Totally worth it.

Michael:

Once COVID ends, if you could go out on a plane and go anywhere, where are you headed?

Mark:

Ah, just somewhere at the beach. I have not been to a beach for a long time. Um, I will literally take anywhere with an ocean. I've actually looked at like day trips, like flying down to quick day trips to like, fly out the morning, go sit on the beach for the day and fly home to Chicago down in Florida somewhere. Uh, but yeah, I've been to Vegas a bunch of times, but you don't get that beach satisfaction there for sure.

Michael:

No, you gotta be careful what you wish for though. Cause my brother went to school in Canada and he told me he threw a snowball from the beach into the ocean once. So you don't want to go to over the cold beach. You got to go to a warm beach.

Mark:

Nope. Headed down to Florida somewhere. That's the quickest cheapest flights it looks like. So right on time, change screws you up. I've told me down with it, but for a quick trip, the time change screws up too much.

Emil:

Come hang in. LA man. If you're ever here

Mark:

Yup Yup.

Emil:

But a day trip is tough to California.

Michael:

Awesome. Well Mark, thank you so much for joining us for round two. This has been super insightful, super informative, and I am sure we'll have you back on again. Soon

Mark:

I look forward to it and anybody that, uh, like I, I try to point people in the right direction. So anyone ever interested in Chicago or anyone that is looking for the right context in Chicago, feel free to reach out

Michael:

Perfect. And what's the best way for folks to get in touch with you?

Mark:

We got, uh, we got our podcast Straight Up Chicago Investor Podcast now, which we started a Facebook group for. And then, you know what, I'll put my cell phone out there, uh, in the, in the show notes. So if you guys can help that

Michael:

Fantastic and your website as well?

Mark:

GCRealtyinc.com

Michael:

Fantastic. Well, thanks again, Mark. Really appreciate it. And we'll chat soon, man.

Emil:

Thank you Mark.

Michael:

Alrighty, everybody. That was our show. Hope you enjoyed it and took some actionable takeaways. If you enjoyed it, feel free to leave us a rating and review as well as subscribe, wherever it is, you'll send your podcasts. It really helps us out. If there's anything that you'd like to hear covered on an episode, feel free to leave that in a comment that would be look forward to seeing them the next one and a big shout out and thank you to Mark. That was really, really great stuff.

The 5 Most Common Misconceptions Every New Real Estate Investor Needs to Know Sep 09, 2020

Join Emil, Michael and Tom to discover the 5 most common misconceptions real estate investors have about new acquisitions.

Market Deep (Dish) Dive: Chicago, Illinois with Mark Ainley Sep 02, 2020

Michael and Emil chat with Mark Ainley from GC Realty and Development about what you should know about real estate investments in the Chicago market.

Link to the article Mark mentions: What Will Section 8 Pay For Rent In Cook County?

https://www.gcrealtyinc.com/blog/what-will-section-8-pay-for-rent-in-cook-county

Roofstock Co-Founder, Gregor Watson's Philosophy on Becoming an Entrpreneur Aug 27, 2020

Roofstock's Co-Founder and Chairman, Gregor Watson, joins us to share his journey to becoming a successful entrepreneur.

The Story Behind Roofstock w/CMO Suresh Srinivasan (and a Sneak Peak of What’s to Come In The Future) Aug 20, 2020

In this episode, Emil and Michael chat with Roofstock's Chief Marketing Officer, Suresh Srinivasan about how Roofstock got started, what has changed since and what we are doing to make buying an investment property as simple as possible.

Should You Put Your Properties Into an LLC? We Asked a Real Estate Lawyer… Aug 06, 2020

In this episode, Michael and Emil speak with real estate lawyer Kellie Chrisman about the pros and cons of LLCs and Legal entities in regards to protecting your investments.

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Transcript

Michael:

Hey, everybody. Welcome to another episode of remote real estate investor. I'm Mike Albaum and as always, I'm joined by..

Emil:

The good ol’ Emil Shour

Michael:

And today we've got a very special guest in Kellie Chrisman, who is actually a real estate attorney. So today we're going to dive deep into all things LLC and trust related. And Kelly is going to answer a ton of our questions. And for those of you who can't make it through the episode, cause it does get a little bit long, make sure to listen to the end of the episode where she gives her contact information in case you have any real estate specific questions for Kellie. So let's go ahead and jump right in to it.

Michael:

Kellie. Thank you so much for taking the time for joining us today. We really appreciate it.

Kellie:

Yeah, no problem. Thanks for having me guys.

Michael:

Absolutely. So I was hoping you could give our listeners a little bit of background on you, you know, where do you come from? What kind of law do you practice and we'll start with there.

Kellie:

All right. Sounds good. So I'm originally from Northern California, Chico and I have been practicing in California for seven years college at UCLA and couldn't leave LA and we stayed down there with Loyola Law school lived in Santa Monica, practice down there, my first, probably four or five years, and then moved back to Sacramento to be closer to family and go all over California and practice all sorts of exciting law that no one usually likes to talk about unless I get real estate people, or unfortunately somebody's going through a hard situation. So I do trust the States business planning and then estate planning as well. And they all kind of intermingle and go together. And it's interesting.

Michael:

It's very interesting. And in full disclosure, Kellie and I have done quite a bit of work together in the real estate arena and the trust arena. And now I think Emil has now as well, right?

Emil:

Yes. From your referral. So thank you.

Michael:

Another convert to team Kellie.

Kellie:

That's right. But I can’t confirm unless you guys can confirm. Attorney client privileges.

Michael:

Awesome. Well, Kellie, I was hoping we could jump into kind of the meat and potatoes of what we want to talk about today and start with some definitions to give folks, because I think so often in the real estate realm/arena, people throw around terms without really defining what they are. So for those of our listeners that have no idea, I would love to just run through some definitions of maybe sole proprietorship, LLCs, S Corps, C Corp and trusts. Can you break down for everybody? What those are?

Kellie:

For me, I am a visual learner, which doesn't work necessarily here, but I can at least try and break it down. And I always have to give the disclaimer, I'm not getting legal advice, getting general recommendation based on things that I know. And we can always talk more detailed than I can get legal advice. I see those as two different things. So a trust is, is in its own category from the sole proprietorship partnership, LLCs, Corporations S Corp C Corp, cause they're really accomplishing two different things. So on the most basic level, the trust is something that's going to plan for worst case scenario. So something bad happens, who's in charge where everything is going and what you want that. Then we get onto the other side, the entity side, every other kind of thing we've mentioned. And that's the type of business or entity protection liability protection. So sole proprietorship is if you are going to own a rental property and you don't do anything, you are automatically. So if there's nothing you want to do, you can of course draft stuff and make it more.

But on its most basic level can do nothing. That's what, no, if you do nothing with someone else, then you are a partnership. You can automatically be a partnership. If you do nothing, or you can spend a lot of money to draft beautiful documents and be a general partnership. They're taxed at the individual level, LLC is a limited liability company. And a corporation is both of those. Together are something you file with a secretary of state, whatever state you live in and they give you liability protection so they can have one member. It can be just you, it can be you and a sibling or you want a friend or it can be in corporations and Apple has countless shareholders. So it can go from there, LLCs, the incorporations provide that protection. And then within a corporation you can be two different texts, escort, which is a closely held corporation or a C Corp, which is what we're most commonly used to. So like an Apple or a year, it can be somebody small.

Michael:

So if I'm hearing you right, if I just bought the property and do nothing, I take title in my personal name. I'm a sole proprietor. Yep. Okay, cool.

Kellie:

And if you do nothing with a friend, then you're a partnership.

Michael:

Got it. Okay.

Emil:

Yeah. I was going to ask. Okay. So I think for people listening, what are you potentially opening yourself up to? If you're a sole proprietorship owning real estate, what are the risks?

Kellie:

Okay.

Michael:

How deep do we want to go down that dark dark?

Kellie:

Don't ask the lawyer that question. So I don't like to scare people, but I always like to be realistic and everybody has their own comfort level. If you are a sole proprietorship, you are leaving everything on the line. So to put it in real estate terms, you, if it's a commercial property, somebody walks into your tenants property and they slip and fall on the curb. You are technically responsible in certain situations, most situations for keeping that curve maintained and safe. So if you get sued, everything you own is on the line, your home, all your other property, your retirement, your income, and it can follow you. So you can get a judgment that you might not have a lot now, but in a little while. Well, so the risk, if you have nothing, that's huge is everything. However, how common that? It’s not so, but not so uncommon. I mean, it can be something as simple. If you have a rental property, I had clients that their tenant had a party to make people on the balcony and somebody moved on the ledge. And once we went over and got hurt, whether they're reliable or not, they're included in the lawsuit. So there can be a lot of expense just to prove you’re not liable.

Michael:

Versus going the LLC or corporation routes. Now that's a very different scenario that we're looking at.

Kellie:

Yeah. So then we're looking at the only thing on the line is what's owned in that corporation or LLC. So you cap your liability and we'll talk, I'm sure a little bit about how that happened and how to maintain that. But if I don't have something in place, everything you own is on the line. If you do have a corporation or an LLC, then just whatever is held in that corporation of the LLC. And so a lot of times you'll see corporations or LLC get sued and then they go bankrupt because they're not going to put more assets into that and they'll have to be other risks. If you just have to go back to the most question, if you just have a sole proprietorship or partnership, you know, if you don't get along with with your partner, if you die, what happens to it? If something tax wise, there's a lot of stuff you can do within this corporation, that instruction. So it gets very strategic and fun if I can say that.

Michael:

Yeah. So it just sounds like you have, from a very high level inside an entity structure, as opposed to a sole proprietorship, more options and more liability protection than if you're just a sole proprietorship, is that accurate or fair to say?

Kellie:

Yeah, I think that's fair to say. There's a lot more that you can do and there's a level of comfort that comes with it.

Michael:

Sure. Okay. And so I get the question all the time of Michael, do I need an LLC to invest in real estate? And I think in the real estate community, there's this very hotly debated topic of pro LLC. No, LLC. So it sounds like we touched on, you know, what the pros are of having an LLC. Are there any pros to just being a sole proprietorship that you really lose out on if you have an LLC?

Kellie:

Yeah. So, and it's funny cause I I'm preaching all of this and, and I just went through it as an attorney. You know, whether I want to become an LLC, a limited liability corporation or whether I want to stay the sole proprietor. And when I talk with my accountant, who is usually my they're usually the person that I work with clients tax wise, there can be consequences. So if you do create an LLC, obviously the first thing is that there's a cost associated with it, just filing it with the state. The state has asked me, um, to create it. Usually you're, you're going to need to either pay somebody to do it, or you're going to buy a package online to do it. And there's some things that come within each state that you have to do. So in California, for example, you have to then start paying payroll taxes. So rather than in a sole proprietorship where I just pull my stake and then I get taxed at my own level, I now have a couple of additional tax requirements, but at a point it becomes worth. So that's where I always recommend working with a CPA or a tax professional.

Michael:

Okay, great.

Emil

Like let's say I buy a property in Florida. I decided to put an LLC, you can set up the LLC in Florida, but California will still require you pay like the franchise tax fee. Like you're an LLC, here right?

Kellie:

The problem is, the government writes the law, um, and they always find a way to get their fingers on a little bit of something. So if you have a corporation or an entity in another state and you live in California and you're essentially running it out of California, which is, I own a rental property that I rent, but I received my rent and my California bank account, you have to register as a foreign entity and you pay a small fee to do that. But that's one of the costs of doing the upside of that liability protection.

Emil:

Totally

Michael:

Wait. So did I, maybe I misunderstood that. So if I own property in Ohio, but I live in California and I registered my, I created my LLC in Ohio and registered it as a foreign entity in California. Should I be paying the $800 annual California franchise tax fee?

Kellie:

You do what it is for a foreign corporation, whatever they require for that.

Michael:

I got, I got to take a closer look at that. Cause if I've been overpaying, I got to talk to somebody that's ridiculous.

Kellie:

That's why I say, talk to your tax professional.

Michael:

Right, right. Right. All right. Cool. Well, I will definitely have to look into that then, but so for, in California, I mean, there's really no way to get around telling California that we have even a foreign entity in California if we're living here, right?

Kellie:

Yeah. They're going to figure it out because the second you file your income taxes, you're going to have that income from the corporation. And they're going to say, Hey, right. So it's a small price. You take my lawyer hat off. And $800 is not a small price for me, but I put my lawyer hat back on and I say, this is $800 is a small price to pay. But when you're looking at the amount of money that you're investing in, what you're building and hoping to gain from creating an entity in front of investing in multiple properties, it's really a drop, hopefully, in the bucket in the grand scheme of things.

Michael:

Sure. And kind of getting back to that original two camps, right? The pro LLC, the new LLC. I think the biggest argument that the no LLC camp makes is that, Hey, I can get the same type of asset protection of liability protection with high liability insurance limits and then get an umbrella on top of that. What are your thoughts around that?

Kellie:

Yes, super common. It just… This is such a lawyer answer. It just depends. So I worked with a medium sized firm here in Sacramento and that's what the partner is. He would tell clients, you know, why spend $800 a year when I can buy you a hell of an umbrella policy? And I agree with that in some situations, and I don't agree with it and others. So there's no the person that, you know, maybe they bought their first house and they're going to keep it and buy their next house. Never going to be a longterm investor. That makes sense. You know, if it's a single family home that you're renting, that's a good amount of insurance. But if somebody slips and falls in that house, I mean, slip and falls was one of many things that can happen. It's just common place. Example. You're hoping, and you're, you're gambling that you bought enough insurance to cover that lawsuit and your lawyer fees.

Because if you didn't, then now everything was on the line. Now that dream home you bought is on the line for this rental home that you have. A lot of times it works in, comes down to, and I'll probably touch on this throughout. It's how risk averse, how well you're going to sleep at night. Wonder, I always use the example of my husband. And so I I'm a little bit of a gambler. We had one property. I don't know if I put it in an LLC. I probably would seeing, having seen other things that I had done and worked on my husband is extremely risky because he's an engineering he would, before we bought the property, he would have an LLC set up. He would make sure everything was like perfect and Excel and everything. And it would be, everything would be in separate LLC, which I'm sure we'll talk about too. So it depends.

Michael:

Yeah. I love that answer. Cause I think so many people approach it with a one size fits all, but it sounds like you can't look at it through that lens.

Kellie:

No. And every situation is different. Every set of facts, if it's commercial property and they're going to be multiple people on this property every day, if there's going to be any kind of manufacturing, any kind of longterm structure to me, that's a no brainer. I would advise my clients to immediately do it and have an entity in place. But it just depends if there's an accident.

Emil:

Yeah. So one of the questions we wanted to ask you is how do you handle insurance if you're using an LLC, does it differ if you're a sole proprietor versus LLC, do insurance companies look at those differently?

Kellie:

So you talked to your insurance agent and each insurance company is going to handle them differently. A lot of times you will insure the LLC itself or the entity LLC, or corporation, and then insure yourself separately. So you can, I mean, if you're extremely risk averse and we send it, my husband would probably have insurance on the LLC and then we'd have an umbrella personally, over ourselves as owners of the LLC as well. So you're, you're double protected, but each insurance company saying that a little differently.

Emil:

So you don't insure the property, you insure the LLC. So if I acquire more..

Kellie:

So you would insure the property, but the property is going to be owned by the LLC itself. So if you're insuring you can insure business and then you can insure the property, but you're likely going to do both. And if you have a mortgage on the property, they're likely going to require that you meet the minimum requirements, ensuring that properties.

Emil:

Right. Got it.

Michael:

So let's just take an example. I've got two properties, both in the same city, both currently insured with the same insurance carrier and I move one of those properties into an LLC. Can I use that same policy, so to speak, that'll cover both properties or do I need now a separate insurance policy for the LLC property and then a separate insurance policy for my, the one I own my personal name.

Kellie:

Yeah. So I'm going to punt to your insurance agent, i’ts going to depend on what they want to do. So, and it's interesting because this area of law is something that's rapidly developing and becoming more common. I think that a lot of smaller investors are becoming more sophisticated. And so now they're looking into these LLC avenues and now lenders and insurance agents are catching up. So I've had clients who, that's not a problem. They're able to do that and just list the entity as a second finer or additional party. And then some insurance companies will say no way, you're not touching separate policies now. So it's just gonna depend on your insurance agent.

Micheal:

Okay. Something that I know we've talked about in the past, Kelly is commingling funds and we'll kind of get there in a minute, but I want to talk about maybe commingling insurance. So if the insurance company is okay with it, right, they're happy to write both my LLC property and my property owned in my personal name on the same policy. Can someone look at that and say, Hey, look, he's insuring these two things on the same policy just cause the insurance company is okay with it. Does that mean it's, I'm safe from a legal perspective.

Kellie:

That is one that I have not encountered before. I believe you would be okay. Simply because you are, you're listing them separately as separate entities. I mean, if you want it to be perfectly safe, have no, you know, gray line. I wouldn't have them completely separate because obviously that's the easiest way to never have it come up in court. There's even an insurance policy that's owned, but I don't, we're looking at the commingling is whether we it's, what's called pierce the corporate veil. And I don't think that the insurance policy would do that on its own. You would have to also be doing additional things. So if that's the only thing you're, you're doing that it shares an insurance policy. I don't think it would be a problem. I don't think that would be enough for the court to look at you and say, Hey, he's treating this corporation or this entity as if it's his own personal bank account as if it doesn't really exist. However, if you're also buying all of your groceries out of the bank account and paying your, your home mortgage and buying all of your diapers, that's going to be like completely different analysis. From the court's perspective.

Michael:

I thought I told you, I haven't worn diapers in years.

Kellie:

I didn't know. You know, it's this whole quarantine thing.

Michael:

This is kind of a nice segue into bank accounts.

Emil:

Okay. So if I'm using an entity structure like an LLC, do I need a separate bank account for that?

Kellie:

Yes, it's very quickly. So the biggest thing that you want to do, and then the purpose of the corporation is going to call corporation LLC interchangeably. Unless we're talking about structure, purpose of the entity is to protect you. And we have to create the corporate veil. We have to create the entity and maintain it as if it is a real thing, because it is. So one of the things, the most basic thing to do to do that is to create a bank account, which is very easy to do. They usually want what you filed with the secretary of state. And what's called an EIN number, employer identification number, which is it's very easy to obtain, or your attorney can do it. You can really do it. It's a little dicey. One of those things that might be worth having your tax professional or attorney do and the bank will create it.

That shows that you are intending to treat them separately. You are intending to honor the law and keep things separate. So it's the first line of defense that I just show that you have created the entity. It also makes me, so you set up your entity, you create your bank account and now, you know, what's coming in and the most basic level, you put all your income for the business, they're all your rent checks. And then you pull all of your premiums for insurance or whatever you need out. And then you can pull your hat when the time comes. So, I mean, I told her the first thing that I recommend the clients do and I recommend they do it.

Michael:

I often get the question, you know, how do I pull money out of this LLC account? Cause I'm the LLC owner. I'm ultimately the owner, but I'm setting up this corporation a structure to limit the liability exposure. So once I received the rent, all the expenses get paid out of that account. Can then I just move that money from the account into my personal bank account.

Kellie:

Mhhmm. So by putting it in the business bank account, first, you're creating a record. You're saying, Hey, this money, this check that I cash was right. And here's where I put it in. And here's where I pulled it out. And this is my thing. So if you are non-graded record keeping and your accountant is not going to, it's going to make it easier for them to do their job for you to pay your taxes. And it also from a legal perspective, shows that you are, you know, you're, you've created an entity in your needs, so you have honored it. You've used it. You've put it in there. You've pulled out the money to yourself. You're not using that business account as nerd ATM or debit card.

Michael:

Okay. So if I wanted to take $50 from my business to go buy groceries, instead of going to use my business debit card at the grocery store, I should simply move the $50 out of my business account into my personal account and then pay for it with my personal debit card.

Kellie:

Yeah. Or put it on your personal credit card and then use the business account down the road. So you pay yourself and then you can pay that off. Okay. Now, if we had a CPA on or an accountant, they'd be saying, well, what are you buying? You know, are you buying, you know, the business expense can now, can we have them leave? I mean, that's my dream. CPA is trying to figure out how exactly they can make it work with business expense. But the point is that you are not intermingling your day to day life with your business life. You're keeping them separate.

Michael:

Got it. You touched on it a little bit ago and I just want to circle back to it. So let's say somebody is interested now in setting up an LLC, what do they do? Who do they call? I mean, they can obviously call you, we'll give everyone your contact information at the end of this, but what are the steps involved with setting up an LLC?

Kellie:

Yeah. So this is an ongoing debate. And I love talking about this because in the most common thing I hear is why can't I just go out and buy this package that I found online for $95, that's going to do it all for me. Why would I pay you? And it's as simple as you just need to file the required documents with the state that you want to create your entity. That's what you have to do on the most basic level that creates your entity. And then from there, you need to build off. So depending on whether you have an LLC or corporation, there are certain documents that need to go into place. So when you file either your articles of incorporation or articles of organization, so organization is the LLC corporation is corporation with the secretary of state. From there, you're going to need that EIN number to help you set up the bank account.

You're going to need the documentation to support and show that you created. So just like we create the business account and we don't intermingle funds where we're showing we've created it by having that business account. We're also showing we've created the entity by having the paperwork that supports it and actually creates it in place. It's fairly common that I have clients come in and all they've done is file. Well, I created it and I'm paying my yearly fee and that's all I have. And when I asked them, you know, who's in charge, if you die or what happens if you and your partner disagree or who, you know, who's the treasurer, who's this, then people go, I don't know. I didn't do that. In that time I bought packaged. I didn't thought paperwork, or I just signed it. I bought that, but I didn't read it.

I don't understand it. Yeah. They have the skeleton in place, but not the details. So I mean, ideally what you're setting up when you, when you do it, you're filing and you're setting up the background paperwork and getting all of the documents. You need to have a successful business going forward. If you do it right at the beginning, you build on it and you have, and you're confident in this round foundation. So if you're going to invest the money to do it at all and the best, the annual fees, then why not just do it a little bit more into it. Right. So that you don't ever have [inaudible].

Michael:

Yeah and if we did have an accountant on the show, they would tell us that that's a startup expense. So keep track of it.

Emil:

I think we need a follow up with an accountant and Kellie!

Kellie:

Love that.

Emil:

Imagine the nuggets we're going to get out of that one.

Michael:

Oh, the fireworks will be flying.

Kellie:

I'm sure. Just agreeing with each other. I'm sure.

Michael:

Right, right, right.

Emil:

I actually want to run through my personal scenario. I think there's some stuff we can pull out for listeners. So when you and I started working together, I had almost all of my properties in my personal name. And I got married a couple of years ago, had a daughter and realized everything sitting in my name there's issues with that. Right. There's… if something happens to me, obviously that doesn't happen. But something happens to me. There's something called probate that I wanted to avoid. Can you really quickly just touch on what probate is?

Kellie:

Yeah, so it's the thing people don't like to talk about.

Emil:

I'll explain where I'm going with this after.

Kellie:

Super important, because I mean, so probate in its most simple form is a court monitored administration of an estate, of somebody's assets. Once they die, it is not the state taking a percentage of what you want. That's the most common thing I hear probate is a nightmare for a host of reasons, mostly being that it's lengthy, it's public, so everything you all is public and open to really looking at it. And in some situations, if you have nothing in place, it goes according to law. So it's going to your kid. Right. And who's getting it in the meantime. You know, if your kid is, you know, one or two, like I know I have, you know, who's watching it for her and do I want my 18 year old getting access to everything that I own at 18 years old? No. So probate is a little bit, but a fun nightmare.

Emil:

Yeah. And I had a family member deal with it and which is why the alarm sounded off for me personally. And so that's why I decided to put these properties in a trust again, moving them out of just my name, avoiding any headaches. If anything happened to me, you touched on what an LLC is just real quickly again, what is the advantage of the trust?

Kellie:

Yeah. So the trust is going to say where everything goes when you die and it avoids probate. So they work together a trust and an LLC. They're not a trust is not going to give you liability protection. I wish it could. I could save my clients so much money. I can trust you liability protection, but a basic revokable trust does not. And really for anybody young, that's all I'm recommending because you don't want to buy property you can't sell. The trust is going to allow you to say, if something happens to me, here's where I want it to go. I want it to go to my daughter. When she reaches the age of 25. If she goes to college, I want everything paid for, you know, she needs a car.

She can have a camry she doesn’t need a Ferrari -- because her dad likes cars. And you know, she graduates from college. She can have 10% or it's a little incentive if I'm not there to help her. But if you don't have kids, it can become even more important. You know, where do you want it to go? You want parents to have it. Do you want your siblings to have it? Do you want your girlfriend to have it? Do you want a charity to get half? You can be super creative. And then from, I think a more important level, if you are in an accident and you're in a coma, who's maintaining everything that you have. And so we want to make sure someone's collecting the right on your property. So once paying your insurance premiums so that you're in a coma, and if you have the worst year ever with 2020, you never know you're in a coma and your property catches on fire. We want to make sure that your transplants are paid and everything is contained. So when you wake up, your life is the same.

Emil:

Awesome. Yeah.

Michael:

And are there any financial benefits to not going through probate?

Kellie:

Yeah. So probate, the fees are set by law. So especially here in California, a percentage of your estate goes to your attorney and a percentage of your States into the person that's running it. So it's an executor administrator. They get it generally is about two to 3% of your estate goes to your administrator. And two to 3% goes to their attorney, being an attorney that practices this all the time. I don't handle a probate that I don't pick up. The probate code. There is always something weird. There's never, and it's kind of a running joke about people that do this area of law. I don't think it's boring and it's, it's shocking how not boring and bizarre. And it's so it's hard to go through without an attorney. So I've worked for firms that they get great deals on wills because a will is perfect.

The trust is not people go, wow, you paid $300 for a will. Or I paid 3000 for a trust. That's ridiculous. I'm getting a will. And the reason attorneys are doing that is because down the road, they're going to be making a lot more money off of you, probating your will. Then they're going to now, if you set up your trust and do it right the first time, not a little attorney, we of, we joke in our, in our industry kind of about, you know, people oftentimes will go do it themselves. And I always tell clients, great, go do it yourself. And then let's have a free consultation. I'll read through what you put together and I'll tell you, honestly, you know, I'm not going to charge somebody money if I don't need you. That's not why I'm in this area of law. But a lot of times people will do it themselves. Think they've done it and they don't execute it. Right. They put something in there. They don't intend. So we hear their properties going where they don't want it to, or it's not valid at all. And the attorneys then making more money than they would have the probate, because now we're fixing what you did wrong through whatever software was cheaper around, seemed like it was cheaper, I should say.

Michael:

So. I mean, we just kind of glided over that fact, but I want to circle back to it. If I have a will in place that does not help me avoid probate, I might be able to dictate where things go and to whom and when, but I still got to go through probate. Well, my, whoever is around has to go through probate. If I've got a trust, I can also dictate where things go to whom and when. And I can avoid paying that two to 3% fee

Kellie:

In the probate. It's attorney's fees and administrator executor fees. So probate is if I have nothing in place, then it's probated and it goes disposition or where it's going. My state, it goes according to law and the law assumes your kids are going to get it as soon as their legal is in 32. And if I don't have to, it goes to my parents. And if I don't have my parents, because my is, and news is full. That's how you hear these people that didn't long loss, fifth cousins or whatever.

Emil:

I remember when we were going through the process of doing this with you. And I'm like, after this person, I just don't know who else at this point

Kellie:

We always, so in that case, what we always do and you'll see in any well drafted will, it will always say, and if everybody's gone to their heirs at law, because if I'm going to keep making, like, I call it like the worst car accident. So if you tell me, okay, I want it to go to my wife and my daughter. And then I go, okay, well, great. You know what? If they're dead and you say, okay, well then I want it to go to my brother and sister. And I go, okay, great. What if they're dead too? And it doesn't matter how many people you tell me I'm going to kill them. Everybody loves talking to lawyers and everyone loves talking about death. So people love talking to me.

Because I, I try to joke with clients and make it light. Cause it's a hard topic. A lot of times, you know, if there's a, everybody that you can name, I'm going to stick them on an airplane or some terrible accident. Cause these things happen. Right. And not super uncommon. I like to use the example of, do you ever go to dinner and do you drive in the same car? And if the answer is yes, then you need a second person or you need to be okay with it going, you know, if I'm off. So if you have nothing in place, the law has something is simple. And if you put together a will, so in a little can be as simple as you can write out, depending on your state, you can write out before you get on the airplane and you sign and date where you want things to go, or you can pay $10,000 to the best attorney in the world and have a 50 page will. And it's still going perfect in that case to go back to my example of, well, I want my daughter to get it at 25 or if she graduates from college, 10% early, she can do that in a little. I can do that through probate, but I have to wait through that year and a half long process.

I'm paying about three to 6% depending if the administrator has an attorney of my estate and what am I gaining? You know, I could've put that same energy and that money into a trust fund given more than my daughter down the road. So it makes total sense. The trust is that I think a gift to the family.

Emil:

I agree. Yeah. That's why I decided to do that. And I know Michael, you've done the same. So my next, and probably the last question on this one is, okay, so right now I have all my properties in a trust. Let's say I go out at some point and I start buying properties in an LLC. Do you move the LLC into the trust? How do you get those properties into the trust as well?

Kellie:

Yeah. So your, your LLC is going to own the property. And then your trust is going to own the LLC, or you can assign your LLC interests into the task. So in that case, it would take effect. If something happened to you down the road, we're pulling it in to the trust itself. So we're avoiding probate by doing it that way. So if I could draw it out, I would have the trust at the top. Well, really you're at the top. And then I'd have a line down. Then we bought a bubble with your trust, uh, the, a mill trust. And then we've got a line down to a bubble with the mill LLC. And now it shows ownership who has control of what? So it doesn't go the other way. So the LLC doesn't have control over the trust and the trust doesn't have control over you.

You have control over everything. And so for each complete protection, really for you and your family, you have the LLC to protect you. Somebody sees you, they can't go past that first bubble, unless you are buying your diapers every single day out of your LLC, you're breaching the corporate veil. So it stops at the LLC level. And then if something happens and you pass away, then we've got everything in place to protect your family. So you're covering both sides and I joke with clients, but this is the scary truth is that none of us get out alive and in a trust, in a will or nothing or probate, we're all headed in that direction. There's, you know, in this crazy world, everything that's going on, the one thing we all have in common and people don't like to talk about it, people don't like to acknowledge it, but accidents happen and aging happens. And so it's something that if you put it together right now, you can build on it for a lifetime and never have the expense.

Emil:

Yep.

Michael:

Awesome. I just wanna ask a clarifying question. When a meal says that he owns the trust, owns his property. What's the name on the title? Is it a meals trust or is it Emil as a person?

Kellie:

When, and your trust owns the property? So when I bought my house, I had Ellie Chrisman. I was married. So Kellie Chrisman and married woman as joint tenants with the husband. Now, when we put our trust together, which as any good attorney does, I want you to talk with me before I close and to put together, I then transferred. Once we closed into Kellie Chrisman as trustee of the Chrisman family trust, those are the goals of the words that place it into the trust. So when you want something to be owned by the trust, when there's a title document to it, what we do to accomplish that is that you own it. You, the individual as trustee of your trust.

Michael:

Okay? Yeah. So if I already own five rental properties and I want to see in my own personal name, and I want to now put them into a trust, we're going to have to change the title of those five properties.

Kellie:

Yep. That could be a whole podcast in itself is if I want to try and do this on my own, where am I most likely to mess up? Titling is number one. So you created a trust or you kind of attorney create it for you. That's half the battle. Now we need to fund it. So now we need to make sure your title to your properties and anything that can be retitled is federal correct. So we're transferring it from you as an individual to us trustee and the deed has to be done correctly. It has to be recorded and usually that's included. And so a lot of times you'll see, Oh, this trust is a hundred dollars and this attorney's 1500, this attorney's 5,000. What's the difference. And it's what they're including for you within the trust package. So the funding should, in my opinion, always be included in done for you. I mean, that's the last thing you want to do is spend the time to go through all of this legal stuff and then have a ton of homework to do, including a legally complex thing like titling.

Michael:

Okay. So Kelly. So just so I understand. So if I've got those five properties in an LLC and I want assign, you know, put all those into the trust as well, I don't have to change the title on those five properties. I can simply assign the interest of the LLC to the trust. Is that right?

Kellie:

Yeah. You don't want to change the title. So if you move it out of the LLC, the issue then becomes that. Now you don't have that protection. It's no longer owned by the LLC. So you want the trust to own the LLC. And whether you do that by assigning it, or, I mean, so I always have a good veteran best, right? So good is listed as an asset. It's find your schedule of assets of your trust. Better is you assign the LLC to the trust itself. And that is the workable solution for most of my clients. Best is within the LLC paperwork itself, the setup of the entity, you have the trust. So you as trustee of your family, trust, owning the LLC interest itself, and that will get the LLC and therefore, anything else you own. So those five properties into your trust,

Michael:

Man, we could go on with this stuff for like probably days, but we're getting along. And the two that I want to be very conscientious of your time. I think the last question that I want to ask, and then I'll give them a chance to ask is, you know, where do you see new investors getting into trouble legally?

Kellie:

Yeah. So saving the penny. And I hate to say that that seems like such a lawyer answer to, Oh, hire me, but it's not just that. I mean, obviously that's ultimately how I make my money, but, but the reason I did this area of law is that I feel like the law gets in people's way so often. And it prevents somebody that has a great idea or a great investment portfolio from protecting themselves correctly. And then people either say, I'm just not going to worry about it. I'm just going to jump over this hurdle of law. I don't have time to deal with it or they try and do it themselves and it makes it worse or they skimp on what ends up being the most important thing and putting everything else on the line. So if you're setting up a investment strategy and you're going to buy hopefully hundreds of thousands of dollars in property and be making significant income, why not invest in an attorney's time?

And it doesn't have to be a lot of attorneys will offer a free consultation and the right attorney is going to work with you to make it affordable. And it's the best investment, the best foundation you can do. And I think the thing that saves people the most money over time, you will end up spending more fixing it, but then you will just doing it, right. I mean, UCLA Bruin. And I like to quote John Wooden as we all do. And then he said, if you don't have time to do it right the first time, when are you going to have time to do it over? And that's something that I always try to put into my own personal, my personal life and my practice. But I think a good attorney is going to work with you. They're going to make sure that you're comfortable. They're going to make sure that you're not surprised. And that's the goal is to make sure that you're empowered to do what you can do, what you can do, right. And then hire when you need to.

Michael:

Awesome love that.

Emil:

I don't know if it's a question, more of a clarification. I know we didn't get to one thing I think people should think about as they're considering personal LLC, all those things. If you're going out to get financing, it's a little bit different with an LLC. Most of the 30 year fixed rate, Fannie Freddie government backed mortgages. Those aren't available. If you take the property in an LLC, C I'll usually have to go to a different type of lender, commercial lender, different type of product, but just something else I think is important to consider as you're evaluating all this and navigating it.

Kellie:

I found with clients that I've worked with in the past. So having an attorney that's read through your stuff, or, you know, if I have a client that I'm helping, I can work with the lender, my dad's a small business lender. So I kind of heard that my whole life in my ear. And so I will work with lenders to do whatever we need to do. And sometimes it's, you know, you're going to take the property in the mortgage in your own name, and we're going to let the lender know, Hey, we're transferring it into an LLC. And they're going to give us a letter that that's okay, or they're going to tell us their procedure, or they might want something else from me. So they might just say, Hey Kellie, can you give us, you know, a letter on your letterhead with your signature that says, you know, they have an entity, here's all the information. It's kind of their way to be past liability to me. But also sometimes it's ridiculous as it is just having the, the Esquire, the attorney at law, after my name, I can write the things you need to do and note that it more weight, but it's just that extra team player in your pocket so that you have all the tools that you need [inaudible]

Michael:

Yeah. Great. Awesome. So Kellie, this has been so awesome. Thank you. So, so, so much if people have additional questions, want to form a trust, need help with an LLC, how legal type questions what's the best way.

Kellie:

So email's always great. Or, you know, check out my website Avvo is a nationwide attorney referral website. It's kind of like a Yelp for attorneys, how exciting! But taylorchrismanlaw.com. Um, and then my email is just my name. I tried to make it easy. Kellie, K E L L I E @ taylorchrismanlaw.com . And I always liked to have a conversation. I always tell clients, don't be afraid that I'm going to charge you. I'll tell you before I charge you. I never want to surprise clients with a bill. That's my worst case scenario.

Emil:

Yeah. I can attest to that

Kellie:

I'll talk to you about the weather. Kellie. How much are we paying you for this? And maybe it's because I'm a little selfish and I like to know my clients, but you know, always happy to have a conversation and then no, somebody doesn't go with me or they go with legal zoom or they do it. I'm always happy to look at what they've got. And I mean, to me, the biggest compliment is down the road. If they refer me to somebody else, you know, that's huge. And so whatever I can do to help, I'm more than happy to be there. And I'll tell you if I charge you and if I don't do it, I'm going to send you to somebody. I'm not just going to say, Oh, sorry, good luck. I'm going to try and find you that person that can help you wherever you are.

Michael:

Great. And can you just spell your last name? So everybody ensures they have the proper spelling

Kellie:

It’s like a Chris and a man stuck together. So it's C H R I S M A N.

Michael:

Kellie. Thank you so much for sharing your contact information. You're a California attorney. We've got listeners all over the country and I think a lot of international as well. Can those folks reach out to you if they don't live in California for help with their legal type stuff?

Kellie:

Yeah. So my restriction is, you know, I know California law the best, and if I'm ever uncomfortable, I'm going to send you or refer you to somebody in your own state. But I regularly handle stuff for clients that either live in California and are investing in property, out of state for clients that live out of state or investing in property in another state. And then I'm helping them through the legal process. So I can draft deeds, you know, all over the country in a trust. You're just going to pick California law. And in this area of law, it's not really that dissimilar from state to state. And so it's something I can help people with and have a conversation. And if it's ever something I can't do it's I refer you out and I'll let you know that I can handle whatever it may be.

Michael:

Fantastic. And before we let you go, what is your favorite kind of pizza?

Kellie:

So pepperoni, jalapeno. And now I want pizza.

Michael:

I've never heard of that combo, but I like it.

Kellie:

Aye. That's what Adam and I used to order

Michael:

Pepperoni and jalapeno. I've got a quick follow up for the group. A question for the group. How do we feel about pineapple on the pizza?

Kellie:

No, that’s a strong no.

Emil:

So a little bit of a long winded answer. I used to work at my first job in high school was Domino's. I worked at Domino's

Michael:

Awesome.

Emil:

Both making pizza and delivering. So I have tried every single type of pizza. You could imagine, like triple Decker, pizza and Kelly. You just reminded me how good pepperoni jalapeno is. I haven't had that since I, I worked at Domino's in high school and it's incredible. I'm gonna have to get that next time. I order some pizza. I do not like pineapple anymore. I think I got pineapples out at Domino's back in. That might happen.

Michael:

I'm a strong pineapple advocate. I just like the sweet and the salty together. Pierre, what's your take pineapple on pizza, yea or nea?

Pierre:

I'm just not into pizza.

Michael:

I don't like pineapple and I don't like pizza.

Emil:

Pierre's too shredded for, for pizza.

Pierre:

No it's one of those things where I never crave it, but I'll enjoy it when it's there, but I will always make a choice over pizza if it's me choosing, but I don't see what the big rage against pineapple is either though. I'm…

Michael:

Kellie's face is make a barf.

Kellie:

It's not supposed to be hot. It's just not.

Pierre:

But barbecued pineapple is pretty darn good. I got to say, got to say, but I agree jalapenos on everything. I eat a jalapeno a day. Every single day. I have a fresh one,

Michael:

Keeps the doctor away.

Pierre:

I don't know. Yeah. I mean probably.

Michael:

Awesome. Kellie, thank you so much for coming on and we will have to have you back at some point down the road because there is just so much good meat here to dig into. Emil any final thoughts before we let Kellie out of here?

Emil:

No, thank you so much, Kellie. I know you've always been very helpful for me with all the legal questions I send you. So thank you on a personal level. And thanks for coming on the podcast.

Kellie:

I can always tell when I’m in the right area. Cause I'm exciting.

Michael:

Awesome. Well, Kellie, I'm sure we'll be chatting soon, but until then have yourself a great one stay safe. Alright.

Kellie:

Thanks guys.

Michael:

Well, everyone, that was our episode. A massive, massive, massive thank you to Kellie. As we mentioned, the sheer number of time we could go on for hours, days, maybe even years about this stuff. I think that's why law school is so long, but we would absolutely love to have Kellie back another episode. Hopefully everybody got a little bit of value out of this and realize just how complicated things can get and how quickly. So I've always touted it. I think Emil would agree. Go get legal advice, go get tax professional advice. Don't try to do this stuff yourself. Just like you're taking your car to the mechanic. They're professionals. Let the professionals handle it. Feel free, if you'd like the episode, to give us a rating and review wherever you listen to your podcasts, go ahead and subscribe. If you want to get automatic downloads on the episodes that come out twice a week. Thanks again for listening. We'll see you on the next one. Happy investing.

Emil:

Happy investing.

The Showdown of The Century (Round 3): Remote vs. Local Investing Aug 03, 2020

In this episode Tom and Emil go head to head to debate which investing strategy is superior, local or remote investing.

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Transcript

Michael:

Hey, everybody. Welcome to another episode of their moat real estate investor. I'm Michael album. And today I'm joined by my usual hosts,

Tom:

Tom Schneider

Emil:

And Emil, The Real Deal, Shour.

Michael:

Ooh, I love that self-proclaimed nickname. Love it. And today we're going to be doing another show down. We've got a lot of feedback from our listeners that showed on episodes were well received. So today we are going to be debating the pros and cons of remote investing versus local investing dunked on done. Well, guys, let's jump into it.

Emil:

That was actually a nickname that someone I went to college with gave me.

Michael:

Okay. So it wasn't self-proclaimed.

Tom:

Emil, The Real Deal.

Emil:

We were in the same frat and we had like boxing night and…

Michael:

that's so good.

Emil:

He introduced me as Emil, The Real Deal!

Michael:

I would never go on a boxing match with anybody that had that intense of a nickname.

Emil:

Those people went down. Went down hard.

Michael:

Okay. So for any of our new listeners out there, my name is Michael Albaum and I'm the head coach with the Roofstock Academy, Roofstock’s education arm, and Emil, do you want to tell us a little bit about yourself and who you are?

Emil:

Yes. My name is Emil Shour. I work on the marketing team here at Roofstock, which if anyone's not familiar, it's a marketplace where investors come to buy and sell single family rental homes. And so I work on the marketing team. I actually invested through Roofstock’s marketplace before I was employed here. And now I have the joy of getting to spread the word.

Michael:

So you're drinking the Koolaid.

Emil:

That's right.

Tom:

An evangelist!

Michael:

That’s right. And Tom, who are you my friend?

Tom:

That is a deep question.

Michael:

Start at birth!

Tom:

Start at birth. So I am an investor. I'm a California broker. I work here at Roofstock on the investor education team. I initially worked at one of the very first publicly traded REITs, doing single family rental, kind of in the wild West of 2009. And then our CEO went and was a co founder and starting Roofstock. So I jumped over and joined him at Roofstock on the product side and the operations. And now, as I mentioned on the investor education side.

Michael:

Awesome. Love it.

Tom:

Before we get into the meat of the episode, a quick announcement as usual, this episode was brought to you by Roofstock Academy. Roofstock Academy is Roofstock’s education program to get you to the next level. We include over $2,500 worth of marketplace credits on demand lectures, one-on-one coaching group coaching, all kinds of benefits. And we have this new benefit that we put together that Michael is leading it's our book club.

Michael:

Within the Roofstock Academy, we actually do a monthly book club. We get together and read the same book over the course of the month that has some takeaway, some motif, some applicable things to real estate investing. And we get together at the end of the month and we have a chat about it. And cause now it's COVID, we're doing that all virtually, but hope to be able to do that in person at some point down the road. And this upcoming months book club book is Michael Uber's, one rental at a time. And as an added bonus for this month book club, we're actually going to have Michael Zuber on that call with us as kind of a fireside chat. And as we're going to be discussing his books, we get to hear it from the source himself about some of the reasons he wrote the book and some of the takeaways from the book as well. So now is the opportune time to join the Roofstock Academy roofstockacademy.com. So you can join us for that monthly book club and take advantage of all of the other advantages the Roofstock Academy has to offer as well.

Emil:

For people who aren't familiar with Michael Zuber, he's been on the podcast twice. Good friend of the podcast episode 11 was the first one we had with him, the power of four rental properties and how it can change your life. And most recently, I think we, we dropped an episode with him this past week called how Michael Zuber Quit His Job On a Whim After Achieving Financial Independence. So if you're not familiar with who he is, go back and listen to those episodes. He's a super, super smart guy he's been investing for. I think 20 plus years. Now he knows a lot and has a really, really awesome message for other investors.

Michael:

So today for our shutter and episode, we're going to be taking two sides of this argument and splitting it up a meal. Why don't we give you remote? We'll give you a remote and Tom, you're going to have to defend local investing.

Tom:

Yeah. A classic episode, a classic discussion for the remote real estate. We're going to, you know, try not to be too biased…

Michael:

But it is called The Remote Real Estate Investor,

Tom:

But it'll be fun. It'll be fun. I don't know. Yeah. It's fun going to the other side of the table. So..

Michael:

I think it's important to address and acknowledge both sides of any topic of any discussion because it's two sides to every coin and there is no one size fits all approach, even though remote real estate investing is far superior, but we're going to get to that in the episode. So a meal, would you like to go first or second

Emil:

I'm game for either Michael?

Michael:

Okay.

Emil:

You're the moderator.

Tom:

Go first Emil. That way I'm giving you a heads up. I'm handicapping you alright,

Michael:

Emil, the floor is yours.

Emil:

All right. So I have three points I want to hit here. That Tom is going to have a very hard time rebutting. So the first one is that with remote investing, you buy where it makes sense. So if you're a local investor, you're looking around at your local market, you're geographically constrained to just the deals around you. So if you live in Los Angeles or the Bay area, like we do, prices have gone out of control. Prices have gone up a lot and rent has not been able to keep up with that. So in certain markets, it's very hard to find cash flowing properties, unless you have a lot of money, put a lot of money down. It's very, very hard to make those work. There's still good markets. It's just harder to make the cash flow work. So when you're a remote investor, you buy where it makes sense.

You look at different markets, you look at where deals are, where the fundamentals are good and you invest there. You're not geographically constrained to only where you live. You go to where the deal is. Makes sense. The second point I want to touch on is you get to build a team instead of doing everything yourself. I know personally, if I was investing locally, I would want to do a lot of things myself, instead of relying on other people, finding the right team. And I think that's an advantage in building a team because these people are professionals. I'm not, I'm not a professional property manager or inspector any of these things, but being the person I am and liking control, I feel like I would try to get my hand into too many of those things. Whereas when you're remote again, you have to rely on the fuel.

You have to build a team. And so I think that's one of the advantages of going remote is you're required to build that team

of professionals. The last one I want to touch on before I get on the floor is I think with remote investing, it's a lot less emotional and more about the numbers. I think when you go and view properties all the time in person, it's hard to ignore some of the blemishes that you bring to the property, right? You have some bias. You're like, Oh, would I live here? And with rental properties, especially for cashflow, that's not what matters. It's do the numbers make sense in a market that I like. And is this an area that I'm comfortable with? The risk it's not about is this somewhere I could see myself living. And I think if you're doing the local investing, you bring a lot of that emotion in looking at a lot of the properties you look at.

Michael:

Wow. Tom, come back from those man.

Tom:

I like it. I'm so confident. I'm going to slow roll a little bit. I'm actually just going to compliment a couple of your points before I stepped back and do the fade away three while kicking my leg out for you to run into it for me to get an extra free throw. So yeah.

Emil:

Okay. James harden.

Tom:

Okay. So to honor my comment there, I love the point about how it allows you to not kind of get in your own head and just be super data-driven about it, but okay. Onto the good stuff, I'm a good stuff. So investing local is definitely the way that you want to do it. So I think the first point that I'm going to make, which could be the most relevant is you're never going to know a market better than your own market. And me personally, I've been studying the market since I was about eight years old. I'd go to Safeway, I'd get the homes and land magazine. And I would just study comps. And I had this long trend of analysis. I know the different markets, different property types, how they're trending. Heck I even know the agents, right? The Kerses family out here, great agents. So you're going to know a market a lot better just from, you know, kind of hounding your local Zillow or Redfin or whatever. Basically the adult version of the homes and land magazine from the Safeway. All right. The next point is, man, what value is it to be able to touch and feel the house, you know, to go up to the house and touch the walls and kind of like smell it. You can't do that remotely. And one of the reasons people like investing in real estate is because it's a tangible asset. It's, it's something, you know, you're not buying some future of gasoline because the price of crude is low.

You know, it's an actual asset that some people actually use using by doing it remotely. You're kind of getting away from that. You're getting away from that touchy, feely wonderfulness of buying a house that you can actually see and walk into. And you know, you get out of the ethereal, if I steal a word from Michael here, it's a nice to the realleal, so, you know, you're being there. So that's number two is the tangibility of it, of actually being there, getting to go see it. It's pretty awesome. And lastly is you're not going to get taken advantage of, you know, doing things over the phone. You're going to have these quick talking sharks, selling you snake oil and all kinds of trouble. So I like to shake somebody's hand or I guess nowadays is you do an elbow bump of, you know, getting, if I'm going to do business with somebody, I'm going to want to get to know them.

I'm going to want to look them in the eye and touch elbows or whatever we do now with COVID and you can't do that in zoom. It's just super awkward. So there you go. That's why you want to invest locally.

Michael:

So, Tom, what would you have to say to some of the meals points that he brought up?

Tom:

All right. Let's do it so well, I, I quite agree with a lot of appeals points. I totally agree. I mean, I don't want to waste my, you know, momentum for when we switched sides of the argument, but there is a lot of limitations on only looking into your own area, but you know, just when we say local, that doesn't mean you have to do everything, you know, within five miles of your house, roll it out a little bit further, you know, go 30 miles go a couple hours. So we were talking before the episode where we were talking about our experience with local investing and I have done some stuff working for fun, not with my own money, doing local investing, but Michael has invested locally. I would consider, you know, within that three hour range that kind of counts as local. So to address that point about, you know, not being specific things in your area, you know, rollout the distance, the radius, spread it out a little bit further. You can still do things locally. You know, if you're uncomfortable going 2000 miles away go 200 miles away like within striking distance. So that would be my point number one.

The point number two, about being comfortable about using other folks is, you know, it's a muscle and if you're uncomfortable, you know, going a hundred percent building a team, that's okay. Just kind of pick points and spots and build that muscle of getting trust in getting good at letting go of things. And honestly, that's a big problem. I know for a lot of people, especially investors who are pretty generally pretty type a kind of go getters is to consciously make an effort of letting go of certain aspects of the business. So you can focus on where you have higher ROI.

Michael:

I've got a question for you, both that you both kind of touched on Amelia, you mentioned that if you're going to invest remotely, that you can't go see the property and that that's difficult to do. And Tom, you mentioned, you know, being local, you're able to go touch and feel and see the property, but couldn't someone who's investing remotely still go touch and feel, see, and smell and taste. I think you included in there, the property,

Tom:

If you're good, you will.

Emil:

That's right. Always want to lick the walls before you sign those docs.

Michael:

Check the lead based paint disclosure before licking the walls.

Emil:

Correct. Actually, I think the right thing to do is to lick it, to make sure that there isn’t lead.

Michael:

That’s right.

Tom:

It's your tongue turns blue then…

Emil:

Trust the verify.

Tom:

No, you're totally right, Michael. I mean I've for some of the house that I've bought, I've seen them, but for most of them might have nod and what the ticket is, is having an inspector because honestly, if I go to the house and my ability to assess, you know, issues is not going to be better than an inspector who like does this professionally. So, you know, having the idea that, Oh, me going out there, I'm going to be able to do a better job than some inspector is a little bit of a stretch. So, you know, having confidence in the credentials and you know, where these inspectors are coming from, and then also looking at their homework. So like when an inspector goes and does an inspection on a house, they're filling out a super thorough report on what was identified. And that is including pictures and descriptions and as well as adding any followup items that are on there. So I'm not really sure where I'm arguing on this. I got, I got going, but you know, to the point, like I think it's, yo u know, going to see the property before buying it, you could totally do that. Even if it is remote, you know, there's no reason why you couldn't do it. And it makes you get comfortable to be able to get in the game. You know, that's an expense that you can use as a writeup. I'm not a tax professional, but for that in there,

Emil:

Thank you, Tom, for further arguing my remote point but no, I think you're right. I think you can, like, let's say you put an offer on a property you're in escrow. You can go visit that property, put some eyes on it, make sure everything looks good. Yes. You know, I rely on pictures and video and things like that to like before the offer process. But I actually want to make that part of how I operate going forward. Obviously with COVID, it makes it a lot tougher, but the markets I invest in, I want to be visiting those more regularly. I haven't at all, but I want to be. And I think it makes a lot of sense if that makes you more comfortable go visit the property before you finish escrow.

Tom:

Yeah. I think I personally kind of like Seesawed a little bit on like, you know, needing to be in the market where kind of when I was in it, I think it was really important to go and check it out, to go in the other way of seeing like, nah, you don't need to see it at all. I think it's been to find a happy balance. Like if you buy a property and it hits those check boxes that you're looking for with regards to population and schools and other kind of local dynamic economy, like great. I think it's some people need to be comfortable by taking a look at the market. Great. Go be comfortable and do that. Just know that, you know, there isn't necessarily a one size fits all answer.

Emil:

Yep. And one last thing you mentioned being local, you know, your market way better than being a remote investor. I think that's true. I think that that'll always be the case you live there, you just, you know, what's happening. One thing I really trying to do though in the markets that I invest in is like get more ingrained in local news outside of just real estate. So I'll set up Google alerts and get the top things happening in that city to just like better understand what's going on. And I think this is where talking to your property manager regularly, again, visiting those markets regularly doing drive-through of different neighborhoods. It's just going to get you better and better at these different markets.

Michael:

That's a really great point Emil. I'm going to piggyback off what Tom said. I always talk in the Academy with members about if going to the market is what's stopping you from investing then by all means go, but you'll have to kind of face the reality of everybody has personal biases and you're not going to be able to unsee undue, unexperienced, the things that you see and do and feel, and experience in that market for better or for worse. And so the ideal scenario is you pick a market that has good numbers, has good metrics and you go see the property and you love the property and you love the market, but that's not always the case. Just like you said Emil is that it doesn't necessarily matter how it makes you feel because you might not be living there. If the numbers make sense and the facts are there to support the market, it could still be a great investment independent of the fact of whether or not you enjoy it. And so if you go somewhere and think, wow, I would never live here. I don't want to invest here. Now we're mixing emotion into the decision making process, which can really be dangerous. And so if we can go with the guys of understanding that it doesn't really matter how I feel, if I feel great, that's kind of a cherry on top, but I should still be willing to invest. Even if it doesn't make me feel good. That's something to think about.

Tom:

That's a great point. I mean, so much of this is an introspective exercise where it's like, okay, what do I need to do to know that, you know, I feel good about investing in this area. And I think it's a great point, Michael, that it comes to a point where you need to be a little bit just focused on the numbers. But if you know that you're going to need to kind of touch it and take a look just at the market in general, then there's no reason that you can't do that. And I like the happy balance of, you know, if there's a market, you know, going to take a look at the market and not necessarily, if there is a property to look at great, go look at a property, but you don't necessarily have to look at the one that you are investing in, but you have like a general kind of taste of the area. If that's something that's important to you, there's no reason why you can't do that. But to Michael's point, like at the end of the day, the numbers are really what carry the day trust in the process.

Emil:

All of us kind of agree that the numbers, aren't the only thing that drive us, right? If it's like awesome cabaret cash on cash, but it's in a really rough neighborhood where we don't see that neighborhood turning around or whatever it is. I don't think any of us would invest there just because the numbers on paper look really good. There's a lot of other factors that we also take into account as well.

Michael:

Yup, absolutely. Alright. This was really great. And I want you guys to flip flop, Tom, why is remote investing far superior than local investing in meal? You've got to defend because you got to go first, last time. So now Tom's on the offensive. Fight!

Tom:

Emil, welcome to 2020. The world is your oyster. Get out of your little hole, get your head out of the sand, you Flamingo is that the animal does the…

Michael:

Ostrich.

Tom:

You're, you're being an ostrich. And you know, there's been some advents in technology that has allowed us to invest remotely. One of them is cloud computing that allows for you to have access to incredible amounts of data outside of your backyard. So cloud computing, that's one, the other is, uh, mobile phones. Uh, there's all kinds of cool technology that didn't exist before that Roofstock leverages and other, you know, potentially brokerages. Um, have you guys seen, have you heard of the 3d walkthrough? Right? So inside maps, Matterport, very cool companies that allow you to basically walk through the house as if you are there. Not only are you being more psychogenic, you're just working smarter, not harder.

So you're able to check these houses out at a really in depth level without needing to go there. You're saving gas mileage. Think of, you know, you're being green, okay. Cloud computing, tons of data, cheap data on markets and evaluating other markets. Number two, mobile applications, mobile devices. And with that is the ability to have these really cool 3D walkthroughs to have a proliferation of inspections available. I know at Roofstock we use some cool mobile phones in using for our inspection capture leading to my third point, this ecosystem, right, that has developed around companies. So one such as Roofstock that basically does all the work ahead of time. All the benefits you would get from local investing in that, you know, being able to find these local partners, you can do really easily through platforms like Roofstock, which will connect you to all the partners that you need.

Be it insurance, be it in lenders. Now I'm not saying you can't use that same grit that you would be using locally, remotely. You should still apply that and apply it in a very diligent way, but all the drawbacks of doing it remotely that used to exist no longer exist, just because of the way the technology has advanced the way the cool companies like Roofstock has advanced. And the proof is in the pudding. I know just off the top of my head, I think there's been, you know, over over $10 million of transaction within the Roofstock Academy community, over $2 billion worth of transactions on the Roofstock community. So the proof is in the pudding. It's, you know, if you're not doing it right now, Emil, remotely investing you're behind. So, so get on the train.

Michael:

Tom, what do you have to say about the interwebs, the online, the www online's making remote real estate investing easier?

Tom:

Uh, you mean the connected tubes?

Michael:

Yeah,

Tom:

It honestly it shrinks the world. It's fantastic. And the big value points I think in there is just access to data. So being a data driven investor, I want to know what are some reputable sources for evaluating the local schools. I want to do a walk around on that block. Oh, wait a minute. I, can I go to Google maps and do a little walk around? That's fantastic. And honestly, again, you get a pretty good taste of, of being able to do it that way and getting the curb appeal and all of that good stuff. So the internet, I mean, it, it honestly would not be possible without it, but just as we've, since we've come so far since AOL and 56K modems or whatever, it's like, you know, on my phone, I could do a diligence on a property that honestly, the top private equity or top real estate investment companies could do it, it would cost them thousands and thousands of dollars to do on an individual property that I could do for free, just on my mobile phone while I am walking in my living room, in a local area. So the cost of doing the kind of diligence at an incredibly thorough level has gotten so cheap and so accessible. That there's just no question that remote investing is here and jump on board toot toot. Get on the train toot toot.

Michael:

Alright Emil, you need some ice. Are you feeling okay? Are you ready to start swinging back?

Emil:

I'm ready. You know what? I think Tom just convinced me to become a remote real estate investor. You opened my eyes.

Michael:

You didn't know this other world existed.

Emil:

I had no idea about this, what podcast are we on?

Michael:

Someone get this guy, a mobile phone.

Tom:

Yeah get him a mobile device connected to the internet.

Michael:

To the interwebs.

Emil:

All right. I'm going to try not to rehash too much of what Tom mentioned. Hold on. Let me get my dog to shut up, one second. Zeke!!

Tom:

So Mr. Michael Album, I hear you are doing some remote investing to the extreme. I've been following you on the Twitter world and yeah.

Michael:

That's… No one should do that. That's a scary thing to hear.

Tom:

Yeah. Doing remote in the United States is one thing, doing remote on the, across the Atlantic?

Emil:

Portugal!

Michael:

Going very far East, stopping once I hit Europe, I'm actually currently investing in some properties in Portugal. There is something called the golden visa that I'm looking to take advantage of. And one of the ways to get a golden visa, which is basically permanent resident status, and then ultimately a passport after a five year period is by investment in the country. And so that can take the form of a few different ways. And so one of the options is investing in property. And so I'm looking to actually flip a property right now and then purchase a property for a long term buy and hold to get me access to that golden visa.

Emil:

[sings] You go the golden visa, you got the golden visa. It’s made up, it’s fairy dust that someone sold Michael

Michael:

And so you, Oh, that's right. That's right. Yeah. Speaking of buying snake oil.

Tom:

Was this specifically for the golden visa.

Michael:

It is, it is. So the returns are not anywhere near as attractive as what you can get in the States. And so the fact that you can buy an investment property and have it generate some kind of return is really a cherry on top. The real premise and the real Genesis is to get a golden visa and ultimately a second passport.

Tom:

Wow.

Michael:

So just being able to travel work, live, receive healthcare in the EU, any of the EU countries essentially for free. And so having the benefits of an, of an EU citizen and potentially be an EU citizen after five years.

Tom:

Wow. So you would be a Portuguese and an American citizen. Yes. Very cool. Yup. Nobody knows any Portuguese out there that wouldn't mind tutoring me a little bit. I would love the help because I am pretty useless.

Tom:

Portuguese is a difficult language. I went to Brazil for a little bit and Holy moly. I do not. Yeah. It was a…

Michael:

It's so foreign and it's so fast.

Tom:

Obrigado!

Michael:

Yeah. Yeah. That's right. That's thank you for anybody listening. Nobody got it. Alright. Emil you're ready to punch back?

Emil:

Alright. Knowing your market. I think that's a big advantage. If you're local, when things happen, you can go visit. That's another big one. The other three I wanted to mention are I think it's a lot easier to project manager rehabs. A lot of times when you're, you're doing a rehab or any type of any type of rehab from distance, you're trusting a lot of people project managing it. Isn't the easiest. Sometimes property managers will do it for you. It's a service they will provide. Sometimes they don't, but you're relying on pictures to kind of make sure each interval of the rehab process is happening. And a lot of times the little details are harder to see through pictures or anything, right. You want to make sure that it work is done right. And I think when you're local to be able to go and see the work that's being done, it's a huge advantage to make sure the little things weren't skipped or things that show up in picture that look okay, but you actually view it in person.

You know, the paint is splotchy or things like that. You can verify those things in person, much easier to do when you're local. The other one is this kind of ties into knowing your market, but where you live and where you are locally, you, you probably believe in that area. You probably believe in that economy. That's probably why you're there. You have a job, whatever it is when you're local, you probably have a sense that this area is going to do well for years to come. And you're trying to ride that wave of appreciation. Whereas when you're going remote harder to know all those things, you don't live there. You're not living and breathing and in that place and knowing what the local economy's doing. So I think when you're a local, you just have a better sense of is this place on the rise? I think most people live somewhere where you think things are going well. So that's another advantage to local, I would say. The last thing I talked about building a team, when you're remote, you have to build a team. I think when you're local, you build a team too. People will find your deals, property management, all those things. But the advantage of when you're local is you can actually go meet those people face to face, interview them a lot easier than when you're remote and you're just calling people. There's less of that personal connection. And I don't know when you meet people in person, you take them more seriously. They take you a little more seriously, not always, but I think it's actually easier to build a team when you're local. You do it for remote and local. And I think it's just easier to local. And that's it. Tom, go ahead.

Tom:

Alright. Last couple of points I'll make on yours. You know, talking about investing in a market that you kind of believe in, you live in something we've learned over the last, I don't know, 30, 30, 40 years of investing is diversification is key. And a lot of people, their biggest investment that they make is going to be the house that they own and live in. And if you're making your biggest investment, obviously in an area that you live in, cause you live in it, why would you, you know, basically just double down on that same area, when you can diversify a little bit and put that money to work in an area that, you know, there might be some correlations with the economy because there generally is, but is subject to other upside and other kind of benefits. So being able to place your chips around. So instead of owning multiple houses in the same area that you live in already, where you have your biggest investment, the benefits of mixing it up and putting it into a different area, there's lots of value to diversifying that play.

Michael:

Would you say Tom, that you would peanut butter spread the risk?

Tom:

I love peanut butter spread. So my wife has started getting groceries from this place called Thrive Market and they have peanut butter in a spreadable packet. Pretty sweet.

Michael:

Different than Justin's?

Tom:

I don't know if it's Justin's I don't think it is, but anyways, it's not in a jar. It’s like toothpaste packets. It's like toothpaste

Michael:

Just on the go packs. Those things are great. Yeah.

Tom:

I think I'm kind of violent about it. Cause I like burst a hole, like in the side. So peanut butter spread the risk, right? Just like spreadable peanut butter. You spread it apart. I guess the last kind of general point that isn't necessarily arguing to one way or the other remote or local investing is with all of this. It's not a one size fits all. I think all of us agree that, you know, while there is a little bit of unique requirements for investing remotely, ultimately the different types of returns it gives you access to and the diversification it gives you access to is it's worth that little bit of overhead. And as we mentioned before, then this episode, there's, there's different ways that people can get comfortable in different areas. For some people, they just get it right away and they can jump right in and invest.

And that's awesome. That's great. For some people they want to be a little bit more hands on and go and visit the area, perhaps even talk to property managers and that's okay too. Just kind of know where you sit and know what you need to do to get there either to move forward with an investment or to move on to some other type of investment. So I'd say as a theme in this podcast and real estate investing in general, have a bias for action of getting yourself into a position to either make the investments or to move on. Let's see the last little recurring theme that I think probably talk about every other episode is, as a remote investor, there really is no one as important as your property manager. So even if you're doing it locally too, and using professional property manager, your investment is gonna live and die by how well someone's going to be able to manage that for you and get, at least if you're not self managing and using professional property manager.

So, you know, it doesn't matter if you're doing remotely or locally, but you know, especially if you're doing remotely, since you're not going to be able to visit the property that often do not sleep on the work that it takes to assess and qualify a property manager because you know, buying right can take you so far, but ultimately, you know, winning the operational metrics and keeping your overhead low is going to be on getting a good property manager. Who's going to keep that property occupied. So those are my final tidbits on it.

Emil:

Well done. I know I don't get a rebuttal, but I thought those were all very strong.

Michael:

I thought you both had strong points nicely done to you both. I'll share a little bit.

Tom:

I'm excited for the Michael tidbits.

Michael:

I was just going to share that I've done some, you alluded to it previously, Tom, but some quote unquote local investing. It was really, my first investment was down in Southern California, which we talked about on a previous episode, but I couldn't fathom investing remotely or out of state or really at much of a distance just because I was so green. So new to this space, you know, Roofstock wasn't around this whole education piece for a, Roofstock Academy wasn't around. And so that's all I knew. And so it was about three hour drive away from my grub. So it was semi local and I went and touched and toured a bunch of properties and met with my local agent who is a family friend who is also my property manager. So to Neil's point, we could touch a shake, hands, have visual rapport, physical rapport, which I'm kind of old school in that regard.

I would always prefer that. I think it's much more meaningful than the remote over zoom or over the telephone. And so I was able to be very hands on with that investment. And it's gone really well, given a long enough time horizon for anyone who listened to that first episode where it just like that property has been through several road bumps, several hiccups and speed. So the fact that it was local did not have any bearing on how difficult it was as a first property. It did not have any bearing on how bad or how sideways things could go. And that's been by far probably the worst experience I've had with any of my other investments. And so you can have good people and bad neighborhoods and bad people in good neighborhoods in local markets and at distance markets. So it's, you know, again, I think we said it before, it's not a one size fits all.

You just, every investor has to figure out what makes the most sense for them and Tom, you were just touching on it. I think if you need to baby, step your way into investing and start local or semi local, do it. If that's what it's going to take for you to start getting into the real estate investing arena, you know, start where it makes sense for you. Some people have no problem letting go of control and just doing it at a distance and setting up a team and kind of taking a back seat so to speak. But if that's not, you figure out how you operate as a person and figure out what's going to make the most sense for you. And then just go do it.

Emil:

So for anyone who was curious about Michael's first deal, we covered that in episode 12, Here's What Our First Deal Looked Like and How They're Doing Today. That was the name of that episode. But I think, you know, the, the main theme, I'm glad you touched on that is there's people who are successful doing both right. There's people who are just local investors in expensive markets who are doing really well. People who just do remote investing, who are doing really, really well. And there's some people who do both, right. They do some local, some distance. And I think that's like the main thing we want to highlight. I don't think one is necessarily better than the other. It kind of just depends on your situation. And I think there's people doing well and doing both,

Michael:

I think I want to just double down on that statement Emil. It is so dependent on who you are as a person and where you live. Because if someone's living in the Midwest right now, listening to this, so like I'm surrounded by deals. Why would I ever go remote when there's tons in my backyard, us being all Californians were, you know, semi-forced to go remote and you know, forced to go invest at a distance. So if that's not, you don't think that, Oh, I have to go invest remotely because of everything they talked about in the podcast, maybe, you know, our remote is your local, Oh, that's a trademark, Michael Albaum, July 28, 2020.

Emil:

Our remote is your local.

Michael:

Yeah. So just go find where the deals make sense. I think is the one of the biggest takeaways because they could be read under your nose and you might not even know it because you're so focused on remote. I absolutely looked at local as a first opportunity semi found it and then how to go remote after the fact.

Michael:

All right guys, I think that was a great rap battle for remote versus local investing. And before I let you guys go, I've got the question of the episode for you. Are you ready?

Tom:

Let's do it.

Emil:

Always. I'm rabbit, baby. I'm winning this rat battle.

Michael:

What's your favorite breakfast cereal and why?

Tom:

I'm ready.

Michael:

Tom go. It's called Magic Spoon. It's not made with normal sugar. It's made from the sugar of raisins. So it's actually being promoted on a lot of podcasts. We're not being paid to promote magic spoon here. We have no affiliation with any royalties, but we're not opposed to it. And so magic spoon is basically children's cereal for adults. It is delicious. It doesn't have carbs. It's full of protein. What's great about not being, you know, I could just kind of say, say the good things about it and not necessarily have a check, a reference check on it, but it's, it's really good. Magic spoon, peanut butter. It's great raisin sugar.

Michael:

So if it doesn't have carbs, like what is it like, what is it made of?

Emil:

Fairy dust.

Tom:

Magic spoon.

Emil:

I've heard of that. It's expensive. It's not cheap.

Tom:

I can't believe how expensive it is. Don't get me going on that.

Michael:

There was this like frozen yogurt place that came out. I don't know. Maybe this is like going back 15, 20 years and kind of dating myself. But it's got like golden spoon, in Southern California, but I like the name gives you no indication of what the thing is. Like you would never think that's an ice cream place because it's called the golden spoon. Am I the only one that thinks that, sorry, golden spoon… If…

Tom:

Spoons got range. Alright Emil, how about you, favorite cereal?

Emil:

Does granola. It's like a granola cereal kind of thing. It's called Autumn's gold. I found it recently a Costco and it's like all nuts and cinnamon. So kind of same deal. It's paleo. No carb. I try to eat paleo during the week, at least. So that's probably like the only cereal these days I eat. But if we're, if we're aligning the clock, favorite cereal growing up, it's gotta be them Lucky charms, man.

Michael:

They're always after me Lucky charms.

Tom:

Are you a guy who eats non marshmallows until the very end? And then you just go all marshmallow.

Emil:

Is there any other way to eat Lucky Charms?

Michael:

I don't trust anybody that eats Lucky Charms any other way?

Emil:

Yeah.

Tom:

Yeah. And remember that like promotion. They are like, oops, we made a mistake and just marshmallows, man, that person on the factory line. What a moron!

Emil:

Or a genius dude. He sold so many Lucky Charms boxes and he was promoted to like vice president.

Tom:

VP of product.

Michael:

That was like Playdo. Wasn't that? A mistake invented by mistake. So many of the greatest things.

Pierre:

Sticky notes.

Tom:

Sticky notes.

Michael:

Yeah. There you go. Alright, Pierre, what's your favorite breakfast cereal? And please don't say like the last pizza episode. I don't like breakfast cereal.

Pierre:

Well, okay. I don't eat breakfast cereal for breakfast. It's more of a dessert. If I'm going to eat cereal, it's going to be before bed.

Michael:

I don't always eat breakfast cereal, but when I do it before bed.

Emil:

I'm with Pierre man.

Tom:

I like that tip. I like that take, unless it's magic spoon. Go ahead.

Pierre:

Hmm. Chocolate granola, chocolate hazelnut granola.

Michael:

Nice, particular brand?

Pierre:

Oh man. It doesn't matter, really. I was raised on coupons, so whatever's on sale.

Tom:

Michael, you got one?

Michael:

You guys are all healthy. I'm like cocoa puffs fan. I like my milk, but I prefer it to be chocolate. So that's really all it is. It's just a vehicle to get more chocolate milk. I don't really care how it tastes.

Emil:

That is true. Just gives you chocolate milk at the end.

Michael:

That's right.

Tom:

I had a roommate, shout out to Carson Mobly. His, uh, he had this quote about food is just a vehicle for sauce.

Michael:

I've always felt that way about carrots and celery. It's just like, how do I get bar ranch into my mouth in a faster, more efficient way.

Tom:

It's just a vehicle for sauce.

MIchael:

That's great. All right, everybody. That was our episode. Thank you so much for listening. If you liked the episode, feel free to give us a rating or review wherever it is you listen to podcasts. Also feel free to subscribe so that you get the most up to date episodes automatically downloaded to your listening device. We look forward to seeing you on the next one. Happy investing!

Tom:

Happy investing.

Emil:

Very formal, happy investing.

7 Insider Tips to Get The Most Out of Your Property Manager Jul 30, 2020

In this episode, Tom and Michael chat with Matthew Whitaker from GK Houses about what it takes to have effective property management and how investors can set themselves up for successful relationships with their PMs.

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Transcript

Michael:

Hey, everyone. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum. And today I'm joined by Tom Schneider and Matthew Whitaker with GK Houses, Matt and GK Houses is one of our preferred property management partners at Roofstock. And so we're going to be talking to Matt today about what it's like to be a property manager. What are some things that we as investors can do to make their lives easier? And give us a little bit of insight into what a day in the life of a PM looks like. So let's get into it.

Theme Song

Michael:

Matt Whitaker. Thank you so much for joining us today. Really, really appreciate you taking the time to be with us. How are you doing?

Matthew:

Yeah, I'm doing great. I'm excited to be here and excited to do this with you.

Michael:

Awesome. And you're down in the Southeast, right?

Matthew:

I am. Yeah. I'm in Birmingham, Alabama. That's where our corporate office is and we're in eight different markets. So we're in three markets in Colorado and then we are also in Birmingham, Nashville, Atlanta, Chattanooga, and Little Rock.

Michael:

Awesome. Awesome. And for those of our guests who might not know you, can you give us a little bit of background about yourself on GK houses, help everyone get to know you a bit?

Matthew:

Yeah. I'd love to some, the CEO of GK houses. I started it about 13 years ago during the last recession. And during that kind of, 07, 08, 09 time when the market crashed, I owned about 30 rental houses at the time and had a hard time selling those once the market crashed. Most of those were in the low to moderate income world and the ability to sell that went away. And I started a property management company, converted all those 30 over into rentals and was able to get some of my investor buddies to also let me manage them. So I got up to about 70 houses pretty quickly, and that was kind of how I lasted through that recession through 08, 09, 2010 was by managing homes in about, we also were selling homes. So we were doing some turnkey stuff at the time, kind of original before it was very popular.

And, but in 2013 we really started off focusing on the management business. And we decided at that point we managed about 250 homes right here in Birmingham. And at that point we decided that we wanted to get to 25,000 houses under management. And so we've been growing that ever since 2013.

And today we manage somewhere around 26, 2,700 homes in those eight markets that I talked about earlier.

Michael:

Great. And did you have any personal management experience in the real estate arena or did you go straight from owner to manager?

Matthew:

I always swore I would never be a property manager or a real estate agent…

Michael:

You’re in good company.

Matthew:

And a lot of companies did that same thing. Yeah. And so never, never say that to yourself, but now I'm a real estate agent and a property manager. And so I managed my own homes. So I had been doing it ever since I first got started, even my first house I ever bought, I still own, and I have rented it ever since. And that was a disaster story. So it's amazing that I'm in the property management business. So yes, I did have a little bit of management experience. I had been in the buying and selling business for about seven or eight years. So I was very familiar with what a manager did. I had some other third party managers that manage some homes for me for some time and found all the things that I didn't like about a property manager. And so I decided to just do it ourselves, with GK Houses.

Michael:

That's great. I love that. You've got that personal experience that you did it for yourself and then went into business, helping other people do it because it just shows that you understand the business kind of from the ground up, which I think is so huge. And you're able to treat the rentals as if they were your own.

Matthew:

Yeah. There's nothing that replaces knowing what it's like to have a $500 bill come through, or a $2,000 air conditioning, a replacement come through where you're expecting that cashflow to pay the mortgage. And now all of a sudden you've got to figure out some other way to pay that mortgage. So it definitely gives us empathy for our owners. And that's something that we've tried to communicate and teach to the team members that work for us is, you know, and I'll often say to them, what if on Friday you found out that I was going to pay you $500 less with your paycheck. And they, you know, that would be disappointing to them if it was a surprise. And that is the same surprise that we were calling up from time to time. And unfortunately having to deliver bad news to owners because inevitably things are going to break when an owner buys a rental house they're in business and you're going to have expenses for that business.

And so we've learned a lot over the years about having reserves and making sure that you can afford to pay for the lumpy expenses that are in this business, but it still requires a bunch of empathy from our team members when they're communicating with owners and having deliver, you know, have tough conversations.

Michael:

That's great.

Tom:

You touched on reserves. I'd love your thoughts, Matt, on, you know, what do you think an appropriate like reserve level is?

Matthew:

Yeah. If I was in new person getting into the business and I bought a foot, let's call it a fully renovated home. I would probably stay about. And obviously depending on the age or the vintage of the house, I would stay about $3,000 out. So I would keep at least $3,000 available at all times. And then as I got to a bigger portfolio, obviously the per house number would come down because you could dilute that across the portfolio. But getting started, I would say somewhere around two to $3,000, just available to make sure that it doesn't affect your lifestyle. And if you do have one of those expenses that comes through

Michael:

And in that same vein, most lenders are going to require a cash reserve amount for PITI. Would you consider that a couple thousand dollars to be that same pool of the reserve bucket? Are you saying above and beyond this? The reserve?

Matthew:

Yeah. I'm just talking about expenses and then capitalizable type items. I mean, I may even start as you started to build a portfolio and this is one of the reasons I always tell people don't buy one rental house. I mean, certainly try it on dip your toe in the water, but it's way easier to own 10 rental homes than it is to own one because you all these expenses start to get diluted amongst your cashflow of your portfolio. And then it doesn't become as big of a deal when you have a $500 bill come through. If you have a rental house, a $500 bill comes through, you're literally writing a check out of your back pocket. Sometimes if you have 10 rental houses and a $500 bill comes through, it's just another number on your statement. And you're just calculating your return based on that. So I think of that in excess of that, I'm just thinking of, in terms of repairs and maintenance,

Michael:

Tom like you always say peanut butter spreading that across.

Tom:

Peanut butter spread the risk. I love that quote yeah, 10 properties, a lot easier than one property.

Matthew:

It is, and absolutely if you're not having to manage all of them, any, even if you are, obviously you're spreading that risk across multiple residents with different jobs and different industries. And if somebody invests through you, they can even do it across different markets. So 10 seems to be the magic number in my opinion.

Michael:

Great

Tom:

perfect segue talking about, you know, as long as you're not managing it, and let's talk in a little bit about the roles and responsibility of a third party property manager that you would hire, what are the different things that services that they would provide in the process?

Matthew:

I really think the services of a property manager fall into two buckets. There is the accounting bucket and the communication bucket. And obviously under that communication comes execution, but let's talk about accounting first. Part of our operations is accounting for our homeowners. We want to make sure that the money comes in on time, that the resident's abiding by what the lease term says in terms of money paid. And so we're going to kind of hold the resident to making sure financially that house is getting taken care of. And then we're going to account for all the dollars that come in and of course paying any expenses that we need to pay out of that money that comes in. And then the other side is just operations and communication around those operations. We're obviously going to make sure that the house is taken care of. One of the interesting things, especially around small multifamily and single family.

There's a lot of logistics involved in that. I always say it's a communication challenge and a logistics problem. So it's about, you know, having a one house, one owner or one vendor, you're always communicating with somebody. So you need to be really good at communicating. And our property managers become more like air traffic controllers. They're making sure the vendor knows where to go. What time to be there has the resident's information. The resident knows that the vendor's coming. The owner knows that there's a problem at the house if it exceeds a certain amount of money. And so you're having to keep all of these people in the loop and make sure that the planes aren't running into each other while you're that. And so, again, it just boils really down to accounting and making sure that I's are dotted and T's are crossed and then operations and communications.

Michael:

Matt, you said something that I want to circle back to that the owner knows if there's a problem, if it's above a certain dollar amount. So from folks who have never purchased a property, what do you mean by that? And why is that important to highlight?

Matthew:

Yes. So you hire a private manager to basically take care of the problems and you don't want to know that something small has happened at your house. That's not really going to affect your lifestyle. It's just kind of brain damage for somebody to call you over a hundred dollar issue. So we have, what's called a $500 kind of threshold. And if one of our maintenance guys goes out there and he sees that this thing's going to exceed over $500, we're going to contact the owner before we do anything and provide them an estimate. But if it's below that $500, we're generally just going to take care of that issue. And then the owner's going to see that happen. You know, see that payment on their statement. You hire a property manager and you will be circled in on all the big issues, but we want to handle all the small issues. That's why we feel like you hire us is for a turnkey solution, not to have to sweat the small stuff.

Michael:

Awesome. Thanks for clarifying and Matt, in your opinion, you know what separates the good from the great property managers?

Matthew:

Yeah. We go back to accounting and communication again, getting the numbers right. Is so incredibly important and you'd be surprised at how many property managers get that wrong. The other, again, communicating, it's so hard in our business to communicate and trying to make sure as an owner. And of course I was in this position. So I know exactly how they feel. If you don't know what's going on, it's not like you expect the best is happening. And so you want to make sure that you're clearly in the loop and you have the confidence and the trust of your property manager, that if something bad is happening, that you're going to be well aware of it. And also communicated with what we call uncomfortable transparency, which means I'm not going to withhold information from you to make it easier to tell you or more palatable or, you know, easier on me really, because I don't want you to get mad at me.

So we want to make sure that we're giving our owners the truth. And we call that also entering into the danger and telling them, being willing to tell them exactly what's going on with their house so that they, if it is a big issue, they can make the best decision for themselves. And also try to remain as objective as possible when we're communicating, because money can be very emotional for people. And if we can kind of steer them towards the best solution, then we want to make sure that we're doing that based on our experience as a property manager, you know, we do have the benefit of, and especially in the South right now, it's getting really hot and air conditioners are breaking well. We have the benefit of knowing that air conditioners break and things we've done in the past and mistakes that we've made in the past. So, you know, when it becomes a, should I spend 600 or $700 to fix this air conditioner and it may last another couple of years or a $2,000 replacement or a $2,500 replacement. Well, we can give them kind of some objective advice based on what we've seen in the past. And then the owner can make their own decision based on that information.

Tom:

That's a great example of being proactive in informing the most decision and using some of the information that you guys have as an investor. We want to get the top dollar. We want to manage the least amount of vacancy as possible. What were some things that you would advise that the owner, the investor can help achieve those?

Matthew:

Yeah, the biggest expense and investor's going to have is turnover. You know, you can have a picky tenant that calls in a lot of maintenance work orders, or it feels like they're calling in a lot of maintenance work orders, but truly turnover in my opinion is the biggest expense you have. I think of it and you played football, Tom. It is like going in to score a touchdown. And instead of you throw an interception on as you're about to score, and then they run it back for a touchdown, it's like a 14 point swing that somebody moves out because, and the reason I say that is not only do you have loss of rent, so you're not having money come in, but you're also having to pay money out on deferred expenses when that happens. And so it's very important that you keep residents in homes and the way you do that is you do it through good communication with the residents.

You do that through handling maintenance work orders. One of the things we found was our residents started staying longer when we internalize maintenance because our maintenance team is not out there just fixing a problem. Our maintenance team is tasked with making the resident happy because they're a GK team member. And so if you think about kind of the change in that, if a maintenance team member thinks his job is to just fix something, well, that's a problem if ultimately in the owner's best interest is that resident staying alone time. But if the maintenance team member is out there with the idea, I want to make this resonant as happy as possible, then it makes the resident happy. It's in the owner's best interest because the resident stays a whole lot longer.

Michael:

That's great.

Tom:

Oftentimes decisions, especially those big decisions that you'll make with an investor it's the repair or replace, or do we want to focus on vacancy or rent growth? And I don't know, I guess one of you just elaborate a little bit on those two important decision points that can make or break deals.

Matthew:

Let's talk a little bit about rent growth, because I think what I've always thought of it, the way I mentally look at it is staying a little bit behind the curve. Like I don't want to be on the bleeding edge and I don't think investors want to be on the bleeding edge of pushing grants. And I know there's some institutions out there that will actually do that for us, I think. And I like to stay a little bit behind the curve because I think it's so important that that a doesn't move out. I don't want that resident to feel like they can get a better deal somewhere else. And so what I like to do is stay a little bit behind, but definitely be in tune with rent growth and be focused on it. In our leases, we have some rent growth built in, but that also gives us the ability to go to the resident and say, Hey, you know, the owners being very generous, wants you to stay another year and has decided only to raise it 1% instead of the three to 5%, which may be in our lease or even better, they've decided not to raise rent. And because, you know, they think you're an awesome resident and normally they would raise it 5%, but they're not going to raise it at all. So it gives us the ability to even if you only raise it 1%, it gives us the ability to basically say, Hey, the owner's doing you a favor because you signed up for three or 5%.

Michael:

That's great. I think, yeah, like you mentioned Tom investors where they want top dollar and you know, as much as we can push the envelope, we'd like to, but that's really great advice. Cause I think something that I chat a lot about with Academy members is when it comes to pushing rent is do the calculation, do the math for if this tenant leaves and you've got three weeks of vacancy, what does that cost versus what do you stand to make with the 10, 15, 20 bucks a month? You're going to increase the rent. The math kind of works itself out pretty clearly.

Matthew:

Yeah. I would think if I'm an investor and I am on a number of rental homes, I think in terms of seven to 10 years, how can I maximize the most amount of money over that seven to 10 years? Not now. And this gets into having reserves too, because if an owner is making short term decisions is going to affect his or her longterm seven to 10 year plan then, and that's a problem. If you have reserves, you can make clear objective decisions based on how much, what the best longterm getting the most money in over that seven to 10 years. And so I think as your clients and investors operate, they need to be thinking longterm because this is a, this is not a get rich quick game. It is a consistently make good decisions over the long period so that they can over the course of owning that rental home, whether it's seven to 15 years, then they end up in a much better place.

Michael:

Tom, Matt set you up so nicely for your T-ball swing. What do you like to say? Be what?

Tom:

Oh, longterm greedy, be longterm greedu.

Matthew:

Yeah, that's great.

Michael:

Matt, I want to ask you a question about property management fees specifically around vacancy. And I get the question a lot in the Academy that says, Hey, you know what? It seems like property managers, aren't incentivized to actually keep tenants in place because of the new tenant placement fee being 50% or 75% or a hundred percent of one month's rent versus a lease renewal is typically less. So what would you say to someone that had that question?

Matthew:

Yeah, I think it's a great question. You definitely don't want to incentivize your property manager to do something that's not in your best interest. And so when you're thinking about property management fees, what I would tell somebody is make sure that the fees are in line as well as you can with your incentives or with the incentives of the property manager, because you just don't want anybody to have to make this kind of moral decision that affects their income. And so what I would say is the way we look at it is we do need to make money when we're leasing, because we do a lot of work. The way we look at GK Houses is we want it to be an annuity business for our owners and for us. And the way to do that is to keep residents in homes. And that allows us to do certainly we're doing a lot of work while the residents in the house, but as soon as that resident moves out, I mean, it's like a full time job trying to get that home back on the market as quickly as possible.

And so we often talk about, and we've structured our fees so that we don't want people moving out. We want to build this big annuity snowball. And so to me, you need to make sure that your property managers fees align with your interests and your interest of being an annuity. So I would say incentivize the manager to renew the lease over a leasing fee. Now the leasing fee may be higher, but what kind of work did they have to do to earn that? I would much rather earn a couple hundred dollars, 200 $5,300 renewal fee that is, that, you know, requires two to three hours worth of work versus the, you know, maybe 20 plus hours of work. I would pour it into a turn.

Michael:

And can you give somebody who's listening a real high level overview of what work does go into a turn because I think that's such a great point is there is so much work that goes on into placing a new tenant, but that goes on behind the scenes. Most folks don't have any idea.

Tom:

The Duck's legs under the water. That's another episode where we riffed on that for a minute. So, sorry. Yeah, go ahead.

Matthew:

Well, we think about this about 60 to 90 days out. So we're trying to renew the resident almost, you know, six to eight months into their lease. We're trying to do it as quickly as possible. And so when they submit their notice and they start to move, you know, we start communication. So we communicate with the unit or, Hey, your resident is submitted. Notice just wants you to know. And then we give them an idea of what we're going to do when they move out. When the resident finally does turn in keys and moves out, we're going to do, depending on the market, we're in, we're going to do a walkthrough. And generally that happens not the same day, but within 24 or 48 business hours of that resident moving out. And we do a full writeup with pictures and it is amazing how many pictures we take, but we really feel like this is part of taking pictures, is communication with the owner.

They can see the pictures and kind of feel what the house looks like. And then one of the things that owners forget is we also have a requirement with the resident to account for their security deposit. So we have all these logistics going on and all this communication with the resident and communication with the owner, we send out a statement or an estimate, the owner that basically dumps all the expenses into three categories. One is these are the expenses we want to charge the resident for anything above normal wear and tear. So, you know, if the carpet has been lived on you can't really charge a resident for that because you expect the carpet to be lived on. But if there's a hole in the wall for some sort of misuse, or you can tell that the home has been misused there, we're going to charge that resonant for that.

And then there's a column that we say are required repairs. And so required repairs are, there's a hole in the wall and we need to fix this before the next resident moves in. You just can't leave a hole. Nobody's going to rent a house with a big hole in the wall, or then the next column is recommended. So maybe there's a room that is kind of in between. It's kind of in a gray area. May if you paint this room, it's going to run faster or you're going to rent it for more money. But if you don't paint it, then it's not going to keep us from renting. So we divide our estimate into those three columns and we'll send it to the homeowner and the homeowner will either approve the required or add on the recommended on top of that, and then approve whether the resident's security deposit. They're happy with how we account for that.

Then we have to basically do the accounting of the resident security deposit and then mail that to the resident. Now, oftentimes sometimes the resident disagrees with how we accounted for that. And the resident obviously did a move in when they, when they, and we did a move in before. So there's some time there's some kind of go back and forth between them and us on it. Was this a definitely misuse or was this like this when you moved in? And so sometimes when we inherit leases, we deal with some issues with that, but we do a really good job of a moving walk through. So we have pictures of the house before it moves in and we can easily compare those to the move out, walk through. Then once we we're done with the resident and everybody's happy there simultaneously, we're going back and forth with the owner on the work that needs to be done to get the house on the market.

And to me, owners love speed. And so that's one of the things we try to do is there is an anxiety that happens with an owner as soon as that resident moves out, that money stopped coming in and the expenses start, but it also makes an owner feel better if it gets done very quickly. So we're trying to renovate that house, turn that house as quickly as possible, and then put it back out on the market as fast as possible. And so, you know, depending on how long it takes to do the work, you know, our goal is to get that house back on the market, just literally as quickly as possible. And the only downtime being the time it takes to get the work done. We also start pre-marketing. So we try to start building some excitement. Some of our markets, we actually pre-market even when the residents about to move out, I just kinda made it hard recently with the pandemic, but you know, kind of a normal world will pre-market and we've been leasing a lot of homes.

We're starting to use some video tours. We're using a Matterport camera and we've been pre-leasing homes without people actually even walking through them. We've done a really good job with these Matterport cameras. And then again, getting it out on the market and getting as many people through it. One of the things that we found though, is if you take somebody through and the work's not done, sometimes there is a misunderstanding of what work needs to be done or what work is going to get done. And there's some disappointment from time to time. So we like to get the work done first, build the excitement, and then generally your first people through are your best opportunities to rent that house. Cause there's a, they feel that sense of urgency. And then we signed the lease and hopefully they move in as quickly as possible so that we get the rent coming back in and stop the expenses from flowing out.

Tom:

I had like two questions I was going to, but you kept hitting him. I was, you know, I was gonna ask, Oh, you know, what changes have you guys made with the pandemic? And that's cool. So you guys are doing video tours and

Matthew:

Yeah, we're using a Matterport camera now, which is basically you set it up in the middle of the room and it allows somebody to virtually walk through the house and it is really cool and it shows it's got a fish eye on it, fisheye camera on. It allows people to really see what it's like to live in that room. And the other thing is it's really a touchless and we're not using leasing agents as much as we did any more. Now, some areas are starting to let some leasing agents back. Colorado's allowing us to use leasing agents again, but it's still a opened the door. Let somebody go through and kind of obviously socially distancing the whole time. But we also use Rently a lot boxes on our homes, which allows a resident to check themselves in with a credit card and their ID. And they can go through the home by themselves without us having to be there.

There's some, obviously some accountability and the fact that we have a credit card and we have their ID and we know who they are, we have their cell phone number, but then we're proactively following up. So one of the things that we found in the past, we went a little too automated where we wanted somebody just never to talk to us to the point where they just leased our house without ever talking to us. But now we've found that proactively reaching out and talking to somebody on the phone, right after a showing, is that great way to get somebody comfortable enough to submit an app. And we're receiving right now, somewhere around three in some markets and somewhere around five times as many applications, part of that is pandemic driven. I think there's a move right now from multifamily to single family, just cause people don't want to be on top of everybody, but in part of it is the summer, but we're more occupied right now than we've ever been before.

Tom:

That's really interesting.

Michael:

Yeah. Very interesting. Matt a question. I get a lot in the Academy, especially of folks who are looking at Roofstock inspections is I've got all this repair work that needs to get done. Is this something that I have to do that I have to coordinate? Or is that going to fall on the shoulders of the PM? Are they able to assist in helping coordinate that work repair work to be done?

Matthew:

I can't speak for all PMs, but I love it when we do the work in full transparency. So we do make money when we do the work as the general contractor of that work. But when I can control the process for the owner and I can control the communication and I can control what gets done and I have vendors that know how I work and I can get them in and get them out. I always think of it again, it says value and speed. I can get it done so quickly and there's not a lot of coordination and communication. If you're in a market, you could certainly try to do that because you may have the time, the drive over there. And it makes sure that the contractor is getting the work done. The biggest challenge we have is contractors and relationships with contractors. So for somebody to remotely hire a contractor and get the work done for not only cheaper, but on time and all their work done appropriately to me is just too big of a risk to take.

And what ends up happening is they end up putting the burden on the property manager to go make sure that we're gets done. So then it ends up costing them more because we're going to charge them for some of that oversight. So we just say, look, just let us handle it. And we're happy to give people an estimate to get that work done. And then we'll contract it out to the people that are vetted vendors that are insured. And if somebody falls off the proverbial roof, then they're not going to Sue you. And so we just think it's in the owner's best interest to let the PM handle that.

Michael:

Great. And what would you say the most difficult part of being a property manager is what do you wake up everyday and go, Oh man,

Matthew:

Not to use another football reference, but I am going to, there is no Superbowl in our world. There's no, we won the super bowl and now we can take two or three weeks off when the 31st hits and we collect a hundred percent of our rent. The first comes the next day and then all our rent's due again. And owners need to know this too. It is a thankless business. The whole point of the job is to deal with problems. And so when you're communicating with your property manager, you need to know that they are doing nothing but dealing with the exceptions, all the problems that have happened that day. And so I have a lot of empathy and sympathy for my team because it is hard. You have to keep them excited and it's hard not to get burned out. And so when an owner gets mad or a resident gets mad at them, obviously that takes an emotional toll.

And generally our PMs are not the ones that made the mistake or when something happens and listen, we're people, we're human. We try to execute as well as we can, but we are going to make mistakes. But when an owner kind of takes that out on a PM, because that's the person they see as kind of the face of the company, you know, that takes an emotional toll on people. So the whole, and when you're communicating with a resonant about not paying rent, you're talking to them about their home and the money, you know, money it's, everything emotionally is tied into this one thing that we're doing. So we have a lot of hard conversations. And so that's, what's so hard about being a PM. And I would say, that's, what's so hard about self managing too, you have the ability to be objective in an emotional situation?

Going back to the first rental house that I bought, I had a six month kind of agreement with an insurance company on a house that had burned down or somebody's house had burned down and they moved in for six months. The insurance company paid me additional money over above what I was asking. Well, the house person was living in the house. Couldn't afford the house normally. And when their house wasn't ready, they'd never moved out of my house. And so here I am self managing I'm 23 years old, and I need that money. I am very emotional about needing that money. And so I was probably the worst person to be dealing with that situation because I was overly emotional making bad decisions. Here I am. This is my first rental house I got paid for six months. Everything was great. I thought I was a real estate guru.

And all of a sudden, now my resident's not paying, I'm paying a mortgage and it's not like I just have tons of money left over every month. And so I was just in an emotional place. And what I would say is, if you can't be objective, you can't treat that relationship like a business or even worse. Maybe you do have a lot of money or the ability to float things. And you allow things to go on too long because a resident may tell you a story. You know, it becomes very hard to be objective in those situations because either you're emotional about your own finances or you become emotional about the resident situation. And it really is like running a business. Well, listen, we do have a lot of sympathy and empathy for our tenants. We're very resident friendly, cause we know we want them to stay a long time. We want good residents to stay a long time, but you also have to be very objective when you're dealing with them. And, and so if somebody can't separate themselves from the situation, it becomes a lot of conflict. You know, personally, you're not going to do the right thing consistently to self manage.

Michael:

I think that’s such great insight into property manager, being a thankless business. You know, I personally am going to make this admission on the podcast. I don't think I've ever called my property manager wants to thank them for a full rent collection month, but I know I've called them and asked why the rent was late. So less than to everybody listening go, thank your property managers for the good stuff. Don't just highlight the bad stuff.

Matthew:

And we do have some owners that are kind enough to thank us. And we do have some really great owners, but you're right. I mean, the expectation of the owner is full rent collection and no expenses. So as long as that happens,

Michael:

Right, right.

Matthew:

The bar is at a hundred percent.

Tom:

Everybody's good.

Matthew:

So anything below that is us not meeting expectations, even though, you know, it's not our house. If the toilet breaks, I've never used that toilet. Right. It wasn't you. Right. But I do understand too, that it's kind of funny, like an owner may move out of the house and then a new resident moves in and immediately owners because they are emotional about, especially a house that they lived in and owner will become very well that toll, it never broke when I was there. And I'm like, well, I don't know what to tell you.

Michael:

I don't know what to tell you! Tom, You got any more questions?

Tom:

Yeah. I guess, you know, kind of continuing on this theme of, you know, helping this thankless job, how would you say investors could help put their property manager in a better position to be successful?

Matthew:

One of the things I would say is around communication is a lot of people want, expect like an email to go out and then an immediate email to come back and we do have RPMs or full time communicating. So we do have the ability to do that, but there are times when they need to be a little flexible about how fast we get back to people, because we do have other fires that are raging from time to time that a PM may be very focused on getting another owner's property fixed. So just having a, you know, not an unrealistic expectation around how fast we're able to get back with people. And look, we that's. One of the things that we measure is we do measure how fast we get back with people.

So we are getting back with people fairly quickly. The other thing is, again, having reserves really helps us out because it gets us into a situation where we're doing the right thing. We're playing the odds. We're placing good bets with these homes and allowing us to help you manage for the long term. So those are two things an owner can do. And then also when they do communicate with us, I know you're going to get frustrated when something happens bad and look, we're frustrated too, but know, it's every bit as hard to make that phone conversation and make that phone call and just know that the PM has been dreading calling you and telling you that there's this $500 expense or whatever it is. And so just having some empathy for that person that is making that phone call is helpful and being problem solvers together. Let's Hey, we're on the same team. We didn't cause this problem, but we're going to both fix it as teammates

Tom:

Love it.

Michael:

It's such a good point about around the communication timing. I was chatting with a student in the Academy. I won't say from where I was just say it rhymes with smooshmork. And they said, you know, I can't deal with this property manager. I said, what happened? He goes, well, I emailed them 20 minutes ago and have her back. I said, well, that, that might be how you're used to communicating, understand that it's different around the country. And so what I was recommending folks is just ask, when you're chatting with property managers, vetting property managers, ask them what their communication style is and ask them what a reasonable response time is, because the expectation should be set on the front end.

Matthew:

Other thing I would add around communication. If you start to get up to, let's say five to 10 rental properties, what you need to is set up a regular monthly call with your property manager. We have found these calls to be so helpful. Again, getting back into being objective. You really solve problems together for the longterm. There's no emotion around it. There's no surprises when you have five to 10 rental properties and it's worth the manager spending an hour with you and kind of making sure that you're on the same page on a regular basis. It would be hard to have those calls for anybody below five houses let's say. But if you're starting to get up into five and continuing to grow, it makes sense for you to have a regular monthly call. And if you get to a point where you have 20 to 25 houses, it may be a weekly call that you would want to have. But I can't tell you how these regular calls have really helped us with our communication with owners, because you're not just hearing about the bad problems. You're also hearing, Hey, we collected this. We collected that. And you're starting to kind of get a better picture of what your portfolio is doing.

Michael:

I've got to go set up weekly call. That's a really great idea.

Tom:

I know. I love that as a takeaway from today's session... Yeah, I love that. That is a great idea. I really like that.

Michael:

Tom, you got anything else?

Tom:

That's good for me. Yeah. That's super insightful.

Michael:

Love it. Awesome. Well, Matt, we've got some quick fire questions. We'd like to end our episodes with, if you don't mind, it's kind of a yes, no one answer to the other.

Matthew:

All right, I'll do it. Alright.

Michael:

So high rent growth or low vacancy?

Matthew:

Low vacancy.

Michael:

Angry resident or angry investor?

Matthew:

Ooh, Whats C?. Yeah, definitely angry resident. Although none of those are fun.

Michael:

Cashflow or appreciation?

Matthew:

I am a cashflow guy.

Michael:

Concentration or diversification?

Matthew:

I am a concentration guy and I think this is an important thing too, is probably a good nugget for the people that are going to be listening to this, become an expert in an area. First, in my opinion, before you try to diversify too much, I have found that when you become an expert in one area like a Birmingham or even a neighborhood in Birmingham, then you are way more successful at buying than trying to diversify and not being an expert in one area. Sorry. That was more than one word, but..

Michael:

No, that's super great insight. Super great insight. Local or remote investing?

Matthew:

I think you can do both with technology today. I mean, I would hate to say one over the other because I think if you have access to all the technology that I have living in Birmingham, so it makes no sense for you living in California or in New York or wherever you're living, not to invest in Birmingham because I have the access to the exact same information as you do.

Michael:

Great. Single family or multifamily.

Matthew:

I'm a single family guy. I think, I think the best opportunities and the biggest opportunities to exploit what is still incredibly inefficient market is in the single family world. I think your points about like the pandemic people wanting a little bit more breathing room, like single family, really great way to go. I'm telling you, Tom we're at over 98% occupied. I've never been on. I've been doing this now almost 13 years. Never been that high and never gotten the amount of applications that were getting approved residents. Great residents are moving into our homes. It is really a good time to be in the single family world. Great turnkey or massive project. Definitely turnkey. Okay. Text message or email. I'm a text message guy. My emails, I forgot like 50,000 unread emails. That's a true story. I can, I can show you.

Michael:

That's great. Last one. Olive oil or butter?

Matthew:

I'm an olive oil guy.

Tom:

Love it. Awesome.

Michael:

Awesome. Well, Matt, thank you so much for taking the time to view with us today. If folks want to reach out to you at GK houses, you know, what's the best way someone can get in touch with you or someone on your staff?

Matthew:

Yeah. I would say email me, but obviously…

Tom:

The jig is up!

Michael:

50,001, right?

Matthew:

Listen. The best email to email is support@gkhouses.com and we are monitoring that through a help desk type system. And then that'll get assigned to the right person in our office that can handle that. You can also look us up online and call any one of our offices. So we're a Roofstock preferred vendor in Atlanta and in Birmingham. And am I allowed to say the other two coming down?

Tom:

Of course, growing markets all the time.

Matthew:

So Little Rock, y'all are in Little Rock now and we're also a property manager there. And then we had a conversation with one of your team members this week about y'all are opening up in Denver, which is super exciting. So glad we're going to be a preferred vendor there too. So just y'all are growing and allowing us to grow right alongside of you. So we appreciate you so much.

Tom:

Onward and upward.

Matthew:

Yeah.

Tom:

Thank you so much for coming on Matt.

Matthew:

Yeah. Thank you for having me.

Michael:

You got it, take care.

Michael:

Okay. Everyone. That was our episode. Thank you so much to Matt Whitaker for coming on today. Really, really appreciate it. If y'all liked the episode, feel free to give us a rating or review wherever it is you listen to your podcast and we look forward to seeing you on the next one.

Market Deep Dive: Birmingham Alabama with Matthew Whitaker Jul 20, 2020

In this episode we do a deep dive with Matthew Whitaker from GK Houses on what makes Birmingham Alabama a unique investment market.

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Transcript

Tom:

Greetings and welcome to the remote real estate investor. And today we have a special episode where we'll be doing a market spotlight today. We're going to be focusing on Birmingham and we have a special guest today and Matthew Whitaker, and I'll be joined with my cohost Michael album. All right, let's do it.

Tom:

Matthew, thank you for joining us today.

Matthew:

Well, thanks for having me. I'm super excited about being on this new spotlight and excited about being able to present Birmingham to you.

Tom:

So Matt, why don't you tell us a little bit about your, your background and GK housing as well?

Matthew:

Yes. So I got into investing when I was 23 years old and bought my first house using a home equity line of credit off of a little house that my wife and I, or a girlfriend, fiancé at the time owned and started buying and selling houses and got really excited about it and quit my job, day job. I was doing it on nights and weekends and started flipping houses for a living thought. I was a big shot real estate investor at 23 and did that for about four or five years and pretty successfully we flipped about a hundred houses. I had some partners, I always joke that they had a lot of money and no time. And I had a lot of time and no money and we got married. So we formed a partnership. I was the operating partner that was out there buying and selling homes. We did about a hundred deals in four years. So for a 25 year old kid, that's out there wheeling and dealing. It was the good old days.

And I thought I had the tiger by the tail. And then as y'all know how the story ends in 2008, 2009 becomes the real estate market crash. And as Warren buffet says, when the tide goes out, you realize who was swimming, found any shorts on? And I looked down and I was one of the ones that didn't have any shorts on. So had I owned about 30 rental houses at the time or 30 homes that we were 15 of, which we were trying to flip 15 of, which were already rentals and we just moved everything into a rental portfolio. And so we started managing, we started out managing as a way to sell more homes though. We were kind of on the front end of turnkey world. And it was very new. The idea of selling homes or packages of homes to investors was very new at the time. And so we did that for three or four years and helped put together a big fund of local investors that bought up a bunch of Birmingham houses. But back in, let's see, 2013, we decided that we enjoyed managing more than the kind of deal of buying and selling.

We were more of a, we call ourselves grinders the more of the plotters. And so we enjoyed management. So we, I still invest on the side about, about 30 or 40 houses a year, still personally, with a partner. And, but my, my day job is I'm the CEO of a company called GK houses. And we started here in Birmingham and started, I always tell the story started with those 15 or 30 houses, depending on how you looked at it. And then started just growing that business. In 2013, we managed about 250 homes. And today we've moved out of Birmingham into eight different markets and manage about 26, 2,700 homes. But Birmingham is still my home. It's where our corporate offices it's where all of our back office accounting and all of our corporate team is. And so, um, Birmingham is the market. I know really well and, and still spend a lot of my time investing in

Tom:

Yeah, Matthew and GK houses are great friends of rootstocks and a great partner that we love to advocate for. And we actually are double dipping our podcast. We are having a podcast dedicated specifically to property management that is going to be coming out very soon with Matthew as well. But today, where is the market focus? So great partner.

Matthew:

I love anytime I get to get on and sing Birmingham's praises, it has come from having a bad reputation for some certain things that happened in the past, but I'll tell you where Birmingham is a great place. And one of the things that people consistently say when they come here is number one, how green it is. So when you watch a movie about the state of Alabama, it's all red clay. And there are areas of Alabama that are certainly like that. But where I live is very green and very hilly. And they're amazed at how progressive, not just politically I'm, I don't want to get into that, but in terms of how it's moving forward. And we're really known for our food scene, our arts and culture scene. So very excited to get on and get to talk about the city that I live and have no desire to move. I get to travel a lot, obviously with my role as the CEO here at the company, but I have no desire to move because Birmingham is such a great place to live.

Tom:

Excellent. So the way that this episode is going to flow is we're going to start with some high level quantitative overview of the market. And then we're going to needle into math to talk about some of the specific qualitative of employer's points of interest and, and all that good stuff. So why don't we go ahead and start in our quantitative breakdown, and we're going to make this consistent for all the markets that we talk about first, the MSA. So the greater area of Birmingham, it has a population of 1.313 million, and this was based off of the last census data and map. What are the major cities that consists of the greater Birmingham area?

Matthew:

Great question. So Birmingham proper the city Birmingham is about 350,000 people, I think. And then it is made up of a group of municipalities. So one of the things that an investor would need to understand about Birmingham is it's not a County based government, but it's a very city-based government. So it's very fractured in terms of each little, like I live in Homewood, which is just South of Birmingham. And we have our own city government that manages our own school system, manages our own trash. Whereas somebody like a Nashville or a Kansas city would have a County based government. So that 350,000 people is Metro Birmingham. And then we have a bunch of municipalities in the kind of suburbs, so to speak what we call South of town and over the mountain area, which is all South of town. And then that also includes the Tuscaloosa area, which is where the university of Alabama is, which is about 45 minutes from Birmingham Southwest.

And obviously that area has grown a lot with, uh, with the university of Alabama, as most university towns are starting to grow. So that's where they make up that 1.3 million. There's probably 1.1 ish, a one to 1.1 in what I would consider really proper Birmingham. We don't manage specifically down in Tuscaloosa than Bessemer, which is about halfway between Birmingham and Tuscaloosa is the, is one of the other big towns or cities. And then Hoover, which is due South of Birmingham is another. So generally when you talk about the MSA, you talk about the Hoover Birmingham Metro area. And so Hoover and Birmingham are really the two largest communities in that MSA.

Tom:

Got it. I'm looking forward to needle again, a little bit on those specific, uh, as it relates to thinking about those areas as investors. So that area has seen pretty significant population growth. According to the information we have with census plus 2.8% over the last couple of years, it has a median household income of $57,500 as a medium household income. This is coming from the John Burns data, and there's a pretty significant amount of units. So when I say units, single family homes, there is 520,000 homes in this MSA where 26% of them are renters. And this is again, John Burns along with some census data. So continuing looking at some of these metrics that we have on Birmingham. So a major uptick in new permits to build single family residence. The last value in 2019 is 3,280, and that is up 17.2% year over year. A couple of other metrics to throw around the entry home value within Birmingham is about $134,800.

And this is coming from core logic. And the median rent, this is 1030 $2. Again, this is core logic where this is coming with a really steady rent growth. We'll actually have all the metrics, all the markets that I've seen as one of the highest that 6.5% increase in rent. The last couple of metrics I'll hit on before we get in to the quality of stuff that we'll talk with Matthew about is the rent tiers. So we see a rent tier, and this is again at John Burns metrics on the lower end of an $827, the mid $1032. That's that same median level and at the high tier $1,408. So those are the bands at which are identified in the Birmingham market. All right. So let's get back in talking about those specific main cities and other cities within the Birmingham market. So are the majority of the rental market, is it just an at Birmingham proper, or tell us a little bit about that. The distribution of rentals.

Matthew:

Let’s talk about Birmingham, because I think I need to kind of set the scene. So if you're listening at home and you wanted to bring up a map of Birmingham, what you will see is that Birmingham appears to flow from the North Eastern side of town down through the Southwestern side of town. And so one of the reasons for that is there is the start of the Appalachian mountains, just South of town and runs from the Southeast to the North are excuse me, from the Southwest to the Northeast, and then runs all the way up through South Carolina and in North Carolina. And, and so it starts here. And, and so if you think about when Birmingham was built, it was built in the early 19 hundreds, 1920s, and it was built because this was kind of the Pittsburgh of the South. It was a steel based industry.

So you had a lot of wealth here, and then you had a lot of workers to support that steel industry. There's a lot of mining happen up underneath the mountain. And so when you think about the housing stock, the housing stock started kind of from the Northeast and flows down through the Southwest. And that is the older housing stock that was built on flat land. So if you look at the map and you look at places like Bessemer, which I talked about going up, I 20 through midfield and Fairfield, and then the Western side of town is called West End. And then you get to the Eastern side of town, which is, and starting to head North towards the airport, Woodlawn, Terrant Roebuck. You're talking about, East Lake, you're talking about areas that were built a lot of times in the, uh, some of those areas started in the twenties and then were built through about the forties or fifties.

So when you think about investing in Birmingham, you need to kinda know what the age of the home is. And that's kind of the first thing I think is important is when houses are built and 19 hundreds, they were built with the idea, there was no air conditioning. And if you've never been to the South in the summer, it is really hot here. And we're, we're recording this during the summer. So I'm coming right out of the heat and it's a hundred and something degrees, heat index with almost a hundred percent humidity. And, and so that is really hot. So you can imagine the ceiling, sometimes in those homes were 12 feet tall so that the heat would rise. And so when you're investing, you want to make sure that either those ceilings have been lowered, because now you're going to be required to have air conditioning in them.

And if you buy this older housing stock, you just need to know that it's older housing stock. So your repairs and maintenance are going to be a little bit higher. And what you'll probably want to dig into some of those, but let me, I'll give kind of the 20,000 foot view. And then we can dig into some areas. As move Northeast. And as you move North, and as you move further West, you get into more homes that were built in the fifties and sixties. So there was another kind of housing boom, around that time, those are more of your brick ranchers, more of your wood, three bedroom, one and a half, one to one and a half, two bathroom homes. And these, I call these your tanks. I mean, they're built for modern amenities because we started to use an air conditioning back then, but they're very efficient.

They have closets, but they're not huge closets. They're just a very efficiently built house. So you might find a 1200 to 1400, 1500 square foot home in these areas. And they are great rental houses because again, their tanks, they just hold up really well. They're again, they're very modern people enjoy them. The one bedrooms obviously rent a little bit less than the two bedrooms. Anytime you get multiple, excuse me, not the one bathrooms, uh, rent less than the two bathrooms. Anytime you get multiple bathrooms. Very important. Now, one of the interesting things too, is what I would consider the more A-class housing stock is South of town. So imagine in the sixties and seventies.

Tom:

Is that Hoover?

Matthew:

Yes, you're talking about Hoover. You're talking about Vestavia, Homewood, mountain Brook, and these areas, these homes are hard to buy and make the rental numbers work, but these are all built up on the mountain. So when we say over the mountain, you had more, as technology came in along and building, you are building these homes on the side of mountains. And so the housing stock is much younger as you get more vertical in Birmingham. And now if you're listening to this in Denver, you might fly into here and wonder where the mountains are. There's all rolling Hills, but we call them mountains. And then as you get further North, just like any city, it grew out, right? You're going to get into areas like Fultondale and Gardendale North. You're going to get into areas like Trussville to the East. You're going to get into areas like Hoover and kind of the Indian Oak mountain Indian Springs area, where my wife grew up, where Oak mountain state park is. And then as you go West, you're going to get into Hueytown and pleasant Grove.

Now these are your B plus neighborhoods that are kind of out a little bit further great areas to buy for high appreciation, but there's suburbs there. People are going to be driving into the city to work. And so, you know, just like any town, you can pretty much dictate what the pricing is of the house based on when it was built and what the housing stock was built for.

Tom:

I think one of my favorite adjectives for a rental property is a tank property. That just goes on. You didn't mention what cities you said it was in the West or the Southwest. Is that like pleasant Grove and Fairfield or…

Matthew:

Yeah, Hueytown pleasant Grove. Our Fairfield's more of that first area that I was talking about that was built more of a C class neighborhood. But when you get into Hueytown and pleasant Grove, you're talking about B plus B plus properties with high possibility for appreciation, a lot of home ownership in those areas. So really if you talk to some of the local investors, those are some of the areas that they like to hit the hardest.

Michael:

Got it. Matthew, I've got a question for you. What I want to know is why are people living in Birmingham and are moving there? You know, there's gotta be job, pull job growth. Can you talk to us a little bit about who some of the major employers are and why folks are headed that way?

Matthew:

The biggest employer in Birmingham is university of Alabama at Birmingham, the hospital and the university. So when you combine that it is a teaching hospital, it's one of the, in the Southeast, it's probably one of the biggest teaching hospitals. So it has a huge draw. You can imagine from Mississippi, from all parts of Alabama. And so we have a bunch of doctors and students that are learning at UAB. And then of course the school university of Alabama at Birmingham, the next thing that's a huge employer is Alabama power, AlaGasCo, kind of the utility companies that service the state. And then another thing that's exciting is we have two, no, excuse me, three different car automobile manufacturers within about an hour and a half of Alabama. So to the Southwest, as you go towards Tuscaloosa, which we talked about earlier, there is an area down there called McCalla.

It is where I 459, which has kind of the bypass meets back up with I 20. And if you keep on going down, [inaudible] right there. That is where the Mercedes-Benz produces the M class Mercedes. So the SUV Mercedes, and so McCall is a great area to buy rental homes. You're talking about a lot of new builds going on. That is where a lot of, and they continue to add square footage onto that facility to build more M class Mercedes. And that obviously feeds jobs. People traveling from Tuscaloosa and people traveling from Birmingham. If you go East on I 20, you have the Honda Odyssey van is produced in Leeds. So great area. Trustful sees a lot of their executives that come in from Japan. One of my old partners used to rent to all Honda executives, and they would come in from Japan and live here for two or three years, and then go back to Japan.

So, and obviously the having building the Honda Odyssey van, there's a ton of you don't think of just Honda, but you also need to think of all the suppliers that have to support a big operation, like building that Honda Odyssey van, building that M-Class. And then if you go due South, you breach Montgomery and just South of Montgomery, and that's, this is only about 60 or 70 miles South. You find the Hyundai plant, and I'm not sure exactly what build there. I would imagine most of the Hyundai workers work in Montgomery, but you still have some of the suppliers that are supplying all three of those in and around the Birmingham area, just so they can be very centrally located. So we have a, so that's pretty exciting. I mean, Mercedes has been there probably 20 years, maybe a little bit longer, maybe 25 years building that M class Honda came about about eight, 17 or 18 years ago.

And then the Hyundai plant is newer, probably 10 to 12 years. There's just a lot of exciting things going on. Amazon is building a facility now in Bessemer. So there's a big kind of gold rush in the Bessemer area just because they know there's going to be, have to be a lot of people that are going to support that Amazon distribution facility. Birmingham has been doing a great job of investing in the city has built new hotels in and around the downtown area. And we're also building a brand new football stadium too, for the UAB blazers. And it's going to hold things like concerts. And so there's just a lot of money right now being invested in and around the Birmingham area. So really a lot of exciting things going on.

Tom:

That's awesome. You know, we already touched a little bit on education, major colleges, but UAB, as well as university of Alabama,

Matthew:

Yeah, University of Alabama is down in Tuscaloosa, which is about 45 minutes to an hour Southwest of Birmingham. You have, let's see, you have Sanford university in Birmingham. You have Birmingham, Southern college is also obviously located in Birmingham. Yeah, you Auburn is about an hour and a half to two hours, South East of Birmingham and a place called Auburn, Alabama, which is pretty obvious Auburn in Auburn, but it is almost a when you get to Georgia. And so there's a lot of kind of university life. You see a lot of university students in and around. And of course the medical school at UAB brings a lot of people in. We have rented a lot, especially when we have homes in and around the South. What we call the South side of Birmingham, which is basically South of the entrepreneurial district. We have a lot of med students, dental students that rent with us.

Tom:

And is that in the general Southern part? You said Southern part of Birmingham.

Matthew:

Yeah, It is. If you kind of zoom in on Birmingham and you look what I would call in between Homewood, if you look where Volkan is, which is a statue that was dedicated to the iron ore industry in and around their five points South, all of that is where a lot of the young people live that are going to those universities.

Tom:

Very cool. How about let's touch on transportation? So in looking at it, it looks like it is almost like an X from 65, 22, 20, 59. So it looks like a major central hub of a freeways in the South that all go through Birmingham.

Matthew:

It absolutely is a Nashville about two hours to the North. Atlanta's about two hours to the East Jackson. Mississippi is about two or two and a half hours to the West. And then Montgomery is about an hour to the South. So it's very centrally located. Half the people here are Atlanta Falcons fans. The other half are Tennessee Titans fans. And so it is a very centrally located city and very easy to get to. And then in transportation, within the community, most people drive everywhere here. It is not a, unless you just live downtown and work downtown, which is, it's not an overly big downtown area you're going to drive to work. So kind of the main corridor where a lot of the, where it gets clogged during the week would be that 280 as you go South and East is a very heavily traveled road. I 20, I 65 coming from the South and from the South West. And that kind of tells you where the people are, right. It tells you where the people are and what they're doing. And then I 65 South into Birmingham in the mornings is very busy. So Birmingham is kind of spread out just because it, as you moved across the mountain, it does flatten out a bit and it allowed for the city to kind of expand,

Tom:

I’m smiling as I'm hearing this, I'm so excited about this series of market spotlight. I'm learning so much about Birmingham and I'm like, so excited dip my toe into the investing market, continuing down. Well, there's also an airport right in Birmingham.

Matthew :

Yeah. We've got what we call an international airport. I'm not sure where that international flight flies. I think it flies at The Bahamas, which is good. I mean, everybody's got to go to The Bahamas, right. But what I tell people is we have major flights in from Denver, obviously, and from Atlanta into Detroit, into New York. So it really is a two flight place. We fly obviously Dallas and Houston direct, but unless you're going to one of those kind of major cities, you're really going to, it's going to be a two flight place, which is fine though. I mean, Birmingham so easy to get around. I always tell people, you know, Atlanta is one flight away from everywhere, but you took two hours to get to the airport. Birmingham takes me literally 10 minutes to get to the airport and then another five minutes to get to my gate. And then I can fly to Atlanta and in 45 minutes. So it really saves me. I get placed as faster than people do in Atlanta.

Michael:

And Matthew, speaking of getting places, do you all have traffic and understand you're speaking to a couple of California, so we gotta be careful here.

Matthew:

Look, I've been in Atlanta on the bypass, the two 85 bypass. And it is really bad. There's only a couple areas in Birmingham that are probably that bad or, or could even like sniff being that bad. That two 80 corridor is really tough in the morning. It may take you an hour to come 15 miles, 20 miles in, but a lot of people do it. Like it's amazing to me. We keep making it wider and wider and wider. And as you know, it also makes it worse before it gets better. And then by the time they finish it, it feels like it needs to be wider. And that's where I would say a lot of the housing growth is going right now is South and East down to 80. So you can see Chelsea down there in the bottom right hand corner of the map. If you're looking at it, Chelsea is a really growing thriving area.

Again, anywhere around McCalla is really growing. That's where they're building a lot of homes. I've got some great friends that are one of the largest builders in Birmingham, and they consistently build in those areas and build in Trussville, which is just East of town. So they're still building in the suburbs. There's not a lot of infill building going on right now. And they continue to sell homes. Even during this market, when we're recording, this is kind of coronavirus world, and they're still selling homes. They're still building them. They still have people that are interested in buying them. So we really feel like in Birmingham, we've got a little bit of a shortage in the housing.

Tom:

Yeah. I mean, it's one of the highest SFR applications for building new houses way up there. And looking at the beginning of some of those metrics, let's touch on investor friendly related matters. So is there any concepts of rent control or, you know, legal concerns around unlawful detainers or three-day notices I'd love just kind of, you're taking, you're probably an expert at this as a property manager, as a CEO of a property management.

Matthew:

Yeah. Unfortunately, sometimes, unfortunately, fortunately. Yeah. So Birmingham is a very conservative, well, Alabama let's say, cause because most landlord tenant laws are state specific. Alabama is a very conservative politically state. Birmingham is a very progressive city though. And so, but still most of the laws are driven, are state driven, landlord tenant laws. So evicting a tenant is easy technically to get done, but it does take a while to get done. And in Birmingham that's probably the biggest drawbacks to Birmingham is sometimes it takes as many as 60, sometimes as many as 90 days to get someone set out from the time you fall an unlawful detainer to the time you actually set them out. So that is a really long time, even in a place like California. I think that's a long time. The good thing about Birmingham though is again, it is a very landlord friendly laws. The landlord tenant law is very, is it really written landlord friendly. We have very low property taxes, relatively speaking. So as a percentage, it's way less than a lot of the other communities around the country. And look, there is no rent control. I don't ever expect that we might be one of the last places in Birmingham to have that. So it's again, pretty much landlord friendly, but you want to make sure you get a good resident in your home so that you don't have to evict them.

Tom:

Makes sense. My other kind of question on, I guess this is sort of landlord friendly. I know some areas have a lot of HOA ways and some of these hos, you know, they have sneaky little rules and the bylaws about being an owner occupant. And is that common in Birmingham?

Matthew:

It's not, we managed in places like Nashville and Atlanta where that's very common. So very familiar with that. Birmingham is not that way right now. It could come that way. As the housing stock that's being been built in the last 10 to 20 years, maybe it becomes more rental stock, but right now it is definitely not that way, especially in the areas where investors are buying.

Michael:

So it sounds like Matt, from the descriptions that you've been giving, this is a very seller friendly market. It's really a sellers market at this stage of the game. Is that fair to say,

Matthew:

Is it is an investor market. It is absolutely. You can definitely sell a house right now, but there's, I mean, it's just a really healthy, it's like very aggressive sellers and very aggressive buyers right now. But yes, if you're selling a home, you could even do a good job. You could make out really well selling homes right now, too.

Michael:

Okay. Great.

Tom:

Any other thoughts on points of interests? I saw there's the Birmingham barons, AAA baseball team.

Matthew:

They are AA, but yes, they are in downtown. They used to be down in Hoover and we moved them. They built a new facility that won a lot of awards in the downtown area. So that is down there much like many of the other communities, some of the things that draw people or we've, we've got a number of local breweries that are kind of fun places to hang out that a lot of people are enjoying doing. We have the food scene's really good here. So last year we had a Frank sta won the James Beard award for the best chef in the country or the best restaurant, excuse me. So we've got an, and then he's got, I always call it the coaching tree, but he's got all these other chefs that he's trained now that have gone out and started their own restaurants.

Tom:

Diaspora. What's the name of his restaurant?

Matthew:

His restaurant is called Highlands Highlands bar and grill. Nice. And so it's kind of an upscale, kind of a New York style bar and grill.

Michael:

Awesome. Man Tom, we gotta make it out there.

Tom:

I know

Matthew:

That's the one of my favorite places to go.

Tom:

Awesome. Michael, do you have any other questions?

Michael:

Yeah. Just curious, Matt. So for all of our listeners who were previously unfamiliar with the Birmingham market, hopefully now they're a bit more acquainted with it. What would be your final thoughts if some of those needs, what, what would you want someone's final takeaway to be from, you know, about the Birmingham market?

Matthew:

It'd be a long ending, but I think it's kind of important is our average rent somewhere in the $900 range. So you're talking about when you look at Birmingham, I would think more about investing in forties, fifties, and so homes in the forties, fifties, and sixties. If you're looking at investing in C class properties, maybe 60 seventies or eighties, or even some of the two thousands, we have some homes that are in the two thousands. If you're looking for B class kind of high appreciation, lower cashflow, where you're going to find those C class properties are in areas like East Lake was a, which is three, five, 206, zip code Western, the free five, two one one, Inslee three, five, two Oh eight. Midfield is three, five, Oh man. I own a house in Midfield. And I can't think of it. I'll think of in a second, but you're talking about Roebuck, which is three, five, two one five, Center point 35215.

You're going to talking about Grayson Valley area. Now you're starting to get into more B class neighborhoods that would be Trussville, Calera, a Chelsea, Hueytown, Pleasant Grove. So, and you're talking about rents now that are more in the $900 to $1,200 range. That's what we would consider B class, which kind of lines up with the statistics you were giving earlier in terms of just kind of a price brackets. We manage about six or 700 homes right now. And it is a great time to be in the rental business because we're at about 98% occupancy. We're actually north of 98% occupancy, which we've never been before. What we are seeing as a shift from people wanting to live in multifamily, to live in single family homes. So that's pretty exciting for us, obviously because the pandemic and I just don't see that going away anytime soon.

Like people just don't forget about the pandemic after it's over. They're not going to forget about it immediately. So I do think there's a shift to single family rental and in the South, this things may change, but the pandemic doesn't feel as bad as I, my friends tell me, you're experiencing in California where people are experiencing in New York, we are renting homes like crazy here. I know that our cases are up in terms of virus, but it doesn't feel that different than normal life down here right now. So all that may change, but I will tell you things are really good right now. And it's not like people are gonna stop paying rent. Obviously if they lose their job, that may be a problem. But everybody seems to have adjusted to kind of coronavirus world down here pretty well. So that's what I would say is most of our investments are in the C class and B class neighborhoods.

And look, another area I would want to highlight is Northwest, which is Forestdale and Adamsville another great area. One of my favorite areas to invest. If I could buy everything up there, I, I definitely would. And so, but I also want to be a reference for any of your potential clients. So, you know, if they have any questions, we obviously have people, I always say you, you date your real estate agent, but you marry your property manager. And so I want you to know that before we get married with any one of your clients, we want to make sure that they're buying the right thing too. So we don't, we have a vested interest in it's a longterm relationship. We can't just put somebody in any home, regardless of what that home is. So I know that was a long ending, but I thought it was important just to kind of give some numbers and some feedback on what's going on at the grassroots level.

Michael:

That was great.

Tom:

I love it. That's one of my favorite pieces of advice to give is, you know, leverage your property manager early and often, even in the acquisition process. I mean, it's a teamwork and you know, the earlier you can kind of start to build that trust, uh, so much value to it.

Matthew:

Well, our, all our incentives are right. I don't want you buying a bad house because I've got to manage it. Like you don't have to manage it. I know you've got to pay for it, but I'm the one that has to manage it. So I don't want you buying something that's going to cause me a lot of headaches in the future. Just like any business owner. Obviously we want to work really hard and earn our money, but we don't want to do extra work just because we put you in a bad property.

Tom:

Awesome. This is fantastic. Thank you so much for your time. This was super interesting. The Pittsburgh of the South. I love it.

Matthew:

We used to be called the magic city because we grew so fast. And so now it's starting to grow again and I'm super excited to be a part of Birmingham.

Michael:

Matt, before we let you go, if folks have any questions about the Birmingham market, where can they reach out to you? And a little birdie told me also that you've got a podcast of your own.

Matthew:

Yeah, no, I appreciate you mentioning it. We actually started a podcast that helps people just like you're, you're trying to help people with Birmingham's specific information. It's called the Birmingham rental investor and they can get that on Spotify or Apple or wherever somebody listens to their podcast. If they want to reach out to us specifically, we again would love to help somebody. We want to make sure that you're getting into the right house. And the best way to do that is to reach out to our support support@gkhouses.com. And what we have is essentially a support ticketing system that we'll get into our sales department and they can help you understand questions about our management services, but most importantly, make sure that you're getting into the right house so you can send them addresses. We'll give you rental reports of what we think that'll rent for. We just want to be a supplier of good information so that you can make the best decision possible. So thank you.

Tom:

All right. Thank you, Matthew.

Michael:

Thanks so much, Matt.

Matthew:

Thank you.

Tom:

Thanks again to Matthew, that was super informative. Learning about the Birmingham market. If you have any other questions, other markets for us to deep dive into, please reach out to us. You can hit me up at tom@roofstock.com and as always, this episode is brought to you by Roofstock Academy. It is your one stop shop to getting to the next level, from on-demand online educational lectures, coaching, the SFR playbook, all of that good stuff. So just check us out at roofstockacademy.com and happy investing.

A Deep Dive With a CPA to Uncover All The Tax Benefits of Rental Properties Jul 16, 2020

In this episode, we have Joel Jensen from Tax Sentry explain exactly why real estate is so powerful when it comes to tax benefits.

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Transcript:

Michael:

Hey everyone. Welcome to another episode, The Remote Real Estate Investor, I'm Michael Albaum. And today I'm joined by Emil Shour. And today as our guest, we have Joel Jensen from Tax Sentry, and Joel is a tax expert and guru, and is going to be talking to us today about what we as investors need to know about income taxes and how to strategize and plan for our taxes so that we can come out ahead. So let's get into it.

Theme Song

Michael:

Joel, thank you so much for being here. Really appreciate you taking the time.

Joel:

Sure. I love to be here.

Michael:

Awesome. So can you give all of our listeners a little bit of background about yourself and how long you've been working in the tax space and kind of what you've been doing?

Joel:

You bet. So I graduated with my master's degree from Brigham Young University in the early nineties. So it feels like a long time ago, but from there I went to work for Ernst and Young, which is one of the, we'll call them the last four large service firms out there. When I was there, they were the big six. Now I kind of call them the final four, but I was with Ernst and Young for about 10 years working on large audits, large compliance, scc transactions, that type of thing. And after doing it for 10 years, the part of the job I really, really liked was working with people, you know, the interactions I had with people, the part I didn't like was feeling like that was just servicing kind of these large companies.

So what I decided to do was leave Ernst and Young kind of start my own firm. So I could actually have a significant impact on an individual's tax and financial circumstances where I felt it was much more gratifying for myself personally. And I've been doing that for almost 20 years now, became a real estate investor myself, probably back in 2005. So I've been doing that as well on the side, which I really enjoy some houses, own some rental properties. So since then, I guess I'm in the real estate game, but my full time job is CPA. Great.

Michael:

You know, it's so counterintuitive that you mentioned that the favorite part of your job working at one of the big six of the big four was interacting with people. Cause all the accountants I know the worst part of their day is when they have to interact with people.

Joel:

I know there's probably only lasted 10 years, right? I'm like, ah, this isn't for me. I gotta go, gotta get out. I gotta get out now while I can.

Michael:

Awesome. Awesome. So, and I love too that you're an investor because you drinking the Koolaid too. And so really talking and preaching and consulting on the things that you're also doing.

Joel:

Correct. Yeah. So I think it helps, you know, if you're dealing with a CPA, for example, that at least they have a working knowledge of what it is that you do. And since I am in the real estate game, obviously I have lots of real estate clients, even contractor clients, anyone, even within the field of real estate, whether they own it or provide services to people who own real estate, that kind of outlines a significant of my clients.

Michael:

Great, great. So I wanted to jump into the meat and potatoes of this tax discussion right away. And I'm gonna let Emil kick it off in talking about deductions and kind of what those are, what those look like, what people should be aware of.

Emil:

So the various types of deductions that real estate investors should have on their radar are property taxes, property insurance, mortgage, interest, property management, fees, property repairs, and maintenance, capital improvements, and ongoing maintenance and advertising expenses. So things like the cost to list a rental, to find a new tenant marketing your property for sale. Those things are also deductions as well.

Joel:

Let me go through maybe the aspect of what it is like to actually own a property. So I go out and I buy a rental property. I'm going to bring that in. I'm going to put a renter in there and I'm going to earn rental income, right? So that's kind of the basic premise of when I own a rental property. Now what's offsetting part of that revenue are some of the standard deductions, like you mentioned. So oftentimes when we buy rental real estate property, we're financing it. So we have mortgage interest, right? We're deducting against that revenue. We have insurance that we have to pay to insure the property that we're also going to deduct against that revenue. Oftentimes it's maybe it's our self, right? Maybe we're managing a property and we don't have a management company that's doing it. Or let's say the property is, I don't know, a hundred miles away from me.

So I have to get a property management company involved. So I got to pay them in order to do it. So I may have some of those types of fees, maybe some HOA fees for owning the property that are due, especially in kind of a condominium space, right? Condos or maybe apartments or multi-doors, rental properties, that sort of thing. I may have some of those fees as well. You know, advertising, whether I'm advertising something for a person to rent or whether I'm advertising for maybe a home to sell all those costs, kind of go in to offset my particular rental income that I'm earning. So if you can think of kind of, if I take, you know, lots of people have experienced with their personal homes, right? And they say, look at all these outgoing bills, you know, utilities, interest in my property, taxes, all those things, think of it in those terms, all those same expenses that you have for your personal home, you're still going to have for your rental property. Cause it is still house, right? In most cases, right? So you're going to have those expenses. Now, all of those things that you're paying out for that property become deductions against your revenue. So I would just look at it as kind of all the expenses that are associated with the property. I get to deduct to get any rental income that a renter is paying me.

Michael:

And that's so different than like you mentioned on our primary residence. If someone has a primary and they have a property tax bill, they don't get to deduct that against any income because there isn't an income, but they don't get to deduct that against them. So it sounds like pretty much everything on a rental property, if it's an expense as a deduction.

Joel:

Yeah possibly can be, yeah. So let's make it easy. So I got to go change a light bulb for someone because they don't have a ladder. So I go to Depot, I buy a light, I go over to my rental property. I put that light bulb in, I get the cost of that light bulb and I get a mileage deduction for driving down home Depot and for driving over to my rental property and then for driving back to my house. So that encapsulates two actual deductions that I may have going for me to offset some of that income. So I always tell people, look at what it took for you to make a dollar. Let's do it at the bare bones minimum. What did it take for you to make a dollar in conjunction with that rental property? How did you spend your time? How many miles did you drive?

What were you buying on behalf of that rental property? What were you buying in order to maintain that property or service that property? For example, you know, renters in there, I managing it myself, got to have a cell phone right now that's cell form becomes a deduction against the rental income. Probably got to have internet if I'm going to list something. Well, now I get to write off my internet as part of the operations of that rental property. So I always say really take a hard look. What did it take for you to make a dollar? Okay, what did it take for you make a dollar and that's probably what you're going to be able to deduct on your tax return as part of that real estate operation.

Michael:

That's great.

Emil:

So all those things we just mentioned are those fully deductible or is it only 50% or some partial amount?

Joel:

Ah, good question. Because of the new tax code limits as personally from our property tax perspective, right? So we can only deduct up to $10,000 worth of state or property tax on our personal tax return. But when it comes to my rental activity, I don't have those same kinds of limitations or I'm deducting property tax in full I'm, deducting my mortgage interest. I'm deducting, you know, the cost of the light bulb in full. Most of those aren't limited or don't have limitations as far as my deductability against the rental property.

Michael:

So then Joel, is it accurate to say, let's say I made $10,000 in rental income in the year and I spent $6,000 in these various expenses that we just mentioned, the delta, there is four, 4,000. So that I ended up with $4,000. But is that what's taxed?

Joel:

That is what's taxed. Yeah. It's your bottom line. Sometimes people get revenue. I an accountant right. So I kind of speak in the account language. So sometimes people think revenue, Oh, I'm texting revenue. This renter just paid me $24,000. Now I got to include $24,000 in my income tax return. And that's what I'm taxed on. But in actuality, what happens is you're taxed on the net. Okay. So I take maybe that $24,000 or in your case, the $10,000 I deduct the $6,000. I'm only taxed on the four grand, not on that top line number.

Michael:

Great, great, super, super powerful. And so that kind of leads in actually to the next point that I want to talk about, which is this thing called depreciation, which I think most investors have heard about maybe not sure how to use or what it actually means. So can you give everyone an idea and a breakdown of what depreciation is and how we can use it to our advantage?

Joel:

Sure. Now I will say If I own a rental, you must take depreciation expense. It's not something that you can leave off. I've seen tax returns that were given to me after the fact of rental operations for people that wanted me to review it. And then I look at depreciation and there's no depreciation. So know that you have to depreciate a rental property. And what that means is the IRS is giving us basically a useful life. If you will. They're saying that I go buy a rental property. It's useful. Life is 27 and a half years. So I'm going to define the cost of that property over that 27 and a half years. And I get a yearly expense of whatever that number ends up being that yearly expense is awesome because I'm able to deduct that. Let's take back your scenario of 16,000 worth of expenses, like with 4,000, right?

But those six thousands were hard, cash, outflow numbers or dollars. I still get to deduct my depreciation that gets that four grand. And now maybe I'm only taxed on $2,000. Right? So depreciation is a wonderful thing because it's also kind of a non-cash item. Okay. I bought the property, it has a loan on it, or maybe it doesn't. Maybe I was able to take the property down in full when I initially purchased it. But I still, even under that scenario, get to depreciate the property. So I'm not paying for the depreciation. It just happens automatically once I purchase it.

Michael:

And so you mentioned that it's based on the purchase price. Is that right?

Joel:

Based on the purchase price. That's correct. Yep.

Michael:

So, In our $10,000 rental example, if we bought the property for a hundred thousand dollars, I did the math really quick, here,

Joel:

Thank you.

Michael:

I wasn’t going to put you on the spot. And we say that residential property is 27 and a half years. Right? Commercial property is 39 years.

Joel:

Correct.

Michael:

And so if it's residential property, we divide the purchase price by 27 and a half. If it's commercial property, we divide the purchase price by 39 years. So let's take our a property. We bought for a hundred thousand dollars divided by 27 and a half years, we get $3,636 of depreciation every year,

Joel:

Every year until that 27 and a half years has passed.

Michael:

Got it. So going back to our $10,000 in revenue example, we had $10,000 in rental income, $6,000 in expenses. So it leaves us with $4,000 net gain. But now you're saying we get to deduct an additional 36 36 and meaning our taxable income is going to be like 40 bucks for the year?

Joel:

Correct? Yep. Holy smokes. Yeah. So that's the power of appreciation. That's why it's so great. So when I buy a rental property, a great position to be in because of depreciation is to be what I call cash positive. Meaning that the revenue that I'm earning is greater than the cash outflow for any expenses that I have. But because I have this depreciation figure, right, I can actually have a loss on my tax return yet still be cash positive in the real world. I mean, that's the power of real estate. So when people say, Hey, I want to go into real estate. There are tons of tax benefits. Oftentimes that's what they're referring to. That I can create loss on my tax return and offset. Maybe my wages, my w two wages from my employer, even though I'm cash positive when it comes to the actual activity of the property.

Michael:

So what another way of saying that be at the end of the year, I can end up with a thousand dollars in my pocket, but actually offset the income that I've earned from my W2 and get taxed at a lesser

Joel:

That's correct. Yup. Yup. I see it all the time.

Emil:

I love that you guys brought this up because this is why people tout the benefits of real estate, right? It's like everyone knows there's huge tax benefits and this is the biggest one where you can actually be making money all year cashflow positive, but because of depreciation, you're showing either no gain or a loss potentially offsetting your personal income, so.

Joel:

That's correct. Yep. Maybe you have that scenario, loss, cash positive. The other thing that happens with real estate is our gains, right? So our appreciation just to the value of the property over years tends to go up. So when I sell it, I'm going to sell it at a higher dollar than when I purchased it for, and the entire time I'm owning it, I'm showing all these losses, but I'm still reaping these cash, positive cash, positive cash flow numbers that are coming through. Yeah. It's a real powerful game when it comes to real estate. That's why I'm in it, right?

Michael:

That's right. That's right.

Joel:

Yup.

Emil:

Probably a little bit more tactical or advanced, but okay. Let's say I've owned the property for 27 and a half years. Right? I've taken full depreciation now I want to sell it. Right. One strategy we've talked about on prior episodes is using a 1031. So let's say 1031. So I have no capital gains on the sale. When I 1031 will my new property, will I be able to depreciate that one over 27 and a half years or what happens to this amount? I've depreciated all that time.

Joel:

So it depends on basis, right? And typically what happens in 1031 exchanges, if you held it for that long and then 10 31 to a new property. I mean, that would be a pretty phenomenal thing, but, but what we do is oftentimes people are selling something to get into something that's larger or bigger or creates more revenue. Right? So it depends on my basis. So if I had something that was worth 300,000 and appreciated at all 27 and a half years, I 1031 exchange that and do something that's 500,000, I've already depreciated $300,000 with my basis. So now I grabbed that additional 200 grand and now I'm going to start depreciating that once I own that new property. Yeah. So I don't depreciate the same thing twice.

Emil:

Okay.

Michael:

Got it. Got it. And so speaking of depreciation, something that I'm doing actually for the first time, this year is a cost segregation study. Can you share with everybody Joel, what that is and how that might be used to help?

Joel:

Yeah, that's really, I mean, that's really powerful because we're talking about depreciation, the benefits of appreciating a property now that 27 and a half years oftentimes can seem like a long time. And if you get into the commercial space with 39 years, can you imagine, you know, you're going to hold something through 39 years. That may seem like a really long time for most people. I think that it would be. So what a cost segregation does is it allows someone to go in and start piecemealing the actual individual cost of a property. Okay. So you may have cost for electrical wire, plumbing, drywall, roofing, wood, steel, nails, screws, light fixtures, you know, all of these different costs now. And realistically a life's not going to last 27 and a half years. So what a cost segregation does is it breaks down at home, into all its individual components and then assigns lives to those individual components.

So rather than depreciating a hundred percent of the cost over 27 and a half years, you may be able to have a bunch of costs that you're depreciating over five years or over 15 years, you're accelerating that depreciation. You're taking more of it upfront again to maximize that possible loss that you have. So when anyone buys a property, I say, look into cost-seg. I mean, it's a great way to accelerate those numbers, to get a whole lot of loss upfront because oftentimes people are looking at holding rental properties, you know, five years, 10 years, 15 years, then maybe they want to cash out for the appreciation or get into something else. But it allows during those holding periods to take advantage of as much loss as possible,

Emil:

Are there professionals who just help you do? Like how do you even do that?

Joel:

There are actually, yeah, there are professionals. You have to do it yourself. I mean, these things actually don't even cost that much. In fact, I had a client who, okay, it's all relative in terms of cost, but he purchased a $2 million commercial building, a $2 million. He did the cost segregation on that study. I think it only costs him about $7,000. And I was able to save him upwards of 60 grand on his tax return. Okay. So that's the power of that cost X study. They're not that expensive. And some peak times people say, Oh, I didn't buy a $2 million property. I just finding a residential home. It only costs me, you know, 350,000 or $400,000. If something still do the cost segregation study, you don't know how long you're going to hold the home. Right? Most people don't hold it 27 and a half years. So go in and do it. Accelerate your depreciation, take a bunch of those expenses up front while holding the property.

Emil:

Michael, can I ask you, why did you decide, I know you have several properties. Why did you decide to do a cost segregation on this one specifically? Yeah. So it's a great question. I was doing a bunch of rehab, like a ton of ton of ton of rehab on both the properties that I'm doing, these cost segregations on. And it was just reading about tax strategies and things to do with properties that you've rehabbed. And this came up as one of the best things to do, because like Joel was mentioning so much of the rehab is the stuff, the baseboards flooring, light fixtures, plumbing, all that kind of stuff. So if I can get some of those benefits back for the cost that I had to spend to do the rehab, that's huge. And so Joel, did I understand you to say that you can do a cost segregation study, even if you haven't done any kind of rehab, you can just go buy a property.

Joel:

Yeah. Even if you go buy a property, you can do a cost segregation on that property even without rehab. So I would always tell people know, look at that really, really give it a good look because it's probably going to be worth your while.

Michael:

That's great. And so we mentioned about how that depreciation is captured and addressed in terms of basis. When we do a 10 31 and step up into something else, but let's say someone's owned a property for 10 years. They've taken depreciation on it the whole time. And then they're just looking at being done with real estate investing. They sell the property, they're going to pay the capital gains. Cause it's been some appreciation what happens to that depreciation? I can't just go away. Right.

Joel:

It doesn't go away. So it's what we call it recaptures. So the appreciation that you take over time when you sell the property recaptures, or it comes back into income and I'm taxed on it and that's what ends up happening. Yeah. Okay. But it's a good trade off because as revenue is coming in and cash is coming in, I want those deductions. And when I sell my house for the gains that I'm going to make off of the appreciation of that house, that's when I have the cash and it's easier for me to afford then the tax on those numbers right on that recapture. So when I have the cash, go ahead and I'll take the recapture when I'm having that little bit of income come in. I want the expense to offset.

Michael:

That makes sense. Yeah. I was just wondering, you know, what's the difference if you're taxed on it now or taxed on it later,

Joel:

That's the cash flow projection. Right. So dealing with my cash flow, I want the cash flow as much as I can right now, you know, and then hit me with it later when I have a big abundance of a onetime cash coming in.

Michael:

Got it makes total sense.

Emil:

Okay. I want to shift gears here a little bit and talk about passive income versus pass through deduction. So can you walk us through that, Joel, and what the differences and why it's relevant for people?

Joel:

Yeah. So excluding capital gains, when we're talking about income from operations, really, I'm just going to narrow it down to two. We call them active and passive. Hey, passive income deals with the rental side of real estate. And the reason people like it so much, it's because there's no self-employment tax associated with it. So in essence, it comes to us as cheaper income. So if I have a retail operation or something where I'm just going out and I'm selling widgets, you know, that I put together, that's all active income. So if I make a hundred grand, I have to pay self employment tax on that a hundred grand, on the flip side with passive income rental real estate. Again, let's say I make $20,000 off of that rental real estate. I don't pay any self employment tax, which is roughly about 15% on that income. And that's on top of income tax by the way. So it comes to me cheaper. It's cheaper income for me to make. So people love it as much passive income as you can get because it's cheaper income take it.

Michael:

Interesting so if someone just to reiterate, if we got rid of the self employment thing, if I'm making a hundred grand at my w two job and somebody else is making a hundred grand in passive income after all of the expenses, right after depreciation, all that good stuff, that's their taxable income. And my W2 is a hundred grand. The person who has the investment income, the passive income is going to walk away with more dollars.

Joel:

Correct.

Michael:

If your head just didn't explode, go back and look that again.

Joel:

Yeah, that's exactly right. The person with the passive income will come out ahead every time.

Emil:

I'm so glad you made that point because I think a lot of, when we're thinking about our ultimate goal of how much passive income do I need to be financially independent or whatever, it's actually less than what you'd need from your W2. That's correct. If you're making whatever a hundred grand, 150 grand, whatever it is, you don't need to make that much in passive income. It's actually less because you're taxed differently.

Joel:

That's right. It's cheaper income. It goes a lot further

Emil:

Love that.

Michael:

Love, love that. Anything else we should know about passive income or passive deductions?

Joel:

No, that's probably the biggest thing. Just the difference between active and passive. I mean, that's kind of the best thing to know about those two. Yeah.

Michael:

Perfect. Okay. So Joel, now shift to talking about something that we've mentioned previously about capital gains instead of income taxes. And so can you tell us what is a capital gain and why is it important to know about and how has it taxed?

Joel:

Yeah. So what a capital gain just means when I sell an asset, they have a different tax classification for rates of how I will be taxed on the game that I make from the sale of that asset and rental real estate, when I own a property or rental income during the time that I own that property, when I sell that property, the gain that I make off that sell is based on the capital gains rates. And typically it's much cheaper. Okay. Then ordinary income again, or active income again right now. I mean, there are some beautiful things when it comes to capital gains or capital gains rates. I mean, I can't remember the last time they were this low.

Did you know that you actually will pay 0% capital gain if your other income is under $80,000? Now there is a great tax strategy and planning to go through for timing. And when maybe it may make a whole lot of sense to sell a rental property above $80,000 to about $500,000. You're only taxed at 15%. Now this is all based on if I held the property over one year, okay, okay. After one year I get longterm capital gains rates above $500,000. My other income sources are above 500 grand. I'm going to pay 20%. So you have, so it depends on your other sources of income to how much capital gains, how much longterm capital gains you're actually going to pay. So if you're going to sell a property, really look at how can I mitigate some of those other sources of income to ensure that I get the lowest possible longterm capital gains rates, lots of tax planning, opportunities that go into that. And

Michael:

Is this something new that you mentioned that, that this has changed recently?

Joel:

Yeah. So it's something new with the whole, yeah. With the, with the new tax change that happened a couple of years ago. It's, you know, they're always kind of fussing about when it comes to capital gain rates and how they want to treat them. This is one of the aspects that came out of it. If you think about just comparing capital gain rates to ordinary income rates where I may, let's say I had, you know, a nice job, I made 150 grand. I sold the property, made another a hundred thousand, that a hundred thousand is only gonna be taxed at 15%. Whereas if I'm married, filing, jointly, my other income is going to be taxed at 22%. Right. Roughly. And so it just comes at a lower rate. So it's, I mean, capital gains rates. I mean, it's so beneficial from trying to put money back in your pocket, especially from a timing perspective nowadays.

Emil:

So if I was retired and I have a property, so my other income is income outside of the rental property business.

Joel:

Yeah. Okay. So if of your rental property, so if you look at a 1040 tax return, you look at all the various lines, dividends interest W2 wages, business income from partnerships or escorts, or however that may be. So you look at the total of that. That's how they measure it. So what is your income sources? And that's, what's going to dictate the capital gain rate that you're going to pay.

Emil:

Got it. Okay. So if I've retired, I have a couple investment properties. I don't have any other sources of income. Right. It's just my rental properties. I go to sell that. I'm not paying, I'm making less than 80K, so I'm on…

Joel:

Yeah, so if you're under, so if you're married, filing jointly, you're under 80 grand. Yeah. So it also makes for some interesting tax planning as well. If you have a few rental properties and you're going to go, you know, let's say I have four or five and I'm going to go sell one. I may go to my rent and say, guess what? December is free. It's on me. Congratulations. I don't want your money. Right. Just cause I want to stay standard that 80 grand. So that's why I say there's all kinds of tax planning opportunities to do, especially timing wise when it comes to selling a rental property. So I'd sit down with a CPA, go through it, go through your scenario and then, you know, make some decisions.

Emil:

Interesting.

Michael:

That is awesome.

Emil:

Yeah.

Michael:

Is there a good time or if you know, Joel, you know, if I want to utilize your services. When would it be the ideal time to start planning strategically for their taxes, yesterday?

Joel:

Yeah. Yesterday and today. Because if you come to me, if you're coming to me now say, Hey, what can I do for last year? I'm going to say, well, you kind of handcuffed me. There's not a whole lot I can do for you last year because we're all cash based taxpayers. So when we report our kind of activity for the year to the IRS and to the state, it's based on January through December, right? So effectively, I need to make all my decisions and spending and do what I need to do between January and December. And when you come sit down with me to do your tax return or the compliance aspect of your operation, then we're just looking back and saying, okay, what did you do? How did things go? Right? That's the easy part. That's just basically reporting. It's nothing more than that. But the actual savings happens throughout the year. It happens throughout the year.

Michael:

Okay, great.

Emil:

You can see, obviously when you have multiple properties, it makes so much sense to work with a tax professional. Do you think, even if I'm just starting out, I have my first property, I've traditionally done my own taxes. Should I really enlist a CPA's help. So it's kind of a loaded question for them.

Joel:

I'm going to self promote myself bias maybe slightly, but okay. But I'm going to give you a real example for this one. Okay. That it has nothing to do with taxes really. I mean really. So when I left Ernst and young, this would have been, you know, 20, some odd years ago. I decided because I'm an accountant and then cheat by nature, right? I mean, most accounts are cheap. You've met us, you've met, you've met my fellow people, right. We're cheap by nature. So I thought that I would save money if I built my own computers rather than going out and buying from Dell, maybe it was only saving a couple hundred bucks, but I thought, Oh, that's a great way that I can set. I can save some money. Then after building my own computers, I thought I was a smart little guy. And I would build my own server, which I did, which led me to building my own phone systems, which I did, which led me to try and to build my own website, which I failed miserably at.

But what would happen is during tax season, when everyone was working, we would do our most billing and our invoices words the highest throughout the year. And someone's computer broke. Guess who? The first person they called us, it was me. Hey, come fix my computer. So I leave my desk, go down there. I may spend two, three hours trying to fix their computer. But guess what I wasn't doing during those three hours during the highest billing rates that I have throughout the entire year, collecting money, right? I wasn't billing anyone. I wasn't doing anything that I could collect money. And at the end of the day, it ended up costing me way more to do it myself. Then it was to hire all that stuff out. And I like to call it team stacking, right? So you gotta look at what is your team? How am I stacking and putting all that together?

So now I have someone that deals with my phone system that deals with all my it, stuff that I need. I have a lawyer that deals with this I'm in real estate. So I have a general contractor that deals with all that stuff. So I don't have to do it so I can focus on what it is that makes me the most money, which is tax planning and tax compliance, doing tax returns. So I would suggest that as well, to someone even new and real estate team stack yourself, put people in place that will allow you to focus on what it is that you want to do and how you want to make money. Because I can promise you, you will never see as many tax things as I do. You'll never have those discussions or read all those wonderful IRS bulletins that even put me to sleep, right? So you wouldn't be doing all that stuff like I would be doing it. So team stack yourself, focus on what it is that make you money, put all those other things together and let them worry about that stuff.

Emil:

I fully agree with you. I have a full time job. I'm trying to focus on the actual real estate investing and all these things have a family. I would much rather leave it to somebody who knows what they're doing. Who's living and breathing it all the time, rather than trying to learn it myself. And this is also one of those things where it's a high ROI thing to me, like a good tax professional is going to be able to figure out how to save you more money than you can go figure out into yourself. So I am with you and I have no bias.

Joel:

Exactly. So the question should be when you go down and sit with someone isn't can I deduct this right? The question should be, how do I deduct this? Right? And then you leave to someone like me to go through and say, give you the house, okay. This is what you need to do. This is the support and documentation that you need to have. And this is how we can structure it, right. That's where tax planning comes in. And that's why it's so important. So even if you're just starting, I would make sure that I get connected with someone who understands the business that I'm doing, understands the real estate game and can start advising me upfront what to do and not making stumble over. Maybe some of those mistakes, someone who tries to do it on their own would find

Emil:

Absolutely agree.

Michael:

It's so good. Yeah. I concur with you both. Not nothing like that. That's great stuff. Okay. Last couple of things I want to touch on Joe, before we get into some high level questions, but can you talk really briefly? I know we had another episode of 1031 exchanges, but can you just touch on 1031 exchanges and opportunity zones?

Joel:

Yeah. So I'll just touch on them really briefly 1031 exchange allows me to sell a property and re-invest all the gains I make off that property into a new one and not pay any tax. So essentially it improves my buying power, right? So I'd say I own something for 200 grand. I sold it for 300 grand. That a hundred thousand dollars worth of gain, I just invest the whole 300 grand into a new property. And it reduces the cost of that property effectively improving my purchase power. So it's a tax deferment strategy that can work really, really well for people.

Michael:

Great.

Joel:

From an opportunity zone standpoint, though, that can get really complicated. So let me just, uh, let me just leave you with two points and maybe, and maybe people can remember this. First of all, opportunities zones are for those economic distress communities. I mean, often they are identified and you can find them. You can do searches online to find out where the opportunities zones are located. But what the IRS tries to do is give you some type of benefit. If you're willing to go into those opportunities zones and make investments into businesses, the issue that you need to be aware of is that first 50% of your income has to come from the opportunities zone for that company. Okay. 50% of it has, which means that if you're a manufacturer doesn't work really well. If you want to go into an opportunity zone, however, if you're a real estate investor works really, really well because I can go into an opportunity zone, buy a building and earn all my income, my rental income from inside the zone, which means that if I hold onto that property for 10 years, I get to sell it tax free. Yeah. So that's the benefit. I'm going to give you a benefit when you sell it right when I sell it, because it can be tax free, but there are lots of rules surrounding how I need to go about buying that property, holding that property, making income from that property. So opportunities don't get really complicated, but just sit down with someone who understands that they can walk you through it, but it can make a really, really great investment from a rental property standpoint.

Michael:

Fantastic. One last question for you, Joel, is what are some common mistakes? You see new investors making?

Joel:

Common mistakes?One is that they lacking in documentation for support of how they spend money. Because oftentimes when it comes to let's say audit, okay. If the IRS was going to look at someone's activity and they wanted to audit it, a lot of your ability to support the expenses that go into your tax return is based off of documentation. The other one I would say is most people don't include all their expenses. They look at them very, very narrowly, right? So if I own a rental property, there are some big ones that just stand out. Insurance, mortgage, interest, property taxes. I mean, those are some of the big ones that are just there. But if you go back to our conversation earlier, when I talked about going to home Depot, buy a light bulb going over, I'm looking at mileage, what did it take for me to actually earn a dollar? People never really take a step back and look, maybe go through your credit card statements, your bank statements, you know, even cash that you spent dealing with. If you have a general contractor or someone like that, like what was the money I spent with you? You really have to take a hard look at all of your expenses that went into the activity of that rental property, because that's where you're going to see your benefit. I mean, taxes. Oftentimes we call it death by a thousand paper cuts because it's all these little things that kind of, I miss miss, miss, miss. And when I accumulate all of them, it's a really big total, right? So really look at how you're spending your money and spending your time.

Pierre:

I have a question.

Michael:

Shoot Pierre

Pierre:

What would be sufficient documentation for driving Home Depot? Is taking a spreadsheet and counting your miles good?

Joel:

Yeah. Spreadsheet could work. You can go onto Google maps. It's a beautiful thing. Get some directions and just print that out. There also lots and lots of apps that will help you identify your mileage, where you went that are really, really useful. Like my like Mile IQ or Tax Bot. It's almost like, you know, the right swipe, left swipe. So it tracks all your mileage. And you're just going through swiping personal, personal business business business. And it's really easy to do it creates the log for you. So I would always tell people to use technology to your advantage, especially when it comes to tracking what you spent and doing your documentation for anything that goes into your tax return. But this spreadsheet would work just as well.

Michael :

Great. Okay. So now we'll move onto the section of the show that we call the quick fire questions. So these are going to be kind of yes or no either or type questions. You ready Joel?

Joel:

Go ahead.

Michael:

High property taxes or high income taxes?

Joel:

High property taxes.

Michael:

Because you can deduct them, right?

Joel:

Because I can deduct them.

Michael:

I love it. High rent growth or low vacancy.

Joel:

Low vacancy, it's easier for me to manage my cash.

Michael:

Nice consolidation or diversification.

Joel:

I like diversification because I just think it's more fun.

Michael:

Cashflow or appreciation?

Joel:

I take cash flow. I want a dollar today.

Michael:

Love it. Local or remote investing?

Joel:

Ooh, that's a good one. I go where the deal is. So I don't care.

Michael:

Right. Single family or multifamily?

Joel:

Multifamily. Because basically in that instance, I've just adding zeros, but doing the same thing.

Michael:

Yep. Turn-key or master project?

Joel:

Oh, that's another good one. I'm going to say, well, nowadays based on the situation, I'm going to do turnkey, but under normal circumstances, I would like a master project just again, because I think it's more fun.

Michael:

Okay. Great. Last two. Midnight oil or early bird worm?

Joel:

Early bird worm, for sure.

Michael:

Awesome. And then text message or email?

Joel:

Text message. Yeah. My email inbox gets over flooded with emails.

Michael:

Yep. I know how that goes. Awesome. Well Joel, thank you so much for taking the time and spending the time with us. This has been really great. What's the best way for someone to get in touch with you if they've got tax questions or tax needs?

Joel:

Yeah. So if they want to get in touch with us, I would actually go to taxhive.com/roofstock. You can sign up. We'd love to talk to you for 30 minutes. We'll give you a free consultation. Maybe we can improve some of the stuff that you're doing. Give you some suggestions, whatever it is that you would like to do, but we're happy to help and give you any advice we can on an individual basis. I think it can be a little more relevant that way.

Michael:

Fantastic. And again, the name of your company is?

Joel:

So we're Tax Sentry, but if you go to taxhive.com, that's where you can find us.

Michael:

Fantastic

Emil:

H-i-v-e?

Joel:

H-i-v-e.

Michael:

Great. Emil, any final thoughts?

Emil:

No. Joel, thank you so much. I actually, I learned a ton about real estate investing taxes myself. So thank you so much for coming on.

Joel:

Sure. Love it. Happy to be here.

Michael:

Always a pleasure looking forward to hopefully chatting again soon.

Joel:

Thanks guys. Okay, everyone. Well, that's our show. Thanks so much for listening. Hope you enjoyed it as much as we did. I know both Emil and I got a ton of knowledge and golden nuggets out of it. So again, a big thank you to Joel and we can hopefully have him on again. Thanks so much for listening and happy investing.

Emil:

Happy Investing

The Pros & Cons of Investing in Rental Properties with an HOA Jul 09, 2020

In this episode, we have Katrina Phillips from Investor HOA Services on to explain everything investors should know about investing in properties that are a part of HOAs.

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Transcript

Tom:

Greetings and welcome to The Remote Real Estate Investor. On today's episode, we have one of the most knowledgeable persons I know on HOA. We have Katrina Phillips, who's the founder and CEO of investor HOA services. So are you, you are interested in investing in a property that is in an HOA. This is a great episode to listen to. All right, let's do it.

Theme Song

Tom:

Hey, Katrina. Thank you so much for jumping on with us.

Katrina:

Thank you. Thank you so much for having me today. It's my favorite topic to discuss.

Tom:

Perfect. Well, why don't we go ahead and start, give us a little bit of a background about yourself.

Katrina:

So I started in the single family industry back in 2012. Prior to that, I was actually a contractor and had several properties that we bought refurbished and sold. And so I spent about 20 years in construction learning it from every aspect so that I can learn it from. And then I started working with American residential property and really develop their operating platform or was their first hire on their operations team. And people really hadn't done this in the past.

The first multifamily, we were able to pull things from, but really we were writing the policies and procedures, the books and utilities and HOA were two things that people hadn't really thought about. It wasn't even a line item on people's profit and loss that they were considering in their, you know, when evaluating investments. And so we really began to build that piece of the process. How does that work? How does, you know, the fact that we own 70% of our properties are in an HOA? How do we interact with them and how does that work? So that's how I kind of got into this side of the business.

Tom:

Awesome. It's funny to think about 2012 and I was there too. It was the wild West where, you know, a lot of these companies such as yours and the ones that I was working at was raising a ton of money, buying these houses. And it's just kind of learning as we go and, you know, HOA and utilities, you know, came to be pretty important, parts of the details in doing this at scale.

Katrina:

It did. And it was so much fun. I thoroughly enjoyed every minute of it. And, uh, you know, we learned a lot and grew it, and here we are today.

Tom:

That's awesome. And you have since gone on to start a new company, right? Why don't you tell us a little bit about your company that you are running right now?

Katrina:

So I was actually sitting in a meeting and, um, we were working with a utility provider that function very similarly to what we have structured as well. We actually asked them the question of if they'd like to take on HOA as, you know, as part of their process and has it was becoming a really growing concern and issue and having some pretty significant impact on the bottom line for companies. So they said, absolutely not that they wanted to stick with what they specialize in and that really planted that seed for me.

And so that's where investor HOA services came into play, where, you know, we took a singular focus to build an operations platform around that that also integrates pretty seamlessly with other companies, systems and process. I knew I couldn't go in and say, throw away what you're working on right now and use what I'm saying to use. I also knew that we had to get it so that people could kind of go to one place to access information and things that they needed to manage the property. And so that's what we began developing back in 2017 is really an operations platform that can be used in several other areas. We just chose to focus on HOA because we could see it with a growing concern, making bigger and bigger impacts to the bottom line of companies. So we focused in there first, so that is investor HOA services.

Tom:

That's awesome. So to sort of paraphrase investor HOA services is a provider for investors to manage basically all things related to the hos for the properties that are located at those hos. Is that right? Is that a good summary?

Katrina:

That's correct. So everything related in the full life cycle of compliance, which could be a city code, HOA, rental, registration, municipal permitting, and all of those kinds of things on the compliance side of property management.

Tom:

Very cool. Very cool. Awesome. Well, let's go ahead and dig into some of the meat of this learning a little bit more about H ways and how they relate to investors who are evaluating. So why don't we take a step back and why don't you define what is an HOA and, you know, high level, what are they

Katrina:

So HOAs can be actually kind of several different things. And of course there's no consistency across the country of what an HOA physically is, but in general, in HOA is a nonprofit company that manages common areas, common elements within the community amenities. And there's also of course, condo owner associations, there's civic associations that are often voluntary membership, and we're starting to see more and more different types of HOAs, such as a borough and a neighborhood developments. Of course, in Florida, you actually see a lot of community development districts. There's some really fun, fancy development districts in Florida that have waterslides and water parks and all kinds of fun things in those. And so to be a member or participate and utilize those amenities items, then you pay your assessments fee on an, you know, either quarterly or annual or semiannual basis. And the HOA then kind of takes care of all those common area elements.

Tom:

Got it. And that's interesting about some of the, those new amenities that are poking up around water slides. I mean, he made it sound it optional at all to join the HOA, or is it like, you know, since your property's located there, or is it kind of built into the deed that you have to join the HOA? I'm curious about that.

Katrina:

Yeah. Civic associations are voluntary. Often they'll have a community pool or something that is shared amenity there or a park or something along those lines. We'll see a lot of lakes and that kind of thing within a civic. So that's voluntary. You also have something called a club membership, which will be, you can pay for different levels of membership within that. So for example, most often they include a golf course. You know, they might include a workout facility that's extra above and beyond what a standard membership would be. And so those are voluntary in regards to what the levels are that you can buy into. But in general, yes, if you're in an HOA, just kind of a standard HOA, then you are required to participate in their program.

Michael:

And it sounds like there's kind of numerous different styles of HOA. I know for me, when I hear HOA, I just automatically think of condo association, but what you're telling us is that they could apply to single family homes, town homes, you know, planned communities. Is that fair to say,

Katrina:

Yes, they can be commercials, commercial spaces. There's just all kinds of different options out there.

Michael:

Interesting. Got it.

Katrina:

There's probably about 10 that are standard that we see standard across the board. And then in different parts of the country, you see kind of different nuances within that. Like I said, you'll see boroughs, of course, in New York and New Jersey, that's a little, you know, structured similarly to a civic or community development, but they all have a little bit of different nuances to them.

Michael:

Okay. Interesting. And you touched on amenities a little bit, and I was curious if there is such a thing as kind of a common or a standard set of amenities that you get as being part of an HOA, or do they vary as drastic as the style of HOA that there could even be out there?

Katrina:

They vary very drastically. So we have especially see this a lot in Georgia where maybe it was built in the eighties, especially, well, pretty much any community built within the 1970s and eighties when HOAs first kind of started coming on the scene, they are just more of a planned community. So you'll see the coldest actual see similarities in regards to finishes on the exterior and, you know, mailbox requirements and that kind of thing. And then it's kind of more where it evolves as time went on. And that's where you kind of see some standardization on what I guess they were into in that moment. So then you hit into the two thousands and, and then now into the late two or 2020 range, and you're seeing these, you know, fun things like that are going on in Florida. So really it varies pretty tremendously. And that's a big part of what we do is we look at okay, what amenities are available, where that assessment money going to, and what's the benefit you're receiving from that.

Tom:

That's interesting. I never thought about it that way about, you know, the vintage of the property. Like what was the fad for developments in the way that they structure these communities? So depending on what year you bought it, it is kind of a different flavor of the way that they were structuring. Super interesting. So I got a question. So if you put your investor goggles on and just think this is very high level about evaluating a property with an HOA, what would you say generally speaking, like what are the good things about buying a rental property that's in an HOA and what would be some of the detractors of buying a property in investment property? That's at an HOA. So we'll start with the positive.

Katrina:

Yeah, let's start with the positive. So one of the things we learned and identified very early on is here, we are an investment firm and we're based out of Scottsdale Arizona. And our house is in Georgia and the HOA begins to function as kind of your eyes and ears and helping you monitor and keep an eye on that property. So I think as an investor, that's a huge value to you. You don't have to actually have people on the ground, you know, checking that property, the HOA is doing that for you. So I think that's probably the biggest positive as well as from a leasing perspective, of course, you know, you're leasing a property that has most likely some upgraded amenities and features that are desirable to people leasing. So, you know, it assist with that, it making it a home to that person occupying that property, not just a rental, they feel like they're part of a community and part of a home on the flip side of that, that can actually, that community sense is something that the HOA have expressed that they're concerned about when institutional investors come into their community, will there be that loss of sense of community because it's a renter there and they're not going to actually participate in the HOA itself.

So that can be a con I think one of the other issues that has occurred over the last several years and kind of my number one thing that I focus on is rebuilding communication bridges, because what happened was when institutional investors came into communities, the HOA did it kind of feared that and was a little concerned that the property values would degrade and there would be issues. So one of the things that has been, I guess, a missed out by the industry is that they didn't work to keep those communications open with the HOA and the HOA began to grow very frustrated. So what they've done out of their frustration is began to really Institute some rental restrictions to either prohibit institutional investment in that community, or really eliminate it and control it. So that's been kind of the, the other side of it that's evolved since 2012, when we first got into the industry, they were happy and they were excited about us coming into the communities. We were remodeling the property and making things better. And then that slowly started to shift in 2013 and 14, where they began to grow skeptical. So there's been a lot of work to alleviate that situation, but there's still some work to do there. So that's kind of the flip side of it, where the HOA is, are frustrated and they're kind of lashing out in these different ways to really essentially get some people's attention and get things cured. And together,

Michael:

You touched on it a little bit ago, Katrina, but I wanted to circle back to it for my own edification. We said that HOA is our nonprofit businesses, who is the HOA when we talk about HOAs.

Katrina:

So the HOA for the most part is a voluntary board of directors of owners within that community. So I we're seeing fewer and fewer of those, maybe it's because most HOA has gone out and decided to have a management company come in, such as associate or for service residential and come in and manage that. So the HOA is just meant to collect dues, cover the expenses of maintaining those common elements. And then that's pretty much it, that's all their job that's there. And then of course, to ensure that people adhere to the CC&Rs for that community and, you know, don't let their grass get to leave their garbage cans out, all that fun stuff.

Michael :

Okay. And so when you talk about the HOA members or board being frustrated with institutional investors coming in and looking to crack down on that a little bit, that's just a group of owners in that specific community that are feeling that way and expressing those frustrations?

Katrina:

Correct.

Michael:

Got it.

Tom:

Gosh, I love your point about, on the good side of thinking of as another eyes and ears. I think a lot of times, you know, we ask these questions, I kind of have an idea of which direction, you know, we're going to get a response, but I never thought about that way of thinking of the HOA as, as kind of part of your team love that. So you touched into a great transition point CC&Rs and, you know, making owners out here, what are some of the recourse that the HOA companies have and with owners that are not adhering, and I'd love for you to get into that and CC&Rs and rules around that.

Michael:

And Katrina for those of our listeners that might not be aware, familiar, what does CC&R stand for?

Katrina:

Covenants codes and restrictions? So it of course varies by state. Each state has some extra nuances. You know, Florida has some really interesting ones, New York, New Jersey as well. So the CCNR are put into place and in those CC and RS, it's really spelled out what the recourse is. We have some, we've had some interesting updates over the last several years in regards to what the HOA can charge you because previous to this, and it kind of started in an Arizona, which is where most HOA has, you know, kind of evolved from. But the previous to this legislation that came through the HOA, kind of do whatever they wanted in regards to getting your attention and having you pay fee. So we're seeing over the last five years or so where they're really standardizing that across the country, which is wonderful. We like standardization. And so they're making it so that they have to go through a very specific process to notify you of that violation, give you a period of time to cure.

If you don't cure, then it goes to the next step. And so usually it's a courtesy warning, one, two, and three, then by warning three are incurring a fine, and those generally start at $25. But in a lot of States, we also have, what's called a stair set process, which is another thing that investors, there's a way to work around this or work with the HOA to do what we call the clean slate program. So the HOA in some States, the fines violations and assessment costs falls the property, not the owner. So you have a new tenant move into that property. And the prior tenant kept violating with trash cans being sent out. And that violation was then go into a monitor status from anywhere from six months to one year. And if they re-violate within that timeframe, it, it goes right back to where it left off.

So if you were at already at $75 in fines, it'll go to a hundred or it'll go to a hearing. So that's something that investors aren't aware of, but you can work with the HOA to, again, wipe that slate. Clean, say, we've had a new occupant in it. We're a new owner. We're going to do things differently now. And we promise you that we won't have those violations incurred. So like I said, it's been really interesting to see over the last several years where they've kind of standardized that with the HOA is, can do kinda maintaining some control. And that has to be documented in their CC and RS, what their fee schedules are now, which really helps you kind of plan for that and be prepared for what's going to come your way.

Tom:

So what are the more common? So talking about, you know, people, you mentioned putting trash cans out, what are the other kinds of issues where people incur fines from HOA, those would be all in those CC&Rs and what are the common issues that you think most investors deal with or violate?

Katrina:

So the number one thing, and we track this, we look at it, we break down and give a lot of granularity to the types of violations that are coming in. And number one on the list is always landscaping and specifically weeds, especially in April and October, when they're doing those inspections on that, and you can get almost weekly fines for that or notices of fine. So landscaping is number one, and I would say two is two and three are usually pretty close and it's trash cans and parking violation. So we have a lot of residents to try to park on the lawn, try to park, you know, on the street when street parking is not allowed.

Michael:

I own a property in an HOA and I get nasty grams all the time. Trash cans are still out. It's been a week. I don't think God, God, God, I got to get ahold of the tenants and pass the message along.

Tom:

Did you say nasty, nasty grams? Is that the nastygram?

Michael:

Exactly, but a letter informing me of a violation, I call the nastygrams.

Tom:

So how about when you do have some issue, can you guys push that to the tenants that are living at the property, if they're violating these rules? Like, are there any laws or registrations like around that? Like if they violate an HOA rule, should it be the tenant that has to pay it or fix it, or I'd love to hear your thoughts on that.

Katrina:

Yes, indeed. So what we call that the tenant charge back process. So we actually have a whole workflow that goes through, we've received a courtesy notice. It gets sent to the tenant. The tenant actually, um, for most of our clients has about seven business days to return photos to us and make sure it's care. We're trying to really alleviate that even courtesy notice from going any further than that is we're trying to alleviate aggravation that the HOA is feeling about institutional investors. So we really work on the front end, as well as tenant education to let them know you live in a HOA, here's the rules and regulations that you need to be aware of. And most of the hos are now taking their several hundred page CC&R document and really narrowing it down to the top things to be aware of. So we make sure that that is available at the fingertips of the leasing team so that they can educate the tenant.

We find we have a much better experience with them. And so that all gets documented so that we can see very clearly, okay, is this an HOA issue or a resonant issue? The resident keeps leaving their trash can out every week. And now it's a thousand dollars in fines because they've been incurring daily fines, which always just makes me cringe because a thousand dollars just for leaving your trash can out, we see it all the time, but it's unfortunate to say the least. So there is a whole system and process where we educate the tenant. We notify the tenant every time we receive documentation and really keep them in the loop and engaged and involved with being part of that solution there versus, you know, ongoing continual issues. And then we also work with the leasing team so that they're aware of, Hey, I think you may need to have a conversation with us, this occupant here and see if you can alleviate that.

And then the third piece of that is of course, communication directly with the HOA is to let them know we have informed the resonant. We have received these photos. Do you consider this violation cured and closed? That's then the issue that I've spoken to, a lot of, of the SFR groups out there where they have that $8,000 mailbox, because they sent out a contractor to fix the mailbox post, but they didn't fix it according to what the HOA was looking for. So we make sure we really communicate with the HOA and let them know what the care was and how it was fixed and make sure that they're good to go with that. And then if they, if there is a fine, we establish with our clients a list of what will be a charge back versus not. So for example, a trainees trend and it's above seven feet where it needs to trend. Most of our clients don't want their residents getting on a ladder. So they'll not charge that back. But if they do, if it's under the seven foot mark, then, and there is a fine incurred, then that gets put onto the tenant ledger to hold them accountable for that.

Tom:

Got it. Jump just the other kind of aspect of the CC&Rs and the rules, not necessarily fines, but you know, percentage of the units that can be rented. So there's some other really important aspects of those rules that an investor would need to know that's in those CC&R. Do you mind touching on some of those,

Katrina:

Right. So we complete a review of all CC and RS that come into us and we're looking for a rental or leasing restrictions. We're also looking for sign restrictions. And other thing that people don't often think about is that certain hos don't allow you to put a sign for lease sign in the front yard, or they don't allow, you know, you can put it in the window, but you can't put it anywhere else, or it has to be a certain size. So we'll look through that, the CCNRs to identify any of those kinds of issues. And then the rental restrictions kind of break down into three categories, either have category one where they just do not allow leasing in their community. And we will recommend that you dispose that property or they'll have the second category. Is there some kind of restrictions where they require a background check and approval of your resident before they move in, or there's a cap in place of 10%?

Usually there are things that you can work through on those rental caps, they're called hardship letters. And you can put in a hardship letter to that HOA requesting them to review and make an exception to that 10% cap. And then there's also in that category where you can't lease the property for anywhere from 12 to 24 months, it has to be owner occupied. So we then document that information in our systems so that you can see the breakout of that. And then they use third category is they just want a copy of the lease and to know who's renting the properties basically. So those documents are captured and sent over to the HOA,

Michael:

Shifting gears here a little bit Katrina, I want to talk about HOA fees because you mentioned at the beginning that are nonprofit bodies or organizations. If you will. I feel like me personally, sometimes that they might be for profit, but so what are the fees usually go towards paying?

Katrina:

So the piece should be going towards paying for those common area. Upkeep. There should be a capital reserve account noted on their budget. They should be issuing the budget to you on an annual basis and it should be reviewed and make sure that there, the other concern that I know a lot of investors have expressed is we keep paying these assessments, but the money is not going to what we've been paying into. And the HOA is virtually insolvent. So they're carrying a negative balance. They have some sort of debt again and against the HOA something's going on in their financial stability is in question. So that is what the money is supposed to be going to. And as well as management of that HOA collecting the assessment funds, paying for an inspector to go on and stacks for fines and violations and those kinds of things, that's where the budget should be going. And like I said, they should have a healthy capital reserve accounts to complete any upgrades that are needed to that age away.

Michael:

Okay. And so you bring up a great point about upgrades. Would upgrades be a reason for an HOA fee increasing from year to year?

Tom:

Yeah. Do they change? Yeah. I'd be interested to hear your feedback.

Katrina:

They do. And you know, 2020 has been interesting for several different reasons. But one thing we're seeing from the actual AEs is a lot of special assessments that are hitting people's accounts. And I have to say, this is the first year I've seen where so many are being instituted and put into place. And so there's actually two levels to that where they don't even have to have a board meeting to vote in a special assessment, depending on what the cap is of that, that amount. So that it could literally just show up on your doorstep one day that you have a $20,000 assessment do so generally speaking in a normal year, we'll see about anywhere from a three to 5% increase of assessments year over year. So several years ago when we started the company in 2017, we've actually seen quite a bit of increases over the last three years.

And I think that's HOA is trying to make up for some of the depositions and things that they have in their capital reserve accounts. So what we're normally would see would be a three to 5% increase, but since 2017, we've seen average across the country of assessment dues go from three 30 to 440. So it's quite a good jump, healthy jump over the last few years, but know normal would be three to 5% where, you know, just cost of things have gone up. So cost of their power bills for the common areas. And those kinds of things have gotten a little bit more expensive. So, you know, on average, I would say anywhere from a $5 increase to about $25 would be pretty normal. Anything above that, then I'm starting to look at the budget and kind of see where that money is going. What's going on.

Michael:

And you mentioned special assessment. Can you talk a little bit about that? What that is?

Katrina:

So it's more common of course, in the condo world and the townhome world. Uh, but a lot of our SFR investors have condos and town halls and things like that. So that would be to replace a roof on ability repaint the exterior in a standard single family development. It would be to put a new roof on the clubhouse, replaster the pool, those kinds of things, where they should be putting aside a capital reserve fund. But what we've seen is, you know, with the change in the economy in 2008, 2009, I think a lot of hos did, you know, ended up dipping into that reserve fund to keep going and keep solvent. And so now they're kind of trying to make up for that. And so we're just seeing a lot more this year than we have in the past. It could also be to do with the average age. And most of our clients' portfolios are just kind of hitting that Mark where they're starting to need some major items completed.

Michael:

Okay. And is there a good ballpark or kind of range or estimate you would anticipate based on size or age of an association or community for how much reserve they should have? The reason I asked the question is I live my primary. Isn't an HOA. I have a condo and there was, I got, there was a study done that showed the financial stability of the association and it showed that they were way under-funded, but they had several hundred thousand in cash in reserve. And so I said, well, that seems like a lot, but I have no idea how much they should be. This, this company thought they were underfunded, but I feel like they're adequately funded. Is there a good ballpark or general rule for that?

Katrina:

No, because there's just so many factors that go into place there, you know, have they managed their funds over the last several years? I would say that HOA is probably managing pretty well with a couple of hundred thousand in there. I've literally seen some with nothing in their capital reserve budget. So I think as our housing inventory ages, uh, you know, it is just becoming more and more of an issue, but yeah, I don't think there's a standard number you guys can count on to tell your investors that, you know, set aside this much because you may, you know, have this come up at some point. It really varies wildly.

Tom:

If you're buying properties within an HOA, is there a way for you to get on the HOA, like a seat or, you know, if you get enough properties or I don't know, I'd be curious to hear your experience. If you can't beat them join, that's not the right way to say it. If yoou can't beat em, join em, but like basically getting on the inside, I would imagine like having multiple customers, like it's probably pretty big sway potentially within certain hos.

Katrina:

Yes, definitely. Especially with institutional investors, you could potentially own 30% or more of a community. So some have instituted in their CCNRs where even if you own several properties, you're still only get one vote, um, board items, but for the most part, yes, it definitely can help sway those voting items. I actually, one of the questions you guys had further down here was have I been on a board and, or joined a board of the company that I worked with previously? And yes, I was on a board in North Carolina and attended several board meetings. What we had done was we were doing a build to rent a pilot projects at the time. And so we were going in and doing infill in a community that was already established a really nice HOA. We did the same thing in Georgia as well. And we actually attended several of the board meetings just to say, this is who we are, what we're about.

These are our goals as a company and what our know kind of core values as a company are. We're not just a nameless faceless corporation where, you know, people that really care about your community. And so it actually really, really helped. It was very, you know, contentious at first, they weren't really excited about us being there, but we were able to really turn that around and then, you know, create a really good relationship with that HOA in the longterm. So there is definitely benefits if they can get some notes, your company and the people at your company, you know, they don't sign you or, you know, put violations on unless you've broken the rules. But I feel that it goes a long ways to kind of alleviate how often they're going to, you know, hit you with those kinds of things, if they know who you are.

And, and then instead of doing a formal final email you directly before they even document that, so you can go in and get it taken care of and never even hit your account. So that was a lot of fun, but it had some pretty tremendous impact. And then we've been a member of a few different boards throughout the country and, you know, same kind of thing where you identify an HOA that seems to be a, maybe elevated in their feelings about your company and whatnot. And you want to, you know, stay in that community and not sell out of it and continue to lease your properties there. I think it's always a great idea to participate in board meetings and discussions with the HOA, because again, remember their biggest issue and concern was that they would lose the sense of community than an HOA brains because it's, you know, it's a corporation coming in and investing in here. So if you can kind of guide them to a different philosophy on that, it has a pretty tremendous impact. Yeah.

Michael:

That makes a lot of sense. Makes a lot of sense. Katrina, can you talk to us a little bit about the value that you've seen in your experience from a rental perspective and then maybe from a sale perspective as well that a well run HOA can bring to an investor? Of course the poorly run ones might harm the value, but as far as rentability and resell value for an HOA property, how have you seen that impact things?

Katrina:

It's definitely positive on both ends of it, right? Because you've got the tenant who now has access to a pool and other things that, you know, if they were to purchase a home, they maybe wouldn't have access to those same things. So by renting, they have that added benefit. And on the South side, you know, I haven't seen data on exact numbers of, you know, increases the value by say $5,000 because of course, then you're paying dues and stuff in there. And I haven't seen any data pull to see how it impacts the sale, but, you know, I definitely know, well run H ways you'll see them move a lot faster. We'll sell that home much faster. People are clamoring to get into that community and be a part of it. So, you know, especially like those really fun ones in Florida, you know, they almost have a wait list of people trying to purchase homes in there cause they want to be there.

Michael:

The water park in the backyard makes sense.

Katrina:

Yeah. I mean, how great is that? So, you know, it definitely impacts leasing, you know, several years ago, stock saw statistics that it definitely on average knocks several days off of the lease up timeframe. So it does seem to help.

Michael:

Interesting. Okay, great.

Tom:

Awesome. My last question I have right now, and this is, I guess, sort of an aggregation, probably of some of the topics that we've talked about, but just at a high level, if you're talking to a newish investor, who's thinking about buying a property, that's in an NHOA, what advice would you give them on how to go about evaluating and owning a property in an HOA?

Katrina:

I think they should definitely, and most people don't do this. I think one thing they should look at is is it, if this HOA is financially solvent and how is it being run because you're right. If that HOA is not being run well, it will certainly have an impact on your resident experience in that home. The very quickly start to feel like, you know, they're being picked on and you know, that's not the resident experience that any of us want. So, you know, as an investor looking at an HOA, I would definitely take a look at that. What does this HOA look like? Are they keeping up with things, are the common elements and go to order in good shape? Are they easily accessible? You know, is it kind of making sense? What if they're charging $300 a year? Can I see where that money is going essentially? So I think visually kind of inspecting the community would be really helpful. And, you know, in evaluating that decision to lease there or not,

Tom:

How would one get the financials related to an HOA?

Katrina:

So in when they're purchasing home, they should be asking for an estoppel. And in that estoppel gives you your statements, your CC&Rs, and ours, all of your documents that you would need. And I think also, like I said, I've spoken about tenant education before, but it's so critical again to the whole kind of overall experience and whether or not you're going to keep that tenant in that home longterm. And of course that's a goal for most SFRs is really going to keep them in the house, you know, two, three, five years. And so, you know, by obtaining that estoppel, now that becomes challenging when you're purchasing via auction or other avenues. But if you're purchasing through MLS and through I'm sure groups like yours, where you can have some of that documentation in place, then I would encourage everybody to go in and take a look at that because it definitely will have an impact to kind of the longterm viability of that investment.

Tom:

Great communication. Well, thank you so much for coming on. This has been super interesting, you know, hos there's so much value in having that kind of preset neighborhood look and feel that is desirable and a good standardization. And I love the feedback about getting to know the HOA and partnering with them on your team has been super helpful. And I want to thank you for coming on.

Katrina:

Yes, I've really enjoyed it. Thank you guys.

Tom:

Awesome.

Michael:

All right, thanks. Have a great one.

Tom:

Thank you to Katrina Phillips for today's episode, super knowledgeable. It got a lot out of that. If you liked today's episode, please subscribe to us on your podcast. Send us a note. My email is tom@roofstock.com. I love to talk investing. I love to talk podcast content. I love to talk investing education hit me up.

This episode was brought to you by Roofstock Academy. Roofstock Academy is a holistic program with one on one, coaching group coaching, over 50 hours of on-demand lectures covering getting started to scaling up. A special bonus Roofstock Academy is now giving $2,500 towards Roofstock marketplace credits. That's right. You can pay $1,250 for $2,500 of marketplace credits. All right. Happy investing.

Theme song

A Special Announcement... Jul 01, 2020

Emil:

Hey Michael

Michael:

Hey Emil whats going on?

Emil:

So right now we are doing something a little different than we normally do. Usually we have a full length episode, but what we wanted to do was do an AMA, an Ask Me Anything, where we want to take questions from you guys, our listeners, and answer them on an episode. So if you guys want to record your question, email it over to us, we will feature you on the episode and answer those questions live. So email those over to eshour@roofstock.com and also send over to Michael who’s at malbaum@roofstock.com. Just grab your phone, open up the voice memo app and record your question and share it with us and we will feature you on the episode. Or, if that is too complicated, just send us your question in an email and we will answer those as well.

Michael:

Or if that seems like too much trouble and you’re not really tech savvy such as myself you can go ahead and call us and leave a voicemail with your question as well. So the number is 415 343 5866. And just leave us a voicemail with whatever your question is and we will answer it on the episode.

Emil:

And make sure you get us those questions by Wednesday July 8th, because we are probably going to record this on Thursday July 9th and release the episode on Tuesday July 14. So make sure to get us those questions by Wednesday July 8th.

Michael:

Hey Emil I got a question, what’s your shoe size?

Emil:

You’ll have to send me an email and I will answer it on the episode.

Michael:

Awesome, so anything you want to know real estate related, send us a question and we will answer it on the episode. Looking very forward to it.

3 Simple Systems Every Investor Should Use to Efficiently Scale Their Portfolio Jun 29, 2020

In this Episode Tom, Michael and Emil share their systems that take the headache out of acquisitions and ownership to effectively scale up.

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Transcript:

Tom:

Greetings and welcome to the remote real estate investor. My name is Tom Schneider, and I'm here with Emil Shour and Michael Albaum. And today we're going to be talking about something that is near and dear to my heart. We're talking about building systems. We're talking about automation. We're talking about scaling. We're going to touch on these topics and a couple of specific strategies as it relates to acquisitions and ownership. All right, let's do it.

Tom:

All right. Welcome back to The Remote Real Estate Investor. Before we get going today, we're going to do a quick introduction from the host a little bit about ourselves and our experience and background and all that good stuff. So, Michael, why don't you go ahead and lead us off?

Michael:

Sure. So I'm Michael Albaum. I used to work in my past life as a professional fire protection engineer in the commercial property insurance industry. So everyone has to bear with me if I speak in math terms, cause I'm a reformed engineer. I've been an investor for the better part of a decade and started very traditionally with single families. And now I've found a, found my stride and niche with multifamily value, add projects out in the Midwest. And I'm also the head coach of the Roofstock Academy program and meal. Can you introduce us to yourself and your mustache?

Emil:

Hey everybody. My name is Emil Shour. I work on the marketing team here at Roofstock. My fun fact is I actually bought a couple properties through Roofstock before I was ever working here. It was a big fan of what the company was doing and now lucky enough to get to help spread the word. And I own a couple single family rentals across the Southeast and Midwest.

Tom:

And my name is Tom Schneider. I am the director of investor education here at Roofstock. My career has been focusing on putting technology process to scale and build systems. So this episode is particularly exciting for me is how I do this personally, with my investing. I've been in real estate investing for over the past 10 years, and I'm also a California broker.

Michael:

Nice.

Emil:

The only one of us who's licensed. Where do you have your license hung somewhere as a broker?

Tom:

You can just hang it right around here.

Michael:

Yeah. Hang it on yourself.

Tom:

Hang it on myself.

Michael:

The broker test. Isn't so much more work than just the agent test, right?

Tom:

It is. They've made it harder when I got my broker's license, it wasn't quite as difficult, but they made the experience requirements a lot more difficult. It was kind of funny. I initially worked in acquisitions for one of the publicly traded rates and literally the day that I passed the broker test, the person who was leading our technology says, Hey Tom, we need a can-do guy to help build out a bunch of systems. And I was like, okay, cool. Let's do it. So I got my broker's license and then proceeded to never use it until I did use it when I bought my own house. So I guess it paid for itself there.

Emil:

What is the difference between an agent and a broker?

Tom:

I'll tell you, I should kind of have an idea on this. So an agent needs their license to be hung underneath the broker. The idea is a broker understands the business a little more and folks who are agents can eventually become a broker. If they wish to, they basically can operate on their own. So within California, you can apply for an agent or a broker. And the broker aspect of the test is a little bit harder and the requirements to get it is a little bit more difficult.

Emil:

Got it. So a broker can do everything an agent can do, but an agent can't do everything a broker can do.

Tom:

Yes. Yes, that's correct. That's a good way to put it.

Michael:

Getting ready for my broker tests.

Emil:

Awesome. I've already learned something on this episode!

Tom:

Early and often, baby early and often. All right. We'll jump into some system stuff. So we have a variety of different things and we're going to have a different one of the hosts take the lead in talking about. So we're going to start with acquisitions. And Emil, why don't you lead us off on some systems, some practical systems that folks can do on their own.

Emil:

It might be a little obvious, but I still think it's worth stating. Set up automated filters and alerts on the places you look for properties. If you're on Roofstock. If you guys are familiar with stock is our marketplace where people can buy and sell single family rental properties. You can go and filter by whatever meets your criteria and save that filter. So you get notifications when new properties hit the site that meet that filter requirement, same thing on other sites like Zillow or Redfin or realtor.com, wherever you're, once you've figured out your buy box. And I'll talk about that in a second. Defining it, plugging it in as a filter so you get automatic notifications cause you want to be on top of those listings, right? When they hit the site, right? It's a lot more effective than just constantly going on them and checking your listings. Even though I do that all the time anyways,

Michael:

I don't know about you guys, but I constantly get notifications from Zillow and Redfin about new properties that have hit the market, but I didn't save a filter even, you know, I searched there twice or three times and now I was like, Oh great. You're super hungry for properties in that market. So I'm just getting blasted by these emails. Yeah.

Emil:

Every time I look@realtor.com, like I was curious the other day about like, what do multifamily in Bakersfield sell for? And now I've just, I've been getting Bakersfield filter notifications from realtor.com. It's like, man,

Tom:

What's cool about these websites and the filters, a little pro tip is you can get really granular with your filters and set up multiple filters. So what I'll do is on my inbox that I have all set up multiple inboxes and I'll set up a filter within my I'm gonna, we're gonna do filters on filters. This is a very layered,

Michael:

Filter-ception

Tom:

Yeah. Very meta. So within my inbox, shout out Gmail, just kidding

Emil:

@Gmail, let us know if you want to sponsor us.

Michael:

Yeah. I've never heard of this Gmail, but this Tom Schneider guy talked about it.

Tom:

Anywho, I set up like a master folder for like incoming property leads. Right. Then within that I'll set up additional folders for each different type of either region or property type. So as new listings that meet my criteria are hitting. I have them in a nice clean folder, so, Oh, great. A new Florida property. That's a duplex in this area and I have a special folder for that. What I'll also do is oftentimes timing can be pretty important and moving quickly, instead of setting up a filter that comes just once a week or once a month, since I have this infrastructure within my Google Gmail, shout out again, I'll have it actually doing real time. So I'm not getting pinged in my main inbox if I'm working on some other stuff, but I have a way to see immediately based on whatever that criteria it's hitting that inbox. So again, the super simple paraphrase, but this isn't that complicated. I have a bunch of different inboxes within my Gmail. And then within the, my buying platforms, I'll set up many filters and many alerts and many immediate alerts. So it'll hit right into my Gmail and I'll know at that time, all right, this one looks pretty good and I can move pretty quickly. And I don't have that issue of, Oh, Property. It's already pending. Like I'm not passively looking for it. It's proactively hitting me as soon as it hits the market and I can act and jumped on it. So that was my extra tidbit on that piece of mill,

Michael:

That description Tom was amazing. It gave me such a visual of kind of how you operate. And it made me reflect about how I operate. And you, I'm picturing this nice, neat cubby with nice section organizers. And mind's like just a fricking melted pizza, but it's just crap everywhere. It's, I'm so jealous. I want to be like you and I grow up and have these systems, but in place, I love that.

Tom:

That's why we make a great team, Michael. That's why we make great team

Michael:

Coffee-man, and melted pizza.

Emil:

Oh yeah. I'm not surprised Tom is like the most organized out of all of us internally. And I'm not surprised when it comes to acquisitions. You're equally as organized with the pick and choose you pick and choose. There's definitely lots of messages. So one thing, if you're going to one of the sites we mentioned, and you're not sure how you should set your criteria, just know that it's okay to start a little wider. And then as you've looked at more and more listings, I think you'll get better at defining your buy box. I know we talk about it a lot and we say, okay, build your buy box. And sometimes it's hard to just like, know what to choose. Right. I kind of started larger. For example, I chose a couple of different markets, couple of different properties, size, like a bigger property size.

Tom:

I like it. You feel that you need to shoot with a sniper. I keep using these weapon analogies, but it's okay if you're not sure to start with like a broader spray and then work your way down as you refine what you're looking for. But I'd say it's better to keep it an open, an open range, and then, then shrink that down.

Michael:

Nick it down.

Emil:

Yup, exactly. And also because sometimes whoever uploaded the listing, sometimes they don't include that information. Right? So if you have like really, really specific defined criteria, you may miss something where whoever listed at the seller or the agent or whatever, just didn't submit that information. It doesn't hit the filter. I've noticed that on a couple of things.

Michael:

And just a pro tip for everybody listening to, if your budget is a hundred grand on the high end, set your filter up to one 20 to include properties that are listed above that because you might offer a 100K and get it. Versus if you set your filter criteria right at your end budget, you might never have seen those properties.

Emil:

Yeah great tip, go like 10, 20% above what you are actually planning on spending.

Michael: It also gives you an idea of what the next tier of property looks like. So if you did want to ultimately spend more, no. What would that buy you?

Tom:

One last piece of advice on building a bike box is to think about how many properties do you practically want to evaluate at a given time? And yeah, you can control this with your buybacks by how targeted it is. So if I have a lot of time and I want to look at a lot of product properties, I'm going to have a really wide buy box. If I don't have a lot of time right now to evaluate properties, I'm going to tighten my buybacks down a little bit. So one way to think about it is to work backwards about what your kind of capacity is for evaluating effectively.

Emil:

It's also, I think when you're first starting out, I think it's okay to, again, to nail this point of going a little broader, I think with time and experience and having different property types, you'll start to get an idea of like, this is the exact property I want in this exact area.

Tom:

Awesome. Michael, do you wanna jump on your next acquisition system?

Michael:

Yeah, absolutely. So, so much of this, in addition to searching, can be done socially kind of quote unquote. And so just talking to everybody who's willing to listen and maybe even some of those who aren't, about what it is that you're looking for. So just in everyday conversations, talk to friends, family members, people in your network about what it is you're doing and what it is you're looking to do because so many eyes are going to be better than, than just one set. So if someone then comes across a property just in their everyday life and thinks, Oh, well, I remember Tom mentioning that he was kind of looking for something like this. That can be a great deal funnel for you as well. Property managers can also be a fantastic, fantastic source of deals for you, which is pretty automatic. You just tell them, Hey, this is what I'm looking for. You, you set your filter, so to speak with them and any property that comes across their radar. Oh, Hey. Yeah. I remember, you know, Emil, I kind of managed this property for him. And he's looking for something like this. It becomes so easy. And so automatic that it's one of those things you can just kind of say it and continue saying it and then forget it. There's not a whole lot of nurturing that has to be done with those types of things, other than some, you know, reminders. And don't be the person that, Hey, have you found any properties yet? Have you found any properties? Just put it out into the universe and just kind of let it, let it bake for a bit and see.

Tom:

It’s like The Secret. You guys remember that book?

Pierre:

I'm still waiting for that check in the mail.

Tom:

It’s coming! Wasn't it The Secret and then The Answer as a followup or something.

Emil:

Yeah.

Tom:

Incredible. Incredible marketing.

Michael:

I didn't read that one. What's The Secret about?

Pierre:

It's the laws attraction.

Michael:

Uh, okay. Okay.

Pierre:

It's when you focus on something for long enough and eventually it comes to you, essentially.

Emil:

That's right. You don't have to actually do anything. Just think about it every day. Hope for it every morning, but no action required. Just think about it.

Michael:

Million dollars, Million dollars! So it's interesting. So for the Academy book club, we just did Think and Grow Rich. And I thought that, you know, that was such a great title by Napoleon Hill and we read it and I thought it was really awesome and talked about a lot of kind of high level things, mindset type stuff. And it was talked about very similar type stuff. And it was, it was interesting. They're all talking about, you know, if we stand around here and talk about blue cars, we'll probably go out and see a bunch more blue cars. And it's not so much that there are more blue cars on the road. It's just that now we're cognizant of that thing. It's kind of front of mind. So it appears more often for us.

Tom:

Yeah. I love that example, Michael, cause not all systems are digital or not all systems are technology, but it's, it's leveraging the people side of your network of funneling in deals through that. So at the end of the day, like a lot of real estate is a people business and nurturing that and building a system that you want and funneling them in deals is excellent.

Michael:

All the real estate meetups that I went to, um, pre COVID, they all talk about they'll usually start or end with the needs and wants section. So people talk about, okay, this is what I need or is it “have and wants”

Tom:

Maybe it’s a “give and a take”, I think I know what you are talking about.

Michael:

Yeah. You announced to the group, what it is that you have to offer to the group and then what it is that you're looking for from the group or from in general, until people say I have money and I'm looking for a deal or whatever. And so it's that those are great opportunities as well. And so again, just kind of reiterating, put it out to the world, don't be embarrassed by it. Don't be shy about it. Just make it known what it is you're looking for. Cause it's tough to help people if they haven't told you what it is that they're looking for.

Tom:

Awesome. Great example. All right. So I'll touch on the last acquisition related systems slash tip slash ways to scale. And this is a special perk that we have within Roofstock Academy is that members can actually export the listings on Roofstock into Excel. And whenever you can do things evaluating a lot of deals at once, like doing it in Excel, that's a great way to do it. So I guess that the main theme is, you know, try to batch processes together. And in this particular example of being able to download all the listings in Excel, batch that whole evaluation of the whole inventory, you know, in one run where, okay, I'm filtering down to these particular property types or, Oh, I'm filtering down for this particular return. So being able to, if you can get a spreadsheet of what you're evaluating or any kind of way, being able to batch it together, do it saves time.

Michael:

And for anybody that's really intimidated by Excel because I know it can often seem very intimidating. There are some really great free courses on YouTube and there are also paid courses. If you want to get more in depth with it, about how to use Excel and maybe how to do some of that batch sorting because it's a really powerful tool. So I guess we're plugging Excel and Gmail in this episode.

Emil:

Shout to Google and Microsoft!

Tom:

Let's continue on. We're going to go into ownership now and Emil why don't you lead us off.

Emil:

Cool. All right. So the first one we're gonna be talking about is cash flow automation. So the first thing I do and you guys let me know if you do this as well. I set up auto pay on all my mortgages. I don't want to think about, did I pay this mortgage? I have to mail a check. I auto pay everything just to make it super easy. Especially when you have multiple properties automating. It is like, step number one. You guys do that as well.

Michael:

Yeah, definitely. Absolutely.

Tom:

Do you also impound your insurance and property taxes when you pay your mortgage payment?

Emil:

I do. I know a lot of people won't because they want that capital and would rather use it throughout the year versus giving it to your lender, to hold it to whatever you like to be able to use that capital. I just don't want to have to think about like, okay, I need to come up with X amount to pay my property tax and insurance. It's kind of like duping yourself into thinking you're richer than you are.

Michael:

I don't, I don't use the impound accounts. I will, if they'll give me a better rate for the mortgage. And then as soon as the loan closes, I cancel the escrow account and just pay it myself.

Tom:

Sneaky move Michael.

Michael:

It's something I'm considering doing just from like a meal mentioned ease of operations. It's just one less thing to think about. So it can be great either way.

Emil:

Why do you not impound it?

Michael:

For the exact reason you mentioned there are significant funds that are going to be paid to property taxes and insurance on an annual basis. And so I'd rather have that kind of, well, that one time hit is kind of a bummer. I'm able to use that cash. I mean, it's a significant amount such that it's usable on a monthly basis to do other stuff with. And so I just know in the back of my mind that, okay, come this time of year, I've got this big, big property tax bill that's going to be due.

Emil:

Yeah. I wonder if there is something there in terms of like at a certain scale, it's a lot more money to be working with versus like, let's say you have one to five properties just for ease and it's not that much extra capital that you'd be able to do something with.

Michael:

Yeah, no, that's a good point. I mean, I think everyone should think about it for themselves because even at that five property level, one to five, your property tax bill could be, you know, $25,000 if we're talking about.

Emil:

Yeah, that's true. Yeah. Good point.

Tom:

Just to clarify impounding your taxes insurance is if you haven't deduced this or don't already know this, it's when you pay your mortgage payment, the mortgage company will also collect a percentage of the annual taxes.

Michael:

They'll take one 12th of the annual tax bill, one 12th of the annual insurance bill with your mortgage payment on a monthly basis. So that you're paying equal payments every month. You're not getting hit with your tax bill or insurance bill just at one time.

Tom:

And then the mortgage company will just pay it for you. So you don't have to think about it. So, boom, that's another system. So that's a good question about, you know, do you use that money in the meantime, if you don't have to pay it for 12 months, but that could be another potential system. Alright. Emil, I broke your flow.

Emil:

Finishing up there. My favorite thing is when they audit your account and you have an excess balance and they send you like a check for a couple of hundred bucks and you're like, Ooh, it's like a Christmas bonus or something. Hanukkah bonus baby. For me,

Tom:

I think I might've mentioned this on another podcast. I like it, but it pisses me off. Cause I'm like, oh geez, what check am I missing? Yeah, it makes me think like, okay, this is great having this check. But I'm like, like honestly concerned that like I may have missed something in the mail because man, there's just so much junk mail as a real estate investor. The wholesalers that email you all kinds of things and like just general, getting a lot of mail. I just get really concerned that I see a check here. That's awesome. But what checks am I not seeing? Because they're buried in between a Serina and Lilly or whatever, a catalog, that's like five pounds and 500 pages. Anyways, go ahead, please continue your answer.

Emil:

No, please continue your rant. I want to hear that.

Tom:

I got to build it up a little bit. I got to build it up a little bit.

Michael:

Tell us more about what other junk mail you received.

Tom:

We Buy Ugly Houses Houses. So many of those. Yeah. If there's any wholesalers listening, I want off your mailing lists.

Emil:

Okay. So the next one, this one's probably obvious a lot of people, setting up ACH auto payment from your property manager. So they collect your rent checks. I don't even know if any property managers do this, but like sending you a check in the mail. I imagine most people already set up you raising your hand, Michael. Cause do you do that?

Michael:

I used to get paper checks because my property manager was pretty old school and I said, okay, please, please, please, please, please, please, please. Can we do this and other way? Yeah, this is just not awesome anymore.

Emil:

I mean, so that should be like, even part of your PM property management vetting, right? Like, do you do, do you have an online portal where you ACH payments to me? So just make sure you set that up. If it's an option, most property managers in 2020, you will have that.

Emil:

Maybe Michael went to one that was established in 1925 or something.

Michael:

1833

Tom:

Is this is the one in Alaska?

Michael:

No, it's actually properties that I've since sold, but out in Missouri kind, of rural Missouri. And so just to expand upon this a little bit is I think we've talked about in another episode, but my property manager, there was only willing to use a certain bank or the local bank branch wasn't anything that we had locally or that I use. So they would go to this bank deposit, the rent check and then would cut me a check to my bank. It was just a whole pain in the butt kind of thing. So what we've automated is now they'll deposit the rent check and then those rent checks we'll get bill paid from that bank to my local bank where I actually do my banking and then from there and get distributed. And so if you can automate as many of those processes as possible, it becomes much easier. So ACH transfer a potentially from multiple bank accounts to multiple bank accounts,

Tom:

Are you're hiding something Michael? I'm just kidding.

Michael:

I don’t know. You ever been to the Cayman islands?

Tom:

That's interesting that a local property manager had a preferred bank that they worked with and yeah, yeah.

Michael:

They're just like no Wells Fargo or B of A or union bank out there. So they're like, this is what we use. It's like cool, pony express it over to me.

Emil:

Carrier pigeon that's right. So the last one in this section, we recommend I do this. I have a separate bank account for all real estate stuff. It just makes things easier, especially come tax time. I also just like having it separate cause I try to treat real estate investing like a business to have its own checking account checking account. I use Chase, it's free to set up another checking account and it's just much easier to track things going in and out and it'll make your CPA's life easier. Do you guys do that as well?

Michael:

I was going to ask if you guys have separate accounts for every property?

Tom:

You know, it’s funny, I just got off a Roofstock Academy coaching session before we started recording this episode and we were just jumping into it with a member exactly on this topic. I don't, I use just one account for all properties. It's just, I don't know, easier. And I don't understand necessarily see the value. Not that it's a lot of overhead to have different bank accounts because you can set them up for free on so many different banks, but I just use one for all the rental properties and yourself, Michael,

Tom:

I have one account per LLC. And so I've got LLCs that own multiple properties. So all that was kind of funnel into that one. Yeah. What about you, Emil?

Emil?

I'm just one checking account where everything funnels into nice. Just for ease. Makes it easy.

Pierre:

What would be one of the benefits of setting up an individual bank account for each property?

Tom:

The benefit of setting up, if you were to set up a different bank account for each property, you know, what I like about it at a portfolio level is I just have a really tight grip on cashflow within that portfolio. If I was to do it at an individual property, man, it would be just so clear if I'm making money or losing money. You know, we have these assumptions that we use when we are acquiring properties, but ultimately, you know, when the rubber hits the road, you hope to hit those or even exceed them. But you know, by having an individual bank account for that property, you have a really immediate, transparent view into, is this property performing to how I was projecting it with the cashflow.

Michael:

I was going to say, it's a really good question Pierre. I'm glad you asked it. So because I only have the one bank account set up, I think I'm echoing Tom's viewpoints and opinions that, yeah, it's very easy to see what the actual numbers are, but I found that I just keep an Excel file, very detailed document of, Hey, anytime there's an expense on a given property, I log it the date, the expense, and then the dollar amount. And so that for me, suffices as a very similar type of scenario without the headache, I would argue of having 10 different property accounts searching through which one has what I've got it all in a file for me, that's worked really, really well over the years.

Emil:

And your property manager, a lot of them you'll have a portal where you'll be able to see all your rent, all the management fees they've taken, they handle a lot of the smaller maintenance. So you'll see those expenses as well. So you also have your property manager, you can lean on, that's going to keep track off a lot of this stuff. The only other thing to track outside of that would be your payments to your lender and then property taxes and insurance.

Michael:

There's all kinds of miscellaneous stuff that you'll likely have to pay outside of that. So like business licenses, if you're required in that state or LLC fees, franchise tax fees in, you know, wherever you live and wherever it's registered, just misc miscellaneous stuff. And I just attach that to each property and whatever it's paid for, you know, even might have to pay a contractor, something if they're that's outside the scope of what your property manager is doing. And so having a place to document all of that, I find it to be very, very, helpful.

Emil:

Yup. I also keep a detailed Excel. I don't do it every month. I do it like bi-annually.

Michael:

Do you do it when you incur the expense or you do it as a reconciliation, every, you know, twice a year,

Emil:

The latter I do reconciliation. It's probably not the best, but I don't know.

Pierre:

Yeah. I mean, we're talking about automation,

Emil:

We're telling you what to aim for. We're not necessarily saying we all do this all the time.

Michael:

Do, as I say, not as I do.

Emil:

Exactly. And you know, you don't have to be perfect in all these areas. We're giving people just different ideas, you know, what makes sense to automate.

Pierre:

Cool

Michael:

It’s one of those too like, we all have bad habits that we've fallen into over the years. And now in hindsight, we'd say, man, I wish I had formed this better habit. So here's what I would do differently. And it's so hard to break those bad habits. Like it's so hard.

Tom:

Getting the grove for sure.

Michael:

Yup. Very true.

Emil:

One other thing, we don't have it here, but I want to talk about it as well. This kind of goes back to acquisition automation, but, it goes back to the concept of paying yourself first. So a lot of us, you know, we have a full time job or we have W2, whatever it is, make sure you set up like an automatic percentage that every paycheck coming in is going towards your investing. So right now, like my process is 20% of every paycheck automatically gets taken out of my checking, put into a separate investing account. And I highly recommend people who are listening, check out a website called I will teach you to be rich by Ramit Satie he has this awesome guide. If you look up, I will teach you to be rich, personal finance guide. It shows you how to automate all this stuff, like having separate accounts for different things you're saving up for. I found that super easy and like a really good way to separate your money and like have kind of different categories and use them for separate things. So I have a separate investing savings account that automatically, you know, income coming in goes into that. So that's another automation thing I do.

Michael:

Piggybacking off that a meal I've also automated paying myself first from the rental amount every month. So when we do our analyses, we see, okay, we've got the mortgage payment, property taxes, all these other expenses that may or may not actually occur on a monthly basis, but we modeled them that way. So it makes the cash flow easier to understand. And so your property is going to collect rent. They're going to take their fee and are going to give you the rest. Well, now that's a huge chunk of change, but we've still got to pay some of these other expenses. And so we all have calculated on a monthly basis what our cash flow should be. And so I will automatically set up that deduction amount from my property bank account, going to my personal bank account, if I'm planning on using that cashflow for everyday life stuff. So if it's a hundred bucks a month, I just receive rent on the 10th or whatever of the month. And then I automatically have a hundred dollars transfer into my personal account. Everything else stays in the property account to then pay all those other expenses for. And at the end of the year, you had a good year. You might have some extra dollars left over and you can pay yourself again. Or if you had a bad year, you might need to put some additional money back into that. But it's a really easy way to just start collecting money from your properties without overdoing it.

Tom:

I like it. So the next operational system I'll jump on, has to do with documentation. So if you're an active investor, you will be regularly buying new properties. You will be regularly refinancing had a good episode, I guess it would be two weeks ago. Once this episode is launched on ways to take out equity, anywho, when you are going through that exercise, you're going to need the same documents again and again and again, you're going to need a copy of the current lease. You're gonna need a certificate of insurance. You're gonna need a sample mortgage payment. And what I like to do with this is to streamline this process is set up a folder structure that is secure. There's a couple of different platforms out there, Dropbox, maybe even Google drive, but you know, in a secure folder online, I'll have my relevant documents in there.And then I can use sharing functionality to give it specifically to my lender or specifically to my CPA. That way I'm not needing to constantly track down these documents that I'm going to need again and again and again, and I can safely share it with whoever needs it. So the main takeaway for this system, I guess you can call it that is, you know, don't sleep on it, just have that document structure set up a do it once and do it right and do it early and then have that available for whenever you go through one of these maneuvers, be it refinancing or taking on a new loan or going through tax time.

Michael:

It's so valuable. I know for my first property, I didn't have these systems really set up in place. I thought I did and then came tax time and I was like, Oh my God. So this is going to take so long to figure this out and go back and collect all these things. So, you know, it's one of those things. It's tough to know what you're looking for until you know what to look for. So ask somebody, ask, you know, ask your CPA, ask your tax professional. Hey, I'm investing in real estate. What things you're going to need from you at the end of the year, they're going to tell you, okay, we need your 1098. We're gonna need all your expenses, property tax, receipts, all these types of things. So that way you can start that ahead of time developing and building these good habits and systems. It makes it so much easier. Come tax time.

Emil:

I don't have anything else that neither does my mustache. Good job guys. Excellent.

Tom:

I actually thought of this while you were talking about it. So I love the concept of paying yourself first, right? And with paying yourself first, when you get your paycheck, it's pretty straight forward, right? You take the first 10%, 20%, whatever, and either save it or spend it. However, I like to think about this with your day. So paying yourself first, the first 10% of your day, how are you guys going to pay yourself first with the first 10% of your day? And you're not allowed to say surfing,

Emil:

I'll go one level up then and just say exercising. I think exercising for me has become as equally as important for my mental wellbeing for the day as it is physical. So for me, that's how I pay myself first to start the day, right?

Tom:

What are you doing for exercise?

Michael:

Surfing!

Emil:

I wish more surfing. Having a small child will put a dent in your surfing ability and it's summer, so the waves were a little slower. I will do. I'll either go for a run or I will do a combination of like pushups pull ups. Or I also use this thing called the seven minute workout app. It's literally a seven minute workout. I don't do long workouts. I don't like, I don't know. I used to spend more time working out, but for me, it's just a matter of like doing it almost daily to just start the day right. Whether it's seven minutes or 30 minutes.

Michael:

Classic Emil fashion, he stole my answer. But that's why I went first because you're going to try to take that out. So not surfing, but I like to do kite surfing and I also work out. Do you exercise in the morning? I find that getting my blood pumping helps kind of burn off that haziness in the morning. But since the meal took that already, I really liked journaling in the morning. Just even for a few minutes, a few paragraphs, just kind of what I'm thinking about. What's going on personally in my life and what my goals are. I read that book think and grow rich. And that reaffirm that journaling is a super powerful tool. I've always known it, but again, it's one of those bad habits that it's hard to break into if you're not used to doing it. So starting slow and just trying to get my thoughts out on paper outside of myself, I find it to be helpful and worthwhile. What about you Tom?

Tom:

So the first 10% of my day has gotten a lot earlier with a small child. So, you know, it's, it's now like the, you know, late five's early 6:00 AM is the first 10% of my day, but excellent partnership with my wife helping out. Well, she has the lion's share for sure, but on the extra early days, all right. I'm digressing. Okay. Going on a walk. So, I mean, I guess this is exercise. Sure. Why not? So getting the baby early morning, throwing him in a little jogger or the stroller walking around the street in the morning when like everything's still quiet and the sun's just creeping up over the Hills and the fog is kind of lifting journal in my head. I dunno. So like walking around in the early morning when nothing else is going on, I know that's a fine first 10% of the day way to pay yourself first.

Michael:

As the only person without a baby, just a PSA, you know, you probably shouldn't throw babies into or at anything whether it be a jogger or cribs.

Tom:

Oh, they're, they're pretty durable, but yeah, for sure,

Emil:

They are very durable.

Pierre:

Antifragile.

Emil:

Antifragile.

Tom:

Antifragile! Yes, they get stronger with it. Yeah. How about yourself Pierre? Your first 10% of the day?

Pierre:

I like to save my working out for the end of the day so I can have a break between my work day and the evening. So the morning is a good time for me to read.

Emil:

I used to read a lot in the morning, baby killed that.

Tom:

Got anything good? Any good books going?

Pierre:

I'm a little bit behind with the book club, but I'm reading the book that Michael chose for the RSA book club, Never Split the Difference.

Emil:

Great book.

Pierre:

And this morning I read the ebook that email sent me and the article on how to write better titles for the podcast.

Emil:

Got to keep the audience clicking.

Michael:

Yeah, that's great. Speaking of our audience, if anybody has any thoughts, suggestions, insights, hot topics they want to hear about. Please feel free to let us know at eshour@roofstock.com, malbaum@roofstoo.com, or tom@roofstock.com.

Emil:

Or hit us up on Twitter. I'm @emilshour, Michael you're @albaummichael. and Tom you are.

Tom:

I am not positive… I’m @tscnheido

Michael:

Freaky deaky Tom

Tom:

Yea, created like whatever, 15 years ago, something like that.

Emil:

I like it.

Michael:

Skater dude, 27 with an eight.

Tom:

Exactly. Awesome guys. Well, thank you so much for listening today. To our episode, we hope that you got some value out of it. If you liked it, please don't be shy. Please rate us. Please subscribe as a meal set. And like Michael and Emil said, reach out to us. We love to hear your feedback on future content to do and to keep driving. So, alright, happy investing.

Emil:

Happy, investing.

Michael:

Happy investing.

How Private Money Lenders Can Help You Close More Deals in Less Time Jun 25, 2020

In this episode we have David Young from RCN Capital tell us all about the world of private lending: what it is, how it works, who might want to use it, where the money comes from and how it differs from traditional lending.

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Transcript:

Tom:

Greetings and welcome to the remote real estate investor. In this episode, we're going to be talking about what investors should and need to know about private capital. We're connecting today with David Young of RCN capital to answer all of our questions. Alright, let's do it.

-Theme song-

Tom:

Awesome David. Well, first off, thank you so much for joining us. And, why don't we start by telling us a little bit about yourself.

David:

Thanks to Tom and Michael for having me, really appreciate the opportunity. Yeah. My name is David Young. I'm the director of business development with RCN capital. We are a direct private lender headquartered in South Windsor, Connecticut, just outside of Hartford. And we do lend nationwide. I'm actually located personally in Boston, remote to the office as are some of our employees. And my background is pretty diverse, prior to arriving at RCN where I got to RCN in 2014, the company started in 2010 in response to the previous financial crisis. If you will, now, we're certainly going through another challenging period, but if you go back to the 2007/2008/2009 nine meltdown RCN was started in response to that, and I'll get to that a little bit more.

So my background is spreads across a variety of things. I graduated from the United States military Academy. At West point, I was in the army active for about seven and a half years upon leaving the service. I took on a variety of roles, many of which were oriented around sales business development. I had executive level positions as a division vice president as well. I also ran a small business in central Massachusetts as a VP running a outbound and inbound call center and a variety of other roles spread across a lot of different types of skills and levels of experience that cover a lot of different ranges of medical, home improvement financing, and several others as well.

Tom:

All right, that's great David, let's jump right into the meat of questions around private lending. So a lot of remote investors, they like to invest with debt, lot of great benefits to investing with debt. And there's this decision right of private capital versus more traditional loans that you would get in your personal home mortgage. Why don't you break down some of the differences between private capital and a more traditional mortgage?

David:

Sure. So, you know, the more traditional route of a mortgage say going to a bank of America or Wells Fargo and applying for your typical 30 year mortgage is certainly an option and might be the best option for somebody depending on their particular situation. In fact, private lending essentially exists and evolves in response to those that can't be served by the traditional sector. So it's filling a gap that isn't being met in the traditional sense. So, you know, a traditional mortgage may be suitable if there are no issues to consider in terms of, you know, damaged credit, if there's not an extreme or even a high sense of urgency in terms of time and being able to complete a transaction in a very rapid amount of time, perhaps if there is no issues with, you know, citizenship, you know, private lending, a lot of the firms such as ours will work with foreign nationals, you know, with traditional mortgages or other, you know, hoops, if you will, that you have to jump through.

There's a lot more that goes into the underwriting with a traditional mortgage in terms of looking at income verification, tax returns and so forth. So, but again, it may be the right route. Generally, the rates are going to be lower and a traditional mortgage, as you see right now, 30 year mortgages are somewhere in the low to mid threes and on private lending, you're not going to be able to get that low, but that's because you're being represented in a different asset class and there's different variables that come into play. So why would somebody pursue a private loan in terms of making a real estate transaction? That could be a variety of reasons. Let's just look at a typical fix and flip, if you will. Timing might be very critical. Somebody might be analyzing an asset that they want to move on and they need to line up financing on that. There may be competition for that particular asset, perhaps there is perhaps there isn't, but either way investors tend to feel a sense of urgency when they identify something that they want to acquire and then renovate and eventually flip. So private lending, generally speaking is going to give you a much faster response time. In other words, you can link up private lenders, such as RCN capital and fairly quickly get through the process and get approved and actually get funded on that loan. Why? Well, there's generally a lot less that goes into the underwriting and there's general early, a lot less in terms of a regulatory issues and traditional banks, you know, going back to the bank of America in order to administer and process your typical mortgage, there's a lot of regulation involved.

There's a lot of issues that they have to consider. They're not necessarily the ones that are thrusting that upon you. Those are things that they must comply with, private lending, not as much, for example, we're not at least in RCN and many others as well. There's no check on tax returns. There's no check on income verification in terms of you don't necessarily have to have a W2 type wage job in order to be approved. And it certainly wouldn't hurt, but you don't necessarily have to have that private lending, particularly if we look at hard money fix and flip, you know, residential real estate where RCN focuses on non owner occupied residential it's asset based. So the focus is on the asset itself. And then other key factors tend to be the experience of the borrower. So how many transactions have the borrower has the borrower completed? We tend to look at the last, most recent 36 months by verifying if their name is on entity that completed a transaction.

And then there's going to be a look at other things like credit score. But for example, in private lending, there are requirements or expectations on a credit score typically lower. In fact, maybe even much lower than in traditional mortgages case in point right now, just in response to the COVID crisis. In some tightening of lending standards across the board, both traditional and private lending, a lot of your traditional banks have really ratcheted up their standards and expectations. Credit score minimums have gone way up liquidity requirements, et cetera, that in and of itself is going to bump a lot of people over to the private lending space and private lending. Currently at RCN Capital, the minimum FICO is 650. If you look across all of our product categories, you're not going to find that at a Wells Fargo. So speed, credit requirements, the ability to be perhaps a little bit more creative with an approach and how to go about getting something done and being rewarded much, much more so for the asset itself. So is this a good deal that you're going for? You know, that's going to be a very high concern to a private lender. Yeah, nd the experience that you bring to the table. So do you know what you're doing? Do you have the experience, do you have the liquidity to accomplish it? That is what really matters as opposed to what, you know, a Wells Fargo or bank of America is forced to look at.

Michael:

That's a really great point. Yeah, I was just going to ask you, you mentioned it in passing hard money is private capital and hard money. Are those two synonymous or do they really differ?

David:

Yeah, that's a great question. Now again, I've been with RCN since 2014. Initially I wasn't directly on the real estate side, but a lot has changed as RCN originated in 2010. What private money consisted of in hard money was what a lot of people I hear now refer to as you know, kind of the old school where, you know, you know, a guy who might know a guy who could get you alone. And then when we say asset based, I mean, it's, there may, there may not even have been, and this still exists today, by the way, we compete with this and RCN where leverage, LTVs loan to values. If you will, to keep it simple, tend to be lower and you're more old school had money, maybe even no doc may not have require barely any documentation. And certainly not necessarily an appraisal or even running a credit score and for the purposes of just adding it to a file. So now when you kind of, it's almost, you know, a point of contention or even something that people joke with each other about in the industry where, you know, hard money has really evolved into a much bigger and more sophisticated ecosystem where more money comes in, where there's more requirements like just looking at the FICO, FICO requirements, FICO minimums. A lot of that is tied to where the capital is originating from to fund these loans.

So there's institutional capital that helps. And not in all cases, there are funds. Well, there are private investors that buy loans directly, but institutional capital tends to come with certain expectations. The FICO is one of those where you have to check the box. If you will, the old school, if you will hide money, probably shrug their shoulders at that. Um, they're not concerned with that. They're not necessarily concerned with an appraisal. They want to see the asset and they're going to protect themselves by, in all likelihood having a lower level of leverage, lower LTV we had prior to COVID essentially the whole private lending, hard money space fix and flip space was getting, you know, leverages, you know, up to 90% or even higher with some particular vendors out there where you were getting 90% of LTV, plus a hundred percent of the rehab funding to close a loan on a flip, as an example, someone doing your so-called old school, hard money. I mean, I haven't heard of anybody doing that high of leverage in that space, but it's still out there. There's those people that, whether it's a lot of times it's speed, somebody will close alone very, very quickly with minimal underwriting work done aside from looking at the asset itself. So there's still a market for that, but there's a lot to your question, a lot of crossover or kind of a lot of blending they're one and the same in some ways. And then they separate from each other as well in different segments of the marketplace, depending on who you ask, different people have different interpretations as well.

Tom:

One piece you touched on is room for, I don’t know is creativity is the right word, but there's a little bit more variability in the different products in that it's just, there's way less regulation I'd say on it. Would you mind touching on that on some of the different products that, and maybe one of the more popular products specifically as a remote investor that you guys originate?

David:

Yeah. One of the ones that really took off, uh, heading into COVID and we've now just activated it again is our 30 year long term rental. Okay. So this is a 30 year fixed, fully amortized loan, much like what many people are familiar with with your traditional 30 year mortgage that we talked about a couple of minutes ago. So 30 year fixed non owner occupied residential. We have that available on one to four units. This really came into play. It. This really took off like a rocket, uh, in March of roughly in the spring of 2019. I don't remember the exact date when we launched it, to be honest with you up to COVID. This thing was already approaching 40% of our originations at that point. And it gives people a lot of flexibility.

We could look at portfolios of assets, so you'd have investors out there with say they had 10 single family residences and they had 10 different financing situations on each one. Maybe two of them were with a particular guy. I know a guy who knows a guy who gave them a bridge loan a couple of years ago. Maybe one of them was with someone else. And there was just all spread out everywhere. The 30 year longterm rental, you could take a whole portfolio and roll it into one transaction and get that entire portfolio into a 30 year fixed fully amortized mortgage. At that time, back in February, you know, rates were getting as low as four 449 on that, which is very low for non owner occupied resi. So you had that, you had the ability to look at those assets. So you may have one particular, if we stick with that example, one house perhaps was not cash flowing as strongly as the others. You weren't necessarily penalized for that. You weren't necessarily told that that one couldn't join the party, so to speak. That one was weighed against the portfolio as a whole. So we could look at the whole portfolio, also look at the investors level of experience, their level of liquidity and take all of that into account to make a decision. We have an executive committee at RCN Capital that looks in each and every transaction and they can exhibit, you know, a certain amount of creativity, if you will, at any point in time to see if the transaction truly makes sense, as opposed to trying to run that through a large bank, traditional bank could potentially be an entirely different experience.

Michael:

That's so cool. David, it's something I talk a lot about with students in the Academy about portfolio loans. It's something that I've used on the commercial side of things, and I think it's the best thing since sliced bread. So I've always thought that they existed for single families, but that's great to hear that they do indeed. So anybody listening that have spoken to me within the Academy about getting, go for portfolio loan, go call David Young at RCN Capital.

Tom:

in coming up with what the rates are. Is there a little bit of a discount for larger pools, larger portfolios, or how does that typically work?

David:

Yeah, that's a great question. So we have generally, you'll see, uh, and right now, as listeners are hearing this, uh, allow me to emphasize if I can, that things are changing very quickly. So in terms of pricing as a whole rates points and whatnot, we saw a very high level of liquidity is kind of sloshing around the system, heading into a COVID and then things really tightening up seizing up even, and then starting to now loosen up. We've seen changes on almost a daily basis over the last couple of weeks here at RCN capital. So the way those rates are determined, you know, in terms of the price at anything is which is, you know, in large part driven by supply and demand as things seized up and there was less or no liquidity for this paper and the secondary market, it became very difficult to price it, you know, because we didn't know what it was trading at when there was a lot more trading volume and activity on this paper and the secondary. Then you could determine pricing a lot more clearly.

Furthermore, you had a lot more of the competitors actually active and lending in the last couple of months, people have pulled back. So we don't necessarily know what this company over here is doing because they've completely ceased lending at this current time. So a lot of that is supply and demand driven, how much volume and activity is there for this paper behind the scenes. And then that results in, you know, subsequent pricing that the retail sees factors that we look at from an underwriting standpoint, and to determine kind of how to bracket that again, back to experience and also the size of the loan. So generally speaking again, pre and post and kind of while we're still with COVID here for the time being, it's a little different, but generally speaking, more experience and a higher loan value dollar absolute dollar value would generally lead to better pricing to the retail client. And through our wholesale channels. My role primarily is with our correspondents that work on our private lending platform, other hard money lenders, private lenders out there in the community that are looking to leverage our infrastructure to grow. We also work in that capacity as well, but the pricing, the borrower's experience and the size of the loan, we have systems in place. Whereas the loan exceeds a certain amount in dollar terms, you may get some relief in terms of the yield. There may be some relief in terms of the origination, but those would be the two main things experienced in the loan size.

Tom:

Got it. And for the kind of ongoing ownership, you know, so there's a secondary market where you guys are selling the mortgages that you guys originate from the experience of the person who was getting their loan originated, or do you guys ongoing service them after you, it, of the loan,

David:

Yeah, depending on the product, but actually RCN Capital. What we have here is, is pretty unique in the industry. And I leveraged this a lot with our wholesale partners when they're looking to find somebody to work with in terms of a capital partners that we have essentially everything in house now, right now, a lot of folks are remote. In fact, almost everybody is given the scenario, but if you'd look past that for the current situation, when we talk about servicing the loans, yes, we have our own servicing team at RCN capital. A lot of lenders in this space are set up with a situation where they're outsourcing that, which is fine. That's a decision. A lot of people make. We actually did that ourselves for a certain amount of time and decided to internalize that and make that organic to RCN, to place that amount of value on the customer experience.

So yes, we're doing that, not all do that, that also holds true for another good example is our legal team. A lot of these transactions involve, you know, somebody originating and kind of setting the table if you will. And then the actual closing of the loan document prep and so forth, working with attorneys, which that can be intimidating and frustrating as a whole to a lot of people that is sent out to some other entity to conduct that business where we have that internally. So we have that an entire legal staff. That's all they do all day long is work on legal issues, closing stock preps, et cetera. We have our accounting team, our marketing team and everything actually in house in RCN. And that really helps as well. Not only does that help the retail client by providing them, they get a loan from us that they're to get an exceptional level of service, everything under our control. If there's a problem, we identify it, we fix it. But also with our, you know, our B to B or our wholesale partners, if you will, other lenders brokers, when they choose to work with us, they have that entire team, all organic to RCN capital to support them and help them grow their business by using our infrastructure and platform.

Michael:

Great. David kind of a specific question for you around some of our CMS product, but anytime someone's using hard money, they want to get out of it as soon as possible because it's typically more expensive than traditional lending. So do you guys have any type of prepayment penalties that would prevent someone from getting out or is that really too specific of a question it's kind of on an ad hoc basis based on the product?

David:

No, that's a great question. It depends on the product. I'll walk you through each of them here briefly. So on our long-term rental. Yes, we do encourage investors to be, you know, fully aware and committed to the asset for that exact purpose. You know, long-term rental and holding of that asset. There is a five, four, three, two, one step down. In other words, you can choose, you know, at what level you are, what time period and what penalty would be associated with that if you were to try and refinance out of that loan. So, you know, obviously that's a big decision to make that you have to be aware of that on our midterm product, which actually now is presenting all kinds of interesting opportunities for investors. It's a two years of interest only we call it a two plus one and already has built in an option to extend for a year. We have this available on one to four units, multifamily five-plus and mixed use, as long as it's at least 51% residential by square footage. On that product, there's a six month prepay penalty.

So if you think it through, if you were to enter into that product to interest only for two years, perhaps you have an asset that you do want to rent, but you're not entirely sure you could change your mind. You may try to sell it. You make, you know, you may rent it for a year. And then at that point, you may want the flexibility to see if you want to do something different with it. The two plus one with only a six month prepay gives you that exact flexibility because after six months you could theoretically enter into a new transaction to get out of that one without a penalty applying. So there's that on the short term, I won't get into specifics on that. It can be on a case by case basis, but there's nothing to dissuade you from completing your project as quickly as possible. You know, as a lender in particularly with the yield component, you know, there's origination, which are the economics kind of front loaded to the front of the transaction.

And then there's the yield component in terms of collecting the actual payments as each month goes by. So there can be challenges that a lender or a transaction ends up being very short. There wasn't much time to collect yield, but again, we don't want transactions that drag out for long periods of time and have to ultimately potentially approach modification as well. So on a 12 month, you know, a flip, if you will, our transactions show that, you know, investors are not penalized for, you know, being expeditious and efficient with their work. And we also have incentives to, you know, not, uh, enable them or make them feel like they should consider trying to extend it or go past a certain point. We try and we want to position them so that the project is done efficiently. According to the data that we have that shows, you know, what success looks like.

Michael:

Awesome. Kind of taking a step back and looking more high level at private lenders. I mean, you touched on it briefly, but who where's this money coming from to fund some of these loans?

David:

That's a great question. When you let's compare it to conventional, you know, just here in COVID, this, this could go in a lot of different directions, but in COVID what we saw was the federal reserve came in and really just threw the kitchen sink at everything essentially. I mean, they've, they've done things that are truly unprecedented that that's cannot be overstated, but one of the things they did is something they've done before. They certainly did it as part of so-called QE, quantitative easing since the 2009 crisis, which was to come in and provide a backstop to mortgage backed securities MBS. Now, even just saying that they're going to do that can have a huge effect regardless of how many they ultimately buy, but those are the traditional mortgages that are originated from, you know, you know, Fannie Freddie type stuff from a bank of America type of transaction that are sliced and diced into exotic securities, and then sold the fed comes in and says, look, we'll back up those, you know, we're gonna, we got your back on that, that helped that particular sector kind of spring back from the depths of the COVID crisis, if you will.

And private lending, you know, we don't have such a backstop from the government. So this money is coming from, you know, private capital sources. However, there's been a big evolution, you know, for a period of time, a lot of this was from a private, you know, private investors, private investors would form funds. So you might form a fund with a group of investors that has, you know, I don't know, $20 million together. And then that funds purposes to invest in these various private lending transactions in whatever area that they choose to focus on. So they're out there lending and recycling that cash and doing their thing. And that's with, you know, that amount of money that they've been able to put together. There's also one off transactions that occur when an originator may take a loan and say, look, here's a loan. We have, do you want to fund this? So they take this loan, it's a 500 K transaction. They present it to that particular investor and they get a yes or no answer. And it's funded that way. RCN can help in those scenarios where you run out of capital and then you can come and jump on our platform. If you happen to be in one of those positions, any of the listeners out there. And then as the industry grew, you know, you have yields here that are pretty juicy compared to traditional. You look right now. Uh, if I pulled it up, I know from looking recently, uh, the 10 year note is what around 0.7%. So you're lining the government money for 10 years, for .7% annualized.

A lot of institutions are, you know, they have to do that, but if you can lend as an institution into the private lending sector for loans that are collateralized by real estate and get five, I don't know, I'm just throwing these numbers out there. A lot of pricing is bounced around, I don't know, five, 6% versus less than one on government notes, government bonds. Then that's certainly a decision that you might want to take a look at. So a lot of that, I think yield differential investor demands for yield, the thirst for yield. You've had interest rates just being destroyed down to nothing. You have negative interest rates in some parts of the world. A lot of folks speculate, you know, rates could even be driven negative here in the United States. So pension funds, you know, other people that manage money institutions, there's no yield. It's very difficult to get yield secured and then incomes private lending, where you have these loans that are backed by hard assets. And as the ecosystem grows, becomes more mature. You have more underwriting standards, you have more eyes looking at it. You have more ability theoretically to, uh, make better loans, uh, minimize the faults and kind of feed the whole beast, if you will. Institutions look and they say, Hey, that's pretty juicy yield. I wouldn't mind getting some of that. And then you have that type of money coming in institutional level. So say, you know, you have funds, people put funds together, you have private investors to do one off transactions and then institutional capital.

Michael:

Super great description.

Tom:

That's a great overview. I'd love to learn a little bit more about the different types of customers and the different flavors of customers that use private capital. So there's individual investors, perhaps there's syndications, I'd love just to learn a little bit more of the different kinds of avatars or profiles of people that use private capital.

David:

Right, yeah. So back to our discussion on experience. So when RCN creates products and underwriting standards, generally speaking, that experience factor is huge. So we do lend to people that have no experience. In many cases, those are, you know, kind of a mom and pop, maybe, you know, an individual that's looking to get involved with their first flip transaction. And that person might be someone that could come from a variety of backgrounds. It may be somebody that was working with someone else on these transactions actually executing the labor, the work, you know, watching a project, go from A to Z with their own eyes, and then deciding that they want to dive in on their own. Maybe it's a husband and wife, couple that are, you know, have a little side hustle going on. So you've got that. You certainly have the mom and pops. Then you have the call it a small business. If you will, maybe that tends to have multiple projects going on at one time, they may have their own crew in terms of contractors and a more sophisticated setup in terms of having a, you know, a playbook on exactly how to execute a transaction and already having the resources lined up or even on their own staff, you have that.

And then you have even bigger organizations that are doing this in big numbers. You know, maybe they may have 20, 30, 40 transactions going on at any given time. They may, you know, they talk in terms of flips. In many cases, they may flip a couple of hundred houses in a given year. You have that as well. We're also seeing, you know, more activity and more interest in the multifamily space. So multifamily five-plus units, you know, these are small balance apartments. Generally. I know in Boston and other areas on the East, you see these spread throughout the communities, a building that may have eight, 10, 12, 16 units. You know, there's estimates, there's about 10 million of these out there in the country. And those are starting to get more activity as well. And for those, you know, that's probably a project that's going to require more than just a couple of guys working together on a side gig and some more sophistication. So you see a variety of different flavors out there. You see people that have made this, their, their living. This is how they make a living. This is their job. This is their career. This is everything. So we've seen different variations.

Tom:

Awesome David, I think people hear private capital or private money tossed around a lot, like we were saying before, and you've given us such a great overview and background of kind of the institutional side of things, if you will, but from a private lending perspective, if I'm looking for money and I happen to know someone that has some extra, could I just go ask them to lend it to me and I think work out some kind of agreement with them, or do I have to go through maybe the more traditional channels of private money?

David:

Yeah. I mean, we have actually specific to my role. We have investors lenders, if you will, that were doing exactly that. Or maybe they may even still do that, where they are providing kind of one off direct transactions between themselves and an individual investor out there looking to flip a house or what have you. So to your question, can you do that? I mean, there's nothing that I could say that's could literally stop somebody from doing that. There may be other things to take into consideration in terms of making sure everything is within compliance. I mean, the compliance is certainly looser on the private lending side than it is on traditional, but you want to make sure that you're working with, you know, it may be worth considering to take a look at working with an established organization or entity. That's been doing this to ensure that all documentation is done correctly, to ensure that all procedures are done.

They'd probably be, it's in their vested interest to help you, help you to look at the project and make sure it makes sense. And there's ROI available there for you to capture, obviously to be able to pay back, pay them back and make the monthly payments. So I, yes, you can still, you know, there's nothing stopping someone from, I suppose, from approaching an individual saying, Hey, do you think you could give me X amount of flip this house? And that's kind of how it all got going, you know, looking at, you know, maintain a certain leverage level minimum or no doc, you know, obviously securing with a lien, putting that money out, collecting interest, only getting it paid off and then getting the balance back, you know, your principal balance back. So there's nothing per se stopping you. I think there's other things to consider in terms of, you know, working with an established entity that, you know, has a strong reputation has done this before, and they may have a lot more options. You know, you're kind of guy on the corner of the street, if you will, may have certain options that might fit certain people, but you go to a lender such as RCN Capital, and there may be more choices there for you that might be a better fit to your situation after you take a complete and thorough look.

Michael:

Okay, great.

Tom:

That's awesome. I think we're, we're getting close to covering all the questions we have. I guess another question, practical question is geographic footprint. So do you guys have any limitations on where you originate loans?

David:

Yeah, that's an excellent question. Anyone that's curious, it's a better description than here in me, you know, yap about it would be to go to rcncapital.com and see if I can get some traffic to our website. Here are capital.com and scroll down to the bottom. You'll see the map and that will show, but yeah, we can originate and close loans in the entire country everywhere except for a few States, Alaska, Oregon, Nevada, the Dakotas, Minnesota, Vermont. So the bulk of where the business is and where the volume is not nothing against those other locations where we're not currently able to do that. We have that covered. So any investor that is looking to do whether it's activity locally, or perhaps even dabble in other areas, you know, another benefit of an established entity such as RCN capital is the fact that we have that footprint nationally already. So we're already established in those areas. If you have something in Tennessee, great, but you may also have something in Oklahoma, we can do both of them. So we've got a pretty well covered.

Tom:

My last question has to do with a product that I'm not that familiar with, but very interested. I'm just not sure I'm interested. If you guys carry it like a revolving credit where you can add properties in and out of a facility, do you guys offer any type of products like that? And this is a self serving question. Just something that I've heard about and just interested in learning more about,

David:

Yeah. I mean, what I can say on that and thank you for that. It is a great question for investors with a certain level of experience, you know, a strong level of experience. If they get connected to RCN Capital and a loan officer, they can certainly take a look at pursuing what we would call a line of line of credit in the precise definition of that is probably not the best description, but we, it comes up a lot in the, in that, in those terms. And people use that to describe it. It's not exactly what it is, but we could potentially consider and look at that for someone with a certain amount of experience in the sector and has that documented and demonstrated. And what that could look at like is just use a million bucks to keep it simple. Perhaps someone being granted exposure of a million dollars every 12 month period, every annual designated period at certain terms. And in that case, they're, you know, why would it benefit them? Why would they care about that? It could be improvements in terms of speed and efficiency. If the borrower's already underwritten, ie. the entity, you know, on these short term loans in particular can only lend to a legal entity. So if that entity and the owners of it are already underwritten, then that's all locked and loaded. And now you're presenting each asset as you identify it and decide to move on it into the mix from an underwriting standpoint. So you still have to follow procedure, you know, appraisals and whatnot, but you've got some of the things out of the way to expedite the process and make it more efficient and make it a cleaner experience for your high volume, high experience clients. And that also would take into account. You may be able to add more fuel to the more logs on the fire in terms of supporting your own case, by adding in, like, if you have other things that contribute to your liquid net worth, you could provide that to perhaps support your case. If you're trying to obtain a certain amount of exposure that you're granted annually, you could look at doing things like that on.

Michael:

Tom you gotta get on that.

Tom:

I know. Yeah, definitely.

David:

It sounds like, Tom was thinking about that one,

Tom:

For sure. Yeah. Okay Michael, do you have any other questions?

Michael:

I think that's it for me that this has been awesome.

Tom:

David, this is great. Yeah. So we're going to end this David with a couple of what we call quick fire questions, and these are just general investing philosophy. It's great having smart guests, such as yourself, come on the show and just love your thoughts on this either or type of question. So are you ready to do it?

David:

I'm ready unless you got a bunch of trick ones in there.

Tom:

All straight forward ones. All right. So consolidation or diversification.

David:

You want me to give a quick answer?

Speaker 4:

All quick answers, all quick answers. Yes. You can say both. I'll always...

Speaker 1:

I’ll say both, I always tend to, when I, if I may, when I identify a trend, I tend to favor something. If it depended on my belief in it, I tend to consolidate, I'll give you an example, crypto. I can consolidate Bitcoin. I don't need to mess around with the others, but in other scenarios, I might favor diversification.

Tom

I think a good way to say that is either shallow and wide or deep and narrow.

David:

Yeah.

Tom:

Deep and narrow, I like it. High property taxes or high income taxes?

David:

Neither

Michael:

That’s the best answer we’ve had yet.

Tom:

High rent growth or low vacancy?

David:

Probably say low vacancy. On that type of thing, I like to play it more safe.

Tom:

Yup. Yup. Cashflow or appreciation?

David:

I'm going to say cashflow. Cause I look at real estate as the primary benefit to me is a hedge against the inevitable destruction of your purchasing power over time. So I feel like that will happen when a hired asset, if it's chosen properly. So I'll go for the cashflow. If you pinned the two against each other.

Tom:

Debt or equity?

David:

From the standpoint of real estate, debt.

Tom:

Love it. Single family or multifamily?

David:

Tough to go against SFR right now.

Tom:

I like it. Alright. Last couple of questions. Turn key or massive project?

David:

How cheap did you get it? Being realistic, turnkey. You know, assessing my own situation.

Tom:

Yeah. Midnight oil or early bird worm?

David:

Early bird worm

Tom:

Text message or email?

David:

Neither. No, I'm kidding. I'm either, probably either.

Tom:

Alright. And the last one kind of an off the wall, olive oil or butter?

David:

Well, I do like that butter that is allegedly made with olive oil. Tried that on a steak and that worked out pretty well, but..

Tom:

I know what you're talking about.

David:

Yeah. It's olive oil or butter with olive oil. I'm not sure what brand it was, but I tend to use olive oil fairly consistently. So I have to be true to myself and to you and this excellent show we’re on.

Tom:

Awesome. Well, well, that's it. You made it through the quickfire questions. Want to give you a chance to yeah. Where can people find you get a hold of you and get ahold of RCN?

David:

Folks can find the company at rcncapital.com, blue and white colors there. If you're Googling around looking for it, usually you'll find it. You can link up to myself. You could certainly shoot me an email if you'd like a first initial, last name dyoung@rcncapital.com. You can hunt me down on LinkedIn as well. Love to make connections with folks and expand the network and learn from people. So those are probably the best ways to get ahold of me and the company.

Tom:

Awesome. David. Well, thank you so much for coming on.

Michael:

David. Thanks so much. This was great.

David:

Thanks guys. Really appreciate you having me and I'd love to do it again. Appreciate it. Thanks.

Speaker 1:

Thanks again to David Young for answering our questions. Today's episode was brought to you by Roofstock Academy and we're running a special promotion right now. For a limited time you can receive a $100 discount with the promo code JULY4. With Roofstock Academy we have all these benefits: coaching, on demand lectures, the tools, the SFR paybook, on and on, but the Roofstock Marketplace credits just got that much sweeter. So initially it was a $750 credit when you buy, now it is a $2500 credit. So you buy Roofstock Academy and for your next 5 transactions you will $500 back at the close of your transaction. Happy Investing!

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